fashion essay

International Trade Theory (Updated August 2020)

Content I. The basics of trade II. Trade theories III. International trade and development IV. Trade and jobs V. The U.S. trade deficit VI. Trade adjustment assistance (TAA) VII. Tariff

I. The Basics of Trade Economic theory states that trade occurs because it is mutually enriching. It is asserted that it has a positive economic effect like that caused by technological change, whereby economic efficiency is increased, allowing greater output from the same amount of scarce productive resources. By allowing each participant to specialize in producing what it is relatively more efficient at and trading for what it is relatively less efficient at, trade (according to economic theory) can increase economic well-being above what would be possible without trade. The benefit of trade is attached to the product received (the import), not in the product given (the export). Hence, countries export to pay for imports. There is a broad consensus among economists that trade expansion has a favorable effect on overall economic well-being, but the gains will not necessarily be distributed equitably. Although most economists hold that the benefits to the overall economy exceed the costs incurred by workers who lose their jobs to increased trade, others argue that the benefits are often overestimated and the costs are often underestimated. Some goods that are imported into the United States, such as bananas, cannot be produced economically in sufficient quantities to satisfy domestic demand. Many other products (including intermediate goods) and services are imported because they can be produced less expensively or more efficiently by firms in other countries. Many imports into the United States contain U.S.- made components (such as semiconductors inside a computer) or U.S.-grown raw materials (such as cotton used to make t-shirts). Consumers can benefit through access to a wider variety of goods at lower costs. This raises consumer welfare (i.e., consumers have more money to spend on other goods and services) and helps control the rate of U.S. inflation. Producers can benefit through access to lower-priced components or inputs that can be utilized in the production process. Longer term, import competition can also pressure companies to reduce costs through innovation, research, and development, leading to growth in economic output and productivity.

II. Trade Theories

1. Mercantilism MERCANTILISM is one of the great whipping boys in the history of economics. The school, which dominated European thought between the 16th and 18th centuries, is now considered no more than a historical artifact—and no self-respecting economist would describe themselves as mercantilist. The dispatching of mercantilist doctrine is one of the foundation stones of modern economics. Yet its defeat has been less total than an introductory economics course might suggest. At the heart of mercantilism is the view that maximizing net exports is the best route to national prosperity. Boiled to its essence mercantilism is the idea that the only true measure of a country’s wealth and success was the amount of gold that it had. If one country had more gold than another, it was necessarily better off. This idea had important consequences for economic policy. The best way of ensuring a country’s prosperity was to make few imports and many exports, thereby generating a net inflow of foreign exchange and maximizing the country’s gold stocks.

Such ideas were attractive to some governments. Accumulating gold was thought to be necessary for a strong, powerful state. Countries such as Britain implemented policies which were designed to protect its traders and maximize income. The Navigation Acts, which severely restricted the ability of other nations to trade between England and its colonies, were one such example. And there are some amusing (and possibly apocryphal) stories of mercantilism in action. During the Napoleonic Wars, the warring governments made few attempts to prevent their foes from importing food (and thereby starving them). But they did try to make it difficult for their opponent to export goods. Fewer exports would supposedly result in economic chaos as gold supplies dwindled. Ensuring an absence of gold, rather than an absence of grub, was perceived to be the most devastating way to grind down the enemy. Few mercantilists were slaves to the balance of payments. In fact, they were alarmed by the idea of hoarding gold and silver. This is because many mercantilist thinkers were most concerned with maximizing employment. Nicholas Barbon—who pioneered the fire insurance industry after the Great Fire of London in 1666—wanted money to be invested, not hoarded. As William Petty—arguably the first “proper” economist—argued, investment would help to improve labor productivity and increase employment. And almost all mercantilists considered ways of bringing more people into the labor force. Though most of the world's rich countries remain committed to free trade today, mercantilist themes are often found in economic policy debates. China and Germany are often envied for their trade surpluses or seen as economic models, and China especially has very deliberately subsidized exports. Both President Barack Obama and President Donald Trump have made an expansion of American exports a major policy goal. This zero-sum way of looking at the global economy is less rooted in the national greatness side of mercantilism than in the focus on full employment, at a time when many rich economies are suffering from insufficient demand and high rates of joblessness; it is thoroughly Keynesian, in other words. And there’s even an argument to the effect that increased trade reduces US employment in the current context; if the jobs we gain are higher value-added per worker, while those we lose are lower value-added, and spending stays the same, that means the same GDP but fewer jobs. 2. Absolute advantage theory Mercantilism is thought to have begun its intellectual eclipse with the publication of Adam Smith’s "Wealth of Nations" in 1776. A simple interpretation of the economic history suggests that Smith’s ruthless advocacy for free markets was squarely opposed to regulation-heavy mercantilist doctrine. According to Adam Smith, countries should find out what they can produce more efficiently (which really means cheaper, better and faster), and then specialize in what they do best while trading with other countries who are also doing what they're best at. Here is one example of "Absolute advantage": let's say you're entering the job market and you're evaluating your options for a career. At the same time, your neighbor, Bob, is also evaluating his options. Now, you have an absolute advantage over Bob in baking cakes. Whether it's chocolate cake, vanilla cake or pineapple-upside-down cake, if both of you baked the same cakes side-by-side, you'd be the one who could bake three times as many cakes in an hour as he could. You're really good at baking cakes, and certainly better than Bob is (who's struggling to get the first cake rolling). Between the two of you, you are the best at it. In economics, we say you have an absolute advantage over your neighbor when you can produce a good more efficiently in the same amount of time.

The absolute advantage theory argues that was impossible for all nations to become rich simultaneously by following mercantilism because the export of one nation is another nation’s import and instead stated that all nations would gain simultaneously if they practiced free trade and specialized in accordance with their absolute advantage. Let's look at one example:

According to Figure 1, England commits 80 hours of labor to produce one unit of cloth, which is fewer than Portugal's hours of work necessary to produce one unit of cloth. England is able to produce one unit of cloth with fewer hours of labor, therefore, England has an absolute advantage in the production of cloth. On the other hand, Portugal commits 90 hours to produce one unit of wine, which is fewer than England's hours of work necessary to produce one unit of wine. Therefore, Portugal has an absolute advantage in the production of wine. If the two countries specialize in producing the good for which they have the absolute advantage, and if they exchange part of the good with each other, both of the two countries can end up with more of each good than they would have in the absence of trade. In the absence of trade, each country produces one unit of cloth and one unit of wine. Here, if England commits all of its labor (80+100) for the production of cloth for which England has the absolute advantage, England produces (80+100)÷80=2.25 units of cloth. On the other hand, if Portugal commits all of its labor (90+120) for the production of wine, Portugal produces (90+120)÷90=2.33... units of wine. By exchanging the 2.25 units of cloth and the 2.33... units of wine, both of the two countries can end up with more of each good than they would have in the absence of trade. 3. Comparative advantage theory (Ricardian model) David Ricardo developed the classical theory of comparative advantage in 1817 to explain why countries engage in international trade even when one country's workers are more efficient at producing every single good than workers in other countries. He demonstrated that if two countries capable of producing two commodities engage in the free market, then each country will increase its overall consumption by exporting the good for which it has a comparative advantage while importing the other good, provided that there exist differences in labor productivity between both countries. Widely regarded as one of the most powerful yet counter-intuitive insights in economics, Ricardo's theory implies that comparative advantage rather than absolute advantage is responsible for much of international trade. Here is one simple example of Ricardo's comparative advantage theory: Suppose that there are only two countries in the world, Country A and Country B – and two sectors – roses and computers. A worker employed in the roses sector would produce five million roses in Country A, and eight million roses in Country B. Another worker employed in the computer sector would produce 200 computers in Country A and one thousand computers in Country B. In other words, whatever the sector, one worker would produce more units of each good when employed in Country B. In this case, Country B has an absolute advantage in the production of both goods. Roses Computers Country A 5 million 200 units Country B 8 million 1,000 units

What about comparative advantages? Let's look at the opportunity costs for each country in terms of roses, of giving up the production of a thousand computers. For Country B the opportunity costs, in terms of roses, of producing one thousand computers less, is eight million roses.

What about Country A? If Country A had to produce one thousand computers, it would have to employ five people in the computer sector, because each employee produces only two hundred computers in Country A. In terms of roses, this would imply a cost of 25 million roses. To sum up, while in Country B the opportunity costs of one thousand computers is eight million roses, in Country A the opportunity costs of one thousand computers is 25 million roses. Since the opportunity costs, in terms of roses, of producing computers are lower in Country B, Country B has a comparative advantage in computers, while Country A has a comparative advantage in roses. The theory of comparative advantage tells us that if Country A and B open up to trade, then Country A will specialize in the production of roses and Country B will specialize in the production of computers.

What will be the effect of specialization? Here is the result of changes in output from specialization:

Roses Computers Country A +10 million -400 units Country B -8 million +1,000 units Total +2 million +600 million

Specialization increases global production of both goods. All countries can gain from trade.

Suppose now that in Country A two workers are moved from the production of computers to the production of roses. This implies that Country A would produce four hundred computers less, and will produce ten million roses more. Suppose also that at the same time, Country B will move one worker from the production of roses to the production of computers, therefore, Country B would produce eight million roses less and one thousand computers more. Overall the global production of roses will increase by two million units. This is because there will be an increase of ten million roses in Country A and a reduction of eight million in Country B.

In the computer sector, there would be six hundred computers more produced globally. One thousand computers more produced by Country B and four hundred computers less produced by Country A. Since specialization increases the global production of both goods, all countries can gain from trade. Trade makes available to each country a higher quantity of each of the goods.

Obviously the Ricardian Model is a very simple simplified model to explain all facts of liberalization of trade. However, it provides two very powerful insights. One is that labor productivity differences are very important in explaining patterns in trade and the other one is that it is comparative advantage and not absolute advantage that is important for trade.

4. Factor Proportion Theory (the Heckscher-Ohlin Model) In the real world, trade is not just determined by technological differences, but it also reflects differences in resources endowments across countries. Therefore, for example, Canada exports forestry products to the United States not because its workers are more efficient in forestry, but because Canada is more endowed with forests. To explain the importance of resources in trade two economists, Heckscher and Ohlin, have developed a theory where trade is determined by the interaction between the relative abundance of factors of production (such as capital, labor or land) and the relative intensity with which these factors of production are used in the production of different goods. Since in this theory, comparative advantages are determined by the proportion of factors endowments and the proportion in which these factors are used in the production of goods, the theory is known as the "factor proportion theory". According to the factor proportion theory, comparative advantage depends on countries’ relative endowment of factors of production. The country which is relatively abundant in labor will have a comparative advantage in the production of relatively labor-intensive goods. The nation which is relatively capital abundant will have a comparative advantage in the production of the relatively capital-intensive goods. If a country is capital abundant, then the cost of capital will tend to be relatively low. As a consequence, the cost of production of the capital-intensive product, and its price, will tend to be relatively low. The opposite will occur in a labor-abundant country – wages will tend to be relatively low and the cost of the labor-intensive products will be relatively low. Differences in relative prices of the two goods will lead to trade. In an open economy, the abundant capital country will tend to specialize in the production of the capital-intensive goods and export this product, while the labor-abundant country will tend to specialize in the labor-intensive good and export that product. Like in the case of the comparative advantage theory (i.e., the Ricardian Model), also in the case of factor proportion theory, it is possible that the global production of both goods may increase with trade. It is, therefore, possible for both trading economies to consume more of both goods than in the absence of trade and therefore both countries gain from trade. Factor proportion theory further illustrates winners and losers of international trade, i.e., free trade raises the earnings of the country's relatively abundant factor and lowers the earnings of the relatively scarce factor. Let's consider the example of an abundant capital country: what will happen in this country after liberalization? In the abundant capital country, trade induces a reallocation of resources towards the capital-intensive goods – therefore more capital will be demanded, and this will increase the domestic price of capital. Owners of the capital will, therefore, gain more because returns to capital increase. What will happen to the demand for labor in this country? – This is the relatively scarce factor, where the country hasn't got a comparative advantage. The demand for labor will go down, and wages will go down. To sum up, in the abundant capital country, owners of capital will gain and owners of labor will lose. In practice, there are costs to move from one sector to another one. Therefore, it is likely that resources employed in the import-competing sector suffer the consequences of a restriction shrinking of that sector. This explains why in industrialized countries at the moment where a labor-intensive sector, like the textiles sector, is liberalized both capital owners and workers in that sector oppose free trade. The important result of the theory to bear in mind, though, is that despite income distribution effects, the country overall gains – that is gains outweigh losses.

5. The new international division of labor and global apparel value chain The new international division of labor refers to an integrated system of worldwide production as a result of globalization (i.e., the production of one product shared by multiple countries). The pattern of new international vision of labor is often reflected by the concept of "value chain", which comprises “the full range of activities that are required to bring a product from its conception, through its design, its sourced raw materials and intermediate inputs, its marketing, its distribution and its support to the final consumer. " (see the figure below)

• R&D: This value-adding function includes companies that engage in R&D, as well as activities

related to improving the physical product or process and market and consumer research. • Design: This stage includes people and companies that offer aesthetic design services for

products and components throughout the value chain. Design and style activities are used to attract attention, improve product performance, cut production costs, and give the product a strong competitive advantage in the target market.

• Purchasing/Sourcing (Inbound): This stage refers to the inbound processes involved in purchasing and transporting textile products. It includes physically transporting products, as well as managing or providing technology and equipment for supply chain coordination. Logistics can involve domestic or overseas coordination.

• Production/Assembly/Cut, Make, Trim (CMT): Apparel manufacturers cut and sew woven or knitted fabric or knit apparel directly from yarn. The cut-and-sew classification includes a diverse range of establishments making full lines of ready-to-wear and custom apparel. Apparel manufacturers can be contractors, performing cutting or sewing operations on materials owned by others, or jobbers and tailors who manufacture custom garments for individual clients. Firms can purchase textiles from another establishment or make the textile components in-house.

• Distribution (Outbound): After apparel is manufactured, it is distributed and sold via a network of wholesalers, agents, logistics firms, and other companies responsible for value-adding activities outside of production.

• Marketing and Sales: This function includes all activities and companies associated with pricing, selling, and distributing a product, including activities such as branding or advertising. These companies frequently do not make any physical alternations to the product. Apparel is marketed and sold to consumers (via retail channels), institutions, or to the government.

• Services: This includes any type of activity a firm or industry provides to its suppliers, buyers, or employees, typically as a way to distinguish itself from competitors in the market (e.g., offering consulting about international apparel businesses or fashion trends).

Apparel has been the classic “buyer-driven” global value chain. Unlike producer-driven chains, where profits come from scale, volume and technological advances, in the buyer-driven global apparel value chain, profits come from combinations of high-value research, design, sales, marketing, and financial services that allow the retailers, designers and marketers to act as strategic brokers in linking overseas factories and traders with product niches in their main consumer markets. The companies that develop and sell brand-name products have considerable control over how, when, and where manufacturing will take place, and how much profit accrues at each stage, essentially controlling how basic value-adding activities are distributed along the value chain.

III. International Trade and Development

1. Export-oriented industrialization strategy Export-oriented industrialization or export-led growth is a trade and economic policy aiming to speed up the industrialization process of a country by exporting goods for which the nation has a comparative advantage. Export-led growth implies opening domestic markets to foreign competition in exchange for market access in other countries. Export-oriented industrialization was particularly characteristic of the development of the national economies of the Asian Tigers: Hong Kong, South Korea, Taiwan, and Singapore in the post-World War II period. 2. Import-substitution industrialization strategy Import-substitution industrialization is a trade and economic policy which advocates replacing imports with domestic production. import-substitution industrialization strategy is based on the premise that a country should attempt to reduce its foreign dependency through the local production of industrialized products. Import-substitution industrialization policies were enacted by countries in the Global South with the intention of producing development and self-sufficiency through the creation of an internal market. The strategy works by having the state lead economic development through nationalization, subsidization of vital industries (including agriculture, power generation, etc.), increased taxation, and highly protectionist trade policies. Import substitution policies were adopted by most nations in Latin America from the 1930s until the late 1980s.

IV. Trade and Jobs 1. What are the costs of trade expansion? Like technological change and other market forces, international trade creates wealth by inducing a reallocation of the economy’s scarce resources (capital and labor) into relatively more efficient industries that have a comparative advantage and away from less efficient activities that have a comparative disadvantage. This reallocation of economic resources is often characterized as a process of “creative destruction,” generating a net economic gain to the overall economy, but also being disruptive and costly to workers in adversely affected industries that compete with imports. Many of these displaced workers bear significant adjustment costs and may find work only at a lower wage. Although economic analysis almost always indicates that the economy-wide gains from trade exceed the costs, the perennially tough policy issue is how or whether to secure those gains for the wider community while dealing equitably with those who are hurt by the process. Economists generally argue that facilitating the adjustment and compensating for the losses of those harmed by market forces, including trade, is economically less costly than policies to protect workers and industries from the negative impacts of trade. While it is debatable how well existing worker assistance policies have worked, funding is also a long-standing issue. A 2008 study by the Peterson Institute for International Economics, for example, estimated the lifetime costs of worker displacement that were triggered by expanded trade in 2003 to be as high as $54 billion, but

calculated that the United States spent less than $2 billion that year to address the costs for workers connected to that displacement. 2. Does trade “destroy” jobs? Trade “creates” and “destroys” jobs in the economy—often called “job churn”—just as other market forces, such as technological change, do. Trade can have different effects on workers in different occupations, which some economists call “occupational exposure” to trade. Such disruptions can also occur through domestic trade when firms relocate from one state to another for various economic reasons. As a result, trade liberalization can have a different effect not only between sectors of the economy, but also within the same industry. Economy-wide, trade causes jobs to shift into industries in which a country has comparative advantage and away from industries with comparative disadvantage. In the process, the composition of employment may change, but there may not be a net loss of jobs. Estimates suggest that job loss attributed to trade is a small share of jobs lost economy-wide each year—one study finds that between 2001 and 2016 more than 150,000 U.S. net jobs were lost annually due to expanded trade in manufactured goods, which accounted for 1% of workers laid off in a typical year. While some jobs might be displaced, some workers are likely to be reemployed elsewhere. On the other hand, some estimates find that the short-run costs to workers attempting to switch occupations or industries to obtain new jobs due to trade liberalization may be “substantial,” including reduced wages. Studies suggest that increased import competition from China in particular negatively affected U.S. local labor markets and manufacturing jobs. Most economists argue, however, that equating net imports—or importing more than exporting, known as a trade deficit—with a specific amount of unemployment in the economy is questionable given the underlying drivers of the trade deficit. Historically, during periods of economic growth, U.S. global trade has also expanded. The U.S. trade deficit and unemployment rate have generally moved in tandem—GDP growth reduces the number of unemployed while increasing aggregate demand, including for imports as well as attracting increased capital inflows, which often leads to an increased trade deficit. 3. Does trade reduce the wages of U.S. workers? International trade can have strong effects, good and bad, on the wages of American workers. Concurrent with the large expansion of trade over the past 25 years, real wages (i.e., inflation-adjusted wages) of American workers grew more slowly than in the earlier post-war period, and inequality of wages between the skilled and less skilled worker rose sharply. Trade based on comparative advantage tends to increase the return to the abundant factors of production—capital and high-skilled workers in the United States—and decrease the return to the less-abundant factor—low-skilled labor in the United States. Therefore, it is reasonable to expect that, other factors constant, a large increase in imports, particularly from economies with vast supplies of low-skilled labor (such as China), could negatively affect the wages of low-skilled U.S. workers in import-sensitive industries. U.S. low-skilled workers have increasingly faced competition from lower-cost producers, largely in developing countries. In many instances, economic globalization has led U.S. multinational firms to source a significant share of their labor-intensive production to lower-wage countries, which, to some extent, has put downward pressure on the wages of U.S. workers in some import-sensitive industries. On the other hand, U.S. workers in export-oriented industries on average are estimated to earn more than workers in non- exporting industries. Overall, the evidence on whether or not trade has contributed to growing income inequality in the United States is mixed and inconclusive. This is due in part because some other factors, such as advancing technology (where the jobs that are generated may require more advanced skills and higher education than was required in the past),

may have had a significantly larger impact on relative wages than foreign trade. For this reason, many economists contend that the United States should implement policies that seek to enhance U.S. education and skill levels to enable U.S. workers better to respond more effectively to the rapidly changing nature of the global economy as well as technological advancements.

V. The U.S. Trade Deficit 1. What is meant by the trade deficit? A trade deficit occurs when a country’s imports are greater than its exports. There are various measurements of the U.S. trade deficit. In general, most media reports on the U.S. trade deficit refer to the balance of U.S. trade in goods (merchandise). In 2019, the United States had a global trade deficit in goods of $866.2 billion, down 2.4% from 2018. However, a large and growing level of U.S. trade is in services, where the United States usually runs large annual surpluses. In 2019, the U.S. services trade surplus was $249.9 billion. 2. Why does the United States run a trade deficit? The most significant cause of the U.S. trade deficit is the low rate of U.S. domestic savings relative to its investment needs. To make up for that shortfall, Americans must borrow from countries abroad (such as China) with excess savings. Such borrowing enables Americans to enjoy a higher rate of economic growth than would be obtained if the United States had to rely sole on domestic savings. This, in turn, boosts U.S. consumption and the demand for imports, producing a trade deficit. The U.S. trade deficit is an indicator that Americans consume more than they produce. As long as foreigners (both governments and private entities) are willing to loan the United States the funds to finance the lack of savings in the U.S. economy (such as by buying U.S. Treasury securities), the trade deficit can continue. The United States, however, accumulates more debt. As of July 2020, the U.S. public debt was $26.5 trillion, up more than $8 trillion from 5 years ago. 3. What role do foreign trade barriers play in causing bilateral trade deficits? Some policymakers view the size of the U.S. trade deficit with certain countries (such as China) as an indicator that the trade relationship is “unfair” and the result of distortive policies, such as subsidies, trade barriers, currency intervention, discriminatory regulations, investment restrictions, and failure to establish an effective mechanism for protecting intellectual property rights (IPR)—to name a few. Such policies tend to affect bilateral trade in specific products and with particular countries and can negatively affect the profitability of U.S. exporters and overseas investors. To some extent, such policies may also affect bilateral trade balances, but do not necessarily affect the size of the overall (global) U.S. trade deficit, which, as noted earlier, is largely a reflection of the level of U.S. savings. If distortive measures were reduced in certain countries, U.S. exporters would sell more of their products to them. But if U.S. consumption/savings behavior did not change, an increase in U.S. exports would likely result in an increased demand for imports, and the overall U.S. trade deficit would likely remain relatively unchanged (all things being equal). Similarly, the reduction of distortive trade policies in one country might raise manufacturing costs to such an extent as to cause firms to move production to another country. As a result, U.S. imports from the first country would fall, while imports from the second country would rise. This would lower the U.S. trade deficit with the first country and increase it with the other, and the overall U.S. trade deficit would be relatively unchanged. 4. Is the trade deficit a problem for the U.S. economy? Many economists view the U.S. trade deficit as a dual problem for the economy. In the long term, it generates debt that must be repaid by future generations. Meanwhile, the current generation must pay interest on that debt. Whether the current borrowing to finance imports is worthwhile for Americans depends on whether those funds are used for investment that raises future standards of living or whether they are used for current consumption. If American consumers, business, and

government are borrowing to finance new technology, equipment, or other productivity-enhancing products, the borrowing results in a deficit and can be paid off because such investments will boost the level of economic growth in the long run. If the borrowing is to finance consumer purchases of clothes, household electronics, or luxury items, it pushes the repayment of funds for current consumption on to future generations without investments to raise their ability to finance those repayments, which implies that in the future, consumption levels will have to fall in order to pay for the debt, which lowers future economic growth. Some economists warn that, under certain circumstances, a continually rising U.S. trade deficit could spark a large and sudden fall in the value of the dollar and financial turmoil in both the United States and abroad. The U.S. current account deficit as a percent of GDP reached a peak of 5.8% in 2006 and has fallen significantly since, declining to 2.9% in 2019, although much of that decline was the result of the effects of the global economic slowdown. Foreign investors continue to look to the United States as a safe haven for their money. As a result, the U.S. Treasury has had no problem selling securities to fund the U.S. budget deficit. Eventually, however, if foreign investors stop offsetting the trade deficit by buying dollar-denominated assets, U.S. interest rates would have to rise to attract more foreign funds into U.S. investments. Rising interest rates could cause a crisis in financial markets and may also raise inflationary pressures. Since global financial markets are now so closely intertwined, turmoil in one market can quickly spread to other markets in the world.

VI. Trade Adjustment Assistance (TAA) 1. What is the Trade Adjustment Assistance (TAA) Program? Trade Adjustment Assistance (TAA) programs provide federal assistance to workers and firms that have been adversely affected by trade. TAA programs are authorized by the Trade Act of 1974, as amended, and were last reauthorized by the Trade Adjustment Assistance Reauthorization Act of 2015 (Title IV of P.L. 114-27). TAA for Workers (TAAW) is the largest program, with appropriations of $790 million in FY2019. TAAW assists trade-affected workers who have been separated from their jobs due to foreign competition, either through increased imports or because their jobs were relocated abroad. The program is administered at the federal level by the Department of Labor and supports various benefits and services, including funding for career services and training, and income support for workers, formally known as Trade Readjustment Allowance. Actual benefits are provided to individual workers through state workforce systems and state unemployment insurance systems. Smaller TAA programs are also authorized for firms and farmers affected by foreign competition 2. Rationale and Economics of Trade Adjustment Economists tend to agree that in defining the rules of exchange among countries, freer trade is preferable to protectionism. Insights from trade theory point to the mutual gains for countries trading on their differences, producing those goods at which they are relatively more efficient, while trading for those at which they are relatively less so. Additional gains are realized from intra-industry trade based on efficiencies from segmented and specialized production. Firm-level evidence supports this theory. Trade appears to “enable efficient producers within an industry, and efficient industries within an economy, to expand,” leading to a reallocation of resources that increases a country’s productivity, output, and income. Consumers (both firms and households) also gain from a wider variety of goods and lower prices. However, increased competition from trade liberalization also creates “winners and losers,” presenting adjustment problems for all countries. Some firms may grow as they expand into new overseas markets, while others may contract, merge, or fail when faced with greater foreign competition. While the adjustment process may be healthy from a macroeconomic perspective, much like market-driven adjustments that occur for reasons other than trade (e.g., technological

changes, weather-related disasters), the transition can be hard on some firms and their workers. Critics of free trade agreements often highlight the adjustment costs of reducing trade barriers. To avoid business closures and layoffs, firms likely to be affected by increased trade may seek to weaken, if not defeat, trade liberalizing legislation. This makes economic sense from the perspective of the affected industries, firms, and workers, but economists argue that in the long run it can be more costly for the country as a whole. The costs of protection arise because competition is suppressed, reducing pressure on firms to innovate, operate more efficiently, and become lower-cost producers. The brunt of these costs falls to consumers, both individuals and businesses, who must pay higher prices, but the national economy is also denied forgone productivity gains. One way to balance the large and broad-based gains from freer trade with the smaller and more highly concentrated costs is to address the needs of firms negatively affected, such as through the TAA programs, including the one for firms. Supporters justify TAA policy on the grounds that (1) it helps those who are hurt by trade liberalization; (2) the economic costs are lower than protectionism and can be borne by society as a whole; and (3) given rigidities in the adjustment process, it may help redeploy economic resources more quickly, thereby reducing productivity losses and related public-sector costs (e.g., unemployment compensation). Others dispute these claims and have raised concerns over the effectiveness and costs of the program, arguing that it should be limited or discontinued.

VII. Tariff Tariff is one of the oldest and most widely adopted trade policy tools in international trade. In general, tariff functions as a tax levied on imports, which can be based on the value of the products (i.e., Ad valorem tariff), the quantity (i.e., specific tariff) or both (i.e., tariff quota). In history, the tariff was used as a means to collect government revenue when a country didn’t have a sophisticated industry base and other sources of income. However, in the 21st century, the tariff is more commonly used as a protectionist trade tool with the purpose of making imported products less price competitive compared with domestically made products. Indeed, since the establishment of the General Agreement on Tariffs and Trade (GATT) in 1947, which later became the World Trade Organization (WTO) in 1995, the tariff rate worldwide has been cut significantly across almost all major sectors, from agriculture to manufactured goods. Statistics from the World Trade Organization (WTO) show that the most-favored-nation (MFN) tariff rate, which applies to products traded between WTO members, on average declined by 15 percent between 1996 and 2017. Table Average Applied Import Tariff Rates in 2020 Unit: % Importers

Average tariff rate for all manufactured goods

Average tariff rate for HS 61

Maximum tariff rate for HS 61

Average tariff rate for HS 62

Maximum tariff rate for HS 62

USA 2.3 12.8 32.0 10.1 28.6 EU 2.8 11.7 12.0 11.3 12.0 Canada 2.1 17.1 18.0 15.9 18.0 Japan 2.5 9.0 10.9 9.1 13.4 Data source: World Trade Organization; HS Chapter 61 includes knitted apparel and HS Chapter 62 includes woven apparel. Nevertheless, because of the unique complicated economic, social, and political factors involved, the tariff reduction for apparel products had been limited. According to WTO, the average applied tariff rate for apparel products worldwide remained at 17.0 percent in 2019, almost twice as high

as 8.8 percent that applies to all goods over the same period. Similar patterns also can be observed at the country level, including in the world’s four largest apparel import markets—namely the United States, the European Union (EU), Japan, and Canada. Take the United States, for example. As shown in the table above, while the average applied tariff rate for all manufactured goods was reduced to only 2.3 percent in 2020, the tariff rates for knitted apparel (HS chapter 61) and woven apparel (HS chapter 62) were still as high as 12.8 percent and 10.1 percent, respectively. For synthetic-fiber apparel products, in particular, the tariff rates often exceed 25 percent. The practice of discriminatorily setting a much higher tariff rate for apparel is not without controversies. For example, statistics from the U.S. International Trade Commission (USITC) shows that between 2017 and 2018, apparel together with textiles, accounted for only around 5 percent of total U.S. merchandise imports in value, yet they contributed almost 40 percent (or US$33bn) of total tariff revenue collected by the U.S. Customs. Notably, these billions of dollars of duties were collected from U.S. fashion companies or importers (NOT by exporters) and U.S. consumers eventually paid the bill. Further, as over 98 percent of apparel consumed in the United States already come from overseas, the rationale for continuing the tariff protection and treating apparel as an “import-sensitive” product raises questions. References 1. International Trade Theory (2012). World Trade Organization 2. U.S. Trade Concepts, Performance, and Policy: Frequently Asked Questions (2019).

Congressional Research Service 3. The Economic Effects of Trade: Overview and Policy Challenges (2018). Congressional

Research Service 4. The Global Value Chain--Economic Upgrading and Workforce Development (2011). Center on

Globalization, Governance and Development, Duke University 5. Handbook of Trade Policy for Development (2013). Oxford 6. World Tariff Handbook (2019). World Trade Organization 7. Trade Adjustment Assistance for Firms (2017). Congressional Research Service 8. Global Trade Policy: Questions and Answers (2017). Wiley 9. Trade Adjustment Assistance for Workers and the TAA Reauthorization Act of 2015 (2018).

Congressional Research Service 10. Why tariff barriers remain a key challenge for apparel sourcing (2019). Just-Style. By Sheng Lu 11. U.S. Trade: Recent Trends and Developments (2020). Congressional Research Service