Unintended Barriers to Trade

As previously mentioned in an earlier bog, international trade increases competition resulting in more options to the consumer and lower prices. Nations are continuously working towards freer trade. Barriers to trade are most commonly thought to be tariffs, or non-tariff barriers such as licenses (import & export), quotas, subsidies, currency devaluation and many other government induced restrictions between nations. However, there are many other barriers to trade that are not so obvious. These are unintended barriers that can be caused by unrelated events such as social problems, political crises and natural disasters. Examples may include the war on terror, the Japanese Earthquake of 2011, Somalian Pirates, and many others. These events have an impact on international trade. Below is just a few of the ways in which the war on terror has impacted trade for the U.S.

September 11, 2001 became a day of great tragedy when terrorists launched an assault on the Twin Towers, New York’s World Trade Center and the Pentagon Complex in Washington, D.C.  Nearly 3000 people died in the attacks. In response, President George W. Bush tightened security throughout the United States. This tightened security caused a slowdown and added costs to trade. The war on terror forced the U.S., and many other countries, to review and improve the ways in which they protect their borders and citizens by monitoring the items that are imported/exported.

These new security checks have resulted in numerous transportation delays. About 2 hours have been added each ships arrival and an additional charge of $1500 for each tugboat escort. Security along borders also slowed down trucks hauling cargo from Canada and Mexico into the U.S. Crossing borders from Canada to the U.S. used to take 1-2 minutes, after the attacks on 9/11 they were taking anywhere from 10-15 hours. The additional security expenses are added to the transportation costs for each shipment. “These costs are an obstacle to trade and impede the realization of gains from trade liberalization. Simply put, differences across countries in transport costs are a source of comparative advantage and affect the volume and composition of trade” (Carbaugh, 2010).

Globalization Drives Changes for U.S. Automakers

Due to globalization, Ford, General Motors, and Chrysler, often referred to as the “Big Three”, have faced steep competition over the years from many foreign producers (particularly Japanese companies such as Toyota, Nissan and Honda). 

Consumers in the U.S. are open to openness. We are continuously looking for the best “bang for a buck”. Competition aids us in our desire to shop around, but can create some disadvantages to U.S. producers. This increased rivalry has resulted in lost market share for the Big Three and has forced them to review all areas of their business to help gain efficiencies and cut costs.

The majority of operations for the Big Three are unionized, resulting in higher labor costs than their competitors, including those that have manufacturing facilities in the US. Due to the extended amount of time that the Big Three have been in business they have a larger number of retirees and therefore have higher pension and benefit obligations. According to the article supplied by the U.S. Department of Commerce, Toyota’s health care costs advantage is about $1,300 per vehicle, compared to the Big Three. This is a substantial advantage for foreign competitors allowing them to put this differential towards other features that make their products more appealing. In addition, they also have cheaper labor. Toyota has a $6.00 per hour advantage over that of the Big Three. These additional expenses will continue to diminish the Big Three’s comparative advantage.

Does the obligation of healthcare benefits negatively impact the comparative advantage of U.S. businesses? Can they compete with countries that offer national healthcare? Are there other policies that could be enacted to improve the comparative advantage of US car manufacturers? 

I believe that additional obligations of U.S. companies have a negative impact on their comparative advantage, but cannot state to what extent. Although other nation’s have national health care, if the U.S. were to convert to such a program it would ultimately be paid for through taxes. I am also not fully aware of any additional expenses that other foreign businesses have that the U.S. may not. Although there are some unknowns, I would imagine that U.S. companies are still at a disadvantage since they currently pay their employees $6.00 more per hour than foreign companies operating in the U.S.

The U.S. government has already provided GM and Chrysler with a $17.4 billion loan to prevent them from failing, while also forcing them to shrink their labor force, slash debt, terminate or sell low performing brands, and decrease the number of models for sale. Why should the government have to step in and tell these corporations how to run their business and provide assistance when they fall short? If they fail to be efficient shouldn't the natural cycle be to remove themselves from the market? Survival of the fittest. Providing assistance is not forcing these businesses to explore every option possible on their own and in the end, even after assistance, they filed bankruptcy anyways.

At what point does the government decide to allow companies like GM and Chrysler to turn to the general principle of comparative advantage and force them to find other means of cost savings or make them close their facilities? It is costing tax dollars to keep them afloat. Yes, citizens of the U.S. benefit from the jobs that these facilities offer, but if GM and Chrysler were to close (Ford seems to be surviving on their own), it would leave more room for foreign competitors to open additional facilities in the U.S. which will take on some of the unemployed workforce.

Of course it is easy to have this opinion since I would not be directly affected by the closing of these facilities. My job would still be safe, but at the same time if my company was failing to compete with international suppliers, I wouldn't expect the government to bail us out. Instead I would work hard to find the company advantages in other areas, search for a new position is a growing company or explore other careers. Competition creates innovation.  U.S. auto manufacturers have to be on the top of their game to find new ways to save costs and create demand for their products just like other businesses.

How open to openness are you?

Openness is defined by the online dictionary as the willingness or readiness to receive. On an economic scale, it is defined as the ratio of a nation’s exports and imports as a percentage of its gross domestic product (GDP).

In today’s global economic environment it is essential for countries to possess “openness” in order to survive and remain competitive. No country could survive in isolation. Trade amongst nations provides many benefits including: greater choice for the consumer, increased competition resulting in lower prices, expanded markets and customer bases, and global investment opportunities. Trade allows countries to specialize in producing the goods in which they have a comparative advantage and trade with other countries for the goods in which they do not, creating efficiency gains. Although regulation of trade is essential, it is a necessary component of survival and growth in today’s economy.

As a society, we always view people that have an open mind in a positive light; it is a good characteristic to possess. We must use the same opinion and mind set when viewing the openness of countries to trade. I am open and welcoming to any countries that would like to trade with the US. We can benefit greatly from the products, service or expertise that other countries have to offer.

How open to openness are you?