South-Western College Publishing - Economics  
Trade Wars - in the U.S.
Subject Gains from trade
Topic Production Possibility Frontiers
Key Words Inflation, Unemployment, Interest Rates, Trade, Imports, Wages, Jobs, Demand, Growth, Layoffs, Trade Deficit, Employment
News Story

The U.S. economy has been growing steadily for a record eight years, inflation is low, unemployment is small, and interest rates are low. Yet 58 percent of the population believes that foreign trade is bad for the U.S. economy because cheap imports hurt wages and jobs. Only 32 percent thinks that trade is good for the U.S. economy, creating foreign demand, U.S. economic growth and jobs. Trade is criticized by a majority of both men and women, and both white-collar and blue-collar workers; the only groups that favored free trade were those earning over $100,000 a year and college graduates. People appear concerned about layoffs and the trade deficit. They believe that they are able to buy cheap imports, but at the cost of Americans' jobs. Even Congress refused to give President Clinton "fast-track" power to negotiate trade deals.

President Clinton has asked Commerce Secretary Daley to head a trade-education initiative. The belief is that when people have more information, they will favor free trade. For example, in South Carolina between 1988 and 1994, while there were job losses in the textile and apparel industries, foreign companies and their suppliers employed more labor, resulting in a net increase in employment of 9 percent.

(Updated March 1, 1999)

1. Assume that South Carolina and its overseas trading partners only produce and consume textiles and "other goods". Draw production possibility frontiers for South Carolina and overseas trading partners. Show South Carolina with relatively fewer resources and a comparative advantage in the production of other goods, and its trading partners as having greater resources and a comparative advantage in textiles. Mark points on the frontiers showing where each might be in the absence of specialization and trade. Label them SC1 and OTP1.
2. On your diagram, draw points labeled SC2 and OTP2 showing where South Carolina and its overseas trading partners might be after increasing the amount of goods traded.
3. Explain in terms of your diagram why South Carolina (and its trading partners) are better off due to foreign trade.
4. Why might people still fear an expansion of foreign trade? Refer to the quantities of textiles and other goods produced in the course of your explanation.
Source Jackie Calmes, "Despite Buoyant Economic Times Americans Don't Buy Free Trade", The Wall Street Journal, December 10, 1998.

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