Port of Providence - Future for Lil' Rhody

The Port of Providence is one of the busiest ports in America’s northeast and one of only 2 deep water ports in New England.

According to a recent study conducted by a special legislative commission, the ports in Providence, Davisville - North Kingstown, and Newport, offer great opportunities for the state. If these ports are further developed they could grow the Rhode Island economy immensely. The recommendations of the study could generate an additional 1,000 jobs, $70 million in personal income, $127 million in business revenue and $8.1 million in state and local tax revenue! The could be great a opportunity for prosperity in Lil’ Rhody!

Rhode Island’s port-related economy currently employs more than 3,600 people, generates more than $320 million in economic activity and provides annual taxes of $25 million. Even with the great economic contribution that already exists, the Providence Planning Department’s Waterfront Plan, is looking to mix industries, and threaten business within the port. They have a “vision of mixed-use residential and hotel uses directly next to heavy marine industrial business”. This would allow hotels, marinas, and condominiums to be built immediately adjacent to existing oil terminals.  Yuck! – who really wants to live next to oil terminals?! No one does, which is why if the state moves forward with this plan, it will result in complaints and lawsuits made by residents that will ultimately put limitations and restrictions of businesses in the area, affecting productivity and the economy of the state. There are many examples of similar scenarios in which housing was built in close proximity to industry and the residential community has consistently won the disputes, ultimately shutting businesses down.

Read more at http://www.pbn.com/Report-Davisville-Newport-Providence-ports-can-grow,65384.

“Visions” such as this have caused many businesses to question their future in the Port. If the state has other plans in mind, where will that leave them and where will that leave their employees and the economy?! The infrastructure in the Port of Providence allows them to offload over 2,000 ships annually, handling over 2.5 million tons of cargo such as coal, cement, chemicals, salt and aggregates, steel, copper and forestry products. Providence is an important gateway for the importation of petroleum products, since almost all of the transportation and heating fuel products are consumed in Rhode Island, eastern Connecticut and part of Massachusetts. 

The city of Providence has many other areas that can attract tourism and condo development without destroying a key economic contributor such as the Port of Providence. The state should focus on selling the existing luxury condos that are vacant due to economic hardships, rather than creating additional buildings. People cannot afford pricey luxury apartments/condos anymore. Many existing condos are being auctioned for almost 70% off of the original asking price. The city should focus on creating good paying jobs for the people of RI while the unemployment rate is on the rise.

The emerging economy of Russia and effects of international factor movements.

As an introduction, Carbaugh (2010) states that, “The economic forces underlying the international movement of factors of production are virtually identical to those underlying the international flow of goods and services. Productive factors move, when they are permitted to, from nations where they are abundant (low productivity) to nations where they are scarce (high productivity). Productive factors flow in response to differences in returns (such as wages and yields on capital) as long as these are large enough to more than outweigh the cost of moving from one country to another.”

Below are some general facts of Russia provided by Migration Information Source

Population: ……………………………  140,702,096 (July 2008 est.)

Population growth rate:………………..   -0.474% (2008 est.)

Birth Rate:……………………………..  11.03 births/ 1,000 population (2008 est.)

Death Rate:…………………………....  16.06 deaths / 1000 population (2008 est.)

Net Migration Rate:……………………  0.28 migrants / 1000 population (2008 est.)

Ethnic groups:…………………………   Russian 79.8%, Tatar 3.8%, Ukrainian 3%,

                                                                Bashkir 1.2%, Chuvash 1.1%, other or 

                                                                unspecified 12.1% (2002 census)

The Russian Federation is the largest country in physical terms, with nearly twice the territory of Canada and the United States.  It shares a land border with 14 countries and requires 450 different official border crossing points.  The official currency is the Russian Ruble, which is one of the world’s oldest currencies. The currency has had its high and lows, but grew steadily after the authorities announced that they would no longer allow independent countries to print Russian national currency.  However, once the Asian financial crises his Russia in the 1998 the value of the ruble dropped.  Today 1 USD is equal to 29.36 rubles.

According to Nation Branding & Investment, Russia has a market economy with enormous natural resources, predominantly oil and natural gas. It has the 10^th largest economy in the world by nominal GDP and the 6^th largest by purchasing power parity.  More recently, higher domestic consumptions and greater political stability have strengthened economic growth. In 2002-2003, as fuel prices rose, FDI flows into Russia increased tenfold over time due higher profit results, and Russia became one of the top countries in the world for inward FDI. Russia’s main focus now is on the quality of long-term investments to ensure that technology and innovations flow into the country, along with capital, modern-production facilities, and the creation of jobs.

It is often argued that migration is needed in order for Russia to maintain growth and stability. Due to Russia’s higher death rate, than that of births as listed above, without immigration it would be necessary to raise the retirement age to 73, however the life expectancy for men and women combined is only 65.

Beginning is 1993 Russia also began its accession to the WTO.  This is a process that may be used as an important tool for economic development.  WTO accession will impact a wide range of policies and institutions, including tariff policy, customs administration standards, rights of foreign investors, agricultural policy, intellectual property and possibly government procurement.  Russia has negotiated most favored nation status or better with all its significant trading partners.  I look forward to seeing Russia’s growth and international economic continuations in the near future.

Regional Trade Agreements – Mercosur

Mercosur is a regional trade agreement, formed in South America, which includes the founding members Argentina, Brazil, Paraguay and Uruguay. It was initiated by the Treaty of Asuncion in 1991, and “aims to eliminate all internal tariff and non tariff barriers on the flow of goods and factors of production, implement a common external tariff and harmonize numerous macroeconomic and sectoral policies” among the four founding members. Although it only has four members the arrangement has evolved to include associate members such as Venezuela, Chile and Bolivia; they can join free-trade agreements but remain outside the bloc's customs union.

Why did these countries decide to enter into a Regional Trading Arrangement (RTA)?  These agreements create unique opportunities to take advantage of economy of scale, allowing a country to export to an unrestricted market and to have opportunities to improve products in better conditions than previously encountered. They can also open protected markets that were unavailable prior to the arrangement. 

Mercosur tariff policies regulate imports and exports and the bloc can arbitrate in trade disputes among its members. In the longer term, Mercosur aims to create a continent-wide free-trade area. Although Mercosur members negotiated about 800 exceptions to the common external tariff (CET) in order to protect multiple fledging industries, the member countries have been able to capitalize on 85% of goods and services being traded free of restrictions. Although they have had some success they have also experienced some road blocks. A problem that has been experienced by Mercosur member is the informal non-tariff barriers such as administrative delays at customs and side deals between private businesses, which hinder the free flow of goods between member countries.

“Perhaps the most telling sign of Mercosur's success is that its core member countries remain part of the bloc and other countries and regional blocs want to associate with it despite its many imperfections.”

Why is it so important for developing nations to be involved in trade, and what institutions and policies exist to help developing nations?

It is no secret that developing nations rely heavily on advanced nations when referring to international trade. The exports of developing nations are primarily imported by advanced nations. The developing nations that become more open to international trade and foreign investment have a higher potential for economic growth and a better life for their citizens.

There are many organizations designed to help the development of these budding nations such as the International Monetary Fund (IMF), The World Bank, and the Organization for Economic Cooperation and Development (OECD). 

The OECD is on a mission to promote policies that will improve the economic and social well-being of people around the world. They provide an opportunity for governments to work together to share experiences and seek solutions to common problems. In essence, countries can learn from each other’s successes and failures. How great is that! Just on a human to human level this has always worked well for me, imagine how much countries can benefit from this type of forum and information sharing!

The OECD sets “international standards on a wide range of things, from agriculture and tax to the safety of chemicals”. Drawing on facts and real life experience, they are known as a statistical agency, the OECD is able to recommend policies to help make an improvement in people’s lives. “OECD uses its wealth of information on a broad range of topics to help governments’ foster prosperity and fight poverty through economic growth and financial stability. We help ensure the environmental implications of economic and social development are taken into account”.

The organization was established in 1961 and is headquartered in Paris, France.  It has 34 member countries, made up by many of the world’s most advanced countries with high-income economies.  As pointed out on the organization webpage, the OECD is currently focusing on 4 main areas:

·         Governments need to restore confidence in markets and the institutions and companies that make them function.  It must be recognized that this will require improved regulation and more effective governance at all levels of political and business life.

·         Governments must re-establish healthy public finances as a basis for future sustainable economic growth.

·         Looking for ways to foster and support new sources of growth through innovation, environmentally friendly ‘green growth’ strategies and the development of emerging economies.

·         To underpin innovation and growth, we need to ensure that people of all ages can develop the skills to work productively and satisfyingly in the job of tomorrow.

The OECD is just one example of an organization that helps improve developing nations. Although most members are developed countries, the OECD can provide budding nations vast knowledge to help promote improvements, and knowledge is power!  

Chinese tires + U.S. chicken feet = trade war.

How is this? There seems to be no link between these 2 products. Well, think again and read on.

In September of 2009, the United Steelworkers and International Trade Commission encouraged President Obama to impose a tariff on automobile and light-truck tires imported from China. American imports of Chinese tires tripled between 2004 and 2008. With four American tire factories closing in 2006 and 2007, and more expected to close in the future, the Union’s request was an effort to control competition and alleviate the disruption of the $1.7 billion market, helping to protect the jobs of American tire workers. Obama conformed and inflicted a three year tariff on Chinese tires for 35 percent the first year, 30 percent the second and 25 percent the third. This is the first time that the United States has invoked a special safeguard provision, as allowed by the WTO.

Needless to say the Chinese were not happy with this corollary and retaliated. How did they retaliate… through chicken feet. That’s right, chicken feet!

One country’s trash is another country’s treasure. 

Although chicken feet, or “phoenix talons” as the Chinese call them, would usually end up being ground into parts for feed in the United States, they are a delicacy in China. China’s production of chicken feet isn’t enough to satisfy its domestic demand, resulting in the need to import from the States. American producers benefit from the ability to sell feet to China for 20 to 30 times more than they could in the States and the Chinese benefit by having more supply to help meet their demand. More than half of China’s imports of chicken feet come from the U.S. 

As a reprisal to the tariff on Chinese tires, China’s Ministry of Commerce announced it would begin imposing antidumping tariffs ranging from 43.1% to 105.4% on imports of chicken parts from the U.S. China’s argument was that domestic producers could not sell their products and were losing money to imported chicken parts from American producers. In 2008, the U.S. exported $677 million worth of chicken to China, half of which was chicken feet that sold for $0.60 to $.80 per pound in the Chinese market, much more than they could sell for in the U.S. The fact that chicken feet sell for much higher prices on the Chinese market than they would in the U.S. proves they are not being dumped or sold below costs. The new tariffs would price American chicken feet out of the Chinese market.

So who is affected by this war? 

The consumer! That’s right; ultimately the consumer seems to always pay the price. The Chinese consumer will pay higher prices for their “phoenix talons”, as the supply decreases and the price rises and the America consumer will pay higher prices for tires due to the higher cost of domestically made tires and the tariffs that will be imposed on cheaper Chinese imported tires. 

Chinese producers have the Ministry of Commerce looking for them and the American producers have the International Trade Commission looking out for them, but as usual, no one seems to be looking out for the consumer.         

             

 

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.