WEEK 1
Chapter 1: International Economics is Different
What is a Nation?
● The existence of nations makes international economics distinct from the rest of
economics
● International economics is about economic relations among nations
● However, nations are sovereign, which is critical
○ No central court can enforce its will on nations with a global police force
● A nation can ignore the interests of foreigners
● A nation can have:
○ Its own currency (own exchange rate and monetary policy)
○ Its own barriers to international trade (trade policy)
○ Its own government taxing and spending (own fiscal policy)
○ Its own laws of citizenship and residence (own immigration policy)
Four Controversies
● Four controversial developments that frame the scope of what we will learn in
international economics
○ Trade War of 2018
○ Immigration
○ Brexit
○ China’s exchange rate regime
● We will use these issues to outline key ideas and concepts of international
economics
The Trade War of 2018
● By mid-2018, the United States had instigated a trade war.
● Trade deficits (e.g., with China, Mexico & other countries) were used as evidence
to support arguments for protectionist tariffs & U.S. withdrawal from, or
renegotiation of, trade agreements.
● In January 2017, the United States:
○ Withdrew from the Trans-Pacific Partnership (TPP)
○ Launched U.S. International Trade Commission (USITC) investigations
● In 2018, USITC concluded that rising imports had harmed U.S. firms in several
industries.
● As a result, the U.S. imposed (temporary) safeguard tariffs ( > 30%) on imports of
washing machines & solar panels.
, ● The US Department of Commerce (USDC) found that imports of steel &
aluminum threatened national security.
● Concerns that steel & aluminum imports threatened national security resulted in
tariffs on steel imports of 25% & 10% on imports of aluminum.
● Initially, temporary exemptions were granted on imports of these products from
Canada, Mexico, the European Union (EU), Argentina, Australia, Brazil & South
Korea.
● Under the threat of tariffs, South Korea & Argentina agreed to voluntarily limit
their exports (i.e., to a VER) and Brazil agreed to quotas on its exports.
● In June of 2018, the U.S. ended the temporary exemptions & imposed tariffs on
steel and aluminum from all countries, except Australia.
● In response to U.S. tariffs, exporting countries imposed retaliatory tariffs on U.S.
exports.
● In March of 2018, the U.S. threatened to impose tariffs on Chinese imports to
retaliate against a range of unfair trade policies & practices towards U.S.
intellectual property.
● China threatened retaliatory tariffs to counter U.S. threats.
● The U.S. brought a complaint against China to the World Trade Organization
(WTO), alleging violation of intellectual property rules.
● In July of 2018, the trade war escalated, with the U.S. imposing tariffs on imports
from China and China retaliating.
● What are the expected results of the imposition of tariffs by the United States &
retaliation by other countries?
○ Impediments to free trade impact producers & consumers in exporting and
importing countries, as well as the world as a whole.
○ Economic analysis concludes that trade is a positive-sum activity (rather
than a zero-sum activity) and both countries generally gain from trade ↔
recall theory of comparative advantage.
○ Economic analysis also suggests that the overall trade balance, rather tan
the trade balance with individual countries is what matters.
Immigration
● About 260 million people, about 3% of the world’s population, live outside the
country of their birth.
● For most industrialized countries – the exception is Japan – the percentage of
the country’s foreign-born population is relatively high, ranging from 13% for the
United States to 29% for Switzerland.
● In addition, this proportion has generally been rising → controversy.
, ● Many of the foreign-born are illegal immigrants—over one-quarter of the total for
the U.S.
● Immigration policies have been set in place to restrict and reduce immigration.
● There have been several failed efforts to comprehensively reform immigration
policies in the United States
● Opponents of immigration stress a range of problems they believe arise from
immigration, including:
○ General losses to the economy
○ The fiscal burden from immigrants’ use of government services (e.g.,
health care, schooling, etc.)
○ Slow integration of immigrants into the new national culture, values, and
language
○ Potential of increased crime
○ Links of some immigrants to terrorism
● How much harm do immigrants do to the receiving country? What do we think?
● Job-seeking immigration brings net economic benefits, not only to the
immigrants, but to the receiving country as a whole.
● However, there are always winners and losers.
○ Winners include the firms that employ the immigrants & consumers who
buy the products.
○ The group that loses is the workers who compete with the immigrants for
jobs.
○ The net effect is positive – the winners win more than the losers lose.
Brexit
● In June 2016, voters in the United Kingdom (UK) voted 52% to 48% to leave the
European Union (EU) → narrow margin.
● Key features of the EU are:
○ Customs union, which eliminates tariffs between EU members & imposes
a common external tariff (CET)
○ Single market which promotes free movement of goods & services,
financial capital & people among EU members, and
○ Common currency (the Euro) & common monetary policy (implemented by
the ECB)
● Differences in the “Brexit” vote were geographic:
○ London, Scotland and Northern Ireland voted to remain in the EU.
○ The rest of England (outside London) and Wales voted to leave the EU.
, ● Differences in the “Brexit” vote were demographic:
○ Younger and more educated people voted to remain.
● Proponents of “stay” stressed economic benefits to the UK of EU membership.
○ Net benefits from trade, immigration from other EU countries & the
dominance of London as a financial center
● Proponents of “leave” stressed re-establishment of British sovereignty.
○ Ability to set own policies
○ Ability to control immigration
○ Use contributions to EU for its own use
● Challenges for Britain & the rest of the EU to resolve:
○ What will be the status of the border between Northern Ireland (part of the
UK) & Ireland? Note: the island of Ireland (Northern Ireland & Ireland)
functions as one economy.
○ What tariffs & customs procedures will exist for trade between Britain and
the EU?
○ Will there be differences in product regulations & standards between
Britain & the EU, and how will these apply to trade?
○ Will there be new barriers to trade in services? Specifically, to what extent
can London banks continue to sell financial services to EU firms and
residents?
○ Will Britain be able to negotiate its own free-trade agreements with outside
countries?
○ Will Britain continue to benefit from the more than 35 free-trade
agreements the EU has with other countries?
○ What policies will oversee migration between Britain & the EU?
○ To what extent will Britain continue to pay the EU?
● Options for Britain in leaving the EU:
○ A ‘hard Brexit’ – complete break with the EU – which might be disruptive
to British companies, industries & jobs.
○ A ‘soft Brexit’ – e.g., Britain shifts to customs union with the EU & accepts
many ‘single-market’ rules but is not formally an EU member – which
allows for much less sovereignty. Britain would have no formal role in
enacting or changing EU laws & regulations.
China’s Exchange Rate
● An exchange rate is value of a country’s currency in terms of some other
country’s currency (e.g., US$/C$ = US$0.83).
Chapter 1: International Economics is Different
What is a Nation?
● The existence of nations makes international economics distinct from the rest of
economics
● International economics is about economic relations among nations
● However, nations are sovereign, which is critical
○ No central court can enforce its will on nations with a global police force
● A nation can ignore the interests of foreigners
● A nation can have:
○ Its own currency (own exchange rate and monetary policy)
○ Its own barriers to international trade (trade policy)
○ Its own government taxing and spending (own fiscal policy)
○ Its own laws of citizenship and residence (own immigration policy)
Four Controversies
● Four controversial developments that frame the scope of what we will learn in
international economics
○ Trade War of 2018
○ Immigration
○ Brexit
○ China’s exchange rate regime
● We will use these issues to outline key ideas and concepts of international
economics
The Trade War of 2018
● By mid-2018, the United States had instigated a trade war.
● Trade deficits (e.g., with China, Mexico & other countries) were used as evidence
to support arguments for protectionist tariffs & U.S. withdrawal from, or
renegotiation of, trade agreements.
● In January 2017, the United States:
○ Withdrew from the Trans-Pacific Partnership (TPP)
○ Launched U.S. International Trade Commission (USITC) investigations
● In 2018, USITC concluded that rising imports had harmed U.S. firms in several
industries.
● As a result, the U.S. imposed (temporary) safeguard tariffs ( > 30%) on imports of
washing machines & solar panels.
, ● The US Department of Commerce (USDC) found that imports of steel &
aluminum threatened national security.
● Concerns that steel & aluminum imports threatened national security resulted in
tariffs on steel imports of 25% & 10% on imports of aluminum.
● Initially, temporary exemptions were granted on imports of these products from
Canada, Mexico, the European Union (EU), Argentina, Australia, Brazil & South
Korea.
● Under the threat of tariffs, South Korea & Argentina agreed to voluntarily limit
their exports (i.e., to a VER) and Brazil agreed to quotas on its exports.
● In June of 2018, the U.S. ended the temporary exemptions & imposed tariffs on
steel and aluminum from all countries, except Australia.
● In response to U.S. tariffs, exporting countries imposed retaliatory tariffs on U.S.
exports.
● In March of 2018, the U.S. threatened to impose tariffs on Chinese imports to
retaliate against a range of unfair trade policies & practices towards U.S.
intellectual property.
● China threatened retaliatory tariffs to counter U.S. threats.
● The U.S. brought a complaint against China to the World Trade Organization
(WTO), alleging violation of intellectual property rules.
● In July of 2018, the trade war escalated, with the U.S. imposing tariffs on imports
from China and China retaliating.
● What are the expected results of the imposition of tariffs by the United States &
retaliation by other countries?
○ Impediments to free trade impact producers & consumers in exporting and
importing countries, as well as the world as a whole.
○ Economic analysis concludes that trade is a positive-sum activity (rather
than a zero-sum activity) and both countries generally gain from trade ↔
recall theory of comparative advantage.
○ Economic analysis also suggests that the overall trade balance, rather tan
the trade balance with individual countries is what matters.
Immigration
● About 260 million people, about 3% of the world’s population, live outside the
country of their birth.
● For most industrialized countries – the exception is Japan – the percentage of
the country’s foreign-born population is relatively high, ranging from 13% for the
United States to 29% for Switzerland.
● In addition, this proportion has generally been rising → controversy.
, ● Many of the foreign-born are illegal immigrants—over one-quarter of the total for
the U.S.
● Immigration policies have been set in place to restrict and reduce immigration.
● There have been several failed efforts to comprehensively reform immigration
policies in the United States
● Opponents of immigration stress a range of problems they believe arise from
immigration, including:
○ General losses to the economy
○ The fiscal burden from immigrants’ use of government services (e.g.,
health care, schooling, etc.)
○ Slow integration of immigrants into the new national culture, values, and
language
○ Potential of increased crime
○ Links of some immigrants to terrorism
● How much harm do immigrants do to the receiving country? What do we think?
● Job-seeking immigration brings net economic benefits, not only to the
immigrants, but to the receiving country as a whole.
● However, there are always winners and losers.
○ Winners include the firms that employ the immigrants & consumers who
buy the products.
○ The group that loses is the workers who compete with the immigrants for
jobs.
○ The net effect is positive – the winners win more than the losers lose.
Brexit
● In June 2016, voters in the United Kingdom (UK) voted 52% to 48% to leave the
European Union (EU) → narrow margin.
● Key features of the EU are:
○ Customs union, which eliminates tariffs between EU members & imposes
a common external tariff (CET)
○ Single market which promotes free movement of goods & services,
financial capital & people among EU members, and
○ Common currency (the Euro) & common monetary policy (implemented by
the ECB)
● Differences in the “Brexit” vote were geographic:
○ London, Scotland and Northern Ireland voted to remain in the EU.
○ The rest of England (outside London) and Wales voted to leave the EU.
, ● Differences in the “Brexit” vote were demographic:
○ Younger and more educated people voted to remain.
● Proponents of “stay” stressed economic benefits to the UK of EU membership.
○ Net benefits from trade, immigration from other EU countries & the
dominance of London as a financial center
● Proponents of “leave” stressed re-establishment of British sovereignty.
○ Ability to set own policies
○ Ability to control immigration
○ Use contributions to EU for its own use
● Challenges for Britain & the rest of the EU to resolve:
○ What will be the status of the border between Northern Ireland (part of the
UK) & Ireland? Note: the island of Ireland (Northern Ireland & Ireland)
functions as one economy.
○ What tariffs & customs procedures will exist for trade between Britain and
the EU?
○ Will there be differences in product regulations & standards between
Britain & the EU, and how will these apply to trade?
○ Will there be new barriers to trade in services? Specifically, to what extent
can London banks continue to sell financial services to EU firms and
residents?
○ Will Britain be able to negotiate its own free-trade agreements with outside
countries?
○ Will Britain continue to benefit from the more than 35 free-trade
agreements the EU has with other countries?
○ What policies will oversee migration between Britain & the EU?
○ To what extent will Britain continue to pay the EU?
● Options for Britain in leaving the EU:
○ A ‘hard Brexit’ – complete break with the EU – which might be disruptive
to British companies, industries & jobs.
○ A ‘soft Brexit’ – e.g., Britain shifts to customs union with the EU & accepts
many ‘single-market’ rules but is not formally an EU member – which
allows for much less sovereignty. Britain would have no formal role in
enacting or changing EU laws & regulations.
China’s Exchange Rate
● An exchange rate is value of a country’s currency in terms of some other
country’s currency (e.g., US$/C$ = US$0.83).
