Question

Explain how international trade has altered the U. S. domestic manufacturing base. How has it made it more or less competitive?

 

 

Answer 1

An increase in global trade due to free trade and lifting up the trade barriers increases the competitive ness of the world market as a whole and improves the efficiency in resource allocation.

Trade happens among nations based on their comparative advantage, a country having comparative advantage in producing a specific product can export it to another country. Due to importing a better quality product at a world competitive price, domestic producers who cannot cover their average costs or whose average cost of production is higher than the world price will have to exit the market, making the entire market competitive. 

 

So, an international trade will shift the market to efficiency, for example during 1965 the market share of automobile industry in US is under the control of big 3, namely GM, Ford and Chrysler. They had created a situation of tight oligopoly in the market where the prices are well above their cost of utilizing the resources. But due to world trade new producers entered into the US market, making the market more competitive, offering a better product to the consumer at a lower cost. By the end of 2010, the market share of these big three had fallen to 44% from 90% in 1965. 

 

So, a world trade makes market, more efficient driving it for an allocative efficiency, where the price charged on the product is equal to marginal cost incurred on utilizing the respective resources.

 

In the above graph, domestic equillibrium price is $76 and the equillibrium quantity are 12 units, when there is a free trade, the world prcie is $70, at this price level, quantity demanded goes up to 15 units, where the domestic suppliers who are competetive can supply 6 units and the rest 9 units are imported, all the suppliers between point a and c has to exit the market. Due to world trade, the domestic consumer of the goods are better off as they recive the gooda at a lower price increasing the cosnumer surplus, but the domestic suppliers will loose as the uncompetent producers has to exit the market. Since the gains from trade are higher than the losses, a free trade is advocated for optimum allocation of resources and for a competetive market place.

So, due to international trade, US manufacturing base has decreased, as it is having higher opportunity cost for manufacturing. But US has increased its production with respect to services. Where its is having a comparative advantage with the rest of the world. 90% of US GDP comes from production of services. 

Thus international trade has reduced the manufaturing base of US, divirting the job to a more efficient nation, jhaving a comparative advantage in manufacturing. 

An increase in global trade due to free trade and lifting up the trade barriers increases the competitive ness of the world market as a whole and improves the efficiency in resource allocation.