Download International Trade Agreements

International Trade Agreements
Spring Semester 2013 – January 16 to May 10, 2013
Globalization, Trade and the Middle Class
The global economy has grown to rely heavily on middle class consumption. Thanks to a long term downwards
trend in personal savings rates from 10 percent in the early 1980s to approximately zero by 2007, the growth of
U.S. consumption has been faster than the growth of U.S.GDP, making it a driver of both the U.S. and global
economies. At $10 trillion, U.S. private consumption accounts for just under one-fifth of the world economy. In
fact, as a source of demand, it is twice the size of the next largest entire economy – Japan – in the world.
The structural force behind large world-wide consumption has been a significant middle class. The middle class is
an ambiguous social classification, broadly reflecting the ability to lead a comfortable life. The middle class usually
enjoy stable housing, healthcare, educational opportunities (including college) for their children, reasonable
retirement and job security, and discretionary income that can be spent on vacation and leisure pursuits. Juliet
Schor has argued that it is a “new consumerism” that defines the middle-class: a constant “upscaling of lifestyle
norms; the pervasiveness of conspicuous, status goods and of competition for acquiring them; and the growing
disconnect between consumer desires and incomes.” In a more academic vein, Murphy, Shleifer and Vishny
emphasize the willingness of the middle class consumer to pay a little extra for quality as a force that feeds
investment in production and marketing and drives growth.
All eyes are now turning to Asia, and specifically to the emerging middle class in China and other populous
countries, to become the next global consumers. Within Asia there is significant talk of rebalancing towards
domestic demand (more specifically domestic consumption) as a way of sustaining growth in the face of
potentially sluggish exports. But the policy prescriptions to achieve such a rebalancing are not easy. They
involve the creation of a social safety net, medical insurance schemes, and better public education services.
Taken from: Growing Middle Class, Brookings Institution, 2006
Definitions and importance of the world´s middle class
Taking an absolute approach, we define the global middle class as those households with daily expenditures
between $10 and $100 per person in purchasing power parity terms. over the coming twenty years the world
evolves from being mostly poor to mostly middle class. 2022 marks the first year more people in the world are
middle class than poor. By 2030, 5 billion people – nearly two thirds of global population – could be middle class.
Taken from: Growing Middle
Class, Brookings Institution,
2006
In the coming 20
years world trade will
suffer a profound
transformation as the
middle class
increases in Asian
countries and other
emerging economies.
What should then be
the strategy for a
company in Mexico
wishing to globalize
itself?
Taken from: Growing Middle Class, Brookings Institution, 2006
As a future International Business Executive
what will the market/product of your company
be in 2020?
Which do you think it is today?
But consumption is not the whole story.
Outsourcing and production linkages are also part
of the new story of the 21st century
Boeing and the 787
Whom do they sell airplanes to?
How do they produce their planes (50 suppliers world-wide (Why?))
Globalization, outsourcing
and trade effects in the
production of a hard disk
Globalized production strategies by many
multinational companies makes it difficult to:
a) know what the final effect of an individual
country´s demand reduction for its goods
will be, and
b) to define the “origin” of a final consumer
good produced through such an outsourcing
process.
Some numbers exemplify this:
a) Trade on final consumer goods
represents less than 27 % of the total
value traded in goods and merchandises
in the world.
b) Trade on intermediate inputs represents
50% of total value traded in the world.
c) Trade on capital goods attained 20% of
total value traded, and agricultural goods
represented just 3% of the world´s total
value of goods and merchandise traded
in the world.
Hence, when an important country such as
the US suffers a negative economic shock,
there will be a chain reaction which will
reduce international trade by a larger amount
than the one that would occur if production
where not as fragmented as it is today.
“made in Thailand?”
“consumed in the US?”