T HE P ENNSYLVANIA S TATE U NIVERSITY E CONOMICS A SSOCIATION P RESENTS :

T HE O PTIMAL B UNDLE
F ALL S EMESTER 2014: V OLUME T EN
N OVEMBER 18, 2014

E DITOR : J OE K EARNS P RINT E DUCATION C OORDINATOR

C ONTRIBUTORS : M IKE B ARNES , W AHHAJ I QBAL , J OE
K EARNS , C OLE L ENNON , C AMILLE M ENDOZA

Special Report on Free Trade

NAFTA: Its Triumphs and Its Unrealized Potential
It took off like a rocket only to fall back to Earth. The North American Free Trade Agreements (NAFTA) liberalization of trade laws between the United States, Canada, and Mexico
attained massive economic success at its inception in 1994 which it has failed to replicate in
the present. According to The Edmonton Journal, nearly five million American jobs pay
wages that are on average 18% higher than positions not directly related to the international
economy. Yet, NAFTA members share of global production reached 36% in 2001 only to fall
to 26% by 2011, partly because of tightened U.S. security at the Mexican border. Nevertheless, NAFTA members are now gaining power through the international energy market because of the shale-gas boom, development of Canadas oil sands, and private firms investment in Mexican energy. An integrated trade bloc offers its members the opportunity to
revamp and refuel their global competitiveness. JK

READ MORE: http://bit.ly/1x78APR http://econ.st/1kgcpfP

NAFTA is a treaty between

the U.S., Canada, and Mexico that was designed to
liberalize trade between
those three countries.

The Trans-Pacific Partnership: A Party Without a Host

Barack Obama and Chinese President Xi Jinping

could be steering their
nations toward more tense
political and economic
relations.

The U.S. is throwing two parties in China, but the host is only invited to one. U.S. President
Barack Obama aims to ratify a $1 trillion trade deal between the U.S. and Far Eastern countries, with the exception of China, known as the Trans-Pacific Partnership. Chinese officials are
displeased to be left out, as this deal establishes more trade which does include China. They
want either more say in the TPP or another agreement entirely, but talks of the existence of TPP
alone yield even more controversy. New investor-state settlement courts that give global investors extra-legal power has slowed the ratification process. Economist Joseph Stiglitz argues that
these courts supersede existing national and international laws concerning debt repayment. In
fact, these court actions would go against the economic and legal recommendations of the International Monetary Fund and other international organizations. The TPP festivities as
planned have gone on too long, and it is time to shut this party down. CL

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bit.ly/14FBB9G

Apple and the Current Account: Mo Money, Mo Problems

Conventional wisdom suggests U.S. companies which sell goods internationally are moving
the country closer to a current account surplus. The reality is that a company like Apple Inc.
can by itself add as much as $1.9 billion to the U.S. current account deficit. Free trade allows
Apples high-tech products to be cheaply constructed of parts produced in several Asian and
European countries before they are finally imported to the U.S. It is true that the measurement of exports and imports inaccurately reflects the value of work performed by workers
from one country. For instance, China is credited with the entire wholesale cost of a shipped
iPhone, even though researchers at the Asian Development Bank Institute calculate the value of work performed by Chinese workers to be worth just 3.6% of the total. Despite the
flaws of current account measurement, it is undeniable that domestic companies can indeed
contribute to worsening of the current account deficit. Free trade might have its virtues, but
its proponents should not assume the success of domestic companies validates them. JK

READ MORE: http://on.wsj.com/14FDiE1

The iPhone 6: Hardly the

only source of the U.S.
current account deficit,
but certainly one of them.

Is Free Trade Preferable to Protectionism?

Tear Down This Wall!

Do Turkeys Like Thanksgiving?

Mr. Azevedo, tear down this wall! The President of the

World Trade Organization has a golden opportunity to
promote international prosperity through free trade, but
he will not be successful unless he debunks the claims of
his detractors. The proponents of protectionist policies
have a common misconception -- free trade results in domestic job loss. Lou Dobbs, a CNN talk show host, argues
that free trade has an adverse effect on the middle class,
but he ignores the fact that free trade allows cheap imports of better quality for the middle class that raise their
standard of living. Protectionists lament on the loss of
360 million jobs since 1992, but fail to mention the creation of 380 million jobs. By outsourcing production, companies are saving money and are using that money to expand and provide better jobs back in America.

Conventional wisdom regarding trade barriers can be defined with a simple phrase: tear them down! The World
Trade Organization has advocated and encouraged leading
economies to remove trade barriers left over from the
2008 crisis. Ghanaian President John Dramani Mahama
echoed this sentiment by stating that developed countries
should remove barriers against Africa, and Thai Prime
Minister Gen Prayuth Chan-ocha intends to free trade
with European countries in an upcoming meeting. Yet, the
overarching theme between these headlines is that they
are all assumptions that developed countries must remove
barriers. Is it inconceivable that there should instead be a
plea for developing countries to increase trade barriers?
Free trade among the rich and poor leads to less jobs for
the industrialized countries, lax labor regulations in nonindustrialized countries, and an unfair disadvantage to the
firms from developing countries.

Protectionists love tariffs and quotas because they are

believed to save the domestic producers, and indeed they
do save the domestic producers, but at the expense of
consumers. Tariffs lead to deadweight loss, which is
caused by inefficient domestic labor and the loss of consumer utility at a higher price. The whole economy suffers
because of these protectionist policies as the total loss of
the consumer outweighs the benefits to the local producer. These restrictive measures not only have an unfavorable effect on the domestic economy but can also lead to a
potential retaliation from the foreign country. In September 2009, the U.S. made imported Chinese tires more
expensive for consumers by increased tariffs on them
from 4% to 35%. This provoked retaliation from China in
the form of an increase in tariffs on U.S. chicken products from 50% to 104% in 2010. Instead of poking the
bear, the U.S. should have let the invisible hand of the
free market govern international trade.
Free trade allows competition, specialization, efficient use
of resources, and lower prices for consumers which results in a higher standard of living and economic prosperity. Organizations like the WTO, however, have a long way
to go in tearing down the barriers of protectionism. A
WTO report issued on Nov. 6 said that of the 1,244 traderestrictive measures G20 members had introduced since
the Great Recession of 2008, only 282 policies were removed and these policies have continued to rise at the
rate of 18 a month over the past year. A sledgehammer,
not merely a scalpel, is necessary to tear down this wall.
WI

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reut.rs/11yTXru http://bit.ly/1qt6D92 http://
nyti.ms/1uqYmqa
Upcoming
Events:

While free trade is meant to eliminate unfair barriers to

global commerce, it actually promotes job loss in developed countries. Firms pursue labor where it is cheaper and
this leads to a "race to the bottom," as developing countries like China, India, and Bangladesh compete with each
other to downgrade labor and environmental regulations.
Western economies generally establish a double standard
of through imposing a protectionist policy on the goods
and services they specialize, while they pressure developing countries to have little to no barriers to trade. As writer
Arundhati Roy states, "Why else would it be that countries
that grow 90% of the worlds cocoa bean produce only 5%
of the worlds chocolate?" The international charity Christian Aid reported that sub-Saharan Africa is $272 billion
worse off because of the World Bank/IMF economic programs that had imposed trade liberalization for over 20
years on them as a condition for receiving aid. The result?
"...imports increased massively while exports went up only
slightly."
Although countries promise that free trade regulations are
equal, the players' capabilities are not. Trade barriers are
a necessary, measure for developing countries to protect
their industries. Smaller economies must subsidize domestic industries and impose barriers against bigger countries that seek to make a feast of them to be globally competitive. After all, turkeys may be present during Thanksgiving, but they certainly do not enjoy it.CM

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bit.ly/1xTDrym http://bit.ly/1zA4NZu

Nov. 19 Fed Minutes

Psuea.org EA Homepage

Nov. 20 Jobless Claims

Psuea-ed.weebly.com Education Blog