3-2. Is International Trade Responsible for the Loss of American Manufacturing Jobs?

How about Robots Instead?

Since China joined the WTO and made it easier to access the US market, labor-intensive
industries, such as furniture manufacturing and textiles, have been particularly hurt by the
foreign competition, increasing the number of American workers lost their jobs. However,
that is not the real reason. A 2015 study by economists at Ball State University's Center
for Business and Economic Studies found that international trade accounted for only 13%
of American job loss in the past decade. Most of the jobs lost, about 87%, are taken by robots
and other domestic factors, reducing the demand for manpower at factories. In the other
words, the United States is automating its production, producing more with fewer workers.
For example, between 1997 and 2017, the US steel industry lost about 265,000 jobs in the
production, a decrease of 42% while steel production rose 38%. American jobs have
disappeared largely due to new technology.
Robots could significantly reduce labor costs in countries. The use of robots instead of
human labor is expected to grow from a global around 25% across all manufacturing
sectors by 2025 when robots becomes more streamlined and easier to program.
3-3. Is the Factor-Endowment Theory a Good Predictor of Trade Patterns? The
Leontief Paradox
The United States had been widely recognized with capital was relatively abundant and labor
was relatively scarce. According to this theory, the United States will export capital-intensive
goods and its import-competing goods will be labor intensive. However, In 1954, A man
named Wassily Leotief has been tested found that the capital/labor ratio for U.S. export
industries was lower than that of its import-competing industries. Leontief concluded that
exports were less capital intensive than import-competing goods. These findings, which
contradicted the predictions of the factor-endowment theory, became known as the Leontief
paradox. Leontief believed that America’s comparative advantage was something other than
capital-intensive goods.
One resolution of the Leontief paradox depends on the definition of capital. The exports
of the United States are intensive in "human capital", not are intensive in capital such as tools
and factories. U.S. exporting industries use a significantly higher proportion of highly
educated workers to other workers as compared to U.S. import-competing industries. For
example, Boeing employs large numbers of mechanical and computer engineers having
graduate degrees. Conversely, Americans import lots of shoes and textiles that are often
manufactured by workers with little formal education.
Many researchers have concluded that the factor-endowment theory is relatively successful in
explaining trade between industrialized and developing countries. But in fact, it is more
complex than those illustrated in the basic factor-endowment theory.
3-4. Economies of Scale and Comparative Advantage
Economies of scale exist when expansion of the scale of production capacity of a firm or
industry causes total production costs to increase but less than increase in output. Therefore,
long-run average costs of production will decrease.
It is classified as internal economies and external economies
3-4a. Internal Economies of Scale
Internal economies of scale means reductions in the average total cost of producing a
product as a firm increases the size of its plant in the long run, which arise within a firm itself
and are built into the shape of its long-run average cost curve.
For example, as you can see in figure about Internal Economies of Scale as a Basis for
Trade. Assume that a U.S. auto firm and a Mexican auto firm are each able to sell 100,000
vehicles in their countries. Assume that identical cost conditions result in the same long-run
average cost curve for the two firms, AC. Initially, there is no basis for trade, each firm
realizes a production cost of $10,000 per auto. Suppose that rising income in the United
States results in demand for 200,000 autos, while the Mexican auto demand remains constant.
The larger demand allows the U.S. firm to produce more output and take advantage of
economies of scale. The firm’s cost curve slides downward until its cost equals $8,000 per
auto. Compared to the Mexican firm, the U.S. firm can produce autos at a lower cost. With
free trade, the United States will now export autos to Mexico.
A key aspect of increasing-returns trade theory is the home market effect means
countries will specialize in products for which there is large domestic demand). By locating
close to its largest market, an industry can minimize the cost of shipping its products to its
customers while still taking advantage of economies of scale. However, this could lead to
small countries and rural areas becoming peripheral to the economic core.
3-4b. External Economies of Scale
External economies of scale exist when the firm’s average costs decrease as the industry’s
output increases. This cost reduction could be caused by a decrease in the prices of the
resources employed by the firm or in the amount of resources per unit of output. This effect is
shown by a downward shift of the firm’s long run average cost curve. External economies of
scale can occur in a number of situations:
+ The rising concentration of an industry’s firms in a particular geographic area attracts
larger pools of a specialized type of worker needed by the industry, thus reducing the cost of
hiring for a firm.
+ New knowledge about production technology spreads among firms in the area through
direct contacts. Rather than having to pay a consultant, a firm may be able to pick up useful
technical knowledge from its workers mixing with workers of other firms.
+ If a country has an expanding industry, the government can collect additional tax revenues.
The government can invest in better research and development facilities at local universities
so that several businesses in that area can benefit.
+ Access to specialized inputs increases with the clustering of component suppliers close to
the center of manufacturing. With the increase in the number of suppliers come increased
competition and a lower price of components for an auto company, for example.