Reference no: EM133719594

Assignment: International Trade the Potential Downsides of Open Borders

1. "If there were free migration and truly open borders, workers from the lower-wage countries would stream into the higher-wage countries. These new arrivals would compete for jobs, accept work for lower pay, and force the existing jobholders to accept either lower wages or unemployment. Precisely for this reason, no one accepts or supports the notion of free immigration. "We do, however, accept and support the notion of free trade, which has the same effect. Instead of exporting workers to the United States, lower-wage countries simply import our jobs and industries to their workers. As the higher-wage nation suffers cutbacks in production, failures of companies, and losses of jobs, the market dictates that workers accept lower wages and a reduced standard of living to match the lower-wage foreign competition." - Professor John Culbertson, University of Wisconsin, writing in the Harvard Business Review, September-October 1986. Explain the economic reasoning in this argument and assess its validity.

2. "Consider two countries producing the same good with the same constant returns to scale production function, relating output to homogeneous capital and labor inputs. ... the Law of Diminishing Returns implies that the marginal product of capital is higher in the less productive (i.e., in the poorer) economy. If so, then if trade in capital good is free and competitive, new investment will occur only in the poorer economy, and this will continue to be true until capital-labor ratios, and hence wages and capital returns, are equalized." - Robert E. Lucas, American Economic Review, 1990. Within the set-up of Lucas' statement - output produced by capital and labor with constant returns to scale and the same technology being accessible to all countries - how can our models of international trade explain why capital flows do not occur the way Lucas argues they should?

3. When NAFTA was being debated in the U.S. Congress, Representative Jerry Lewis of California said: "Bill Johnson owns the largest Caterpillar distributorship in the West. There is currently a 20% tariff on his products sold in Mexico. Caterpillar has a 50 percent share of the Mexican market. The other half is dominated by Komatsu Company of Japan. Bill says, 'Imagine what will happen when the 20 percent tariff comes off our tractors and it remains on the ones from Japan.' " Under what circumstances will this effect of NAFTA be beneficial, and when will it be harmful, to (a) the U.S., (b) Mexico, and (c) Japan?