Question

Mark Mobius the legendary international fund manager warns that the trade war is a prelude

to the next financial crisis. (30 Points try to answer last)

(Explain/Elaborate in your own words. Please use trade theory terminology, Protectionism, Zero-sum Game,

and so on, to elaborate your explanations)

"My politics are short and sweet, Like the old woman's dance.

I am in favor of a national bank. I am in favor of an international-improvement system and a high protective tariff.

These are my sentiments and political principles. If elected, I shall be thankful; if not, it will be all the same."

Abraham Lincoln 1832

“Nothing contributes so much to the prosperity and happiness of a country as high profits. “David Ricardo”

Theory of “Comparative advantage” (David Ricardo 1817, in his book “On the Principles of Political Economy

and Taxation” Ricardo's theory implies that comparative advantage rather than absolute advantage is

responsible for much of international trade.)

Answer 1

First, let us understand what are benefits and costs of trade for Americans as an example.This applies to all economies.

Positives of International Trade -- for US consumers: 1. Due to international goods- Customers get varied choices. Low price goods can be chosen. Consumers get more choices and due to intense competition the prices go down. Companies come with better products and economies of scale improves resource allocation.

Positives of International Trade -- for US citizens: US citizens get more jobs in industries where comparative advantage is with USA. for ex- advanced weapon making industry. USA industrialists can outsource a few operations and can focus on core products which will give its citizens higher paid jobs in services industry.

Positives of International Trade -- for US Economy: Countries with absolute and comparative advantage will get advantage of economies of scale. Productive and allocative efficiency will be encouraged. Through exports US can run engine of growth.

Negatives of International Trade -- for US consumers: US consumers may get goods where child labor is used or proper quality is not maintained. Strategic data may be stolen by products coming from other countries.

Negatives of International Trade -- for US citizens: Over dependence for a particular product from a certain country. Infant industries in USA may not be able to withstand and new start ups may be upset.

Negatives of International Trade -- for US Economy: Cheaper imports may cause difficulties for US producers and jobs may be lost. USA dollar value may go down if imports are more than exports.

If these points are analysed carefully then benefits clearly outnumber the costs. Trade is clearly a positive sum game. World economy is integrated today. Livelihoods in Asia are hugely dependent on exports to Europe and North America. If these exports are stopped then many will be jobless. This will create huge defict in government budgets and may make countries stuck in debt cycles.

Companies will not invest in these economies and aggregate demand will shift to the left and recesionary impacts will be created which is nothing but financial crisis.