Economics - International Trade and Investment Policy - Lifting U.S. sanctions on Cuba - Afghanistan’s WTO membership - Political economy of trade liberalization - Assignment Help

International Trade and Investment Policy - Lifting U.S sanctions on Cuba - Afghanistan’s WTO membership - Political economy of trade liberalization - Assignment Help

Assessment Task:

1 Lifting U.S. sanctions on Cuba

Under former U.S. president Barack Obama, U.S. sanctions on Cuba were partly lifted. We will analyze this using the Heckscher-Ohlin model and only consider Cuba and then U.S. Assume that before the sanctions were lifted, Cuba did not trade with the U.S. at all. Further assume that the two economies produce two goods: labor-intensive cigars and capital-intensive wheat. Further assume that Cuba is labor-abundant and the U.S. is capital- abundant. Finally, assume that technologies are identical in Cuba and the U.S. and also that Cubans and Americans have the same tastes.

(a) When the sanctions are lifted, which product will be exported by the U.S., and which product will be exported by Cuba? Hint: use the Heckscher-Ohlin theorem to answer this question.

(b) Demonstrate graphically that both countries can reach a higher community indifference curve, i.e., there are gains from trade for both Cuba and the U.S. Remember to label the graphs correctly!

(c) Do you think that the assumptions of the Heckscher-Ohlin theorem hold in reality for this particular example? Name the assumptions and discuss.

2 Afghanistan’s WTO membership

Since the 29th of July 2016, Afghanistan is a member of the World Trade Organization (WTO). Due to its membership, it gains access to the lower tariffs for WTO members (so-called Most Favored Nation, MFN, tariffs). As a consequence, Australia and other industrialized economies will trade more with Afghanistan. According to the Stolper-Samuelson theorem, what will be the long-run impact on the wages of low-skilled workers in Australia? And what will be the impact on the wages of low-skilled workers in Afghanistan? Hint: think about the relative abundance of low-skilled labor in Australia and Afghanistan compared to the abundance of other production factors, say capital or high-skilled workers.

3 Political economy of trade liberalization

Let us study the implications of trade liberalization for politics, the so-called political economy of trade liberalization. To fix ideas, assume that a democratic country uses two production factors, labor and capital, to produce two goods, capital-intensive cars and labor-intensive textiles. Both production factors can freely choose in which industry they work. Imagine that the country has very high tariffs which essentially shut down international trade. The parliament of the country discusses to abolish the tariffs and open up to international trade. To get a better idea about what the population of the country wants, a public hearing of interest groups is organized in parliament. Four interest groups have been invited: the Textile Workers’ Union (TWU), the National Union of Care Workers (NUCW), the Association of Capitalists in the Automotive Industry (ACAI), and the Textile Capitalists’ Alliance (TCA). The four groups represent the production factors in the respective industries. For simplicity, let us assume that the interest groups want to maximize the real wage or real return for their respective constituency.

(a) Assume that the country is relatively capital-abundant compared to the rest of the world. Will there be interest groups in favor of trade liberalization? Or against?

(b) Now assume that the country is relatively labor-abundant compared to the rest of the world. Will there be interest groups in favor of trade liberalization? Or against?

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