US Foreign Policy

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# US Foreign Policy
## Trade, Immigration, Investment, and Monetary Policy
### Michael E. Flynn
### Kansas State University
### Updated: 2021-11-08

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# Lecture Overview

1. Terminology

2. Historical Background

3. Why do these topics matter?

4. Trade, immigration, investment, and monetary policy as foreign policy tools.

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# Key Questions

1. How has the importance of trade to the US economy changed over time?

2. What is protectionism? What role has it played in the history of US development?

3. What is the difference between fiscal and monetary policy? How do they relate to one another?

4. How does an industry's size relate to its ability to get protectionist policies?

5. What are the positions of the two major parties been on trade policy? How have they changed over time?

6. What are some of the major changes in immigration policy across US history?

7. How has immigration been a tool of US foreign policy?

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# Terminology

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# Terminology

### Trade

Trade: The flow of goods and services between countries

Imports: Goods and services that are consumed within a referent country but produced in another.

Exports: Goods and services that are produced within a referent country for consumption in another.

Aggregation: We can talk about how to group different businesses or products (specific items, technologies, industries, sectors, etc.)

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# Notes

Example of aggregation: North American Industry Classification System Item #311111: Dog and cat food (e.g., canned, dry, frozen, semimoist), manufacturing.

Another: 311330 Cocoa, powdered, mixed with other ingredients, made from purchased chocolate

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# Terminology

### Finance and Monetary Policy

Finance: Refers to the flow of capital (cash) within and across borders
  
  - Portfolio Investment
  - Sovereign Lending
  - Foreign Direct Investment (FDI)

Monetary Policy: Refers to the supply and valuation of currenty

- Interest rates
  - Money supply

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# Historical Background

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# Historical Background

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# Historical Background

Trade before 1934

- Protectionism is dominant approach to US economic development

- Northeastern manufacturing interests had substantial political influence and favor protectionist policies

- Southern and Western agricultural interests less influential and favor freer trade polices.

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# Historical Background

Trade after 1934

- Northeastern and Southern interests align in 1930s and 1940s

- Both groups come to support freer trade

- Protectionist barriers begin to come down

- World War II marks an important turning point

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# Historical Background

Bretton Woods System

- Partly a reaction to pre-World War II move to autarky

- Three main components

- General Agreement on Tariffs and Trade (GATT)
  - International Monetary Fund (IMF)
  - International Bank for Reconstruction and Development (World Bank)
  
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# Notes
- GATT focuses on promoting free trade and lowering tariff barriers
- IMF focuses on short-term imbalances in payments between states
- World Bank promotes development in less developed countries
  
  
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# Why Does Trade Matter?

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# Why Does Trade Matter?

Theoretical

- Realism/Mercantilism

- Trade as a source of national power
  
  - Trade is a zero-sum game
  
- Liberal theory

- Trade can be positive-sum (both/multiple players can "win")
  
  - Trade has other beneficial effects (e.g. it promotes peaceful relations between states)
  
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# Notes

- Historically nations very wary of trade as it might enrich adversaries
- Adam Smith and David Ricardo came along and talked about the benefits of specialization and free markets.
- We see greater moves towards free trade throughout the 1800s, mostly as a response to British leadership and technological change
- Ideas gain steam in 20th century through Woodrow Wilson's 14 Points
  
  
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# Why Does Trade Matter?

Tangible benefits

- Trade creates jobs

- Access to desirable goods (spices, cool cars, technology, media/entertainment)

Less tangible

- Soft power and prestige

- Information, education, etc.

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# Trade as a Policy Instrument

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# Trade as a Policy Instrument

Trade can be a source of power

- Control over vital resources

- Necessary for survival of the state, everyday life, etc.
  
- Few substitutes, few alternative suppliers

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<figure>
<img src="../images/fdr-ibn-al-saud.jpg" style="width:600px; height:400x;">
<figcaption>President Franklin Roosevelt (seated right) and Fleet Admiral William Leahy (standing left) meet with King Ibn al Saud (seated center) aboard the USS Quincy, February 14, 1945.</figcaption>
</figure>
  
  
  
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# Trade as a Policy Instrument

Market access

- Producers need markets. Scaling up production requires larger markets.

- Exports bring in money from the sale of goods

- Domestic consumer base is often limited in various ways (money, taste, interests, etc.)

- Provides bargaining power

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# Trade as a Policy Instrument

Does this mean trade is hurting your economy?

No!

Let's look at how GDP is calculated:

`$$GDP_{it} = Consumption_{it} + Investment_{it} + Government_{it} + (Exports_{it} - Imports_{it})$$`

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# Trade as a Policy Instrument

Protectionism

- Trade creates winners and losers

- Some countries can produce goods more/less efficiently than others

- Domestic producers who are relatively inefficient tend to favor protectionism (i.e. government intervention)

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# Trade as a Policy Instrument

Forms of Protectionism

- Trade protection can come in a variety of policy interventions

- Tariffs: Taxes on imported goods
  
  - Quotas: Limits on how much of a good is imported
  
  - Subsidies: Government payments to purchase goods or offset costs of donig business
  
  - Health and safety regulations: Creating different standards between importers and exporters
  
  
  
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# Trade as a Policy Instrument

Example: Sugar Quota System

- WTO agreements requires the US to import a minimum of 1,117,195 metric tons of raw sugar from global producers

- This is an aggregate figure-it does not have to be distributed evenly across sugar producing states

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# Trade as a Policy Instrument

What is the benefit to foreign countries?

- Dominican Republic share = 185,050 metric tons

- World raw sugar price (2019) `$\approx$` 12.36 cents/lb.

- US raw sugar price (2019) `$\approx$` 26.16 cents/lb.

- Difference = 13.8 cents/lb.

So what?

That's about $56.3 million more than world market!

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# Trade as a Policy Instrument

More recent example: Manufacturing

- Some industries are politically powerful for reasons apart from economic salience

- Manufacturing sector has a lot of influence

- Heavily tied into American image of production and the importance of making things

- Early Trump economic policies focused on "reviving" US manufacturing, but was it even in need of resuscitation?

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# Notes

There's really no evidence that Trump's tariffs altered the employment or wage levels/growth that we see here.

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# Monetary Policy

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# Monetary Policy

People need money to buy things

- Theoretically, we could use all sorts of stuff!

- A commonly held/used/accepted currency (e.g. "brand") of money helps resolve coordination problems

- US dollar is widely used and valued, making it a great basis for global commercial exchange

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# Monetary Policy

So what are we talking about here?

For present purposes, let's focus on two key issue areas

- Money supply

- Exchange rates

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# Monetary Policy

Mr. (money) manager

- Governments manipulate money and its value through a couple of key mechanisms

- Setting interest rates
  
  - Buying and selling assets

- People use the dollar, so what?

- Well, when you print your own currency and that currency is used as a global reserve currency, you've got options!

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# Immigration Policy

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# Immigration Policy

A Brief Overview of US Immigration Policy

- Immigration was largely unregulated until the late 1800s
- US government starts keeping track more systematically in 1819 with the Steerage Act
- Immigration Act of 1864 creates positions within the State Department to oversee immigration, but Act is repealed after 4 years.
- Chinese Exclusion Act of 1882
- Immigration Act of 1882
- Immigration Act of 1891

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# Immigration Policy

Early Quote System

Immigration policy takes a turn in the 20th Century

- Quota Law of 1921
- National Origins Act of 1924

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# Immigration Policy

Cold War Period

- Labor shortages during WWII lead to growth in immigration from Mexico
- US eliminates formal race-based quotas on immigration, but *de facto* policy still prioritizes Western Europe
- Country-specific quotas are gradually eliminated, but broad regional quotas remain
- US policy eventually starts to emphasize humanitarian concerns, partly to stick it to the Soviets

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# What Drives Immigration?

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# What Drives Immigration?

Lots of things, but for now we'll focus on a basic IPE approach to political economy

- Push Factors
    - Lack of economic opportunity (i.e. jobs)
    - War and conflict
    - Repression and violence
    - Crime
    
- Pull Factors
    - Basically the same, but the inverse
    - Attracted to job opportunities
    - Less crime/violence
    - More political participation

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# What Drives Immigration?

Heckscher--Ohlin Framework

- Think of migration in terms of trade theory
- Countries *export* goods that make intensive use of the factors that are abundant
- Countries *import* goods that make intensive use of the factors that are scarce

Migration as factor mobility

-  Just as investors move capital around seeking a greater return on investment, so too do individuals move trying to find greater returns on **their** investment (i.e. time, effort, skills, etc.)