1 00:00:00,500 --> 00:00:04,850 [SQUEAKING][RUSTLING][CLICKING] 2 00:00:10,895 --> 00:00:12,020 JONATHAN GRUBER: All right. 3 00:00:12,020 --> 00:00:13,215 Let's get started. 4 00:00:13,215 --> 00:00:15,090 Today, we're going to continue our discussion 5 00:00:15,090 --> 00:00:16,850 of international trade. 6 00:00:16,850 --> 00:00:20,000 I want to finish up discussing comparative advantage, 7 00:00:20,000 --> 00:00:23,180 and then we'll talk about the welfare implications 8 00:00:23,180 --> 00:00:25,190 of international trade, and then how 9 00:00:25,190 --> 00:00:27,410 that drives our thinking about trade policy, one 10 00:00:27,410 --> 00:00:31,010 of the hottest topics in economics discussions today. 11 00:00:31,010 --> 00:00:34,460 So let's finish our discussion of comparative advantage 12 00:00:34,460 --> 00:00:37,250 that we started last time. 13 00:00:37,250 --> 00:00:40,970 Remember, the key lesson from the PPF-type analysis 14 00:00:40,970 --> 00:00:45,290 we had last time is that if there's comparative advantage, 15 00:00:45,290 --> 00:00:48,900 it can yield gains to trade through specialization. 16 00:00:48,900 --> 00:00:51,690 So that's sort of the key lesson, 17 00:00:51,690 --> 00:00:55,010 is that comparative advantage yields 18 00:00:55,010 --> 00:01:02,190 gains from trade through the mechanism of specialization. 19 00:01:06,470 --> 00:01:10,160 So basically, because of comparative advantage, 20 00:01:10,160 --> 00:01:12,650 you can specialize, and that means you can essentially 21 00:01:12,650 --> 00:01:14,570 get an outward-bending PPF. 22 00:01:14,570 --> 00:01:16,790 You can essentially get economies of scope 23 00:01:16,790 --> 00:01:19,560 by specializing and combining your activities. 24 00:01:19,560 --> 00:01:21,587 Now, you don't literally get economies of scope, 25 00:01:21,587 --> 00:01:23,420 because each person's doing their own thing. 26 00:01:23,420 --> 00:01:25,807 But it acts as if the economy as a whole 27 00:01:25,807 --> 00:01:27,890 is yielding economies of scope, because basically, 28 00:01:27,890 --> 00:01:30,380 by specializing, you're allowing the economy as a whole 29 00:01:30,380 --> 00:01:33,080 to benefit from people doing what they're best at. 30 00:01:33,080 --> 00:01:37,070 So that's the basic intuition of the economics 31 00:01:37,070 --> 00:01:40,250 of why international trade can yield gains. 32 00:01:40,250 --> 00:01:40,880 OK? 33 00:01:40,880 --> 00:01:42,950 Now, that raised the natural question of, well, 34 00:01:42,950 --> 00:01:46,438 where does comparative advantage come from? 35 00:01:46,438 --> 00:01:48,480 Why do some countries have comparative advantage? 36 00:01:48,480 --> 00:01:50,930 We [INAUDIBLE] from me versus LeBron James. 37 00:01:50,930 --> 00:01:53,480 He's got better genes and he's worked harder than I have. 38 00:01:53,480 --> 00:01:57,958 But basically, when it comes to countries, 39 00:01:57,958 --> 00:01:59,750 where does comparative advantage come from? 40 00:01:59,750 --> 00:02:03,540 And basically comes from, roughly speaking, two sources. 41 00:02:03,540 --> 00:02:07,640 The first source of comparative advantage is factor endowments. 42 00:02:11,630 --> 00:02:13,850 Some countries, just through the nature 43 00:02:13,850 --> 00:02:16,040 of geography and geological history, 44 00:02:16,040 --> 00:02:20,700 are endowed with things that people want, and therefore 45 00:02:20,700 --> 00:02:22,950 gives a comparative advantage in trading those things. 46 00:02:22,950 --> 00:02:26,060 So if you think about Canada, Canada 47 00:02:26,060 --> 00:02:28,970 is endowed with enormous amounts of forested land, 48 00:02:28,970 --> 00:02:32,780 and they've become a major exporter of lumber and paper 49 00:02:32,780 --> 00:02:33,980 products over time. 50 00:02:33,980 --> 00:02:35,570 That's their comparative advantage 51 00:02:35,570 --> 00:02:39,690 because they happen to have all this forested land around. 52 00:02:39,690 --> 00:02:43,610 So for example, that's why most clothing today comes from China 53 00:02:43,610 --> 00:02:45,290 and less developed countries. 54 00:02:45,290 --> 00:02:49,130 Because their factor endowment is cheap labor. 55 00:02:49,130 --> 00:02:52,290 It's not that they have more natural textile threads 56 00:02:52,290 --> 00:02:52,790 or whatever. 57 00:02:52,790 --> 00:02:55,880 It's just they have a cheap labor, which 58 00:02:55,880 --> 00:03:00,500 is the primary factor which goes into producing textiles. 59 00:03:00,500 --> 00:03:04,670 So one source of comparative advantage is factor endowments. 60 00:03:04,670 --> 00:03:07,550 Now, once again, some country could have more of everything. 61 00:03:07,550 --> 00:03:09,800 Canada could have cheap labor and lumber. 62 00:03:09,800 --> 00:03:12,170 But the key point is in the simple two-by-two world 63 00:03:12,170 --> 00:03:14,120 we're thinking of, it's all about relative, 64 00:03:14,120 --> 00:03:15,203 comparative advantage. 65 00:03:15,203 --> 00:03:17,120 So it's the one that have the most of relative 66 00:03:17,120 --> 00:03:18,790 to other countries. 67 00:03:18,790 --> 00:03:20,090 OK? 68 00:03:20,090 --> 00:03:22,660 And the second source of comparative advantage, 69 00:03:22,660 --> 00:03:25,250 the second reason why some countries acquire advantage 70 00:03:25,250 --> 00:03:26,650 is technology. 71 00:03:29,460 --> 00:03:32,990 So if you look at Japan and cars, 72 00:03:32,990 --> 00:03:35,793 Japan has no comparative advantage of producing cars. 73 00:03:35,793 --> 00:03:38,210 It's not like they have more of the raw products that make 74 00:03:38,210 --> 00:03:41,190 steel than, say, the US does. 75 00:03:41,190 --> 00:03:44,040 The difference is that Japan was a leader 76 00:03:44,040 --> 00:03:47,590 in developing the technology of the modern automobile. 77 00:03:47,590 --> 00:03:51,950 And that technological boost gave the comparative advantage. 78 00:03:51,950 --> 00:03:54,280 So factor endowments are kind of natural. 79 00:03:54,280 --> 00:03:59,500 Technology is a created source of comparative advantage 80 00:03:59,500 --> 00:04:02,650 that essentially, by developing the technology, 81 00:04:02,650 --> 00:04:06,010 you give yourself really sort of a first mover advantage, 82 00:04:06,010 --> 00:04:09,093 and are able to then have leadership, 83 00:04:09,093 --> 00:04:11,260 have the relative comparative advantage in producing 84 00:04:11,260 --> 00:04:12,490 that good. 85 00:04:12,490 --> 00:04:16,720 That's why, in some sense, technology policy really 86 00:04:16,720 --> 00:04:17,839 becomes trade policy. 87 00:04:17,839 --> 00:04:20,470 And we'll talk about that at the end of the lecture 88 00:04:20,470 --> 00:04:23,200 when we talk about trade policy in the US. 89 00:04:23,200 --> 00:04:23,760 OK. 90 00:04:23,760 --> 00:04:24,480 So that's really all. 91 00:04:24,480 --> 00:04:26,330 I just want to finish up on comparative advantage. 92 00:04:26,330 --> 00:04:28,580 The main thing's the intuition we developed last time, 93 00:04:28,580 --> 00:04:31,630 but just want to highlight also what competitive advantage 94 00:04:31,630 --> 00:04:33,870 means and where it comes from. 95 00:04:33,870 --> 00:04:36,470 What I really want to focus on today 96 00:04:36,470 --> 00:04:39,080 is the welfare implications of the international trade, 97 00:04:39,080 --> 00:04:43,730 and why economists are such big fans of international trade. 98 00:04:43,730 --> 00:04:46,310 So the welfare. 99 00:04:46,310 --> 00:04:47,960 Welfare and trade. 100 00:04:47,960 --> 00:04:52,560 And why do economists, in simple diagrammatic form, 101 00:04:52,560 --> 00:04:57,560 such strong proponents of free international trade? 102 00:04:57,560 --> 00:05:00,120 So to consider that, let's go back to our example of roses, 103 00:05:00,120 --> 00:05:03,610 and look at figure 19-1. 104 00:05:03,610 --> 00:05:06,900 We have here a simple representation 105 00:05:06,900 --> 00:05:09,690 of the domestic market for roses. 106 00:05:09,690 --> 00:05:13,050 You've got a supply curve and a demand curve. 107 00:05:13,050 --> 00:05:16,770 And you yield your consumer and producer surplus. 108 00:05:16,770 --> 00:05:18,180 So let's say this is for the US. 109 00:05:18,180 --> 00:05:19,800 You've got US supply of roses, US 110 00:05:19,800 --> 00:05:22,980 demand for roses, consumer and producer surplus. 111 00:05:22,980 --> 00:05:27,210 Now let's ask, what happens once we allow international trade? 112 00:05:27,210 --> 00:05:30,000 Once we allow for the importation or exportation 113 00:05:30,000 --> 00:05:30,945 of roses. 114 00:05:30,945 --> 00:05:33,320 Let's go to the next figure, which is pretty complicated, 115 00:05:33,320 --> 00:05:34,362 so let's walk through it. 116 00:05:37,630 --> 00:05:41,620 Now we look at the rose market with imports. 117 00:05:41,620 --> 00:05:47,050 Now, the presence of imports doesn't actually 118 00:05:47,050 --> 00:05:49,610 change the nature of demand and supply. 119 00:05:49,610 --> 00:05:53,880 So the domestic or US demand and supply curves are not shifted. 120 00:05:53,880 --> 00:05:59,130 What imports do is effectively increase the supply curve 121 00:05:59,130 --> 00:06:02,070 of roses available to US consumers 122 00:06:02,070 --> 00:06:06,150 by adding roses from other countries. 123 00:06:06,150 --> 00:06:10,020 So what we do is to make this work, what we basically-- 124 00:06:10,020 --> 00:06:12,420 the trick we use in these models is we 125 00:06:12,420 --> 00:06:15,510 essentially assume that in international markets, 126 00:06:15,510 --> 00:06:19,050 there's a perfectly elastic supply of the good. 127 00:06:19,050 --> 00:06:21,150 So what we say is international trade creates 128 00:06:21,150 --> 00:06:24,210 a perfectly elastic supply of rose at the price 129 00:06:24,210 --> 00:06:29,190 P sub W. That is, the price used to be P sub A for autarky. 130 00:06:29,190 --> 00:06:30,870 That's the price-- where domestic supply 131 00:06:30,870 --> 00:06:32,227 hit domestic demand. 132 00:06:32,227 --> 00:06:34,560 We're going to assume that what international trade does 133 00:06:34,560 --> 00:06:38,940 is lower the price to P sub W make supply perfectly elastic. 134 00:06:38,940 --> 00:06:41,530 That is, the US can get as many roses 135 00:06:41,530 --> 00:06:45,020 as it wants at a price P sub W. 136 00:06:45,020 --> 00:06:48,530 Now, for a small country, this sort of makes sense. 137 00:06:48,530 --> 00:06:51,500 For a small country, essentially, they're 138 00:06:51,500 --> 00:06:54,670 like a small producer in a perfectly competitive market. 139 00:06:54,670 --> 00:06:57,560 For the US, it might not make so much sense. 140 00:06:57,560 --> 00:07:01,070 The US is big enough that it's hard to imagine 141 00:07:01,070 --> 00:07:04,310 that we're price takers with respect to anything. 142 00:07:04,310 --> 00:07:07,370 We're the US, we don't take any prices. 143 00:07:07,370 --> 00:07:10,798 But in principle, the basic intuition 144 00:07:10,798 --> 00:07:12,590 we get from this model works, so we're just 145 00:07:12,590 --> 00:07:16,348 going to treat US as a small country for these purposes. 146 00:07:16,348 --> 00:07:17,765 And for something like roses, it's 147 00:07:17,765 --> 00:07:19,490 probably not bad to think of the US 148 00:07:19,490 --> 00:07:22,760 as a price taker in the rose market. 149 00:07:22,760 --> 00:07:25,400 So it's a bit of a cheat to say the US faces 150 00:07:25,400 --> 00:07:27,830 perfectly elastic supply in the world market, 151 00:07:27,830 --> 00:07:30,650 but it's not a bad cheat, and it doesn't 152 00:07:30,650 --> 00:07:33,140 hurt the important intuitions we'll derive. 153 00:07:33,140 --> 00:07:35,840 So we're going to assume the US faces a perfectly elastic world 154 00:07:35,840 --> 00:07:38,730 supply at price P sub W. 155 00:07:38,730 --> 00:07:41,700 Now, what does this do? 156 00:07:41,700 --> 00:07:45,600 What this does is, suddenly, at that lower price P sub W, 157 00:07:45,600 --> 00:07:51,820 consumers now want C sub T. They want a lot more roses, 158 00:07:51,820 --> 00:07:54,810 because the price has fallen, demand's downward sloping. 159 00:07:54,810 --> 00:07:59,790 But domestic producers want to produce a lot fewer roses, 160 00:07:59,790 --> 00:08:02,040 since marginal cost is upward sloping. 161 00:08:02,040 --> 00:08:04,232 If you're going to force the price down to P sub W, 162 00:08:04,232 --> 00:08:05,940 they don't want to produce as many roses. 163 00:08:05,940 --> 00:08:08,980 They only want to produce Q sub T. 164 00:08:08,980 --> 00:08:10,390 How do you resolve this? 165 00:08:10,390 --> 00:08:12,910 You resolve this through imports. 166 00:08:12,910 --> 00:08:20,270 That the difference between Q sub T and C sub T is imports. 167 00:08:20,270 --> 00:08:22,280 So the total amount of roses consumed 168 00:08:22,280 --> 00:08:27,420 does rise from Q sub A to C sub T. The total amount of roses 169 00:08:27,420 --> 00:08:29,040 consumed does rise. 170 00:08:29,040 --> 00:08:32,280 But the amount produced domestically falls. 171 00:08:32,280 --> 00:08:33,720 So both things are happening. 172 00:08:33,720 --> 00:08:36,450 Both US consumers are consuming more roses, 173 00:08:36,450 --> 00:08:38,940 and US producers are producing fewer roses. 174 00:08:38,940 --> 00:08:42,250 And the gap is made up by imports. 175 00:08:42,250 --> 00:08:43,500 Kind of a complicated diagram. 176 00:08:43,500 --> 00:08:44,835 Are there questions about this? 177 00:08:44,835 --> 00:08:47,210 Because I'm going to build on this diagram going forward. 178 00:08:47,210 --> 00:08:49,360 Any questions about how this works? 179 00:08:49,360 --> 00:08:50,170 OK. 180 00:08:50,170 --> 00:08:53,480 Now let's ask, what are the welfare implications? 181 00:08:53,480 --> 00:08:56,615 Let's go to figure 19-3. 182 00:08:56,615 --> 00:08:57,990 What are the welfare implications 183 00:08:57,990 --> 00:08:59,730 to international trade? 184 00:08:59,730 --> 00:09:03,460 Well, the welfare implications are, for consumers, 185 00:09:03,460 --> 00:09:08,010 their surplus used to be-- 186 00:09:08,010 --> 00:09:11,130 their surplus used to be W. They used 187 00:09:11,130 --> 00:09:15,030 to get Q sub A roses at a price P sub A. 188 00:09:15,030 --> 00:09:18,400 So their surplus used to be the area W. 189 00:09:18,400 --> 00:09:20,980 What is the surplus of domestic consumers? 190 00:09:20,980 --> 00:09:23,170 Let me-- an important point for welfare. 191 00:09:23,170 --> 00:09:27,690 We're going to look at domestic welfare only. 192 00:09:27,690 --> 00:09:30,190 We'll come back later to caring about the rest of the world, 193 00:09:30,190 --> 00:09:32,140 but for now, we only care about the US. 194 00:09:32,140 --> 00:09:34,960 So when I talk about welfare, unless I say otherwise, 195 00:09:34,960 --> 00:09:36,880 I think about US welfare only. 196 00:09:36,880 --> 00:09:38,830 US consumers, US producers. 197 00:09:38,830 --> 00:09:41,080 Very important to keep in mind, because otherwise this 198 00:09:41,080 --> 00:09:42,392 can get confusing. 199 00:09:42,392 --> 00:09:44,600 So for now we're talking about domestic welfare only. 200 00:09:44,600 --> 00:09:47,770 So for US consumers, what has happened? 201 00:09:47,770 --> 00:09:52,520 They used to get a surplus of W. What's their surplus now? 202 00:09:52,520 --> 00:09:53,177 Yeah. 203 00:09:53,177 --> 00:09:54,285 AUDIENCE: X, W, and Z. 204 00:09:54,285 --> 00:09:55,160 JONATHAN GRUBER: Yes. 205 00:09:55,160 --> 00:09:57,390 Z, by the way, is the entire light purple area. 206 00:09:57,390 --> 00:09:59,390 It's confusing, because there's this dotted line 207 00:09:59,390 --> 00:10:00,057 down the middle. 208 00:10:00,057 --> 00:10:01,580 Z's either side of the dotted line. 209 00:10:01,580 --> 00:10:03,230 The entire triangle is Z. 210 00:10:03,230 --> 00:10:07,010 So consumers now get W plus X plus Z. Why? 211 00:10:07,010 --> 00:10:09,800 Because they're consuming C sub T at a price 212 00:10:09,800 --> 00:10:12,690 P sub W. Don't let the other complications in the graph 213 00:10:12,690 --> 00:10:13,190 confuse you. 214 00:10:13,190 --> 00:10:15,230 Remember, consumer surplus is just the area 215 00:10:15,230 --> 00:10:17,603 below the demand curve, above the price, 216 00:10:17,603 --> 00:10:18,770 at the equilibrium quantity. 217 00:10:18,770 --> 00:10:20,312 The new equilibrium quantity consumed 218 00:10:20,312 --> 00:10:22,770 is C sub T. The new price is P sub W, so they 219 00:10:22,770 --> 00:10:24,850 get that giant triangle. 220 00:10:24,850 --> 00:10:30,520 Producers used to have a surplus of X plus Z. X plus Y, 221 00:10:30,520 --> 00:10:31,690 I'm sorry. 222 00:10:31,690 --> 00:10:35,980 Producers used to sell Q sub A at a price P sub 223 00:10:35,980 --> 00:10:40,180 A. So the area above the supply curve below the price 224 00:10:40,180 --> 00:10:42,070 was X plus Y. 225 00:10:42,070 --> 00:10:46,430 Now, X has been transferred to consumers. 226 00:10:46,430 --> 00:10:51,450 So producer surplus has fallen to Y. So what's happened? 227 00:10:51,450 --> 00:10:53,430 What's the opposite of the deadweight loss 228 00:10:53,430 --> 00:10:55,290 diagrams we saw before? 229 00:10:55,290 --> 00:10:57,480 When we did things like impose a tax, 230 00:10:57,480 --> 00:10:59,790 we transferred from one group to another, 231 00:10:59,790 --> 00:11:01,810 creating deadweight loss. 232 00:11:01,810 --> 00:11:04,050 International trade is the opposite effect. 233 00:11:04,050 --> 00:11:06,210 We've transferred from one group to another 234 00:11:06,210 --> 00:11:10,530 and created social gain for the US. 235 00:11:10,530 --> 00:11:12,920 US consumers have gained. 236 00:11:12,920 --> 00:11:17,650 And on net, US society is better off by the area Z. 237 00:11:17,650 --> 00:11:19,330 And this, in the terms of this course, 238 00:11:19,330 --> 00:11:22,180 is why economists like international trade. 239 00:11:22,180 --> 00:11:25,130 That expands the opportunity set. 240 00:11:25,130 --> 00:11:29,840 By allowing consumers to get these cheaper goods, 241 00:11:29,840 --> 00:11:32,840 you raise consumer surplus more than you 242 00:11:32,840 --> 00:11:35,180 lower producer surplus. 243 00:11:35,180 --> 00:11:37,190 And that's why we like international trade. 244 00:11:37,190 --> 00:11:39,728 It's a net win for society. 245 00:11:39,728 --> 00:11:42,020 Now, different parties might feel differently about it, 246 00:11:42,020 --> 00:11:43,560 and we'll come back to that. 247 00:11:43,560 --> 00:11:46,372 But let's just focus right now on total social surplus. 248 00:11:46,372 --> 00:11:47,830 And for total social surplus, which 249 00:11:47,830 --> 00:11:51,150 are defined as producer plus consumers, we are better off. 250 00:11:51,150 --> 00:11:54,050 And that's why we like international trade. 251 00:11:54,050 --> 00:11:55,027 OK? 252 00:11:55,027 --> 00:11:55,860 Question about that. 253 00:11:55,860 --> 00:11:56,390 Yeah. 254 00:11:56,390 --> 00:11:58,590 AUDIENCE: What is the new producer surplus? 255 00:11:58,590 --> 00:12:00,632 JONATHAN GRUBER: The new producer surplus is just 256 00:12:00,632 --> 00:12:03,525 Y. It used to be Y plus X. So producers 257 00:12:03,525 --> 00:12:06,000 are losing X. Consumers gain that X, 258 00:12:06,000 --> 00:12:07,933 but consumers also get Z. So it's 259 00:12:07,933 --> 00:12:09,600 sort of the flip side of deadweight loss 260 00:12:09,600 --> 00:12:10,750 we talked about before. 261 00:12:10,750 --> 00:12:12,750 You're transferring for producers and consumers, 262 00:12:12,750 --> 00:12:14,167 but you're also creating new gains 263 00:12:14,167 --> 00:12:15,860 for consumers along the way. 264 00:12:15,860 --> 00:12:17,400 OK? 265 00:12:17,400 --> 00:12:17,970 OK. 266 00:12:17,970 --> 00:12:19,290 So now, that's imports. 267 00:12:19,290 --> 00:12:20,640 What about exports? 268 00:12:20,640 --> 00:12:22,710 Let's flip and think about computers. 269 00:12:22,710 --> 00:12:27,420 Let's go to figure 19-4 and talk about computers. 270 00:12:30,230 --> 00:12:35,450 For computers, once again, we start at point A. 271 00:12:35,450 --> 00:12:40,220 We start with computers under autarky without trading. 272 00:12:40,220 --> 00:12:43,090 The price is where demand equals supply, a P sub 273 00:12:43,090 --> 00:12:45,650 A, and the quantity's Q sub A. And that's 274 00:12:45,650 --> 00:12:48,170 the initial equilibrium for computers. 275 00:12:48,170 --> 00:12:50,430 Now we open up to trade. 276 00:12:50,430 --> 00:12:53,630 Well, what happens now, is now, the rest of the world 277 00:12:53,630 --> 00:12:58,190 wants US computers, so the US can sell at a higher price. 278 00:12:58,190 --> 00:13:01,250 Before, the US could only sell to domestic consumers. 279 00:13:01,250 --> 00:13:04,190 But now, their demand for their goods 280 00:13:04,190 --> 00:13:06,860 worldwide-- we don't show world demand here. 281 00:13:06,860 --> 00:13:11,000 But world demand is way above US demand. 282 00:13:11,000 --> 00:13:16,060 If you flip back to 19-3, the reason that that P sub W line 283 00:13:16,060 --> 00:13:19,410 is below the P sub A is that world supply-- 284 00:13:19,410 --> 00:13:21,040 or 19-2 is easier-- 285 00:13:21,040 --> 00:13:25,340 world supply is above US supply. 286 00:13:25,340 --> 00:13:27,460 Since supply is higher, the price falls. 287 00:13:27,460 --> 00:13:32,980 Now, in 19-4, world demand is higher than US demand, 288 00:13:32,980 --> 00:13:34,720 so the price rises. 289 00:13:34,720 --> 00:13:39,930 So we end up with a P sub W at the higher level. 290 00:13:39,930 --> 00:13:41,740 What does this mean? 291 00:13:41,740 --> 00:13:47,320 With a higher P sub W, domestic consumers want fewer computers. 292 00:13:47,320 --> 00:13:49,770 They used to be able to buy computers at P sub A. 293 00:13:49,770 --> 00:13:51,970 Now they have to pay P sub W, because they're 294 00:13:51,970 --> 00:13:54,830 competing with consumers around the world. 295 00:13:54,830 --> 00:13:56,320 So they have to pay more. 296 00:13:56,320 --> 00:13:57,790 So they want fewer computers. 297 00:13:57,790 --> 00:14:01,600 Their demand for computers falls from QA to CT. 298 00:14:01,600 --> 00:14:03,502 What about domestic producers? 299 00:14:03,502 --> 00:14:05,210 Well, now they're getting a higher price, 300 00:14:05,210 --> 00:14:07,030 so they want to make more computers. 301 00:14:07,030 --> 00:14:10,800 So their production rises from QA to QT. 302 00:14:10,800 --> 00:14:13,500 So you now have consumers consuming much less 303 00:14:13,500 --> 00:14:15,400 than producers are making. 304 00:14:15,400 --> 00:14:18,645 So the producers send the rest abroad, and that's exports. 305 00:14:22,340 --> 00:14:24,310 So we have the flip side. 306 00:14:24,310 --> 00:14:28,990 Before, we had-- in figure 19-2, if you flip back and forth, 307 00:14:28,990 --> 00:14:33,700 in figure 19-2, we had consumers wanting more than producers 308 00:14:33,700 --> 00:14:35,480 domestically willing to make. 309 00:14:35,480 --> 00:14:36,920 So you had imports. 310 00:14:36,920 --> 00:14:39,280 Now we have domestic consumers wanting 311 00:14:39,280 --> 00:14:41,830 less than domestic producers are willing to make, 312 00:14:41,830 --> 00:14:43,800 so you have exports. 313 00:14:43,800 --> 00:14:45,290 What are the welfare implications? 314 00:14:45,290 --> 00:14:47,790 Go to 19-5. 315 00:14:47,790 --> 00:14:52,660 Now what you get is consumers are worse off. 316 00:14:52,660 --> 00:14:56,260 They used to have a consumer surplus of W plus X, where 317 00:14:56,260 --> 00:14:58,790 X is the entire dotted area. 318 00:14:58,790 --> 00:15:01,460 Now, the consumer surplus has fallen to just W. Remember, 319 00:15:01,460 --> 00:15:03,097 we're doing domestic consumers only. 320 00:15:03,097 --> 00:15:05,180 There's some people in Colombia who got computers. 321 00:15:05,180 --> 00:15:06,670 They're happy, we're ignoring them. 322 00:15:06,670 --> 00:15:09,360 We're just doing US consumers. 323 00:15:09,360 --> 00:15:11,810 They used to get W plus X. Now they only 324 00:15:11,810 --> 00:15:15,280 get W. Below the demand curve, above the new price. 325 00:15:15,280 --> 00:15:18,410 But producers, who used to get Y, 326 00:15:18,410 --> 00:15:25,540 now get Y plus X plus Z. So you've transferred X 327 00:15:25,540 --> 00:15:27,460 from domestic consumers, domestic producers, 328 00:15:27,460 --> 00:15:30,970 but you've also given domestic producers this extra bit Z. 329 00:15:30,970 --> 00:15:33,890 So once again, surplus has gone up. 330 00:15:33,890 --> 00:15:36,260 So this is the crazy thing about trade. 331 00:15:36,260 --> 00:15:40,093 Imports raise welfare, and exports raise welfare. 332 00:15:40,093 --> 00:15:41,885 Either way, whether the goods are coming in 333 00:15:41,885 --> 00:15:43,850 or the goods are going out, society as a whole 334 00:15:43,850 --> 00:15:46,110 is better off. 335 00:15:46,110 --> 00:15:46,730 Why? 336 00:15:46,730 --> 00:15:49,280 Because of comparative advantage. 337 00:15:49,280 --> 00:15:51,260 Because we're better off as a world 338 00:15:51,260 --> 00:15:54,530 where we can share our goods across nations, because we 339 00:15:54,530 --> 00:15:57,680 can then rely in the more efficient producers lowering 340 00:15:57,680 --> 00:16:02,150 the prices for roses in places like the US, and raise the-- 341 00:16:02,150 --> 00:16:04,850 lowering the prices for goods US consumes, 342 00:16:04,850 --> 00:16:07,340 and raising the price for goods US produces. 343 00:16:07,340 --> 00:16:08,810 And same with every other country. 344 00:16:08,810 --> 00:16:10,990 It's literally a win-win. 345 00:16:10,990 --> 00:16:13,690 Every country, by the need to specialize, 346 00:16:13,690 --> 00:16:16,300 gets to see lower prices in the goods they weren't 347 00:16:16,300 --> 00:16:19,740 good at making and higher prices at the goods they 348 00:16:19,740 --> 00:16:22,670 are good at making. 349 00:16:22,670 --> 00:16:24,970 So this transfers across producers and consumers, 350 00:16:24,970 --> 00:16:30,000 but overall, welfare goes up. 351 00:16:30,000 --> 00:16:33,060 So basically, this is the bottom line. 352 00:16:33,060 --> 00:16:36,738 These two graphs are why economists unambiguously-- 353 00:16:36,738 --> 00:16:39,030 traditionally-- traditionally, economists unambiguously 354 00:16:39,030 --> 00:16:40,068 like free trade. 355 00:16:40,068 --> 00:16:42,360 So you get into subtleties, like caring about producers 356 00:16:42,360 --> 00:16:44,400 versus consumers separately. 357 00:16:44,400 --> 00:16:47,040 Basically, the logic of last time, 358 00:16:47,040 --> 00:16:50,250 which is a comparative advantage allows specialization, 359 00:16:50,250 --> 00:16:53,730 means that by trading, we can allow countries to specialize, 360 00:16:53,730 --> 00:16:55,120 and thereby getting higher prices 361 00:16:55,120 --> 00:16:57,780 for things they send abroad and lower prices of the things 362 00:16:57,780 --> 00:17:00,572 they bring in from abroad. 363 00:17:00,572 --> 00:17:01,430 OK? 364 00:17:01,430 --> 00:17:04,680 Questions about that. 365 00:17:04,680 --> 00:17:06,873 And we can see from this why the notion of a trade 366 00:17:06,873 --> 00:17:08,790 deficit as something that we should care about 367 00:17:08,790 --> 00:17:10,780 is sort of ridiculous. 368 00:17:10,780 --> 00:17:13,710 Because it's all just about your endowments. 369 00:17:13,710 --> 00:17:16,540 At the end of the day, you want to sell stuff 370 00:17:16,540 --> 00:17:18,732 that you have a comparative advantage in 371 00:17:18,732 --> 00:17:21,190 and import stuff you don't have a comparative advantage in. 372 00:17:21,190 --> 00:17:22,960 If the rest of the world has more compared advantage 373 00:17:22,960 --> 00:17:25,210 than you, then you want to import more than you export. 374 00:17:25,210 --> 00:17:26,319 Doesn't mean you're worse off, it just 375 00:17:26,319 --> 00:17:28,030 means your consumers are benefiting 376 00:17:28,030 --> 00:17:29,488 from the fact the rest of the world 377 00:17:29,488 --> 00:17:32,410 is good at making stuff like sweaters. 378 00:17:32,410 --> 00:17:36,400 So that segues us naturally to our important policy 379 00:17:36,400 --> 00:17:41,030 discussion, and one of the main focuses of public policy today, 380 00:17:41,030 --> 00:17:43,660 which is trade policy. 381 00:17:43,660 --> 00:17:47,530 How do we take this framework and apply it 382 00:17:47,530 --> 00:17:49,450 to thinking about government policy 383 00:17:49,450 --> 00:17:50,590 over international trade? 384 00:17:50,590 --> 00:17:52,780 And that's what I'll spend the rest of today talking about. 385 00:17:52,780 --> 00:17:53,345 So let me just ask just before we 386 00:17:53,345 --> 00:17:55,137 go there, any questions about the economics 387 00:17:55,137 --> 00:17:58,380 here, before we start talking about policy? 388 00:17:58,380 --> 00:17:59,470 OK. 389 00:17:59,470 --> 00:18:04,550 Now, let's start once again with trade policy 390 00:18:04,550 --> 00:18:07,640 with the standard economics view. 391 00:18:07,640 --> 00:18:10,640 Which is that you'll often hear people say, 392 00:18:10,640 --> 00:18:13,430 well, imports are a job killer. 393 00:18:13,430 --> 00:18:16,010 And in some sense, they're right. 394 00:18:16,010 --> 00:18:19,370 That's what figure 19-3 is showing. 395 00:18:19,370 --> 00:18:22,720 Producers are the ones with the jobs. 396 00:18:22,720 --> 00:18:26,780 Producer surplus is falling, so there's 397 00:18:26,780 --> 00:18:28,970 less profitability in the corporate sector, 398 00:18:28,970 --> 00:18:30,680 so there may be less jobs there. 399 00:18:33,210 --> 00:18:36,960 Now, many people say we should react to that by imposing 400 00:18:36,960 --> 00:18:40,290 restrictions on imports. 401 00:18:40,290 --> 00:18:42,600 They say, look, exports are great, 402 00:18:42,600 --> 00:18:44,980 but what about imports that are killing jobs? 403 00:18:44,980 --> 00:18:46,890 Why don't we restrict those? 404 00:18:46,890 --> 00:18:48,300 And there's two fundamental forms 405 00:18:48,300 --> 00:18:49,920 of restrictions on imports. 406 00:18:49,920 --> 00:18:53,510 There's quotas, which is literally 407 00:18:53,510 --> 00:18:56,720 a limit on how much of a certain good you can import. 408 00:18:56,720 --> 00:18:59,310 Those aren't used so much anymore. 409 00:18:59,310 --> 00:19:03,470 The more typical form of import deterrents is tariffs. 410 00:19:06,470 --> 00:19:08,570 Is tariffs. 411 00:19:08,570 --> 00:19:09,740 OK? 412 00:19:09,740 --> 00:19:12,710 And basically, what these are are taxes that 413 00:19:12,710 --> 00:19:14,270 are levied only on imports. 414 00:19:14,270 --> 00:19:16,820 A tariff is just a name for a tax 415 00:19:16,820 --> 00:19:18,760 that only applies to imports. 416 00:19:18,760 --> 00:19:19,760 That's what a tariff is. 417 00:19:19,760 --> 00:19:23,060 It's a certain kind of tax that only applies to imports. 418 00:19:25,620 --> 00:19:27,590 So we could, for example, levy a tariff 419 00:19:27,590 --> 00:19:30,430 on roses coming in from Colombia. 420 00:19:30,430 --> 00:19:34,270 If we levy that tariff, making roses expensive enough, 421 00:19:34,270 --> 00:19:35,905 then folks might go back to buying it 422 00:19:35,905 --> 00:19:37,280 from the US producers, and we can 423 00:19:37,280 --> 00:19:40,320 reopen those greenhouses and the jobs that come with them. 424 00:19:40,320 --> 00:19:41,790 That is true. 425 00:19:41,790 --> 00:19:44,220 What that misses the fact that US consumers then 426 00:19:44,220 --> 00:19:47,550 suffer from paying higher prices for roses. 427 00:19:47,550 --> 00:19:50,100 And on net, we're worse off as a result. 428 00:19:50,100 --> 00:19:53,470 To see that, let's go to figure 19-6. 429 00:19:59,460 --> 00:20:04,140 So basically, what figure 19-6 does is 430 00:20:04,140 --> 00:20:07,290 we now start from the position of being 431 00:20:07,290 --> 00:20:08,532 in international trading. 432 00:20:08,532 --> 00:20:10,740 So before, the other figures, we started from autarky 433 00:20:10,740 --> 00:20:11,457 and added trade. 434 00:20:11,457 --> 00:20:13,290 Now I want to start from position with trade 435 00:20:13,290 --> 00:20:14,310 and add a tariff. 436 00:20:14,310 --> 00:20:18,300 So initial equilibrium is at P sub W, 437 00:20:18,300 --> 00:20:23,570 with consumers consuming C1, producers producing Q1, 438 00:20:23,570 --> 00:20:25,770 and initial level of imports denoted 439 00:20:25,770 --> 00:20:27,900 by imports before tariff. 440 00:20:27,900 --> 00:20:29,540 That's where we start. 441 00:20:29,540 --> 00:20:32,880 What the tariff does is essentially raise the price 442 00:20:32,880 --> 00:20:34,700 back up. 443 00:20:34,700 --> 00:20:38,132 Now, I can't raise the price above the domestic price, 444 00:20:38,132 --> 00:20:39,590 because if the tariff's big enough, 445 00:20:39,590 --> 00:20:41,048 you just go back to buying what you 446 00:20:41,048 --> 00:20:42,790 want for domestic producers. 447 00:20:42,790 --> 00:20:45,140 But it raises it back towards the domestic price. 448 00:20:45,140 --> 00:20:48,730 So let's say, for example, the tariff is high enough that 449 00:20:48,730 --> 00:20:50,480 the international-- that the world price-- 450 00:20:50,480 --> 00:20:54,390 the price paid in the US rises from PW to PT. 451 00:20:54,390 --> 00:20:57,120 The gap being the amount of the tax. 452 00:20:57,120 --> 00:21:01,600 So with untaxed trade, the US would pay PW for roses. 453 00:21:01,600 --> 00:21:08,630 Now, when we tax trade, that price goes up to P sub T. OK? 454 00:21:08,630 --> 00:21:11,900 So now, let's ask, what does that do to the market? 455 00:21:11,900 --> 00:21:14,715 Well, it's pretty straightforward. 456 00:21:14,715 --> 00:21:16,590 You just say, well, what is demand and supply 457 00:21:16,590 --> 00:21:17,720 at that new price? 458 00:21:17,720 --> 00:21:19,610 Well, at that new price, there's lower demand 459 00:21:19,610 --> 00:21:24,320 for roses, so rose demand falls from C1 to C2. 460 00:21:24,320 --> 00:21:26,990 There's more domestic production of roses, 461 00:21:26,990 --> 00:21:30,200 so domestic production rises from Q1 to Q2. 462 00:21:30,200 --> 00:21:32,930 And the imports after the tariff shrink massively. 463 00:21:32,930 --> 00:21:34,970 The tariff had its desired effect. 464 00:21:34,970 --> 00:21:37,980 It shrunk imports. 465 00:21:37,980 --> 00:21:39,660 But what does this do to welfare? 466 00:21:39,660 --> 00:21:40,720 Let's go to figure 19-7. 467 00:21:44,570 --> 00:21:47,810 Now, we can just compare this area between the two 468 00:21:47,810 --> 00:21:48,650 horizontal lines. 469 00:21:48,650 --> 00:21:50,483 We used to be at the bottom horizontal line. 470 00:21:50,483 --> 00:21:52,300 Now we're at the higher one. 471 00:21:52,300 --> 00:21:57,315 A, the area A is the new producer surplus. 472 00:22:00,050 --> 00:22:03,140 Producers used to get the area-- 473 00:22:03,140 --> 00:22:05,870 that low triangle below area A. We 474 00:22:05,870 --> 00:22:11,000 used to call it Y. Now they've added A. Producers have now 475 00:22:11,000 --> 00:22:15,180 added a new producer surplus A. 476 00:22:15,180 --> 00:22:21,630 But consumers have lost A, B, C, and D. That entire area is 477 00:22:21,630 --> 00:22:22,390 lost to consumers. 478 00:22:22,390 --> 00:22:22,890 Yeah. 479 00:22:22,890 --> 00:22:25,920 AUDIENCE: Is this [INAUDIBLE] the comparison to when there 480 00:22:25,920 --> 00:22:26,860 was-- 481 00:22:26,860 --> 00:22:28,610 JONATHAN GRUBER: Yeah, that's what I said. 482 00:22:28,610 --> 00:22:31,780 Comparison-- when there was free trade, no tariff. 483 00:22:31,780 --> 00:22:35,280 So it's a comparison to the second situation 484 00:22:35,280 --> 00:22:40,650 in figure 19-3. 485 00:22:40,650 --> 00:22:43,575 So 19-3-- and this is confusing, I'm sorry about that, 486 00:22:43,575 --> 00:22:45,450 but it's too hard to put it all on one graph. 487 00:22:45,450 --> 00:22:49,230 19-3 is what happens when we move from no trade 488 00:22:49,230 --> 00:22:50,900 to free trade. 489 00:22:50,900 --> 00:22:54,830 19-7, 6 and 7, I'm going from free trade 490 00:22:54,830 --> 00:22:57,530 to free trade with a tariff. 491 00:22:57,530 --> 00:22:59,060 By the way, if the tariff was-- 492 00:22:59,060 --> 00:23:00,830 brought us exactly back to the no-trade situation, 493 00:23:00,830 --> 00:23:02,810 it'd just be the flip of the previous diagrams. 494 00:23:02,810 --> 00:23:04,435 Just makes it a little more interesting 495 00:23:04,435 --> 00:23:06,475 by making the tariff somewhat lower than that. 496 00:23:06,475 --> 00:23:08,100 So what's happened to consumer surplus? 497 00:23:08,100 --> 00:23:09,170 Well, look at this way. 498 00:23:09,170 --> 00:23:11,100 Remember consumer surplus. 499 00:23:11,100 --> 00:23:14,450 It's the area below the demand curve, above the price. 500 00:23:14,450 --> 00:23:16,680 So it used to be a huge triangle. 501 00:23:16,680 --> 00:23:21,440 Now what's happened is fallen by the entire trapezoid, ABCD. 502 00:23:21,440 --> 00:23:22,700 Can folks see that? 503 00:23:22,700 --> 00:23:23,742 Look at the new consumer. 504 00:23:23,742 --> 00:23:25,700 Ignore the fact that it's four different areas. 505 00:23:25,700 --> 00:23:27,180 Just think of it as one trapezoid. 506 00:23:27,180 --> 00:23:29,000 The new consumer surplus is the area 507 00:23:29,000 --> 00:23:31,952 under the main curve above PT. 508 00:23:31,952 --> 00:23:34,160 The old consumer surplus is the area under the demand 509 00:23:34,160 --> 00:23:35,720 curve above PW. 510 00:23:35,720 --> 00:23:39,620 That's followed by the trapezoid ABCD. 511 00:23:39,620 --> 00:23:42,440 Now, why do we split that into four pieces? 512 00:23:42,440 --> 00:23:45,263 Well, first of all, because A is gained by producers, 513 00:23:45,263 --> 00:23:46,430 so we want to call that out. 514 00:23:46,430 --> 00:23:48,730 That's not a net loss of welfare. 515 00:23:48,730 --> 00:23:54,160 There's also the area C, the green area C. C is also a gain. 516 00:23:54,160 --> 00:23:55,090 What is C? 517 00:23:55,090 --> 00:23:58,812 That's the government revenue from the tariffs. 518 00:23:58,812 --> 00:24:00,770 The government's gained something from the-- we 519 00:24:00,770 --> 00:24:02,690 get tax revenue. 520 00:24:02,690 --> 00:24:04,770 We can give that back to consumers if we want, 521 00:24:04,770 --> 00:24:06,990 so that's not lost surplus. 522 00:24:06,990 --> 00:24:08,660 The tax revenue's exactly the amount 523 00:24:08,660 --> 00:24:12,450 of new imports times the tariff. 524 00:24:12,450 --> 00:24:13,630 So it's complicated. 525 00:24:13,630 --> 00:24:15,880 Now we have this third player which is the government, 526 00:24:15,880 --> 00:24:17,640 It used to be just either producer 527 00:24:17,640 --> 00:24:19,548 or consumer, or society. 528 00:24:19,548 --> 00:24:21,840 Now we have this third player, which is the government. 529 00:24:21,840 --> 00:24:24,810 So the deadweight loss from the tariff 530 00:24:24,810 --> 00:24:30,315 is B plus D. What we've lost is B plus D. So 531 00:24:30,315 --> 00:24:31,690 let me go through the math again. 532 00:24:31,690 --> 00:24:38,100 Consumers lost A plus B plus C plus D. Producers gained A, 533 00:24:38,100 --> 00:24:43,110 and the government gained C. So the net loss on the tariff 534 00:24:43,110 --> 00:24:48,540 is B plus D. That's sort of hard, but do people see that? 535 00:24:48,540 --> 00:24:51,540 And that's why economists don't like tariffs. 536 00:24:51,540 --> 00:24:55,110 Because the amount producers gain, 537 00:24:55,110 --> 00:24:57,060 plus the amount the government raises, 538 00:24:57,060 --> 00:24:59,280 is much less than what consumers lose. 539 00:24:59,280 --> 00:25:02,100 Yeah, we've produced some jobs growing roses. 540 00:25:02,100 --> 00:25:03,953 Yeah, we've gotten a little tax revenue. 541 00:25:03,953 --> 00:25:05,370 But we've really screwed producers 542 00:25:05,370 --> 00:25:07,770 who now have to pay much higher prices for their roses. 543 00:25:07,770 --> 00:25:09,370 And if you add that up, it's worse. 544 00:25:09,370 --> 00:25:10,290 Why is it worse? 545 00:25:10,290 --> 00:25:12,540 Because you're taking less advantage of specialization 546 00:25:12,540 --> 00:25:15,240 in comparative advantage by forcing us away 547 00:25:15,240 --> 00:25:16,490 from the most efficient point. 548 00:25:16,490 --> 00:25:18,115 The most efficient point's where we can 549 00:25:18,115 --> 00:25:19,550 take-- everyone can specialize. 550 00:25:19,550 --> 00:25:20,633 You force that away. 551 00:25:20,633 --> 00:25:22,050 You've put the US, which shouldn't 552 00:25:22,050 --> 00:25:25,200 be growing roses, back in business of growing roses. 553 00:25:25,200 --> 00:25:27,210 And Colombia, which should be growing roses, 554 00:25:27,210 --> 00:25:29,120 gets out of that business. 555 00:25:29,120 --> 00:25:30,146 Yeah. 556 00:25:30,146 --> 00:25:32,490 AUDIENCE: The tariffs-- where are tariffs applied? 557 00:25:32,490 --> 00:25:35,256 Are they on US-- 558 00:25:35,256 --> 00:25:37,720 I guess importers receive goods, or are 559 00:25:37,720 --> 00:25:41,303 they on [INAUDIBLE] exporters [INAUDIBLE].. 560 00:25:41,303 --> 00:25:42,220 JONATHAN GRUBER: Yeah. 561 00:25:42,220 --> 00:25:43,410 So that's a great question. 562 00:25:43,410 --> 00:25:45,870 I am not expert on the actual logistics, 563 00:25:45,870 --> 00:25:48,870 but roughly speaking, when it comes into the US, 564 00:25:48,870 --> 00:25:49,915 into Customs-- 565 00:25:49,915 --> 00:25:51,540 so any goods shipped in the US for sale 566 00:25:51,540 --> 00:25:54,740 into Customs, at that point, there is a tax levied on it. 567 00:25:54,740 --> 00:25:57,060 Now, I don't know logistically who gets the bill. 568 00:25:57,060 --> 00:25:58,727 Does the exporting company get the bill, 569 00:25:58,727 --> 00:26:00,750 or the importing company get the bill? 570 00:26:00,750 --> 00:26:02,730 When we talk about taxes, I'll show you 571 00:26:02,730 --> 00:26:04,320 it doesn't matter who gets the bill. 572 00:26:04,320 --> 00:26:06,040 It's the same either way. 573 00:26:06,040 --> 00:26:07,110 So hold that thought. 574 00:26:07,110 --> 00:26:09,100 But that's basically what happens. 575 00:26:09,100 --> 00:26:10,710 Good question. 576 00:26:10,710 --> 00:26:11,340 OK. 577 00:26:11,340 --> 00:26:16,170 So with that in mind, so that is the fundamental reason, 578 00:26:16,170 --> 00:26:19,350 in graphical terms, why economists don't like tariffs. 579 00:26:19,350 --> 00:26:21,120 But that's not the only reason. 580 00:26:21,120 --> 00:26:23,250 In fact, there's two other reasons 581 00:26:23,250 --> 00:26:24,760 that aren't even in this graph why 582 00:26:24,760 --> 00:26:26,820 tariffs and restrictions on trade policy more 583 00:26:26,820 --> 00:26:28,960 generally are bad. 584 00:26:28,960 --> 00:26:32,560 The other reason is that they cause trade wars. 585 00:26:38,690 --> 00:26:44,140 So let's say we impose this tariffs for Colombian roses. 586 00:26:44,140 --> 00:26:46,730 Well, Colombia will be like, screw you. 587 00:26:46,730 --> 00:26:48,260 If you're going to tax our roses, 588 00:26:48,260 --> 00:26:50,630 we're taxing your computers. 589 00:26:50,630 --> 00:26:54,050 Well, what would happen if there was a tariff that Colombia 590 00:26:54,050 --> 00:26:55,545 placed on our computers? 591 00:26:55,545 --> 00:26:57,170 Well, I don't have that figure, but you 592 00:26:57,170 --> 00:27:01,040 should be able to show yourself that that is exactly 593 00:27:01,040 --> 00:27:02,850 the opposite effect. 594 00:27:02,850 --> 00:27:06,290 It raises US consumer surplus, because now computers 595 00:27:06,290 --> 00:27:09,680 are cheaper in the US because we can't sell them in Colombia. 596 00:27:09,680 --> 00:27:11,743 But it lowers our welfare, and now we 597 00:27:11,743 --> 00:27:13,160 don't get the government revenues. 598 00:27:13,160 --> 00:27:14,840 Colombia does. 599 00:27:14,840 --> 00:27:19,360 So we lose almost all the trapezoid in that case. 600 00:27:19,360 --> 00:27:21,030 If you flip this around, we would 601 00:27:21,030 --> 00:27:22,690 get a small rise in consumer surplus 602 00:27:22,690 --> 00:27:24,190 but a huge loss of producer surplus, 603 00:27:24,190 --> 00:27:25,650 and we wouldn't even get the government revenues to make it 604 00:27:25,650 --> 00:27:26,580 up. 605 00:27:26,580 --> 00:27:28,745 So that's really bad for us. 606 00:27:28,745 --> 00:27:30,370 And of course, it's a natural response. 607 00:27:30,370 --> 00:27:33,350 Why wouldn't Columbia do it? 608 00:27:33,350 --> 00:27:37,460 So this first problem is, this understates, yes, we 609 00:27:37,460 --> 00:27:39,410 might create some jobs in roses, but we're 610 00:27:39,410 --> 00:27:42,243 going to destroy jobs in computers, because we're not 611 00:27:42,243 --> 00:27:44,160 going to sell as many computers as we used to. 612 00:27:44,160 --> 00:27:47,600 So it's not even job-creating. 613 00:27:47,600 --> 00:27:50,270 Once you take in the fact that other countries retaliate, 614 00:27:50,270 --> 00:27:54,780 in fact, we make consumers worse off and producers worse off. 615 00:27:54,780 --> 00:27:56,910 Because we make the price for roses much higher, 616 00:27:56,910 --> 00:27:59,480 and we lose jobs in the computer sector. 617 00:27:59,480 --> 00:27:59,980 Yeah. 618 00:27:59,980 --> 00:28:02,355 AUDIENCE: Is there a way to diplomatically eliminate this 619 00:28:02,355 --> 00:28:04,106 if you're like a world monopoly? 620 00:28:04,106 --> 00:28:05,437 I feel like a world monopoly-- 621 00:28:05,437 --> 00:28:07,020 JONATHAN GRUBER: So basically, one way 622 00:28:07,020 --> 00:28:09,910 to do it is to come to trade deals, where you essentially 623 00:28:09,910 --> 00:28:11,370 cartelize countries. 624 00:28:11,370 --> 00:28:12,870 So this is much-- if you could think 625 00:28:12,870 --> 00:28:15,930 of this in very parallel ways to a non-cooperative oligopoly, 626 00:28:15,930 --> 00:28:17,760 if you can cooperate, what do you do? 627 00:28:17,760 --> 00:28:19,277 You just get to free trade. 628 00:28:19,277 --> 00:28:21,360 And we'll talk about trade deals in a few minutes. 629 00:28:21,360 --> 00:28:22,650 That's essentially what those are doing. 630 00:28:22,650 --> 00:28:23,150 Yeah. 631 00:28:23,150 --> 00:28:25,074 AUDIENCE: Why are current economic advisors 632 00:28:25,074 --> 00:28:28,415 in the government [INAUDIBLE] tariffs [INAUDIBLE]?? 633 00:28:28,415 --> 00:28:30,040 JONATHAN GRUBER: So let me get to that. 634 00:28:30,040 --> 00:28:30,540 OK. 635 00:28:30,540 --> 00:28:33,640 So basically, what we've done-- 636 00:28:33,640 --> 00:28:35,330 and let me answer the first question. 637 00:28:35,330 --> 00:28:38,450 What we've done is, because of the archetype made here, 638 00:28:38,450 --> 00:28:42,170 over time, we've created essentially co-operative 639 00:28:42,170 --> 00:28:44,360 oligopolies around the world. 640 00:28:44,360 --> 00:28:46,470 The one you've heard of a lot is-- 641 00:28:46,470 --> 00:28:46,970 OK. 642 00:28:46,970 --> 00:28:48,380 So I'm sorry, trade wars is the first thing. 643 00:28:48,380 --> 00:28:49,922 Let me [INAUDIBLE] the second reason. 644 00:28:49,922 --> 00:28:52,297 The second reason is that, actually, 645 00:28:52,297 --> 00:28:54,380 as decent human beings, we might care about people 646 00:28:54,380 --> 00:28:56,960 in other countries too. 647 00:28:56,960 --> 00:28:59,975 And the fact is that there's-- 648 00:28:59,975 --> 00:29:04,280 when you-- these both import restrictions and trade wars 649 00:29:04,280 --> 00:29:06,625 hurt other countries just like they hurt us. 650 00:29:06,625 --> 00:29:09,740 It's not only we worse off, but other countries are worse off. 651 00:29:09,740 --> 00:29:12,530 Even without the trade war, we've made ourselves worse off, 652 00:29:12,530 --> 00:29:14,072 and we've hurt Colombia, because they 653 00:29:14,072 --> 00:29:16,146 can't sell the roses to the US. 654 00:29:16,146 --> 00:29:17,800 So the reason we don't like-- 655 00:29:17,800 --> 00:29:20,080 so the other reason besides this figure 656 00:29:20,080 --> 00:29:22,690 is that basically, if we place any weight at all 657 00:29:22,690 --> 00:29:26,800 on the utility of people outside the US, which we should, 658 00:29:26,800 --> 00:29:28,070 it's bad as well. 659 00:29:28,070 --> 00:29:31,000 Now, I'm not saying you have to weigh the Colombians' 660 00:29:31,000 --> 00:29:34,532 welfare the same as US welfare, but as long as it's nonzero, 661 00:29:34,532 --> 00:29:36,240 then that's a second reason to oppose it. 662 00:29:36,240 --> 00:29:38,760 And that's why there's been a huge growth in agreements, 663 00:29:38,760 --> 00:29:40,920 the most famous of which we've heard of 664 00:29:40,920 --> 00:29:44,160 is NAFTA, the North American Free Trade Agreement, 665 00:29:44,160 --> 00:29:46,950 signed in the early 1990s under President Clinton, which 666 00:29:46,950 --> 00:29:50,670 essentially set up a cooperative oligopoly between the US, 667 00:29:50,670 --> 00:29:51,768 Mexico, and Canada. 668 00:29:51,768 --> 00:29:54,060 Essentially, let's just get rid of these trade barriers 669 00:29:54,060 --> 00:29:56,820 so we can have freer trade within our regimes. 670 00:29:59,800 --> 00:30:06,220 And basically-- but this was actually 671 00:30:06,220 --> 00:30:08,860 you know quite popular at the time, economists liked it. 672 00:30:08,860 --> 00:30:11,170 But it's become very unpopular over time. 673 00:30:11,170 --> 00:30:13,063 Was opposed by President Trump, and in fact, 674 00:30:13,063 --> 00:30:14,980 he recently ripped up NAFTA, although replaced 675 00:30:14,980 --> 00:30:17,020 with something that's pretty much the same, just 676 00:30:17,020 --> 00:30:20,170 renamed it as USMCA. 677 00:30:20,170 --> 00:30:24,460 So why are people so opposed to free trade? 678 00:30:24,460 --> 00:30:25,810 It's a great question. 679 00:30:25,810 --> 00:30:28,480 Why are Trump's advisors-- why in fact are the majority-- 680 00:30:28,480 --> 00:30:29,980 the majority of Americans, depending 681 00:30:29,980 --> 00:30:32,330 on how you ask the question, don't like free trade. 682 00:30:32,330 --> 00:30:33,830 It depends how you ask the question. 683 00:30:33,830 --> 00:30:35,622 But it's certainly not universally popular, 684 00:30:35,622 --> 00:30:36,760 like I said it should be. 685 00:30:36,760 --> 00:30:39,190 So what's going on? 686 00:30:39,190 --> 00:30:42,740 Well, there's really a couple things going on. 687 00:30:42,740 --> 00:30:44,770 The first is that we can't-- 688 00:30:44,770 --> 00:30:45,640 we don't. 689 00:30:45,640 --> 00:30:46,720 I wouldn't say "can't." 690 00:30:46,720 --> 00:30:48,295 We don't compensate the losers. 691 00:30:52,210 --> 00:30:53,620 This is the most important part. 692 00:30:56,340 --> 00:30:57,850 We don't compensate the losers. 693 00:30:57,850 --> 00:30:59,320 What do I mean by that? 694 00:30:59,320 --> 00:31:02,100 Let's go back to figure 19-3. 695 00:31:06,790 --> 00:31:09,920 What's happened when we've put international trade? 696 00:31:09,920 --> 00:31:16,340 Producers have lost X. Consumers have gained X and Z. 697 00:31:16,340 --> 00:31:18,740 So it's a simple economic policy. 698 00:31:18,740 --> 00:31:21,050 If we did international trade, and then just took 699 00:31:21,050 --> 00:31:25,210 X and gave it back to producers, no one would be sadder. 700 00:31:25,210 --> 00:31:27,080 Even if we give a little more than X. 701 00:31:27,080 --> 00:31:28,497 What if we did international trade 702 00:31:28,497 --> 00:31:32,300 and gave producers X plus 20% of Z? 703 00:31:32,300 --> 00:31:34,740 Then everybody wins. 704 00:31:34,740 --> 00:31:35,850 That's the [INAUDIBLE]. 705 00:31:35,850 --> 00:31:38,460 The problem is we don't do that. 706 00:31:38,460 --> 00:31:42,170 All we do is let consumers have these super cheap sweaters. 707 00:31:42,170 --> 00:31:45,230 So I get to go buy this incredibly cheap sweater, 708 00:31:45,230 --> 00:31:49,230 and people in North Carolina's livelihoods are destroyed. 709 00:31:49,230 --> 00:31:51,360 We don't compensate the losers. 710 00:31:51,360 --> 00:31:53,010 And the winners don't notice they're 711 00:31:53,010 --> 00:31:55,350 paying $5 or $10 less for a sweater, 712 00:31:55,350 --> 00:31:59,270 but the losers notice they don't have a job. 713 00:31:59,270 --> 00:32:01,750 So the problem is, yes, there's more winning. 714 00:32:01,750 --> 00:32:03,970 But first of all, it's winning among many more people 715 00:32:03,970 --> 00:32:06,220 by a small amount, whereas losing 716 00:32:06,220 --> 00:32:08,410 is by fewer people by a large amount, 717 00:32:08,410 --> 00:32:11,230 and that always gets more political attention. 718 00:32:11,230 --> 00:32:14,250 And we don't have mechanisms in place, or don't put in-- 719 00:32:14,250 --> 00:32:16,000 I started "I can't," but it's not "can't." 720 00:32:16,000 --> 00:32:17,356 We could. 721 00:32:17,356 --> 00:32:19,070 We could easily address this. 722 00:32:19,070 --> 00:32:20,780 There'd be a simple policy. 723 00:32:20,780 --> 00:32:28,010 What if we simply said, there'll be a tax on all consumers 724 00:32:28,010 --> 00:32:31,113 of international-- not just a tax on consumers, 725 00:32:31,113 --> 00:32:33,530 not of international goods-- that would be like a tariff-- 726 00:32:33,530 --> 00:32:36,442 but just a general tax on consumers of consumer goods 727 00:32:36,442 --> 00:32:38,150 that tend to come in international trade. 728 00:32:38,150 --> 00:32:40,730 So it's a tax on clothes. 729 00:32:40,730 --> 00:32:43,070 And we'll take all that money, and we'll 730 00:32:43,070 --> 00:32:45,590 redistribute it to people who lost 731 00:32:45,590 --> 00:32:47,100 their jobs in the textile sector, 732 00:32:47,100 --> 00:32:49,790 help retrain them for new jobs, or help pay their bills 733 00:32:49,790 --> 00:32:51,530 while they find a new job. 734 00:32:51,530 --> 00:32:55,220 Then we could literally deliver some of X 735 00:32:55,220 --> 00:32:57,200 and even maybe some of Z to the producers. 736 00:32:57,200 --> 00:32:59,340 But we don't do that. 737 00:32:59,340 --> 00:33:01,790 And that's the main reason, to answer your question, why 738 00:33:01,790 --> 00:33:03,300 does opposition to free trade? 739 00:33:03,300 --> 00:33:09,357 Is because people see the cost, they don't see the benefits. 740 00:33:09,357 --> 00:33:11,940 And well-off people like me who don't need-- who could happily 741 00:33:11,940 --> 00:33:14,580 afford to pay twice as much for a sweater, 742 00:33:14,580 --> 00:33:17,280 we just get these benefits we don't even pay attention to, 743 00:33:17,280 --> 00:33:20,550 whereas typically lower-income workers, because they compete 744 00:33:20,550 --> 00:33:25,530 in lower-income countries, lose their jobs and they notice it. 745 00:33:25,530 --> 00:33:27,360 So that's one big reason. 746 00:33:27,360 --> 00:33:29,970 The other big reason is that there 747 00:33:29,970 --> 00:33:40,510 can be socially-damaging routes to comparative advantage. 748 00:33:40,510 --> 00:33:42,037 There can be socially-- that sounds 749 00:33:42,037 --> 00:33:43,870 like socially-damaging routes to California. 750 00:33:43,870 --> 00:33:48,670 Socially-damaging routes to comparative advantage. 751 00:33:48,670 --> 00:33:50,470 That is, there can be ways that countries 752 00:33:50,470 --> 00:33:54,230 get to comparative advantage that are not so happy. 753 00:33:54,230 --> 00:33:55,905 So why does China have low labor costs? 754 00:33:55,905 --> 00:33:58,030 Partly because they got a billion and a half people 755 00:33:58,030 --> 00:33:59,200 to work. 756 00:33:59,200 --> 00:34:02,440 But partly because workers are massively exploited there. 757 00:34:02,440 --> 00:34:04,480 Work conditions are terrible. 758 00:34:04,480 --> 00:34:07,810 And it's a horrible life being a worker in a Chinese factory. 759 00:34:07,810 --> 00:34:10,540 Moreover, there's terrible environmental conditions 760 00:34:10,540 --> 00:34:12,889 imposed by Chinese production. 761 00:34:12,889 --> 00:34:16,127 In the US, we have restrictions that try to minimize, 762 00:34:16,127 --> 00:34:18,710 in some ways, the environmental damage done by our production. 763 00:34:18,710 --> 00:34:20,239 They don't have those in China. 764 00:34:20,239 --> 00:34:21,409 Or India. 765 00:34:21,409 --> 00:34:23,960 India is home to three of the top five 766 00:34:23,960 --> 00:34:26,630 polluted cities in the world. 767 00:34:26,630 --> 00:34:27,570 They don't have those. 768 00:34:27,570 --> 00:34:31,120 So by creating their comparative advantage, 769 00:34:31,120 --> 00:34:34,060 they may be doing damage that we don't like. 770 00:34:34,060 --> 00:34:36,420 Just like we care about the fact that consumers-- 771 00:34:36,420 --> 00:34:38,929 that we care about other countries' welfare, 772 00:34:38,929 --> 00:34:41,380 we might also care about the fact 773 00:34:41,380 --> 00:34:45,540 that this free trade is hurting other countries' welfare. 774 00:34:45,540 --> 00:34:46,498 So a great example-- 775 00:34:46,498 --> 00:34:47,540 I've got a great example. 776 00:34:47,540 --> 00:34:49,610 A very relevant example was a recent story 777 00:34:49,610 --> 00:34:52,280 about lead poisoning in China. 778 00:34:52,280 --> 00:34:54,199 There was this battery factory-- 779 00:34:54,199 --> 00:34:56,179 batteries are big business now-- 780 00:34:56,179 --> 00:35:00,470 that made lead acid batter for motorcycles and electric bikes. 781 00:35:00,470 --> 00:35:03,410 And basically, they operated in flagrant violation 782 00:35:03,410 --> 00:35:04,540 of environmental law. 783 00:35:04,540 --> 00:35:06,290 They would just dump the mercury and stuff 784 00:35:06,290 --> 00:35:08,600 they were using in the rivers and lakes all around. 785 00:35:08,600 --> 00:35:10,790 Flagrant, everybody knew it. 786 00:35:10,790 --> 00:35:14,180 And 233 adults and 99 children were 787 00:35:14,180 --> 00:35:16,550 found to have lead in their blood up to seven times 788 00:35:16,550 --> 00:35:17,535 the safe amount. 789 00:35:17,535 --> 00:35:19,160 And they're basically are going to be-- 790 00:35:19,160 --> 00:35:21,980 lives will be destroyed by this. 791 00:35:21,980 --> 00:35:24,540 And this is a big issue in the negotiation of NAFTA, 792 00:35:24,540 --> 00:35:26,450 and a big reason a lot of people on the left 793 00:35:26,450 --> 00:35:29,030 don't like international trade, is 794 00:35:29,030 --> 00:35:31,560 because they fear for the welfare of people 795 00:35:31,560 --> 00:35:33,240 who are being affected. 796 00:35:33,240 --> 00:35:36,300 So when NAFTA was negotiated in the early '90s, 797 00:35:36,300 --> 00:35:38,120 there were some protections for workers. 798 00:35:38,120 --> 00:35:39,350 There were some protections. 799 00:35:39,350 --> 00:35:41,270 Basically, the idea was, Mexico, if you want to sign this, 800 00:35:41,270 --> 00:35:42,830 you got to put in some protections 801 00:35:42,830 --> 00:35:44,747 to raise the standard of living of your worker 802 00:35:44,747 --> 00:35:46,270 and improve your environment. 803 00:35:46,270 --> 00:35:51,830 So once again, there are ways to deal with this by saying, 804 00:35:51,830 --> 00:35:55,360 look, free trade, where you impose some restrictions, 805 00:35:55,360 --> 00:35:57,370 is still better than no free trade. 806 00:35:57,370 --> 00:35:59,500 So we might go in and say, look, once again, it's 807 00:35:59,500 --> 00:36:03,530 all about how you spend Z. You got a bunch of money to spend. 808 00:36:03,530 --> 00:36:04,780 How are you going to spend it? 809 00:36:04,780 --> 00:36:05,830 Some of the way you can spend it is 810 00:36:05,830 --> 00:36:07,440 by compensating the producers. 811 00:36:07,440 --> 00:36:09,190 Another way you can spend it is by saying, 812 00:36:09,190 --> 00:36:11,137 look, we'll be willing to make it all smaller, 813 00:36:11,137 --> 00:36:13,720 have the world price be a little bit higher, but make sure you 814 00:36:13,720 --> 00:36:15,520 have decent environmental conditions and decent wages 815 00:36:15,520 --> 00:36:16,360 for your workers. 816 00:36:16,360 --> 00:36:18,610 As long as we don't impose too high restrictions, 817 00:36:18,610 --> 00:36:20,455 we could still all gain. 818 00:36:20,455 --> 00:36:23,080 So that's another reason people don't like international trade. 819 00:36:23,080 --> 00:36:26,220 On the other hand, we taught the story of the child workers 820 00:36:26,220 --> 00:36:28,290 in Vietnam, and how free trade in rice 821 00:36:28,290 --> 00:36:31,530 was better for them, because the parents got richer and had 822 00:36:31,530 --> 00:36:33,150 them work less and put them in school. 823 00:36:33,150 --> 00:36:34,900 So it's not clear which way this goes, 824 00:36:34,900 --> 00:36:38,420 but that's certainly another concern. 825 00:36:38,420 --> 00:36:40,610 And then finally, there's the issue 826 00:36:40,610 --> 00:36:43,760 which is, I think, paramount in this administration, which 827 00:36:43,760 --> 00:36:47,450 is trade policy-- 828 00:36:47,450 --> 00:36:51,035 trade policy as a tool of foreign policy. 829 00:36:58,040 --> 00:37:00,190 Trade policy as a tool of foreign policy. 830 00:37:00,190 --> 00:37:04,378 Look, consider where we are with China today. 831 00:37:04,378 --> 00:37:06,420 There's a host of reasons to be angry with China. 832 00:37:06,420 --> 00:37:07,930 Now, some are irrational. 833 00:37:07,930 --> 00:37:10,340 The Trump's administration obsession with trade deficits, 834 00:37:10,340 --> 00:37:12,530 as I've explained repeatedly, is irrational. 835 00:37:12,530 --> 00:37:15,130 It's the Pikachu fallacy. 836 00:37:15,130 --> 00:37:18,160 But some of it's rational. 837 00:37:18,160 --> 00:37:20,230 China-- we operate under something 838 00:37:20,230 --> 00:37:21,910 called the World Trade Organization. 839 00:37:21,910 --> 00:37:23,050 Once again, coming to the other question, 840 00:37:23,050 --> 00:37:25,250 it's another chance to try to cartelize the country 841 00:37:25,250 --> 00:37:29,800 and set a-- cartelize the world and set a set of fair trading 842 00:37:29,800 --> 00:37:30,700 rules. 843 00:37:30,700 --> 00:37:32,050 The World Trade Organization. 844 00:37:32,050 --> 00:37:35,080 China repeatedly violates the rules set up by the World Trade 845 00:37:35,080 --> 00:37:36,950 Organization. 846 00:37:36,950 --> 00:37:38,930 For example, under those rules, China 847 00:37:38,930 --> 00:37:44,120 should allow much freer sales of US goods in China, 848 00:37:44,120 --> 00:37:46,010 but they implicitly restrict them. 849 00:37:46,010 --> 00:37:47,600 Not on paper, but in practice. 850 00:37:47,600 --> 00:37:49,760 They set up lots of practices which makes 851 00:37:49,760 --> 00:37:52,650 it harder to sell US goods. 852 00:37:52,650 --> 00:37:56,790 They also do a lot of significant industrial 853 00:37:56,790 --> 00:37:59,122 espionage and stealing our industrial secrets. 854 00:37:59,122 --> 00:38:00,580 So one way to do that, for example, 855 00:38:00,580 --> 00:38:04,050 is China has a rule that you cannot have a solely-owned 856 00:38:04,050 --> 00:38:05,783 subsidiary in China. 857 00:38:05,783 --> 00:38:07,200 If you want a subsidiary in China, 858 00:38:07,200 --> 00:38:09,930 it has to be jointly owned with a Chinese company. 859 00:38:09,930 --> 00:38:12,890 Which then will promptly take the ideas, 860 00:38:12,890 --> 00:38:16,290 and pass them on, and kick you out of the country. 861 00:38:16,290 --> 00:38:19,460 So China's engaged in some nasty practices 862 00:38:19,460 --> 00:38:21,940 which are bad for the US-- 863 00:38:21,940 --> 00:38:22,940 which are certainly bad. 864 00:38:22,940 --> 00:38:24,065 They may be good for China. 865 00:38:24,065 --> 00:38:26,700 They're certainly bad for US self-interests. 866 00:38:26,700 --> 00:38:27,840 And that's true. 867 00:38:27,840 --> 00:38:29,610 That is unambiguously true. 868 00:38:29,610 --> 00:38:33,402 The question is, what's the right response? 869 00:38:33,402 --> 00:38:34,860 And the Trump administration argues 870 00:38:34,860 --> 00:38:36,550 the right response is tariffs. 871 00:38:36,550 --> 00:38:40,110 The right response is to punish China through tariffs 872 00:38:40,110 --> 00:38:42,640 for their bad behavior. 873 00:38:42,640 --> 00:38:45,860 And economists-- virtually all economists-- 874 00:38:45,860 --> 00:38:47,390 say that's the wrong response. 875 00:38:47,390 --> 00:38:51,700 There is literally less than 1% of economists 876 00:38:51,700 --> 00:38:52,825 who agree with this policy. 877 00:38:52,825 --> 00:38:54,201 Just a few of them happen to work 878 00:38:54,201 --> 00:38:55,580 with the Trump administration. 879 00:38:55,580 --> 00:38:56,690 But basically, at the end of the day, 880 00:38:56,690 --> 00:38:58,160 basically virtually all economists 881 00:38:58,160 --> 00:38:59,450 agree that it's a bad idea. 882 00:38:59,450 --> 00:39:01,850 And that's for three reasons. 883 00:39:01,850 --> 00:39:03,910 The first reason is our standard reason 884 00:39:03,910 --> 00:39:05,410 that we think trade is good. 885 00:39:05,410 --> 00:39:08,560 We think we're hurting ourselves by imposing tariffs 886 00:39:08,560 --> 00:39:09,280 on Chinese goods. 887 00:39:09,280 --> 00:39:10,290 All we're doing is hurting ourselves. 888 00:39:10,290 --> 00:39:11,915 We're making people pay more for stuff. 889 00:39:11,915 --> 00:39:14,630 Why would we want to do that? 890 00:39:14,630 --> 00:39:17,390 Moreover, we're causing a trade war. 891 00:39:17,390 --> 00:39:19,250 China's now imposing tariffs on our goods, 892 00:39:19,250 --> 00:39:20,750 which hurts our producers. 893 00:39:20,750 --> 00:39:23,735 So our farmers, for example, are going 894 00:39:23,735 --> 00:39:25,110 to suffer because it'll be harder 895 00:39:25,110 --> 00:39:27,120 to sell our farm goods in China because of the new tariffs 896 00:39:27,120 --> 00:39:28,100 they've imposed. 897 00:39:28,100 --> 00:39:31,110 So the standard arguments we have here still hold. 898 00:39:31,110 --> 00:39:33,610 We like free trade because it expands opportunities, 899 00:39:33,610 --> 00:39:34,715 and if we try to limit it, other countries 900 00:39:34,715 --> 00:39:37,420 will respond in a way which further restrict opportunities. 901 00:39:37,420 --> 00:39:41,480 So that's the standard reason economists are mad about this. 902 00:39:41,480 --> 00:39:44,333 The second reason is it's sort of hard to do this. 903 00:39:44,333 --> 00:39:46,250 It's hard to use trade police [INAUDIBLE] tool 904 00:39:46,250 --> 00:39:47,840 of foreign policy because it's not 905 00:39:47,840 --> 00:39:49,970 even clear what's made in China and what's 906 00:39:49,970 --> 00:39:52,560 made in America anymore. 907 00:39:52,560 --> 00:39:54,770 So if we build the car in America, 908 00:39:54,770 --> 00:39:57,580 but the parts are made in China, is it an American car 909 00:39:57,580 --> 00:39:58,982 or a Chinese car? 910 00:39:58,982 --> 00:40:00,440 Oftentimes, we'll have things which 911 00:40:00,440 --> 00:40:02,857 are shipped to China, back to America, then back to China, 912 00:40:02,857 --> 00:40:04,132 or vice versa. 913 00:40:04,132 --> 00:40:07,448 So it's not even clear what's a Chinese import or export 914 00:40:07,448 --> 00:40:08,740 and what's US import or export. 915 00:40:08,740 --> 00:40:10,540 These are blurry lines now. 916 00:40:10,540 --> 00:40:13,220 Now, once again, that's all because of the efficiency 917 00:40:13,220 --> 00:40:13,970 of production. 918 00:40:13,970 --> 00:40:16,160 Basically, what we've done over time 919 00:40:16,160 --> 00:40:20,450 is we've sort of disaggregated production 920 00:40:20,450 --> 00:40:22,070 to more and more efficient components. 921 00:40:22,070 --> 00:40:24,095 It used to be one guy made the whole car. 922 00:40:24,095 --> 00:40:25,970 Now we recognize there are certain parts that 923 00:40:25,970 --> 00:40:27,428 are made more efficiently in China, 924 00:40:27,428 --> 00:40:29,660 certain parts made more efficiently in Cambodia, 925 00:40:29,660 --> 00:40:32,130 more efficiently in the US, more efficiently in Germany, 926 00:40:32,130 --> 00:40:33,543 and we put them together. 927 00:40:33,543 --> 00:40:35,960 What that does is it makes international trade super messy 928 00:40:35,960 --> 00:40:36,980 to understand. 929 00:40:36,980 --> 00:40:38,662 But it makes the world better off. 930 00:40:38,662 --> 00:40:40,745 It's just further increasing comparative advantage 931 00:40:40,745 --> 00:40:41,980 and specialization. 932 00:40:41,980 --> 00:40:44,147 But it makes it hard to decide what's a Chinese good 933 00:40:44,147 --> 00:40:45,140 and what's a US good. 934 00:40:45,140 --> 00:40:47,070 So that's the second problem. 935 00:40:47,070 --> 00:40:49,910 And the third and probably the single most important criticism 936 00:40:49,910 --> 00:40:53,900 economists make is, this is a really silly thing 937 00:40:53,900 --> 00:40:55,880 to do by yourself. 938 00:40:55,880 --> 00:40:58,760 The US is big, but we still represent 939 00:40:58,760 --> 00:41:02,298 a minority of Chinese exports. 940 00:41:02,298 --> 00:41:04,840 We obviously [INAUDIBLE] a large share, but still a minority. 941 00:41:04,840 --> 00:41:09,003 As long as China can still sell to other people, 942 00:41:09,003 --> 00:41:10,420 and they're making plenty of money 943 00:41:10,420 --> 00:41:13,580 off their practices against us, they might not stop. 944 00:41:13,580 --> 00:41:16,195 Now, they prefer to sell to us. 945 00:41:16,195 --> 00:41:17,570 But if you think on the one hand, 946 00:41:17,570 --> 00:41:19,600 they're making a ton of money ripping us off. 947 00:41:19,600 --> 00:41:22,780 On the other hand, they'll still get to sell 70%, 80% 948 00:41:22,780 --> 00:41:25,665 as much to the rest of the world once they adjust things. 949 00:41:25,665 --> 00:41:27,040 Then maybe they'll be like, fine. 950 00:41:27,040 --> 00:41:28,332 We're happy to let you do that. 951 00:41:28,332 --> 00:41:30,740 You're just cutting off your nose to spite your face. 952 00:41:30,740 --> 00:41:34,060 But if we get the whole world to coordinate and say, 953 00:41:34,060 --> 00:41:36,850 you violated the norms of the World Trade Organization, 954 00:41:36,850 --> 00:41:39,700 we're now all going to set up trade restrictions on China, 955 00:41:39,700 --> 00:41:42,048 then they feel the pain. 956 00:41:42,048 --> 00:41:43,590 So the other reason economists oppose 957 00:41:43,590 --> 00:41:48,680 this is moving unilaterally on trade just doesn't make sense. 958 00:41:48,680 --> 00:41:52,200 If you want to try to deal with these problems, 959 00:41:52,200 --> 00:41:55,320 you need to through coordinated response. 960 00:41:55,320 --> 00:41:57,660 Now, let me be very clear. 961 00:41:57,660 --> 00:42:01,680 This is a very, very hard issue. 962 00:42:01,680 --> 00:42:03,810 Economists try to make it very simple 963 00:42:03,810 --> 00:42:06,530 with our surplus diagrams and stuff like that, 964 00:42:06,530 --> 00:42:09,360 but it's a super hard issue. 965 00:42:09,360 --> 00:42:14,790 Nonetheless, it's an issue where your bias in thinking about it 966 00:42:14,790 --> 00:42:17,355 should be towards the basic bias of economics, 967 00:42:17,355 --> 00:42:19,230 which is that if we can expand opportunities, 968 00:42:19,230 --> 00:42:21,610 that's a good thing. 969 00:42:21,610 --> 00:42:24,190 And the real challenge is twofold. 970 00:42:24,190 --> 00:42:27,930 How do we expand opportunity sets in a fair way? 971 00:42:27,930 --> 00:42:30,570 And two, how do we deal with compensating the losers 972 00:42:30,570 --> 00:42:32,182 as opportunity sets advance? 973 00:42:32,182 --> 00:42:34,140 And this is something we'll spend a lot of time 974 00:42:34,140 --> 00:42:37,680 on after Thanksgiving, is how we redistribute society 975 00:42:37,680 --> 00:42:39,610 from one group to another. 976 00:42:39,610 --> 00:42:40,110 OK. 977 00:42:40,110 --> 00:42:40,960 Now let me get some questions. 978 00:42:40,960 --> 00:42:43,120 I know, this is sort of a top [INAUDIBLE]---- yeah. 979 00:42:43,120 --> 00:42:50,420 AUDIENCE: So on an international level, 980 00:42:50,420 --> 00:42:52,510 when a country behaves badly, sometimes 981 00:42:52,510 --> 00:42:54,790 the UN will suggest that sanctions are 982 00:42:54,790 --> 00:42:56,938 imposed against the country. 983 00:42:56,938 --> 00:42:59,480 And I was wondering if you know anything about how that tends 984 00:42:59,480 --> 00:43:01,320 to work in terms of welfare? 985 00:43:01,320 --> 00:43:05,360 Like, do the sanctions tend to make a country behave better, 986 00:43:05,360 --> 00:43:08,500 and then ultimately the world is better off, 987 00:43:08,500 --> 00:43:09,935 or are those also a bad idea? 988 00:43:09,935 --> 00:43:12,320 JONATHAN GRUBER: That's a really interesting question. 989 00:43:12,320 --> 00:43:14,770 So let's think about sanctions in this framework. 990 00:43:14,770 --> 00:43:18,623 So sanctions-- let's say one sanction would be-- 991 00:43:18,623 --> 00:43:20,290 it depends on the form of the sanctions. 992 00:43:20,290 --> 00:43:21,160 It depends-- et cetera. 993 00:43:21,160 --> 00:43:22,827 So one sanction would be, literally, you 994 00:43:22,827 --> 00:43:24,310 have to pay a bunch of money. 995 00:43:24,310 --> 00:43:26,560 Well, then, that's just like a tax on the country. 996 00:43:26,560 --> 00:43:28,810 We just think about that, think of the country individual. 997 00:43:28,810 --> 00:43:29,590 They're worse off. 998 00:43:29,590 --> 00:43:30,310 The UN gets some money. 999 00:43:30,310 --> 00:43:32,602 In some sense, it depends on whether the sanction works 1000 00:43:32,602 --> 00:43:33,140 or not. 1001 00:43:33,140 --> 00:43:36,070 So the easy case is just simply the trade-off of, do 1002 00:43:36,070 --> 00:43:38,080 you encourage a behavior you want to encourage, 1003 00:43:38,080 --> 00:43:40,000 versus what pain do you impose on the country, 1004 00:43:40,000 --> 00:43:41,560 and how do you trade those two things off? 1005 00:43:41,560 --> 00:43:42,610 If they're a really bad-acting country, 1006 00:43:42,610 --> 00:43:44,230 you might not carry imposing pain on them. 1007 00:43:44,230 --> 00:43:46,772 As long as there's some chance you get the change in behavior 1008 00:43:46,772 --> 00:43:48,040 you want, you're happy. 1009 00:43:48,040 --> 00:43:50,260 But what if the sanction's limiting trade? 1010 00:43:50,260 --> 00:43:52,660 Well, then you're hurting other countries too. 1011 00:43:52,660 --> 00:43:54,190 Then it becomes a bit trickier. 1012 00:43:54,190 --> 00:43:56,590 So then once again, the trade-off is three-piece. 1013 00:43:56,590 --> 00:43:59,360 I hurt the country I want to hurt. 1014 00:43:59,360 --> 00:44:01,520 But I hurt countries I don't want to hurt. 1015 00:44:01,520 --> 00:44:03,950 But I also may get a change in behavior I want. 1016 00:44:03,950 --> 00:44:05,630 So you have to weigh-- you have to add those three pieces 1017 00:44:05,630 --> 00:44:06,620 and put them together. 1018 00:44:06,620 --> 00:44:07,530 How do you put them together? 1019 00:44:07,530 --> 00:44:09,380 That's exactly what we'll talk about after Thanksgiving. 1020 00:44:09,380 --> 00:44:11,505 You put them together by thinking about a weighting 1021 00:44:11,505 --> 00:44:14,540 function, which we call social welfare function, which weights 1022 00:44:14,540 --> 00:44:16,415 the well-being of all these different parties 1023 00:44:16,415 --> 00:44:17,565 and puts them together. 1024 00:44:17,565 --> 00:44:19,940 A very related issue we haven't talked-- yeah, I'm sorry, 1025 00:44:19,940 --> 00:44:20,700 go ahead. 1026 00:44:20,700 --> 00:44:23,200 AUDIENCE: So do you think that the current administration is 1027 00:44:23,200 --> 00:44:27,176 putting in these policies to try and gain popularity because so 1028 00:44:27,176 --> 00:44:29,422 many people understand trade? 1029 00:44:29,422 --> 00:44:32,210 JONATHAN GRUBER: You know, I think 1030 00:44:32,210 --> 00:44:36,275 there's almost no one who makes any money by trying 1031 00:44:36,275 --> 00:44:38,900 to understand what's in the mind of the current administration. 1032 00:44:38,900 --> 00:44:41,750 So I have no idea. 1033 00:44:41,750 --> 00:44:44,120 I think China is engaging in bad practices, 1034 00:44:44,120 --> 00:44:45,710 but I also think it's good politics, 1035 00:44:45,710 --> 00:44:48,795 and it's hard to know what's the mix. 1036 00:44:48,795 --> 00:44:49,920 But let's actually relate-- 1037 00:44:49,920 --> 00:44:50,765 [INAUDIBLE] take the current administration, 1038 00:44:50,765 --> 00:44:52,530 this raises another issue that's related to all this 1039 00:44:52,530 --> 00:44:54,030 which we haven't talked about, which 1040 00:44:54,030 --> 00:44:56,550 is what about immigration? 1041 00:44:56,550 --> 00:44:59,210 Another-- I'm going to stop before I get to abortion. 1042 00:45:02,810 --> 00:45:04,720 What about immigration? 1043 00:45:04,720 --> 00:45:07,370 Well, immigration, actually, the framework 1044 00:45:07,370 --> 00:45:10,940 is very much the same. 1045 00:45:10,940 --> 00:45:15,650 If there are people who can contribute to our society 1046 00:45:15,650 --> 00:45:19,410 by coming here, then we are better off 1047 00:45:19,410 --> 00:45:24,035 by letting them in by the same logic of specialization 1048 00:45:24,035 --> 00:45:26,210 and comparative advantage. 1049 00:45:26,210 --> 00:45:27,300 If there are people-- 1050 00:45:27,300 --> 00:45:31,070 for example, let's say US folks don't want to pick our crops, 1051 00:45:31,070 --> 00:45:33,223 and we don't want to clean toilets. 1052 00:45:33,223 --> 00:45:35,390 But picking crops and cleaning toilets at a low wage 1053 00:45:35,390 --> 00:45:38,300 is a terrific opportunity for someone from another country. 1054 00:45:38,300 --> 00:45:41,860 Then we could be better off by letting them in. 1055 00:45:41,860 --> 00:45:43,390 Or let's say-- as it's turned out 1056 00:45:43,390 --> 00:45:46,210 to be true historically-- the kind of person who wants take 1057 00:45:46,210 --> 00:45:49,330 the risk to immigrate to America is the kind of person who 1058 00:45:49,330 --> 00:45:51,667 often becomes an entrepreneur and thinks up new ideas. 1059 00:45:51,667 --> 00:45:53,500 Much of the entrepreneurial ideas in America 1060 00:45:53,500 --> 00:45:55,660 have come from our nation's history of immigrants. 1061 00:45:55,660 --> 00:45:57,100 Because who picks up and leaves? 1062 00:45:57,100 --> 00:45:58,850 It's kind of a risky thing to do. 1063 00:45:58,850 --> 00:46:00,475 To pick up, leave your home, and leave, 1064 00:46:00,475 --> 00:46:01,840 and come to this unknown place. 1065 00:46:01,840 --> 00:46:03,550 And those risk-loving people are often 1066 00:46:03,550 --> 00:46:06,110 the kind of people who think up new ideas 1067 00:46:06,110 --> 00:46:08,160 and want to start new businesses. 1068 00:46:08,160 --> 00:46:10,550 So for that reason, immigration has traditionally 1069 00:46:10,550 --> 00:46:13,530 been an enormous benefit to the US economy. 1070 00:46:13,530 --> 00:46:15,890 And I think today, the general consensus-- this is more 1071 00:46:15,890 --> 00:46:17,630 controversial than free trade. 1072 00:46:17,630 --> 00:46:20,390 But I think the general consensus among economists 1073 00:46:20,390 --> 00:46:23,510 is that immigration on net is good for the country, 1074 00:46:23,510 --> 00:46:26,860 but there's redistributional consequences. 1075 00:46:26,860 --> 00:46:29,890 It's good for rich people because they 1076 00:46:29,890 --> 00:46:33,375 get low-pay people to pick their fruits and do their lawn work. 1077 00:46:33,375 --> 00:46:35,500 But it's bad for people who used to pick the fruits 1078 00:46:35,500 --> 00:46:37,350 and do the lawn work. 1079 00:46:37,350 --> 00:46:39,480 So once again, if we can figure out 1080 00:46:39,480 --> 00:46:42,030 a way to compensate the losers, immigration 1081 00:46:42,030 --> 00:46:43,860 is probably [INAUDIBLE] good. 1082 00:46:43,860 --> 00:46:45,210 Now, it's more complicated. 1083 00:46:45,210 --> 00:46:48,848 When we import a car, it doesn't get welfare or commit crimes. 1084 00:46:48,848 --> 00:46:50,890 Immigrants might get on welfare or commit crimes, 1085 00:46:50,890 --> 00:46:53,430 so it's more complicated than just free trade. 1086 00:46:53,430 --> 00:46:55,560 So what you have to do in that case is you 1087 00:46:55,560 --> 00:46:58,140 have to look at the evidence. 1088 00:46:58,140 --> 00:47:01,110 And the evidence is that immigrants commit crime 1089 00:47:01,110 --> 00:47:04,710 at a much lower rate than comparable US citizens 1090 00:47:04,710 --> 00:47:08,070 and collect welfare at a much lower rate than comparable US 1091 00:47:08,070 --> 00:47:09,000 citizens. 1092 00:47:09,000 --> 00:47:10,667 So you can't compare an immigrant to me. 1093 00:47:10,667 --> 00:47:13,250 An immigrant is more likely to commit crime or collect welfare 1094 00:47:13,250 --> 00:47:15,920 than I am, but immigrant's also less educated than I am. 1095 00:47:15,920 --> 00:47:17,170 I'm not the comparable person. 1096 00:47:17,170 --> 00:47:18,780 Compare an immigrant to the person 1097 00:47:18,780 --> 00:47:20,920 they're replacing in the labor market. 1098 00:47:20,920 --> 00:47:23,025 A low-skilled US citizen. 1099 00:47:23,025 --> 00:47:24,900 Immigrants are less likely to collect welfare 1100 00:47:24,900 --> 00:47:28,030 and less likely to commit crimes than are those people. 1101 00:47:28,030 --> 00:47:31,080 So as a result, those arguments don't really bode well 1102 00:47:31,080 --> 00:47:32,670 for restricting immigration. 1103 00:47:32,670 --> 00:47:34,300 On the other hand, I think there's 1104 00:47:34,300 --> 00:47:36,300 very few people who say we should have a totally 1105 00:47:36,300 --> 00:47:39,330 porous and open border. 1106 00:47:39,330 --> 00:47:41,040 Because of illegal movement of goods, 1107 00:47:41,040 --> 00:47:44,615 and because we don't want people objectively criminal 1108 00:47:44,615 --> 00:47:46,490 in other countries that are also risk-loving, 1109 00:47:46,490 --> 00:47:48,670 we don't necessarily want them here. 1110 00:47:48,670 --> 00:47:50,218 So I think this is a hard issue. 1111 00:47:50,218 --> 00:47:51,593 Unlike international trade, where 1112 00:47:51,593 --> 00:47:54,410 I think economists would say just more is good, 1113 00:47:54,410 --> 00:47:57,410 I think that immigration, there are some difficult trade-offs, 1114 00:47:57,410 --> 00:47:59,630 because people come with a set of baggage 1115 00:47:59,630 --> 00:48:02,450 that goods don't come with. 1116 00:48:02,450 --> 00:48:04,060 But I think economists would generally 1117 00:48:04,060 --> 00:48:06,310 say a lot of the same arguments apply. 1118 00:48:06,310 --> 00:48:09,100 We might need a more comprehensive policy 1119 00:48:09,100 --> 00:48:11,700 than we have when it comes to trading goods.