Trade Between China and the United States

This paper discusses some theories about international trade, and why countries trade with one another. The first trade theory that warrants discussion is specialization, something that Adam Smith touched on. He used the analogy of specific professional to illustrate this theory — nations do what they are best at. A quick look at the relationship between the U.S. And China illustrates this quite well. The United States is a world leader in innovation. A company like Wal-Mart is a leader at designing logistics and inventory management systems. It has no particular expertise in producing goods. China, on the other hand, has developed considerable expertise in recent years with respect to production. Thus, the arrangement between Wal-Mart and China, more or less, is that China makes the goods and Wal-Mart will then get those goods to market and sell them. This plays to the strengths of both of these entities. Wal-Mart has opened retail operations in China, again because it feels that it is superior at logistics and merchandising.

Wal-Mart — and by extent the United States — has an absolute competitive advantage is logistics and retailing. There are few countries and companies that do it better, as Wal-Mart has demonstrated in a number of international expansions. China, by contrast, has emerged as the world’s manufacturer of choice. In this instance, both countries are playing t their strengths and the combination is compelling as a major driver of world trade. Apple and China is a similar story — American innovation, design and retailing combines with Chinese production to create value that few if any in the world can match. Even Apple’s major contractor, Foxconn, is an example of international trade at work, with Taiwanese management and Chinese laborers. So these are generally all examples of specialization in trade where nations do the things that they are the best in the world at.

David Ricardo developed one of the most influential theories about international trade, known as the theory of comparative advantage (WTO, 2013). This theory holds that nations do not necessarily trade only where there is absolute competitive advantage, but where there is comparative advantage. For example, there may be countries with lower cost structures than China with respect to manufacturing — perhaps Vietnam, or Bangladesh — but China has comparative advantage in that its costs are lower than those in the United States. Likewise, the U.S. may not have the world’s best design, but it has very good designs and this alone is enough to provide it opportunity. Nations will trade where such comparative advantages exist — China can learn how to sell things from many nations but it goes with the U.S.

Unrestricted free trade between nations seeks to foster greater economic efficiency in trade. In a nutshell, comparative advantage works better when there are fewer barriers to trade. For example, perhaps the U.S. buys Chinese manufactured goods not because Vietnam’s are more expensive but because there are more trade barriers between Vietnam and the U.S. than there are between China and the U.S. All other things begin equal, trade barriers can govern the trade flows between nations. Where the influence of trade barriers takes trade between nations away from economic efficiency, this reduces the total wealth of each nation.

Thus, eliminating trade barriers will create truly free trade. Nations under free trade will be able to compete with each other on even terms. As Porter (1990) notes, these terms tend more to reflect innovation and improvement as forces driving competitive advantage, rather than factor endowments. When trade barriers are removed, nations are forced to compete with factors like innovation and education. Those nations with better capacity to invest in public infrastructure like education are going to be more innovative. There is a significant difference between how nations would trade under free trade conditions. When the world moves towards freer trade, this takes the world closer to economic efficiency, which should increase total global wealth.

For many countries, economic efficiency holds a lot of intellectual appeal, but is not necessarily pragmatic. The benefits of economic efficiency are clear. Resources are allocated more efficiently, more goods and services are produced, and in general there is improvement in living standards are total wealth increases. However, many nations must weigh the quest for economic efficiency. There are a few reasons for this. First, we do not exist in a world of stable nation-states. We exist in a world characterized by perpetual conflict Today’s allies were yesterday’s enemies and vice versa. Nations therefore have a vested interest in the long-run preservation of things like military power (so steelmaking, military R&D, automobiles) and food security. While economic efficiency might make a case for free trade in something like agriculture, there is no guarantee that today’s trading partners will sell to us tomorrow. A nation faced with an existential threat from a lack of food security is likely to become a failed state, and this is something that governments prefer not to happen if the only benefits are a few cents off the price of milk.

Thus, governments play an active role in fostering the national competitiveness of certain industries. Governments also do this for other pragmatic reasons, such as the fact that governments are elected. For example, if there are not enough jobs for the people, there will be social unrest, and elected official risk losing office. Thus, there is strong incentive for politicians to promote certain industries even at the risk of economic inefficiency.

Governments should not play a role in fostering national competitive advantage, under economic orthodoxy, because this will reduce the overall economic efficiency of the global economic system. However, that efficiency is not ever going to be optimized. Remember that there is no efficiency in labor markets. If pure market forces demand that another 200 million people come to the United States, this will not happen because the country has immigration policies, there are costs associated with infrastructure that further constrain labor mobility and the total supply of labor in the world is not related to demand — there is no natural equilibrium point. Thus, governments act in their own interests to foster competitive advantage in many industries in order ensure employment, food security, military security and other social goals that are important to the electorate but that detract from pure economic efficiency.

For managers dealing in the new economic trading system it is important to understand how this system affects their businesses. The trend was once towards greater trade freedom but in the past couple of years this trend has flatlined at its current level, according to libertarian think tank the Heritage Foundation, which tracks a trade freedom index (Riley & Miller, 2013). Trade activity is rising in the world, but moves to lower trade barriers have stalled. In this delicate geopolitical time, there is risk that trade barriers could even increase on aggregate. What this means is that managers need to constantly be aware of the shifting sands of world trade and how that affects their industry. Comparative advantage examples in school always use numbers, but in the real world those numbers are not static. China still has a comparative advantage vs. The U.S. In manufacturing, but this is not as significant as it once was. Other countries might have superseded China in this respect, with either low costs and better quality at the same cost, as China’s costs continue to rise. Managers need to be alert to these trends. Furthermore, managers should be aware of other changes, such as trade agreements. If the U.S. signs a new agreement with, say, Vanuatu, then a manager should be aware of how that will affect his or her business. It might not, but if that business is in coconut milk, and the agreement removes tariffs on Vanuatu coconut milk, that matters. Managers need to always be aware of the changing dynamics of differential advantage in world trade, because these changes could be significant for its business.

Another recommendation for managers in this new trading system is to understand where the threats lie. For example, producers in another country could have a substantial advantage, but have their access to your country blocked by a tariff. If those tariffs change, your company could be exposed. When barriers on Japanese cars fell, they became more competitive on the American market and began to increase market share. Similar things happen in a number of industries. For many industries, it is better to pressure government to erect trade barriers than to compete on even footing. Likewise, competitors in foreign markets might put pressure on their governments to do the same. For managers, it is important to know where the company would stand if trade barriers were eliminated, because this will better inform strategy.

Civil Rights Movement

1. J. Edgar Hoover viewed the Black Panthers as a threat to the internal security of the United States. There is speculation as to why this was, but surely his suspicion lay in the ability of the Black Panthers to organize the black community. Their school lunch program was viewed by authorities as a means of winning favor in the community, which would lead to “indoctrination” of young people into the values and ethics of the Panthers. Hoover was cited in the New York Times (UPI, 1969) as having described the Black Panthers as a “violence-prone extremist group.” Hoover seemed to tolerate the Panthers as something other than an existential threat to the United States as long as they were underground. The school lunch program seemingly gave them a larger voice, and more power, and this is what threatened Hoover.

In particular, Hoover was aware of the high tensions of the time, as the Panthers were an extension of the civil rights movement that had been prominent throughout the 60s. He saw uprisings among students as a major threat, citing over 4000 arrests and $3 million in damages. Hoover no doubt saw the engagement of the African-American community, so long marginalized in the United States, as a threat, and doubly so when this engagement was being driven an organization as aggressive at the Black Panthers.

Hoover also cited the idea that the Black Panthers were schooled in Marxist-Leninist ideology, which reflected two great fears of the old, white male power base of the time. The first was revolution, which was a direct attack on the power base, and the other was Communism, which was understood at that time to be a significant threat to the United States. The idea that a group within the country’s borders could harbor those sentiments, and be easily activated given the historic mistreatment of African-Americans by the nation’s majority, posed a threat to Hoover that probably outweighed the actual nature of the threat. But Hoover also needed a narrative that would allow him to take action against the Panthers, and a Communist/terrorist narrative was easier to sell than a narrative based around a desire to keep black people down.

2. The case of the Regents of the University of California v Bakke revolved around admissions at the University, which included affirmative action quotas that allowed for the school to set aside a certain number of places for minority applicants. While such policies were only mildly controversial for general admissions, they became controversial where admissions were scarce, and failure to be admitted had significant financial consequences. This was the case for Allan Bakke, who was twice rejected from UC Davis for its medical school. Bakke sued the school, claiming that the only reason he was not admitted was because of the spaces held aside for minorities, and that this was racial discrimination against him. He won his case and it was upheld by California Supreme Court, paving the way for the SCOTUS decision.

The Supreme Court of the U.S. overturned the state court’s ruling, effectively upholding the affirmative action program at UC Davis medical school. Affirmative Action was deemed to be legal under the 1964 Civil Rights Act, and after this decision remained in place. The court considered Bakke’s own application, and whether or not he was rejected on merit, before investigating the discrimination angle. The school had argued that Bakke was rejected because of his age, not because of the affirmative action program. The case, by the time it reached the U.S. Supreme Court, had begun a flashpoint for race relations, with some viewing it as a test of the nation’s progress with respect to defining key principles like equality of opportunity and equal rights. The ruling has stood to this day and Bakke was admitted to medical school on the basis of the ruling by the Supreme Court of California.

3. Gerald McWorter laid out his concept for a black university that would provide a learning environment quite different from the mainstream. McWorter was driven by what he viewed as institutional racism in the education system. His blueprint focused on the social aspects of the black university. Curriculum would be developed that would reflect the African-American perspective, in contrast to the current university educations at the time, which ignored the black perspective entirely. He noted that the black experience combined social cohesion and social disruption, as family and social units had been disintegrated, but there were moments of social cohesion in the community as a result of common ethnicity and common experiences in the Americas.

McWorter’s ideas were based largely around an ideology that emphasized the need for black education to play a role in rebuilding the community and fostering a greater sense of black identity. Even when schools of the day would teach black studies, the curriculum did not reflect the African-American experience, and that was something that McWorter wanted to remedy.

His vision emerged as a legitimate response to the state of black life at the time. The Civil Rights movement had fostered a greater sense of black community, but simultaneously the community was challenged by both majority cultural hegemony and by deteriorating economic and social conditions in majority black communities across the United States. There was a need, McWorter felt, for educational institutions that would promote a greater sense of black identity.

References

No author (2013). Intro to African-American studies. eBlackStudies.org. Retrieved November 25, 2013 from http://eblackstudies.org/intro/chapter1.htm

Porter, M. (1990). The competitive advantage of nations. Harvard Business Review. Retrieved November 25, 2013 from http://kkozak.wz.cz/Porter.pdf

Regents of the University of California, Petitioner v. Allan Bakke. Retrieved November 25, 2013 from http://www.law.cornell.edu/supremecourt/text/438/265

Riley, B. & Miller, T. (2013). Congress should get smart and cut tariffs to boost trade freedom. Heritage Foundation Retrieved November 25, 2013 from http://www.heritage.org/research/reports/2013/10/congress-should-get-smart-and-cut-tariffs-to-boost-trade-freedom

UPI, (1969). The Black Panthers viewed by Hoover as national threat. New York Times. Retrieved November 25, 2013 from http://jfk.hood.edu/Collection/White%20Materials/White%20Assassination%20Clippings%20Folders/Security%20Folders/Security-Hoover/Item%20183.pdf

WTO. (2013). Comparative advantage. World Trade Organization. Retrieved November 25, 2013 from http://www.wto.org/english/res_e/reser_e/cadv_e.htm