Download Waves of Globalization

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CHAPTER
1
The International
Economy and
Globalization
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Chapter Outline (1 of 2)
• Economic Interdependence: Federal Reserve
Incites Global Backlash
• Globalization of Economic Activity
• Waves of Globalization
• The U.S. as an Open Economy
• Why is Globalization Important?
• Globalization and Competition
• Common Fallacies of International Trade
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Chapter Outline (2 of 2)
● Does Free Trade Apply to Cigarettes?
● Is International Trade an Opportunity or a Threat
to Workers?
● Backlash Against Globalization
● The Plan of This Text
● Summary
● Key Concepts and Terms
● Study Questions
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Economic Interdependence
(1 of 2)
• High degree of economic interdependence
– No nation exists in economic isolation
– All aspects of a nation’s economy linked to
economies of trading partners
– Reflects historical evolution of the world’s
economic and political order
– Economic interdependence is complex, and its
effects are uneven
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The International Economy
(2 of 2)
● High degree of economic interdependence
• Steps toward international cooperation
• Mutually advantageous for trading nations
• Specialization, efficiencies of large scale production
• Wider variety of products at lower cost
• Protectionist pressures
• Some developing nations argue that liberalized
trading system serves to keep them in poverty
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Economic Interdependence:
Fed Policy Incites Backlash
• Domestic economic policies have spillover effects
on other economies
– Quantitative easing by Fed, intended to
stimulate U.S. economy during Great
Recession, criticized by U.S. trading partners
as attempt to improve American
competitiveness through depreciation of dollar
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Globalization of Economic Activity
(1 of 2)
• Globalization
– Greater interdependence between countries
and their citizens
• Increased international flows of
– Goods and services
– People
– Investments in equipment, factories, stocks, bonds
• Non-economic elements
– Culture and the environment
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Globalization of Economic Activity
(2 of 2)
● What forces are driving globalization?
• Technological change
• Multilateral trade negotiations
• Continuing liberalization of trade and investment
• Widespread liberalization of investment
transactions
• Development of international financial markets
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Waves of Globalization
(1 of 13)
• History of globalization tied to the evolution of
trade
– In late 1700s and 1800s, mass production and
improved transportation made international
trade easier, making most goods tradeable
– Rise of global manufacturing in 1990s
characterized by geographical fragmentation of
productive processes and offshoring of
industrial tasks
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Waves of Globalization
(2 of 13)
● First Wave of Globalization: 1870-1914
● Decreases in tariff barriers
● Technological developments
• Declining transportation costs
• Shift from sail to steamships; railways
• Driven by European and American businesses
and individuals
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Waves of Globalization
(3 of 13)
● First Wave of Globalization: 1870-1914 (cont)
• Exports as share of world income nearly
doubled to 8%
• Per capita incomes increased 1.3% per year
• Previous 50 years: 0.5% per year
• Nations that actively participated in
globalization became richest countries in world
• Brought to an end by World War I
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Waves of Globalization
(4 of 13)
● Great Depression of 1930s
• Governments practiced protectionism
• Raised tariffs on imports
– Tried to shift demand into domestic markets to
» Promote sales for domestic companies
» Promote jobs for domestic workers
• Exports as share of national income fell from 8% to
5%, undoing 80 years of technological progress in
transportation
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Waves of Globalization
(5 of 13)
● Second Wave of Globalization: 1945–1980
• Horrors of retreat into nationalism renewed
incentive for globalization
• Falling transportation costs fostered increased
trade
• Trade liberalization not uniform
• Which countries participated? Mainly developed
countries
• Which products were included? Manufactured
goods
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Waves of Globalization
(6 of 13)
● Developed and developing countries
differentially affected during second wave of
globalization
• Developed countries largely freed of barriers
• Greatly increased the exchange of manufactured goods
• Raised incomes in developed countries
• Developing countries
• Exports faced no barriers only for agricultural and
primary goods not produced in developed countries
• Exports of manufactured goods faced sizable barriers
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Waves of Globalization
(7 of 13)
● Second Wave of Globalization: 1945–1980 (cont)
• New kind of trade
• Rich country specialization in manufacturing niches
– Gained productivity through agglomeration
economies
» Firms clustered together
» Some clusters produced same product; others
connected by vertical linkages
• Agglomeration economies
• Benefits only those in clusters
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Waves of Globalization
(8 of 13)
● Second Wave of Globalization: 1945–1980 (cont)
• Most developing countries did not participate in
growth of global trade in manufacturing and
services
• Continuing trade barriers in developed countries
• Unfavorable investment climates
• Antitrade policies of developing country
governments
• Dependence on agricultural and natural-resource
products
• Developing countries as group left behind
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Waves of Globalization
(9 of 13)
● Latest Wave of Globalization (1980 to present)
• Many developing countries have participated,
led by
• China, India, and Brazil, which entered world
markets for manufactured goods
• Other developing countries
• Increasingly marginalized in the world economy,
with decreasing incomes and rising poverty
• Significant international capital movements
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Waves of Globalization
(10 of 13)
● Latest Wave of Globalization (1980 to present) (cont)
• Some developing countries have harnessed
competitive advantage in labor-intensive
manufacturing
– Bangladesh, Malaysia, Turkey, Mexico, Hungary,
Indonesia, Sri Lanka, Thailand, and the
Philippines
– Tariff cuts and lower barriers to foreign
investment
– Technological progress in transportation and
communications
• Protectionist policies in developed countries
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Waves of Globalization
(11 of 13)
● Latest Wave of Globalization (1980 to present) (cont)
• World more globalized - international trade,
capital flows
• Foreign outsourcing
• Different aspects of a product’s manufacture
performed in more than one country
• Manufacturing moved to wherever costs were
lowest
– Job losses for blue-collar workers
– Cries for passage of laws to restrict outsourcing
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Waves of Globalization
(12 of 13)
● Latest Wave of Globalization (1980 to present) (cont)
• Digital platforms increasingly enable small
companies and individual entrepreneurs to
participate in global economy
• Integrated factory floor increasingly replaced by
network of individual suppliers specializing in
specific services or phases of production
• Boeing 787 Dreamliner is example of trade
occurring between different participants of a
production chain
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Waves of Globalization
(13 of 13)
● Latest Wave of Globalization (1980 to present) (cont)
• By 2000s, foreign outsourcing of white-collar
work
• Information Age
– Digitization, Internet, and high-speed data
networks around world
• Sending upscale jobs offshore
– Accounting, chip design, engineering, basic
research, and financial analysis
• Foreign outsourcing
• Reduce costs of a given service: 30 to 50%
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The U.S. as an Open
Economy(1 of 8)
• Trade patterns
– Openness
• Rough measure of the importance of
international trade in a nation’s economy
• Nation’s exports and imports as a percentage of
its Gross Domestic Product (GDP)
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TABLE
1.3
The Fruits of Free Trade:
A Global Fruit Basket
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24
The U.S. as an Open Economy(2 of 8)
● Openness
• Large countries – lower measures of openness
• Less reliant on international trade
• Many firms in larger countries can attain optimal
production size without having to export due to the
population and economic size
• Small countries – higher measures of
openness
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TABLE
1.4
Exports &
Imports
as a % of
GDP...
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The U.S. as an Open Economy(3 of 8)
● Openness of the U.S. economy, 1890 to 2013
• Less open to international trade, 1890 to 1950
• Relatively high openness in late 1800s
– Rise in world trade: technological improvements
in transportation and communications
• Two world wars + Great Depression of the 1930s
– Reduced dependence on trade
» National security reasons
» Protect home industries from import competition
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The U.S. as an Open Economy(4 of 8)
● Openness of the U.S. economy, 1890 to 2013 (cont)
• After World War II - negotiated reductions in
trade barriers
• Rising world trade; technological improvements in
shipping and communications
• U.S. trade
• In 1890, mostly raw materials and agricultural goods
• Today, manufactured goods and services
• U.S. producers more affected by foreign competition
today than 100 years ago
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FIGURE
1.1
Openness of the U.S. Economy, 18902013
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29
The U.S. as an Open Economy(5 of 8)
● Labor mobility in U.S. has not risen in past 100
years
• In 1900, 14% of U.S. population foreign born
• 1920s to 1960s – immigration sharply curtailed
• Foreign-born U.S. population: 6%
• 1960s, liberalized restrictions; by 2014
• 12% of U.S. population foreign born
• Foreigners: 14% percent of labor force
– Half – from Latin America
– One quarter – Asians
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The U.S. as an Open Economy(6 of 8)
● Capital flows to U.S.
• Foreign ownership of U.S. financial assets has
risen since 1960s
• 1970s, OPEC - investments in U.S. financial
markets
• 1980s, major flows of investment funds to U.S.
• By late 1980s
• U.S. - consuming more than it produced
– Net borrower from rest of the world
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The U.S. as an Open Economy(7 of 8)
● International banking
• Average daily turnover in foreign-exchange
market
• Today: almost $4 trillion
• 1986: $205 billion
• Trading day begins in Tokyo and Sydney and
moves around world in unbroken 24-hour cycle
• London - largest center for foreign-exchange
trading
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The U.S. as an Open Economy(8 of 8)
● Commercial banking
• U.S. banks
• Worldwide branch networks, 1960s and 1970s
• Loans, payments, foreign-exchange trading
• Foreign banks
• Increased presence in U.S. in 1980s and 1990s
• Today: more than 250 foreign banks operate in U.S.
● Securities firms - globalized operations
• By 1980s, U.S. government securities traded
on 24-hour basis
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Why is Globalization Important?
(1 of 2)
• Law of Comparative Advantage:
– Each nation gains by producing goods in which it has
relative advantage
– If a good or service can be obtained more
economically through trade, makes sense to trade for
it, not produce it
• International trade also gains from competitive
process
– Competition essential to innovation, efficiency
– Global competition can result in high-cost domestic
producers exiting market
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Why is Globalization Important? (2 of 2)
● Open economies
• More competition, which lowers prices
• More firm turnover
• Improvements for industry
● Economic growth rates - closely related to
• Openness to trade
• Education
• Communications infrastructure
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Globalization and Competition
(1 of 3)
• Globalization and free trade provide benefits
to many but impose burdens on others
– Kodak had 90% camera market share but was
complacent; did not address competition by adopting
new technology
– Fuji entered U.S. market with lower priced film and
supplies; Kodak ignored them
– By mid-1990s, Fuji had 17% of market, Kodak, 75%
– Kodak finally developed digital camera but was
undercut by smart phones; filed for Ch 11 bankruptcy
– Kodak now a small digital imaging company
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Globalization and Competition
(2 of 3)
● Globalization and free trade provide benefits to
many but impose burdens on others (cont)
• Schwinn bicycles the standard of the industry, surviving
the Great Depression with continuous innovation; bikes
durable, stylish, but heavy
• Competitors produced mountain bikes & racing bikes;
cheap imports entered market
• Schwinn moved production to non-union state;
obtained parts from foreign countries, but uneven
quality; Schwinn declared bankruptcy; firm purchased
• Schwinn bicycles today made in China
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Globalization and Competition
(3 of 3)
● Globalization and free trade provide benefits to
many but impose burdens on others (cont)
• Once, 150 U.S. manufacturers of televisions
•
•
•
•
•
Imports from Japan, China, South Korea, others
Flat panel TVs lighter, cheaper to ship from Asia
By 2000, no U.S. TV manufacturers
But costs in China rising, U.S. factories more competitive;
In 2012, Element Electronics became only TV manufacturer in
U.S.; all parts imported, assembled in Detroit
• Assembly in Detroit yields distribution efficiencies; avoids
tariffs; TVs shipped in boxes with “Made in America” logo
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Common Fallacies of International
Trade (1 of 2)
• “Trade is a zero-sum activity”
– False; both partners gain from trade
• “Imports reduce employment and burden the
economy, while exports promote growth and
employment”
– False; source of fallacy is failure to consider
link between imports and exports
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Common Fallacies of International
Trade (2 of 2)
● “Tariffs, quotas, and other import restrictions will
save jobs and promote a higher level of
employment”
• False; fails to recognize that a reduction in
imports does not occur in isolation
● Free trade
• Increases competition, lowers prices
• Makes better products available to consumers
• Results in higher consumption
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Does Free Trade Apply to
Cigarettes?
• Usually, free trade results in higher
consumption; but with cigarettes, is this a
good thing?
• Some contend that cigarettes are not normal
“goods” but “bads,” requiring their own
regulations
• Must distinguish between regulating
cigarettes for public health and regulating
them to protect domestic markets
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International Trade:
Opportunity or Threat to Workers?
(1 of 3)
• International trade benefits many but not all
workers
– Cheaper consumer goods
– Employers – better technologies/equipment
– Workers - more productive
– Exports - jobs and income for domestic
workers
– Cheap imports - rising unemployment
– Hurts unskilled workers in import-competing
industries
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International Trade: Opportunity
or Threat to Workers?
(2 of 3)
● International trade
• Aligns domestic prices with international prices
• Wages increase for workers whose skills are
scarce
• Wages decrease for workers who face
increased competition
• Jobs lost in one industry replaced by jobs
gained in other industries
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International Trade: Opportunity
or Threat to Workers?
(3 of 3)
● The long-run effect of trade barriers
• Does not increase total domestic employment
• Reallocates workers
• Away from export industries
• Toward less efficient, import-competing industries
• Leads to less efficient utilization of resources
● International trade
• Just another kind of technology
• Adds value to inputs
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Backlash Against Globalization
(1 of 3)
• Proponents of free trade and globalization say:
– Countries prosper
– New ideas and technology flow freely around the
world
– Productivity growth
– Increasing living standards
– Lower consumer prices
– Increased variety of goods and services
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Backlash Against Globalization (2 of 3)
● Criticisms of free trade and globalization
• Benefits large corporations at expense of
average citizens
• Environmentalists argue that elitist trade
organizations like WTO make undemocratic
decisions
• Undermine national sovereignty over environmental
regulation
• Unions argue that unfettered trade permits
unfair competition
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Backlash Against Globalization (3 of 3)
● Critics of free trade and globalization say: (cont)
• Human rights activists argue that World Bank
and International Monetary Fund support
governments that
• Allow sweatshops
• Pursue policies that bail out government officials at
expense of local economies
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