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IB ECONOMICS HL

Internal Assessment Market Structures

UPDATED ON - 27 APR 2020
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Table of Contents

  1. Article 1

  2. Article 2

  3. Article 3

  4. Article 4

 

The local bus sector has been referred to the Competition Commission by the Office of Fair Trading amid complaints of "predatory tactics" by companies.

The OFT said evidence suggested limits on competition may be leading to higher prices for users in England (except London), Wales, and Scotland.

The move follows a five-month investigation into the £3.6bn industry.

An OFT spokesman said the issues it had identified "clearly justify a full investigation".

 

Findings include:


• The majority of local routes are operated by a small number of large bus companies.
• There were higher fares in areas where operators with a strong market position are not challenged by a large, well-resourced rival.
• Many complaints alleged "predatory" behavior by incumbent firms designed to eliminate competition from new entrants.
• There were few bids for supported service contracts in many areas, with just one bidder for a quarter of tenders.


'Crowding out'


The OFT said it had received some 30 complaints of behavior designed to exclude rivals from the market since March 2000 - about once every four months.


So-called predatory tactics can include upping the frequency of buses to "crowd out" rivals or timing buses to run just in front and sometimes also just behind a rival's buses.


It also said bus groups could hit competition by cutting fares significantly or running buses for free, or by refusing to take part in multi-operator ticketing schemes to limit the scope for entry or expansion by smaller operators.


OFT chief executive John Fingleton said the investigation had unearthed a range of evidence which suggested the sector was "often not working as well as it should".


"This may be resulting in higher prices for bus users," he said.

 

"Also, this is a market where an estimated £1.2bn comes from public subsidy so restricted or distorted competition can potentially have a significant impact on taxpayers.


“There is a great deal of competition between bus operators, large and small, although the biggest competitor for the bus industry is the car”.

John Major Confederation of Passenger Transport UK


"We believe that the issues we have identified justify a full investigation and we, therefore, propose to refer this sector to the Competition Commission." John Major, of the Confederation of Passenger Transport UK, which represents the bus industry, said they would be studying the report.


"Bus companies operate in highly competitive local markets and it is always in our interests to keep prices competitive to attract passengers out of their cars and onto our services," said Mr. Major.


"There is a great deal of competition between bus operators, large and small, although the biggest competitor for the bus industry is the car."


The OFT is asking for comments on its decision, to be received by 15 October 2009.

 

The market is controlled by few large companies as “the majority of local routes are operated by a small number of large bus companies” and the industry is an oligopoly, a market with a small number of large firms between which there is interdependence and each firm is affected by the decision of the rivals. Significant barriers to entry exist (anything that prevents or impedes the entry of firms into an industry), imperfect knowledge, and the product can be differentiated, but in the bus industry is homogeneous. In some areas, the market could be characterized as a monopoly, “in areas where operators with a strong market position are not challenged by a large, well- resourced rival”. Monopoly is the industry with only one large firm, possibly coexisting with much smaller ones, entry is restricted due to significant barriers to entry, unique product, and imperfect knowledge. Competition in the bus industry is doubted, mainly because the “bosses” of the market are trying to increase barriers to entry, with the major barriers being aggressive tactics and possibly resource barriers. Specifically, bigger firms increase the number of routes in the areas where smaller firms are working, decreasing their demand. The form of aggressive tactics is predatory pricing, the pricing at a loss until competitors are forced to exit, by offering discounts for their tickets and “free rides”. Possibly the oligopolistic firms agreed, informally, to limit competition by blocking new entrants, following tacit collusion. When competition is limited, usually inefficiency in production exists and as Fingleton suggests, “the sector was often not working as well as it should”. If the oligopoly is collusive, they are considered to be functioning as a single firm, a monopoly. To show if the market is efficient, we could compare it to a more competitive market, a perfectly competitive one, as shown below.

 

 

If firms are profit-maximizing, they would produce were MC=MR and MC rising. Thus, the MR of the monopoly is equal to the MC of the monopoly at QMON and the price of the monopolist is PMON. Perfectly competitive firms produce QPC because that is the output where the sum of MCs of the perfectly competitive firms, also their supply, equals the demand thus the MR. The monopolist is charging a higher price at a lower output (QPC>QMON) than the perfectly competitive firms; due to “limits on competition” higher prices are implemented, shown above as PMON>PPC. Productive efficiency, achieved when firms can produce at the minimum possible average costs, as well as allocative efficiency, attained when producers and consumers receive maximum benefit from their resources, but neither is achieved because as shown above, average costs for QMON are not equal to ACMIN and the price is not equal to marginal costs, PMON>MC.

 

The previous analysis is valid only when economies of scale, which exist when an increase in the scale of production, reduces all average costs of production are not evident. If there are economies of scale, Fingleton’s assumption for higher prices due to limited competition is false and increasing competition in the bus industry would make the consumer worse-off, as explained above.

 

 

Because of economies of scale, the monopolist would have lower marginal costs than the perfectly competitive market (MCMON<ΣMCPC). This is why the monopolist charges a price PMON lower than the perfectly competitive PPC and produced output QMON greater than QPC. Increasing competition would increase prices towards PPC against the benefit of the consumer. Also, the market may not be able to support more than the producer. In that case, there is a natural monopoly, a situation where long-run average costs would be lower if an industry were under monopoly than if it were shared between two or more competitors.

 

 

Graph 3 illustrates the industry demand curve and thus the monopolist’s demand curve. One firm can serve the market profitably at an output level from Q1 to Q2. If a  second firm enters, demand D2 will be faced by each of the firms when the market is evenly split, the production will be unprofitable as losses will be made at all output levels and the routes will not be served.


The bus industry is subsidized with £1.2bn. Because firms are probably charging higher prices, the consumer loses by paying both the abnormal profits, defined as the excess of total profit above the normal profit of the firms, shown in graph 1 as the area PMONXYAC1 and the subsidies through taxes.

 

 Commentary Coversheet 
Candidate Name Danai Antonia Antoniou
Candidate Number D 001005 – 004
Teacher Anna Petmeza
Source of the Article The Economist
Title of the Article Not by monetary policy alone
Date of Article 28/10/10
Date Written 6/12/10
Word Count 748
Commentary Number 2
Area of the syllabus
your commentary
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 Section 2: Microeconomics

 Section 3: Macroeconomics

 Section 4: International Economics

 Section 5: Development Economics

 

 

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Not by monetary policy alone
Another dose of “quantitative easing” is necessary; but it will not, by itself,
revive America’s economy

October 28th, 2010

 

 

ONE of the few people to come out of the economic crisis well is Ben Bernanke, chairman of the Federal Reserve, America’s central bank. He won acclaim for his decision to pump trillions of dollars into the American economy by providing liquidity to frozen financial markets and, from late 2008, by buying government bonds and mortgage-backed securities, or “quantitative easing” (QE). By common consent, these measures helped avert global economic disaster.


Now there is pressure for Mr. Bernanke to work his magic again. Although America’s economy no longer looks at the point of collapse, it has failed to return to healthy growth. Unemployment, at 9.6%, is five percentage points higher than it was before the crisis and GDP are not growing fast enough to bring the jobless rate down. This economic slack is pushing inflation worryingly low. Core consumer prices rose a mere 0.8% over the past year. The Fed is therefore expected to announce a new round of asset purchases, widely known as QE2, at the end of its November meeting next week.


This round is unlikely to work as well as the last one. Financial markets are healthier than they were two years ago, so there is less scope for the Fed to give the economy a boost by providing extra liquidity. QE works in part by bringing down long-term interest rates, but the more you do, the less the incremental effect is likely to be. There are also potentially nasty side-effects. Fed purchases should help America’s economy by pushing asset prices up and the dollar down, but they may lead to a damaging rise in commodity prices and fuel asset bubbles in emerging economies. A big jump in the size of the Fed’s balance-sheet may also increase fears that quantitative easing could stoke inflation which could prove hard to control.

 

Despite these risks, QE2 is the right thing to do. Deflation is a bigger worry than inflation right now. Deflation would make it much harder for Americans to shake off their debts, and a combination of deflation and stagnation in America would be devastating for the world. Since underlying inflation is threatening to sink towards zero, the Fed is right to act pre-emptively.

 

Lower expectations, more help


The bigger danger is not that the costs of QE2 will outweigh the benefits, but that America’s politicians will expect too much of it. For although QE is a potent weapon against deflation, its power to support recovery is limited. It can help growth by weakening the dollar and thus boosting exports. But with many households unable to borrow, others keen to pay down debt, and many businesses swimming in cash, lower interest rates are likely to have only a modest effect.


Rather than rely on Mr. Bernanke alone, politicians should complement QE2 with more short-term fiscal stimulus. The first stimulus is now expiring and much of its contribution was canceled out by the shrinking of the state and local government budgets. A new fiscal boost combined with targeted structural measures— encouraging banks to write down mortgage principal, for instance, so that homeowners with underwater mortgages can move house to look for work—would bring unemployment down faster. Yet Congress is reluctant to act because increasing the deficit is politically toxic.


Americans are right that government debt is a serious long-term problem. But growth is a serious short-term problem. The two can be addressed simultaneously, by adopting a credible medium-term deficit-reduction plan of the sort that Britain’s government has announced. Doing that will take courage, for it means coming up with a scheme for cutting entitlements to pensions and health care that will not go down well with voters. But if ever there were a moment for courage, this is it.

 

The US economy faces high unemployment rates, slow growth, and falling levels of inflation (general and sustained increase in price levels), possibly deflation. The USA is recovering, shown:

 

 

At tA, the economy faces a deflationary gap, with actual output (YA) below full employment level of output (YF) where all resources able and willing to work at current factor payments are employed.


USA government increased aggregate demand(AD) (economy’s total spending including consumption (C), investment (I), government spending (G) and net exports (NX)) by lowering interest rates (r) (the price of money determining amount to be paid when borrowing or depositing), thus adopting expansionary monetary policy (EMP). Quantitative easing (QE) (central bank’s money supply increase (Sm) by buying securities through open market operations) was implemented; “bringing down long-term interest rates” (graph 2).


According to Classical, lower r increases (C) (total households’ spending on goods/services over a certain period) because falling loan payments increase the money available for consumption, durable goods consumption increases because they become cheaper and lower share prices increase financial wealth, hence consumption. According to the wealth effect theory, asset purchases - increasing asset prices - lead to increases in household wealth (consumption determinant), hence consumption. Furthermore, the marginal efficiency of the capital theory states that firms’ investment (I) expenditure on capital equipment over a given period, rises asr (interest rates) fall because more investment projects will be profitable, and saving retained profits is less attractive.

 

 

The increased (Sm) (shift of Sm1 right to Sm2) lowers r from r0 to r1, increasing C and me from C1, I1 to CI2, II2 (Classical view – C, I(Classical) curve). According to Keynes, C and I are insensitive to changes in r (inelastic C, I(Keynesian) curve) and C, I fall to C- K2, IK2

 

Falling long-term r lower the dollar exchange rate (bring “the dollar down”), increasing (NX) (exports minus imports). Increasing C, I, and NX lead to higher AD, reducing unemployment and preventing deflation. Falling r could “lead to a damaging rise in commodity prices” as commodities’ demand increases because they are investment alternatives to long-term bonds (less attractive due to lower r).

 

 

Lower r from r0 to r1, increased NX, C, and I from C1, I1 to C2, I2. Their rise increases AD, from AD1 to AD2. If the economy was producing Y1 at P1, the AD rise leads to increased prices, P2, and output Y2, lowering the deflationary gap YF-Y1 to YF-Y2, reducing unemployment. But higher commodity prices increase production costs, lowering the SRAS (shift SRAS1 to SRAS2). Moving from B to C (graph 4) upsurges prices P2 to P3 and reduces output Y2 to Y3, increasing unemployment and the deflationary gap to If-Y3 failing to achieve the desired outcome. However, falling r lowers financial costs, thus production costs, increasing SRAS, and possibly counterbalancing increased commodity prices effect, allowing SRAS stability.

 

 

At output Y1, unemployment is 9.6% (par.2). The increase from AD1 to AD2 leads to higher prices P1 < P2 and greater output Y2, thus lower unemployment. In the Phillips curve, this is a movement from A to B, lowering unemployment to 9.6-x1% and increasing inflation rate to i2.


Lower r increases output, but also lowers SRAS, reducing output and minimizing EMP’s effect. Moreover, EMP increases prices P1 to P3 thus “increase fears that quantitative easing could stoke inflation” (cost-push), by increased costs of production, and demand-pull due to excessive monetary growth, caused by increasing AD. But, with the falling inflation levels (possibly deflation), the EMP is “a potent weapon against deflation”. The effect of EMP is also limited because “businesses and households are unable to borrow”. Through the QE the government buys its bonds from financial institutions to encourage banks’ lending. The increased Sm though, may not be used for lending but by banks to balance their sheets, making the policy ineffective. AD also increases through higher government spending and lower taxes, known as expansionary fiscal policy (EFP), to “bring unemployment down faster”.
EFP could also strike demand-pull inflation, but initially, it would not work because, despite increased G and decreased taxes at a federal level, greater taxes and less spending reduced state budgets, with the one canceling out the other. Demand-side policies lead to growth (graph 1) with a movement up along the actual GDP curve, 
with output (Y3) being greater at tA, thus less unemployment 9.6-x1%. The EFP lowers unemployment but expands the USA’s deficit. Since growth “is a serious short- term problem”, it should be solved “not by monetary policy alone”.

 

Commentary Coversheet
Candidate Name Danai Antonia Antoniou
Candidate Number D 001005 – 004
Teacher Anna Petmeza
Source of the Article The Guardian
Title of the Article The overvalued exchange rate is a symbol of Britain’s economic malaise
Date of Article 08/03/2010
Date Written 21/03/2011
Word Count 748
Commentary Number 4
Area of the syllabus
your commentary
relates to

 Section 2: Microeconomics

 Section 3: Macroeconomics

 Section 4: International Economics

 Section 5: Development Economics

 

 

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The overvalued exchange rate is a symbol of Britain's economic malaise

Weaker sterling may mean dearer imports but it will help rebalance the economy

 

 

The high value of Sterling between 1997 and 2007 made exports dearer, left industry struggling and there was a steady deterioration in the balance of trade.


Sterling fell on the foreign exchanges last week. That's good news. Halifax reported that house prices were down 1.5% in February. That too is good news.


This may seem strange, given that the pound is a totem of national economic virility, while we all know how deeply attached the Brits are to property inflation. Ministers will no doubt feel a bit jittery about last week's events since dearer imported goods, more expensive foreign holidays and the drop in house prices are likely to lead to a diminished "feelgood factor" and thus favor the opposition parties at the election.


But the message from the past 40 years – which includes repeated boom-busts in the property market and three deep recessions in manufacturing that have hollowed out the country's industrial base – is that an overvalued exchange rate and an over-heated housing market are the ugly sisters of the UK economy. Only in Britain would it have been possible for a fall in output of almost 5% in 2009 to have been accompanied by a 10% jump in house prices. Only in Britain would it have been seen as a cause for celebration.


As the chart shows, the decade up to the crisis of 2007 was a period of sterling strength. Adjusted for unit labor costs – a measure of the different inflation rates affecting exporters in different countries – the pound was even more expensive than in the early 1980s when the over-valuation of the exchange rate helped wipe out a sixth of manufacturing capacity. The high value of the pound between 1997 and 2007 made exports dearer. The industry struggled and there was a steady deterioration in the trade balance. These trends, though, were ignored. You will, for example, struggle to find a mention of the balance of payments in Gordon Brown's budget day panegyrics to his brilliance. That was because overall economic growth remained robust.


And the reason it remained robust was that the flipside to dear exports was cheap imports. The lower cost of goods entering the UK, particularly from Asia, bore down on inflation, and this helped boost consumer spending in two ways. Firstly, it meant each pound bought more in the shops. Secondly, lower inflation meant that the Bank of England could keep interest rates lower than they would otherwise have been. Consumers loaded up on debt; they piled into the property market and they used credit cards with gay abandon. Property prices rose rapidly and fuelled ever-higher borrowing, which left individuals vulnerable to the inevitable downward leg of the boom-bust cycle.

 

Over this period, consumer spending grew more rapidly than the economy as a whole, while net exports – the difference between goods and services coming in and goods and services going out – acted as a drag on growth. This pattern needs to be reversed for a long time to lay the foundations for a better-balanced economy.

 

Best mix


The hope is that foreign goods will be priced out of our domestic market by a falling pound, while British exports become more attractive overseas. The experience of the early 1990s suggests that the best mix of economic policy for the UK as it comes out of recession is for a tightening of the fiscal policy so that monetary policy can remain loose.


This probably needs an explanation. Monetary policy is all about interest rates and the level of the pound; fiscal policy is concerned with taxation and public spending. Low-interest rates and a weak pound help manufacturers by keeping the cost of new investment and working capital low, but they also, as we have learned, put upward pressure on the cost of living and encourage investment in speculative assets as well as productive investment.

 

That's where fiscal policy comes in. Raising taxes or cutting public spending squeezes consumer demand and government investment, leaving more room for a private-sector-led recovery driven by manufacturing and exports. That's not just a theory: the economy was rebalanced in this way after the pound left the Exchange Rate Mechanism in 1992. Interest rates and the pound fell sharply but very tight fiscal policy kept a lid on consumer spending and house prices.


On the face of it, this presents a strong argument in favor of tackling the budget deficit without delay, since it should ease any fears that the Bank of England has about excessive demand pushing up inflation, and thus enable the monetary policy committee to keep interest rates low. And, since low-interest rates normally make a currency less attractive to global investors, it should keep the pound weak as well. This is precisely the case being made by David Cameron and George Osborne, and it is a perfectly respectable point.


The counter-argument goes like this: sterling has been the weakest of all the major currencies in recent weeks, and the main reason cited for its sharp fall last week was political uncertainty. Investors are running scared of the possibility that a hung parliament will delay a credible plan for deficit reduction. So imagine that Alistair Darling today announces tougher measures to cut the deficit, which is what the financial markets say they want. The impact of that, logically, would be to push up the pound. That would not just hinder the rebalancing every party says it wants but could tip the economy back into recession. It wouldn't, in all honesty, take much.


Let's be clear: a cheap pound will not be enough on its own to produce export-led growth. The last century has been pockmarked by devaluations of the currency that provided a short-term fillip to the UK industry that was subsequently squandered due to poor quality goods, a failure to control costs, and a simple lack of ambition. A falling sterling exchange rate provides the conditions in which it is possible for rebalancing to take place: it does not guarantee that it will happen.


The same applies to the housing market. Hard though it is to imagine, residential property speculation is a relatively recent phenomenon in Britain, with house prices rising only gently in the first quarter of a century after the second world war.


There were two reasons for this: the supply of houses increased rapidly in the building boom of the 1950s and 1960s, and there were strict controls on lending. The impact of financial deregulation and innovation on house prices has been profound. Ted Heath's government prompted the first big post-war property boom when it liberalized lending through Competition and Credit Control, and the 1980s housing boom followed another wave of deregulation under Margaret Thatcher.


Mismatch


The granting of 125% mortgages was an example of how lending standards were further relaxed during the boom earlier this decade. Meanwhile, the new-home building is much lower than it was in the decades immediately after the second world war, increasing the mismatch between demand and supply, particularly in southern England.

 

The change will require intervention in the market. For manufacturing, the government should use its stake in the banks to push investment into productive uses, especially low-carbon industries. That would be controversial. As for housing, it's a combination of higher property taxes, more homes, and tougher curbs on the lending of the sort used in France. That would risk political suicide. So expect the trade balance to start deteriorating from 2012 and the next housing bubble around 2016.

 

During 1997-2007 the UK faced a high exchange rate (ER)(the price of one currency in terms of another) making “exports dearer, left industry struggling and there was a steady deterioration in the balance of trade”. As the price of exported goods (Px) was rising faster than imported (PM), net exports (NX) fell since import expenditure increased and export revenues fell, contributing to the current account deficit- CRAD (total export revenues less than total import spending). Falling NX lowered aggregate demand (AD), shown by AD1 shifting left to AD2, reducing price P1 to P2 and output Y1 to Y2. Despite that, “economic growth remained robust” because lower PM, led to cheaper raw materials being imported, reducing production costs.

 

 

Lower production costs increase SRAS, shifting SRAS1 right to SRAS2, lowering P2 to P3, and increasing Y2 to Y3 which “bore down on inflation and this helped boost consumer spending”. Consumption (C) rose due to the real balance effect, as lower prices motivate consumers to lower savings to maintain real balances and since C=Yd-S, consumption rises. Also, rising SRAS lowered inflation, allowing the central bank to keep low-interest rates (r), and increasing consumption (see commentary 2). The consumption increase was higher than the NX fall, therefore AD rose, shifting AD2 right to AD3, increasing P3 to P4 and Y3 to Y4. But, lower r and inflation increased consumer borrowing, thus individuals’ debts, exposing them to the upcoming recession and creating unbalanced growth driven by higher C and excessive consumer borrowing.

 

Currently, the pound’s ER falls, leading to falling PX and rising PM, increasing NX. But, this assumes that depreciation will increase NX because the combined price elasticities of DX and DM are greater than one. But, if the Marshall-Lerner condition is not satisfied, NX will fall and export-oriented growth will not occur. Also, the government follows EMP by preserving low r and combining it with decreased ER, keeps “the cost of new investment and working capital low”. Since lower r increases I (commentary 2) and lower ER increases NX (national flow injections), based on the multiplier, the national output could rise by a multiple of the initial injection, creating consecutive economic benefits. But, there is “upward pressure on the cost of living” due to falling purchasing power as imports become more expensive, lowering living standards.


Lower r increase C and I and since NX rise, AD will increase, creating fears for demand-pull inflation. Therefore, a contractionary fiscal policy-CFP (lowers AD through higher Taxes, lower Government spending) is set, lowering C due to higher T and G, allowing investment and export-oriented growth. CFP generates tax revenues used to reduce the UK’s budget deficit and negate fears for inflation as rising C, I, NX balances by falling C and G, allowing the Central Bank to preserve low r. With weakening pound though, more will be needed to pay back debts in foreign currencies, thus external debt rises in terms of a pound.

 

Political uncertainty, fears for delayed deficit reduction plan and low r – reducing the return on pound deposits – “make the currency less attractive to global investors”, averting short term capital movements, lowering pound’s demand, and reducing the ER.

 

 

Falling D£ is shown by shifting D£1 left to D£2, reducing ER1 to ER2 and Q0 to Q1, and keeping “the pound weak” to increase NX. But, since the pound’s falling ER is due to fears of foreign investors by political uncertainty and suspension of deficit reduction plans, the CFP would increase investors’ expectations, increasing the pound’s demand and the ER, obstructing economic rebalance and leading to recession. According to the J-curve though, depreciating reduces short term NX (wor en the CRAD) but increases NX in the long term.

 

 

Assume CRAD1 at t1 when the ER depreciates. During t1-t2 the ML-condition may not be satisfied as the price elasticities of exports and imports will probably be relatively inelastic in the short term. Therefore, falling ER reduces NX and increases CRAD1 to CRAD2, worsening foreign investors’ expectations.


Overall, Cameron’s policy could allow UK’s economy to rebalance through investment and export-oriented growth, but since falling ER ‘diminished the “feel-good factor”, favoring the opposition parties at the election’, the government might increase ER to avoid risks, even though in 2009 an overvalued pound reduced output by 5%. But, assuming that ER does fall, providing the conditions for rebalancing; this alone cannot guarantee the ‘rebalance’ as pound’s previous devaluations did not affect due to poor quality goods, failure to control costs, and lack of ambition.

 

Commentary Coversheet
Candidate Name Danai Antonia Antoniou
Candidate Number D 001005 – 004
Teacher Anna Petmeza
Source of the Article New York Times
Title of the Article U.S. – Mexico Trucker Dispute Takes a Step Forward
Date of Article 22/1/2011
Date Written 11/2/11
Word Count 747
Commentary Number 3
Area of the syllabus
your commentary
relates to

 Section 2: Microeconomics

 Section 3: Macroeconomics

 Section 4: International Economics

 Section 5: Development Economics

 

 

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 A proposal by the Obama administration that would grant Mexican truckers greater access to Texas roadways — and far beyond — would be a boon to businesses in the state, supporters say. But unions, the Teamsters, in particular, say the plan would cost American jobs.


Three of the top five ports for trade between the United States and Mexico are Laredo, El Paso, and Houston. Through the first 10 months of 2010, more than $146 billion in trade
between the United States and Mexico moved through the Port of Laredo, more than $57 billion through El Paso and $17.5 billion through Houston, ranking the ports No. 1, No. 2
and No. 5, respectively, in terms of trade with Mexico. Overall, the United States traded about $324 billion with Mexico during the same period.


A provision in the original 1994 North American Free Trade Agreement would have allowed long-haul truckers from Mexico to move about the United States without mileage
restrictions, but it was never put into effect. Today, tractor-trailers entering the United States from Mexico (and vice versa) are limited to traveling within a 20-mile to 25-mile
the radius of ports of entry. There, Mexican truckers must drop their goods, which are then picked up by American truckers to be transported to their final destinations.

 

This month, the Obama administration issued what it called a “concept document” addressing many of the concerns that have blocked full carrying out of the provision.


In 2009, Congress and the administration ended a two-year-old long-haul pilot program. Labor unions, especially the Teamsters, and other critics have long opposed allowing
Mexican truckers access to American roads out of concern that trucking jobs in the United States would be lost and roadways made unsafe because of differences in safety
standards between the two countries. (A status report published by the Federal Motor 
Carrier Safety Administration in 2009 stated that American carriers had a higher out-of-
service rate than other participants in the program.)

 

After the pilot program ended, Mexico said the United States was in violation of Nafta and put more than $2 billion in tariffs on nearly 100 American products — including agricultural products like onions and peanuts — in retaliation.


The United States Department of Transportation’s preliminary proposal includes a requirement that participating vehicles be equipped with electronic recording devices to allow monitoring of the drivers’ hours of service and compliance with American trucking laws. Drivers will also have their combined American and Mexican driving records checked to ensure that they have no history of unsafe driving that would disqualify them under United States standards.


“The cross-border trucking program boosts trade opportunities for the U.S. and creates jobs here in Texas. Mexican trucks must be held to stringent safety requirements — just
like any carrier on U.S. highways,” Senator John Cornyn, Republican of Texas, said in a statement after the Transportation Department issued its proposal. “It is time to take the
brakes off this program that represents a significant trade opportunity for the U.S. and a new way to create jobs and drive revenue for my home state of Texas.”


Other Texas politicians have clamored to lift the ban on Mexican trucks, saying it damages the state’s economic interests.


“U.S. farmers should not have to pay the price for broken diplomatic relationships,” Todd Staples, the state’s agriculture commissioner, wrote to President Obama when the pilot program ended. Mr. Staples estimated that before the tariffs were imposed, Mexico was the top purchaser of Texas agricultural products, buying an estimated $3.1 billion in goods in 2008.


Last week, Mr. Staples restated his support for beginning negotiations to restart the program.


“Texas agriculture should not be penalized because Congress broke a 17-year-old agreement,” he said. “I hope our trade negotiators cut a fair deal soon so Texas agriculture can continue to provide a safe, affordable food supply and good jobs for our
citizens.”


Mexican officials have said the tariffs would be lifted if a long-haul trucking agreement were reached. Negotiations are expected to take several months.


An official with the Federal Motor Carrier Safety Administration said Nafta provisions required reciprocity across the border, meaning that American trucks would be able to travel farther into Mexico under the plan. But union leaders in Texas and elsewhere still say the proposal would take away jobs only from Americans.


“If the U.S. can’t seal our borders now, why should we have confidence that a long-haul trucking program will maintain safety at our borders, on our roads, and in the interior of our nation?” said Ed Sills, a spokesman for the Texas A.F.L.- C.I.O. “This cheap-labor program comes at too high a risk and at too large a cost to middle-class American workers who work long, hard hours to help maintain a safe commerce system in our nation.”


The Texas Department of Public Safety has not weighed in on the trucking program, but it dismissed the notion that it would lead to an increase in human, drug, illicit cash, or weapons smuggling.


“The Texas D.P.S. has significantly enhanced commercial vehicle enforcement activity along the U.S.-Mexico border since 2003-4 through border staffing grants from the Federal Motor Carrier Safety Administration in anticipation of the full implementation of Nafta at some future date,” said Tela Mange, a spokeswoman for the public safety department. “All commercial vehicles, including commercial vehicles operated by Mexican-based carriers, entering the U.S. through commercial border crossings from Mexico are already subject to various types of inspections by the U.S. Customs and Border Patrol, as well as the Texas D.P.S.”


Under the Transportation Department proposal, which the administration emphasizes is only a starting point for negotiations, Mexican carriers applying to the program would have their information vetted by the Department of Homeland Security and the Department of Justice. And for “an agreed-upon period of time,” Mexican drivers and vehicles would be inspected by American officials every time a tractor-trailer entered the United States.

 

Ms. Mange said the public safety department was not convinced that allowing the long- haul program would cause a meaningful change in the amount of traffic on Texas highways. That is because the goods coming across the border are currently transported by trucks, though ones driven by Americans, to destinations throughout the United States and Canada.

 

“The net volume of commercial traffic entering the U.S. is not expected to increase significantly, if at all,” she said. “In many cases, cross-border operations will simply be replaced with some long-haul operations.”

 

A free trade area (FTA) was created between the U.S., Canada, and Mexico with the NAFTA agreement, abolishing protectionist measures (interventionism in trade to protect domestic producers) between themselves but retaining their protectionist policy against non-members. Mexican truckers though were “limited to traveling within a 20-mile to 25-mile radius of ports entry”, with the U.S. setting a quota (limit on imports, raising their price and allowing domestically produced substitutes to replace some imports at the higher price) since transportation is the product.

Graphically: 

 

 

The quota reduces world supply Sworld to Sworld+quota, increasing prices P0 to P1. This lowers the quantity demanded Q1 to Q3 (law of demand) and the domestic quantity supplied Q2 increases to Q4 (law of supply). Also, imports Q1-Q2 fall to Q3-Q4, reducing Mexican truckers’ revenues from areas F+G+H to C+G, increasing revenues for domestic producers from areas E+F to A+B+E+F.


In response, Mexico retaliated by “$2 billion in tariffs on nearly 100 American products”. The tariff (ad valorem or specific tax on imports aiming to increase domestic production and to reduce imported quantities):

 

 

World supply Sworld falls to Sworld+Tariff, increasing prices P0 to P1, lowering quantities consumed Q1 to Q3, and increasing Mexican production Q2 to Q4. Besides reducing imports Q1-Q2 to Q3-Q4 and U.S. producers’ revenues from areas E+F+G to area E, tariffs increase revenues for domestic producers to areas A+B+H+F(from H+F) and generate as tax revenues, for the Mexican government(area C).


The U.S. proposed to eliminate the quota (“grant Mexican truckers greater access to Texas roadways”) and Mexico replied: “tariffs would be lifted if a long-haul agreement were reached”.


Proponents state this would increase US-Mexico trade and since “Mexico was the top purchaser of Texas agricultural products” this would greatly increase U.S. exports and revenues, especially for southern state producers with low transportation costs, not distorting the comparative advantage (C.A. over another country exists in the production of a good when production is at lower opportunity cost compared to the other), possibly leading to trade creation creating static gains because of the move of purchases away from higher-cost towards low-cost producers.


Unions argue U.S. unemployment will increase as domestic production falls to Q2 (graph 1). But, since tariffs will be lifted, U.S. exports to Mexico will increase back to Q1-Q2 (graph 2) creating jobs for exporting industries, increasing employment. In the short term, jobs will be lost for U.S. truckers, but efficiency will increase, reducing unemployment, as the triangles B+D (graph 1) will be eliminated and producer surplus will be lost since inefficient domestic production will fall to Q2 and consumer surplus will increase as consumers now benefit by buying more (Q1) at lower prices.

 

Mexico benefits too, as triangles B+D (graph 2) will also be eliminated, increasing efficiency. Banned Mexican truckers wasted scarce resources making both economies inefficient and, in the long term, increasing unemployment which falls with the removal of quotas/tariffs. Also, U.S. truckers will “travel farther into Mexico” reducing unemployment, since Mexico is a great importer of U.S. products, but union leaders support that only U.S. jobs will be lost. A disadvantage for Mexico is the tax revenues of the tariff lost (graph 2-area C) when they are lifted.


“U.S. farmers should not pay the price for broken diplomatic relationships” as tariffs were mostly imposed on agricultural products while farmers are low-income workers driven out of business with higher costs due to tariffs, increasing unemployment and poverty.


Those against argue that “roadways will be made unsafe because of differences in safety standards between the two countries”, but the extensive safety measures; electronic recording of drivers’ hours of service (par.7), checking driver’s background (par.7), inspections of Mexican drivers when entering the U.S.(par.19), negate safety concerns. Tariffs and quotas may be eliminated but the measures stated above may form indirect/invisible protectionism through health and safety standards and administrative obstacles which increase costs thus prices of imports and delay delivery, disadvantaging Mexican truckers, reducing imports, and allowing U.S. production to rise.


The agreement could “increase in human, drug, illicit cash or weapon smuggling”, but the extensive control of Mexican truckers could reduce the transport of illegal products. These controls though create administrative costs for the U.S. but they will benefit from the FTA through static and dynamic efficiency gains.


Overall, benefits outweigh costs and the U.S. will benefit from the long-haul agreement through lower unemployment and greater trade but will face high administrative costs and invisible protectionism may reduce FTA’s benefits.

 

 

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