Economists have long described the gains that nations (or individuals, for that matter) receive when they engage in trade with each other. When one nation exchanges its surplus production (in wheat, apples or CD-ROMs) with another nation for its surplus production (oranges, cotton or BMWs), both nations benefit. Economists point to this "mutually beneficial" characteristic of trade: if both nations weren't better off, the deal wouldn't get done!
David Ricardo, a famous economist from the early 1800s, stressed that nations should look for 'advantages' in what they can produce relative to other nations. Ricardo argued that when these 'advantages' were present for different products in different nations, then these nations should trade with each other rather than make all things at home. Ricardo called these advantages 'comparative advantages.'
But comparative advantage is not the only thing that influences trade. People (and nations) respond to political as well as economic incentives. Because the benefits of foreign trade are not equally spread among all people in a nation, there are winners and losers. The losers (think back to Professor Ingram's shrimp/banana example - in each nation, either the shrimp industry or the banana industry would suffer) often resort to political means to 'keep out' goods that they might produce and sell at home. This leads to trade barriers that keep out foreign goods. A more detailed explanation of trade barriers can be found here.
Currently, the United States and the European Union (EU) are engaged in a heated discussion (some call it a trade war) over barriers to the trade in bananas. Both nations (the EU isn't technically a nation, but in this case it acts as one) have been threatening to place trade sanctions on the other's goods if an agreement about the banana trade cannot be reached.
The US is angry at the EU for giving preferential treatment to banana growers from former colonies in the Caribbean, Africa and the Pacific. The EU feels the US is trying to 'throw its weight around' and determine EU trade policy. The 'Banana War' is on!
Your task is to become more informed about the 'Banana War,' to develop an understanding of the issues at stake, and to compose an e-mail letter the the World Trade Organization outlining what you think should be done about the trade dispute. Use the resources that follow to complete the assignments in the Process section of this Economic Minute.
Using information from the resource links above, write an action memorandum to the World Trade Organization's Director-General Renato Ruggiero. Your memo should address key issues in the trade war and then recommend a policy for resolving the dispute. What should be done? Use the following questions (in outline form) to help you develop your memo. After you have completed your memo, you might email it to the WTO.
1. Which nations grow bananas? Which nations trade bananas with other nations in the world?
- Describe the 'comparative advantage' these banana-producing nations have over the US or the UK.
- Why aren't bananas grown in, say, Michigan or Minsk?
2. Why are bananas such a popular fruit?
- Are there health benefits associated with bananas?
- What are some popular uses for bananas (other than eating them)?
3. What are the key issues of the banana trade dispute?
- What positions does the US and the EU hold?
- Where does each nation get its bananas?
- Why are these nations involved (when they don't produce any bananas)?
|Nation||Position in the 'Banana War'||Source of Bananas|
4. What other products are involved in the trade dispute?
- What products are each nation threatening to put tariffs on? How does a tariff work?
- Why these products? What do they have to do with bananas?
5. Of course, the EU and the USA can adopt any trade policy they wish, but not without costs.
- What are the costs/benefits of placing trade barriers on EU or US goods as a result of the 'banana war'?
|Nation||Costs of Trade Barriers||Benefits of Trade Barriers|
6. Finally, based on ALL that you have learned - about trade, gains to trade, trade barriers, and bananas - write a policy recommendation for action by the World Trade Organization. What should be done about this 'banana war?' Use specific information you found in this WebQuest to support your recommendation.