TWO APPROACHES TO FOREIGN TRADE

And now, day (lesson) six.  For those who follow this blog, they know that it has been about reporting the development, in real time, of a unit of study.  The unit is a two-week instructional plan designed as the last unit of a senior level, American government class.  To date, the plan has students look at the history of this nation’s foreign trade, specifically how government policy since World War II has attempted to reinvigorate the economies of war torn industrial nations, and to spur industrial developments in lesser developed nations.

          In general, some criticize this historical path in that its policy choices have left the US in a disadvantaged position.  By liberalizing foreign trade policy, the nation has lost its dominant position in foreign trade and, as a consequence, has lost millions of manufacturing jobs.  Hence, the main thrust of the unit:  foreign trade and how that trade has affected job availability.

          For this sixth lesson, the focus shifts to other countries, but, before describing this topic, a word on data that indicate more recent years have been a bit contrary to the general history just reviewed.  The turning point for this reversal was the onset of the Great Recession.  Apparently, to combat the detrimental effects of the downturn that began in 2008, the Federal Reserve initiated a policy known as quantitative easing.  Central to this policy was to devalue the dollar.

          How?  The FED bought government and other securities (IOUs, such as bonds, and stock ownership certificates) and, by so doing, increased the money supply.  This, in turn, puts more dollars into circulation and lowers the value of a buck.  As such, this makes, as has already been pointed out in these lessons, American goods cheaper in other countries.  Of course, cheaper goods enjoy higher demand.  All this can’t help but improve economic conditions and, as more recent data indicate, that is what has happened.

          To instruct students on this development, this sixth lesson’s newsletter reflects this and is identified below.  The information is taken from a FED publication and it reports on the improved economic developments from 2013 to 2016.  One word of caution:  the economic improvements are relative to its initiating year, 2013, not to the economic conditions facing the American middle-class in the 1960s.  Since the ‘60s there has been an enormous shifting of income and wealth to the very top economic classes.

          In terms of the actions and policies of other nations, the main topic of this lesson, the point is that other nations can be classified as using one of two approaches in dealing with foreign trade.  One approach can be summarized as “beggar thy neighbor” and is implemented by mostly Asian countries such as China.  The other approach is followed by European countries and reflect a nurturing strategy that does not negate market forces.

          Previous posting identified two insights that reflect this distinction.  They are the original thirteenth and fourteenth insights and based on the work of Edward Aldin.[1] In shorten form, they are:

Often in American discourse concerning international trade, it is portrayed as a zero-sum competition.  Unfortunately, this has been accomplished by nations, especially China and Japan, ascribing to “beggar thy neighbor” strategies.[2]

And

In counter distinction to the distorting policies utilized by Asian countries and identified in the [above] insight, European countries use more pro-market strategies.  They rely mostly on nurturing their businesses and training their workforces.  This approach is particularly seen in the Nordic countries (Denmark, Finland, Sweden, Norway, and Iceland).[3]

One can add Germany to this list of countries.  These insights will be further addressed below as the lesson plan incorporates them into the instruction.

          Here is that lesson plan.

LESSON ON FOREIGN COUNTRIES’ FOREIGN TRADE POLICIES

Objective:

Given a list of foreign trade policy elements, the student will be able to correctly identify whether the elements represent a “nurturing” policy strategy or a “beggar thy neighbor” policy.

Lesson steps:

Pre-lesson.  See previous posting, “Setting the Problem,” October, 17, 2017, for this element’s description.  In this sixth lesson, the “newsletter” will be provided by the teacher – this gives the newsletter group a break for the day.  The factoids in this newsletter is provided by the FED and, as can be seen, is a bit longer list of facts.  This will alter the plan from how the newsletter has been presented in the previous lessons.  The factoids are as follows:

·        Between 2013 and 2016, median family income grew 10 percent, and mean family income grew 14 percent.

·        Families throughout the income distribution experienced gains in average real incomes between 2013 and 2016, reversing the trend from 2010 to 2013, when real incomes fell or remained stagnant for all but the top of the income distribution.

·        Families at the top of the income distribution saw larger gains in income between 2013 and 2016 than other families, consistent with widening income inequality.

·        Families without a high school diploma and nonwhite and Hispanic families experienced larger proportional gains in incomes than other families between 2013 and 2016, although more-educated families and white non-Hispanic families continue to have higher incomes than other families.

·        Families near the bottom of the income and wealth distribution experienced large gains in mean and median net worth after experiencing large declines between 2010 and 2013.

·        Families without a college education and nonwhite and Hispanic families experienced larger proportional increases in net worth than other types of families, although more-educated families and white non-Hispanic families continue to have higher wealth than other families.

·        Homeownership rates decreased between 2013 and 2016 to 63.7 percent, continuing a decline from their peak of 69.1 percent in 2004. For families that own a home, mean net housing values (value of a home minus outstanding mortgages) rose. 

·        Retirement plan participation and retirement account asset values rose between 2013 and 2016 for families across the income distribution, with the largest proportional increases in participation occurring among families in the bottom half of the income distribution.

·        Ownership rates and the value of direct and indirect holdings of corporate equities increased between 2013 and 2016, with the largest proportional increase in ownership among families in the bottom and upper-middle parts of the income distribution.

·        Business ownership increased from 2013 to 2016 to 13.0 percent, nearing its 2010 level. These gains were broad based, occurring throughout the income distribution, with the largest proportional gains occurring among the highest earners.

·        Overall, debt obligations fell between 2013 and 2016: Median debt declined 4 percent, and mean debt decreased 2 percent, for families with debt.

·        For the median family with debt, debt burdens also fell between 2013 and 2016: Leverage ratios, debt-to-income ratios, and payment-to-income ratios all fell. The fraction of families with payment-to-income ratios greater than 40 percent declined to 7.0 percent, the lowest level seen since 2001.

·        Some of the decline in debt can be explained by the decline in the fraction of families with home-secured debt, which fell from 42.9 percent to 41.9 percent, a decline that is comparable to the size of the drop in homeownership.

·        Between 2013 and 2016, the fraction of families with credit card debt increased. Although median and mean balances for families with credit card debt both fell 3 percent, the fraction of families that pay off credit cards every month decreased.

·        Although many measures of debt and debt obligations indicate that debt has fallen, education debt increased substantially between 2013 and 2016.

·        In 2016, 20.8 percent of families were considered credit constrained; i.e., those who reported being denied credit in the past year, as well as those who did not apply for credit for fear of being denied in the past year.[4]

(Same day steps)

1.     Teacher collects homework assignment – student notes on policy option choices. (one minute, students’ attendance will be based on homework sheets – i.e., students who did not do the assignment need to turn in a blank sheet with their names on it)

2.     Teacher hands out the newsletter for the day.  Students are given time to read the newsletter while attendance is taken and other administrative items are handled. (seven minutes)

3.     Teacher asks students if they have any clarifying questions regarding the newsletter.  Since this day’s newsletter is significantly longer, the teacher will give students more time to read and consider its content.  After about ten minutes, the teacher opens up the process for general discussion.  The teacher should make sure that students are cognizant of the dates the newsletter highlights.  This is important because the improvements the FED is reporting need to be in the context of the poor economic years from 2008 to 2013.  Those were the years of the Great Recession.  The point is that improvements reported does not mean all the damage of the recession or of the loss of manufacturing jobs, since the late ‘60s, no longer exists. (twenty minutes)

4.     In the remaining time, the teacher hands out a sheet that contains two insights which describe how foreign countries approach foreign trade and their manufacturing capabilities (originally thirteenth and fourteenth insights).  One is summarily described as “beggar thy neighbor” and is associated with Asian countries, notably Japan and China.  The other is considered a “nurturing” approach and is associated with European countries, particularly the Nordic nations and Germany.

5.     Teacher writes on the board the following strategies:  restrictive regulations, subsidizing businesses, and manipulating currencies.  For each strategy, students investigate and answer these questions:  how is this strategy done?  How does it lead to short-term advantage?  How does it pose long-term disadvantages?  How does it distort market forces?  What needs to be spelled out is:  how does a national government “nurture” domestic businesses, especially in the manufacturing sector?  What seems to be central to a nurturing approach is a strategy that avoids direct subsidy and instead focuses on creating a fertile environment of entrepreneurial factors.  Students investigate to answer these questions.  They can see internet site:  https://www.weforum.org/agenda/2014/12/6-ways-governments-can-encourage-entrepreneurship/ to gather the needed information.   (twenty minutes)

6.     Teacher instructs students to complete this in-class assignment at home.  Students will, at the beginning of the next class period, be quizzed on the information they find. (two minutes)

Assignment:  Students finish in-class assignment.

          That ends lesson six.  The remaining class time in subsequent lessons will be taken up with preparation for and conducting a class debate and developing an action plan (mostly accomplished by the debate component).

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[1] Edward Alden, Failure to Adjust:  How Americans Got Left Behind in the Global Economy (Rowman and Littlefield, 2017).

[2] See posting, “Restrictive or Liberalized,” September 22, 2017.

[3] Ibid.

[4] Board of Governors of the Federal Reserve System, “Changes in U.S. Family Finances from 2013 to 2016: Evidence from the Survey of Consumer Finances,” Federal Reserve Bulletin, September, 2017, 103 no. 3, accessed November 1, 2017, https://www.federalreserve.gov/publications/files/scf17.pdf. 

VALUATING A BUCK

This blog is reporting on the writer’s (developer’s) effort to design a unit of study suitable for high school seniors.  The unit is the last unit of a government course (a required semester course in most, if not all, states).  To date, the blog has presented the first four lessons of the unit.  The planning, in real time, will now continue with the fifth lesson of a nine-lesson unit (two weeks).  Each lesson has addressed an aspect of foreign trade and how that trade affects job availability in the US.

      This fifth lesson will address the role currency valuations have in foreign trade.  In a previous posting, the developer identified the following insight:

In international trade, if a nation’s products are losing favor among customers, then its national currency will lose value.  Why?  Because one needs that nation’s currency to buy that nation’s products and if less people are buying its products, they need less of that currency – lowering its demand. 

When the value of a currency goes down, though, it takes less of another nation’s currency to buy that first currency.  This, in effect, lowers the final price of that first nation’s products.  They become cheaper and, therefore, will be in more demand as time goes by. 

The opposite happens when a nation’s products become more favored by customers.  Currency value of the nation goes up, those products become more expensive, and the demand for the products goes down. 

In short, if currencies values can float according to market forces, they will act to stabilize the balances of trade/payments among nations.  But when a nation manipulates its currency, that policy aborts the market from arriving at such a balance.[1]

Understanding the role that currencies play in foreign trade is essential to understanding, one, how foreign trade transpires and, two, how the politics of foreign trade affects the general politics of the nation.  The US is not new to this source of political motivations.  It was an issue affecting Jeffersonians in the early years of the republic.

      As the insight points out, high currency valuations hurt the exporters of a nation.  As it makes their products more expensive, demand for their product shifts to those nations that have relatively cheaper currencies.  This can off-set lesser demand for lower quality products. 

The reader can ask him/herself:  has he/she ever bought a product that is known to be of lower quality, but cheaper?  Probably so.  It terms of many products, where the quality is not so much an essential attribute, the consumer might very well be attracted to cheaper prices, albeit for a lesser quality item.  One might buy a Buick SUV, for example, even though he/she can afford a Mercedes-Benz SUV.  And that’s a product where quality is important.

Higher currency valuation policy is judged to be part of a restrictive, overall trade policy.  Lower currency valuation policy is judged to be part of a liberal trade policy.  The US has a history of higher currency valuations.  This in part, especially in the years just after World War II, was due to the demand for US manufacturing goods.  Remember, most of the manufacturing capabilities of the other industrial nations were seriously damaged during the war.

Part of the Marshall Plan thinking, described in an earlier posting, was to sustain a high currency valuation in the US.  This was thought to further assist the other nations to get their manufacturing capabilities viable again.  It also helped lesser developed nations to initiate industrial capacities.  This was particularly helpful initially to China and subsequently to nations such as Korea, Vietnam, and other Asian nations.

With that context, it’s time for the fifth lesson plan.

Objective:

Given the appropriate prompt asking students to describe the function of currency valuations in foreign trade, the student will provide the instrumental elements of currency’s role in heightening or depressing demand levels for the products of a trading nation.  Summarily, higher demand for a nation’s products raises the value of that nation’s currency which, ironically, lowers the demand for those same products.  The reverse is true when there is lower demand for those products.  As such, currency valuations serve as a leveling factor if they are allowed to fluctuate via market forces.

Lesson steps:

      Pre-lesson.  See previous posting, “Setting the Problem,” October, 17, 2017, for this element’s description.  In this fifth lesson, the following factoids are distributed:

·        Americans aged 55 to 65 years old are the best educated people of that age bracket in the world.  Americans aged 25 to 34 are ranked 13^th in education attainment in the world.[2]

·        The US ranks 16^th in the world when it comes to the quality of its infrastructure.[3]

·        The US is last, by a long shot, among advanced nations in retraining its workers.[4]

·        In 1979 the United States had 19.5 million manufacturing jobs; in 2004 it had 14.3 million manufacturing jobs; in 2014 it had 12.2 million manufacturing jobs; and it is projected that in 2024 it will have 11.4 million manufacturing jobs.[5]

·        In terms of the loss of manufacturing jobs, 13.4% is due to trade; 88% is due to productivity growth – mostly the product of automation.[6]

Same day steps –

[Note:  the following steps contains an activity that is being, along with the rest of these lesson plans, developed in real time.  The activity, as written below, needs further development – perhaps a dry run with students who know they are cooperating in its development would be helpful.]

1.     Teacher hands out the newsletter for the day.  Students are given time to read the newsletter while attendance is taken and other administrative items are handled. (seven minutes)

2.     Teacher asks students if they have any clarifying questions regarding the newsletter.  Beginning with the last lesson, there will be no follow up activity regarding the newsletter; its content provides further information relevant to the topic of the unit and subsequent activities. (five minutes)

3.     Teacher collects homework assignment. (one minute)

4.     Teacher begins a simulation exercise.  It calls on students to take out a couple of sheets of paper.  On one, they divide the sheet into three parts.  On each part they roughly draw the image of a product, such as cars or refrigerators.  These products can be predetermined by the teacher and assigned to groups of students who gather in such groups and represent an individual nation (nation A, B, C, etc.)  In addition, each nation is given a population amount (a suggested distribution would have A with the lowest population and B, C, and, if necessary, D having consecutively higher populations).  The number of nations can be limited to three or four.  Therefore, each nation produces, exclusively in the simulation, the three products they indicate on their paper.  It probably works best if the products are considered essential, such as cars and refrigerators.  On the other sheet, they divide the sheet into ten equal spaces (rectangles) and in each space writes the name of the nation (A, B, C, etc.) and the number 1 million.  The students then cut out the spaces created on each sheet so that, for example, one cut out space corresponds to 1 million or one product.  The “million” refers to that nation’s currency and a million units (such as dollars or pounds) of that currency.

5.     The teacher instructs students that the class is going to simulate a round or two of trade.  Each nation “needs” the products produced by each of the other nations.  They “must” buy it.  No two nations produce the same product and, therefore, each nation must buy each product from the producing nation.  But, there are two interfering factors:  one, the buyer needs to first buy the currency of that nation and, two, not all currencies are valued the same.  Nation A’s currency is twice as valuable as Nation B’s currency (it takes 1 million of A’s to buy 2 million of B’s), B’s is twice as valuable as C’s, and if applicable, C’s is twice as valuable as D’s.

6.     Teacher “taxes” each group twenty million of their currency to expedite the banking function described in number 7 below.  This taxing amount might need to be higher.

7.     Teacher plays the role of the “banker” and will entertain one student from each group who will trade their nation’s currency for the currency sought; i.e., the currency from which the nation wants to buy products it wants.

8.     Teacher announces to all the groups what products are for sale, with their prices, and which countries sell them (price designation should take into account how much of the currency is in “circulation”).  Having these lists visible is helpful.

9.     The students, within their groups, decide which products they will buy and in what amounts.  These decisions are based on the list of prices the teacher projects on the board or overhead.  After sufficient time, each group lists its proposed purchases and submit the list to the banker.  The aim is to see which group comes closest to its aim.

10. Representatives from each group goes to the banker to exchange their currency for the currencies they need.

11. Then students from each group go and “purchase” the units of products they choose to buy.

12. After all purchasing takes place, an accounting is done to see how close the pre aims of each country are met.  If necessary, the above procedure is done a second time.  If not, the teacher conducts a short discussion aimed at pointing out that currency values affect how well trading nations do in conducting foreign trade.  Of course, time availability in the period needs to be considered.

13. The teacher concludes the activity by sharing the insight upon which this lesson is based.  He/she goes on to explain how currency valuations, as the insight points out, can serve to level foreign trade by affecting the demand for specific goods, as the simulation should demonstrate.

14. Teacher ends the lesson by posing a question for students to consider:  should a nation actively manipulate its currency or leave it to market forces to determine its value?

Assignment:  The teacher asks students to jot down their ideas on what a good foreign trade policy should include.  Should it encourage exports?  If so, how?  Their ideas will be collected to ensure students take the time to answer the questions.  This is an easy “A” grade since the teacher is only determining the effort to complete the assignment.

      That ends the fifth lesson.  The next lesson – i.e., the next posting – will look at how other nations have conducted their trade and set up their foreign trade policy.

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[1] See posting “To Be Pro Market or Not,” September 26, 2017.  This insight was based on the research of Edward Alden, Failure to Adjust:  How Americans Got Left Behind in the Global Economy (Rowman and Littlefield, 2017).

[2] Edward Alden, Failure to Adjust:  How Americans Got Left Behind in the Global Economy (Rowman and Littlefield, 2017).

[3] Ibid.

[4] Ibid.

[5] “Live Velshi and Ruhle,” MSNBC, October 24, 2017.  This report was highlighting an article by Sheelina Kolhatker, “Welcoming Our New Robot Overlords,” The New Yorker, October 23, 2017.

[6] Ibid.