Question

Suppose the U.S. is engaging with China in a discussion of trade policies. The Chinese diplomat explains to their U.S. counterpart that labor in China is less expensive than in the U.S., so the U.S. consumer would benefit from cheaper products produced in China. Also, since the U.S. has a highly skilled labor force, capable of making the capital intensive goods that the Chinese consumer desires, both countries would benefit from trade.

The U.S. diplomat counters this argument, stating that without trade restrictions, wages in the U.S. would decline. So, by taxing Chinese imports they are protecting the U.S. worker.

Support one or both of the diplomats' arguments with key some of these terms;

Terms:

Comparative Advantage

Efficiency

Globalization

Inefficiency

Laissez-faire

Law Of One Price

Production Possibility Curve

Production Possibility Table

Production Efficiency

Answer 1

I support the argument of the Chinese diplomat that trade between the U.S and China can benefit both the countries. This argument is based on the concept of comparative advantage. Trade is beneficial for both parties as it allows countries to specialize in the production of the commodity in which they have a comparative advantage. Country A has comparative advantage in something when the opportunity cost of producing that product in country A is less than the opportunity cost of producing the product in the partner country, say country B. Therefore, if U.S is capital abundant and China is labor abundant, U.S’s opportunity cost for producing capital-intensive goods will be less as compared to that of China. On the other hand, China’s opportunity cost for producing labor-intensive goods will be less than that of U.S’s. Therefore, U.S will have a comparative advantage in the production of capital-intensive goods and China will have a comparative advantage in labor-intensive goods. The firms in U.S and China will be able to increase these efficiencies by doing so. Also, by entering into trade, China will be able to import capital-intensive goods at a lower cost from U.S and U.S will be able to import labor-intensive goods at a lower cost from China. Moreover, U.S consumer will be able to consume more of labor-intensive goods under trade as compared to what U.S’s autarky production possibility curve allows to. The same applies to China as well as their consumers will be able to consume more of capital-intensive goods under trade as compared to what China’s autarky production possibility curve allows to. Therefore, the trade will be win-win situations for the firms as well as the consumers of both the countries. Post trade, because of the principal of one price, the price level of capital intensive goods will come down in China and the price of labor-intensive goods will come down in U.S. However, in order to the law of one price to work, there should be a laissez-faire situation in which trade barriers are completely eradicated and government have no intervention in the trade between two countries.

Thanq u