Pat Buchanans Economics Essay Research Paper THE

Pat Buchanans Economics Essay, Research Paper

THE FALLACIES OF PAT BUCHANAN’S ECONOMICS Pat Buchanan is currently campaigning to become the Republican representative in the next U.S.Presidential election. He is credited with striking a chord amongst the main stream, blue collar sectorof the country. This is because he has based his economic platform on common myths about free trade andhow it is the cause of the economic problems in the U.S. His theme is that layoffs and the closing ofAmerican plants are the result of foreign companies and countries taking advantage of easy access intoU.S. markets which, in his opinion, is not being reciprocated abroad. This is how he accounts for thecurrent trade deficit that the U.S. is running with countries like Japan. Pat’s economic platformregarding trade policy can be summarized as follows:* Impose a 10% tariff on Japanese imports and a 20% tariff on Chinese imports. This wouldgenerate, in his opinion, $20 billion in government revenue and reduce the trade deficit which could bereinvested into the American economy and help create tax cuts for small businesses.* Impose a social tariff on Third World manufactured goods to protect U.S. workers’ wage rates fromthe foreign laborers who are paid a fraction of what their U.S. counterparts earn. He also resents thatforeign companies do not have to adhere to the strict environmental, safety, and health standards thatAmerican firms do yet get free access to the U.S. market via GATT and NAFTA.It is evident that Pat Buchanan believes that trade deficits and trade with Third World countries are atthe heart of what he perceives to be America’s economic problems. He feels that through tariffs theburden of income taxes paid by U.S. workers and small businesses can be shifted onto consumers whopurchase foreign goods. His underlying sentiment about his trade restrictive policies is, “This is ourland; America is our country; the U.S. our market. We decide who enters here and who does not.” The basis of international trade is that their are gains to be had from partaking in it. This was provenby David Ricardo, an economist in the early 19th century, who introduced the concept of comparativeadvantage. His theory stated that a country’s “absolute advantage (overall productivity differencesbetween countries) should be reflected in differences in income, whereas comparative advantage(variations in productivity differences by sector) will determine the pattern of international trade.”A common misconception about free trade is that it is based on absolute advantage. Comparative advantagealways is applicable when applied to international trade so it stands to reason that there will always begains from trade. The existence of low wages in a country is not by itself a reason for the U.S. to feartrading with them. For one thing, wages generally reflect the productivity levels of workers. If lowwages meant low costs then world trade would be dominated by Th!ird World countries and the U.S. would never export. The fact is that differences in technology causelabor productivity variances between countries which affects unit labor costs. A firm will tend to hiremore workers until the value of the product that the last worker produces is equal to the cost of thatworker. In the less developed countries low productivity, as a result of low levels of technology, isreflected in wages. The significant measure to determine which sectors a country has a comparativeadvantage is not wages, but unit labor costs. A country can have a comparative advantage in a sectoreven if it is more inefficient than any other country. This is because comparative advantage is basednot on who is the best, but rather on where a country’s “margin of superiority is greater, or its marginof inferiority smaller”. As long as a poor country specializes in sectors where it is the leastinefficient compared to a rich country then it will gain from trade. The Ricardian Model, based on differences in labor productivity, is best explained using a simplesituation based on the following assumptions: two countries, one called Wealthy, the other Poor; twogoods, jeans and sneakers; and labor is the only factor of production. Both countries have 40 hours oflabor available but Wealthy has more advanced technology which gives it an absolute advantage in theproduction of both goods. These countries will benefit from trade because pre-trade relative pricesdiffer. For this example assume that sneakers and jeans are traded in world equilibrium on a 1 for 1basis and that there are constant returns to scale. Amount of labor JEANS SNEAKERS JEANS/SNEAKERSWEALTHY hours required to 1 2 1/2POOR produce one unit 5 2.5 2 In analyzing the production possibility frontiers of each country it becomes apparent that Wealthy canproduce only 1/2 a pair of sneakers in an hour. However, in that same hour, they could make one pair ofjeans and trade with Poor for one pair of sneakers. Thus, they will gain from trade with their lesstechnologically advanced partner by specializing in the production of jeans. Poor can make 1/5 of a pairof jeans in an hour or produce 1/2.5 of a pair of sneakers which can be traded for 1/2.5 of pair of jeanson the world market. Therefore, through trade both countries are using their labor twice as efficientlythan when they had closed economies. This results in gains being realized from trade. The U.S. signed NAFTA and became trading partners with Mexico much to the chagrin o