Overview

The introduction to the subject ofinternational economics has three major purposes:

1.    Show that internationaleconomics addresses important and interesting current events and issues.

2.    Show why internationaleconomics is special.

3.    Provide a broad overview of thebook.

 

We begin with four controversies that showthe importance of current issues addressed by international economics.

 

The first controversy began with the riseinU.S.imports ofautomobile tires fromChinaduring 2004-2008. With rising imports,U.S.tire production decreased and someU.S.tire workers lost their jobs.The union that represented about half ofU.S.tire workers filed a petition seeking temporary import protection, and theinvestigation concluded that the surge of tire imports fromChinawas harming theU.S.industry. President Obama hadthe final decision about what to do. Here the controversy gets moreinteresting. The President could use the law to raise tariffs against tireimports fromChina,but should he? Key themes for the course arise in this case. Helping somedomestic groups (U.S.tiremakers and workers) harms other domestic groups (U.S.tire buyers). And, the basicconclusion is that the losers lose more than the winners win. President Obamadid impose higher tariffs, and most of the predicted effects did seem to occur.However, the decline in tire imports fromChinaled less to an increase indomestic production and employment and more to an increase in tire imports fromother countries. And, it appears that the Chinese government retaliated againstU.S.exports of chicken andauto parts toChina.Overall, theUnited StatesandChinalost some of the mutual gains from international trade.

 

The second controversy arises frominternational migration, especially the increasingly vehement complaints aboutimmigrants in many of the major receiving countries. In these countries arather large (10 percent or more) and rising percentage of the population isforeign-born, including many who are in their new countries illegally.Opponents accuse immigrants of causing general economic harm, imposing fiscalcosts as immigrants use government services, and increasing crime.International economics is often about emotional issues like immigration, yetwe do our best to use economic analysis to think objectively about actualeconomic effects. In a preview of the analysis of Chapter 15, we can reach twokey conclusions about the effects of immigration on the receiving country.First, as with many issues in international economics, there are both winnersand losers in the receiving country. Second, we can determine the net effect onthe receiving country. As we often conclude when we examine freer internationalexchange, the net national effect of immigration is positive according to thebasic economic model, in this case even if we ignore the gains to theimmigrants themselves.

 

The third controversy is the exchange ratevalue of the Chinese yuan. From the mid-1990s to 2005, the Chinese governmentmaintained a fixed exchange rate of the yuan to the U.S. dollar. AsChina’s trade surplus increased and the Chinesegovernment continually had to enter the foreign exchange market to buy dollarsand sell yuan to keep the exchange rate steady, theUnited Statesand the EuropeanUnion increasingly complained about the fixed rate. In 2005 the Chinesegovernment began to allow gradual increases in the exchange-rate value of theyuan. In mid-2008, inresponse to the worsening global crisis, the Chinese government reverted to afixed exchange rate. Then, as the Chinese economy resumed its rapid growth andChina’sgovernment continued to amass international reserves through its interventionto defend the fixed exchange rate, foreign pressures reemerged. In mid-2010China’sgovernment again began to allow gradual appreciation of the yuan.

 

In the controversy over China’s exchangerate policy, we can see many of the issues that we will examine in Parts Threeand Four of the book, including the measurement and meaning of a country’sbalance of payments (including its trade balance), government policies towardthe foreign exchange market and how a government defends a fixed exchange rateagainst market pressure for the exchange rate value to change, foreignfinancial investments and the role of currency speculators, political pressuresthat can place limits on how long a country with a fixed exchange rate and atrade surplus can maintain the fixed rate value, and how exchange rates affectnot only a country’s trade balance, but also its national macroeconomicperformance (including production, employment, and inflation).

 

The fourth controversial development is theglobal financial and economic crisis. It began in theUnited States, which hadexperienced a credit boom and a bubble in house prices. As the house pricebubble began to deflate in 2006, an increasing number of mortgages went intodefault. In August 2007 problems at BNP Paribas signaled the depth of losses onsecurities backed by these mortgages. Furthermore, financial institutionsbecame reluctant to lend to each other, because potential lenders becameworried that the borrowing institutions may hold dodgy assets that made it morelikely that they could not service their debts in the future. With the failureof Lehman Brothers in September 2008, short-term financial markets and lendingamong financial institutions froze, and the crisis entered a much worse phase.The crisis shows a controversial downside to globalization. Problems in onesector (housing) in one country can spread to much of the rest of the world,through losses on their foreign investments and through declines ininternational trade in goods and services. The discussion of the crisis inChapter 1 forms the backdrop for a series of six new boxes that areinterspersed in the book’s remaining chapters.

 

These four controversies show thatinternational economics addresses important current issues. They also can beused to show why international economics is special—why national boundariesmatter in economics. The first reason that international economics is specialis that some resources do not move freely between countries. Land is essentiallyimmobile. There are substantial impediments to the movement of laborinternationally, as we see in the analysis of international migration, becauseof the personal and economic costs to people of moving from one country toanother, and because of restrictive government policies. Financial capitalmoves more freely, but there still seems to be a home bias to many people’sfinancial investments.

The second reason that internationaleconomics is special is that national government policies matter—in fact, theymatter in two ways. One way is that national governments can adopt policiestoward international transactions, as we see in the political decision to limitU.S.tire imports fromChina. Theother way is that national governments adopt different economic policies. Thesenational policies usually are designed to serve national interests, but theyoften have international effects. We see the tension between national interestsand international effects in the discussion ofChina’s exchange rate policy.