Final Examination Review Notes
Q. Trade and protectionism
Compare the ratification processes of NAFTA and CAFTA. What does this comparison
tell us about the prospects for further trade agreements involving the United States?
About one-third of the House Democrats joined two-thirds of House Republicans to pass NAFTA. Since
then, the anti-trade forces in the Democratic party have gotten much stronger.
In 2005, the Central American Free Trade Agreement (CAFTA), whose effects are completely negligible
as far as the U.S. domestic economy is concerned, attracted the support of only 15 House Democrats, where
NAFTA had attracted almost 100.
What are the upsides and downsides of a protected labor market?
He claims that globalization leads to economic dislocation as well as to increased productivity.
High levels of innovation, otherwise known as creative destruction, the rendering obsolete of older technologies,
processes and ways of doing business, and their supplanting by newer ones, were not created by globalization but
are the driving engine of capitalism itself; or, possibly more correctly, both capitalism and globalization are both
aspects of the same great historical shift, the supplanting of traditional society by modernity. But globalization
accelerates creative destruction. The rate of change induced by competition among firms accelerates when the
competitors are located all over the globe instead of within one country. For example, compare the rate of
innovation in the automobile industry before 1978, when Detroit had only marginal foreign competition to
contend with, with the rate of innovation from 1979 to the present, with competitors located in Japan, Korea and
Europe. But the flip side of increased innovation and increased competition is increased dislocation. To stick
with the example of the automobile industry, compare the rate of dislocation in the earlier period, characterized
by full employment, high and increasing wages and generous health and pension benefits, with the later period,
characterized by layoffs, buyouts and falling volume, and also by calls to keep out the Japanese cars that are
supposed to be causing the problem.
Compare tariffs and subsidies in terms of their effects on consumer prices, government
budgets and trade distortion.
Effect on consumer
Effect on government
Effect on international
Money flows from
Little direct effect
are not competitive
Money flows from