Question

5. World Trade In a Global Crisis – (20 pts.) Answer in one paragraph.

a) During this pandemic, does the law of comparative advantage still apply to trade?

b) During this crisis, what has happened to the value of the US dollar on world markets? What are the advantages and disadvantages of this in terms of the trade deficit and foreign travel?  Describe how you would show this trend on a foreign exchange graph.

c) Prior to the pandemic, the US and China were involved in a trade war. In an effort to reduce its trade deficit, the United States decided to slap tariffs on imported steel. Prior to the tariff, Chinese imported steel sold for less than the US domestic price.   Who wins and who loses because of the tariff?

Answer 1

a)  Comparative advantage gives a company the ability to sell goods and services at a lower price than its competitors and increase sales. During this period law of comparitive advantage does not apply as

• Countries that were relying heavily on goods imported from China, they are now having to seek alternative sources of production even if it cost more then importing.
• No or less goods are being exported and imported, heavy quarantine procedures/health checks are being carried out at ports which is prolonging the delay. Falling demand for crude oil accross the globe , also zero income for tourism based earning countries have resulted falling in GDP also hampering the purchasing power of customer around the globe.

So we can say that the law of comparative advantage does not apply as every country is producing goods and services on its own wether it costs more or less for them.

b) The value to US Dollars decreased as the pandemic started and hit its lowest point for the year 2020 on march 9 but still is the most reliable currency over the globe.

The following advantages of a US Dollar in terrms of trade deficit and foriegn travel are :

• Traveling Abroad Is cheaper as local prices in foreign countries are not influenced greatly by changes in the U.S. economy, a strong dollar can buy more goods when converted to the local currency.

• Trade is cheaper as Goods produced abroad and imported to the United States will be cheaper if the manufacturer's currency falls in value compared to the dollar.

The following disadvantages of a US Dollar in terrms of trade deficit and foriegn travel are :

• Tourism to the U.S. Is More Expensive as Visitors from abroad will find the prices of goods and services in America more expensive with a stronger dollar.
• Trade Suffers as imports become cheaper at home, domestically produced goods become relatively more expensive abroad.

c) The Trump administration's tariffs were received negatively by the majority of economists and analysts being that the tariffs either have no direct benefits on the U.S. economy and GDP growth or they have a small to moderately negative impact on the economy. The harm caused to U.S. businesses and consumers would increase. The Trump administration would do well to not follow a path of imposing tariffs that could dampen the U.S. economic outlook.