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Globalization The Debate over Globalization: by David Hummels, Purdue University Focus Globalization NCEE 1 What is Globalization? Telephone call centers in India providing service to American customers who bought Japanese electronics while vacationing in France 2 What is Globalization? Giant Multinational firms with operations in every time zone 3 What is Globalization? Fleets of container ships moving trillions of dollars worth of goods across the oceans 4 Or is Globalization… Erosion of labor and environmental standards Loss of sovereignty to international institutions not accountable to citizens of any nation 5 Generally, globalization refers to increases in the degree of integration between national economies. 6 Integration encompasses all of the ways national economies are connected in international markets 7 Integration Trade in goods, services, and ideas International movements of factors of production Coordination of public policies 8 US Trade in Goods & Services Exports – 1960-2003 increase by 800%* Imports – 1960-2003 increase by 1300%* (w/ inflation adjustment) 9 Part of this growth (1960-2003) simply reflects the growth in the US economy which expanded by 400% 10 International trade grew faster than the national economy. 11 US Trade in Goods & Services Imports grew from 4.2% to 13.8% of the economy Exports increased from 4.9%-9.3% 12 Despite this growth, the US is far less dependant on trade than most other nations… 2003 – France exported 25% of its national output – Canada exported 40% of its national output – Belgium exported 80% of its national output 13 Although US exports have grown since 1960, they are comparable today to what they were in 1880, and actually less than they were after WWI 14 Another trend in international trade is that a growing share of trade is done between countries that are nearby neighbors. Canada & Mexico are US’s greatest trading partners. 15 International Mobility of Labor and Capital Another way national economies are integrated in the international marketplaces is by movements of factors of production Both labor and capital can cross national borders 16 International Mobility of Labor and Capital United States is and continues to be a nation of immigrants Migration is still important today 2001: 31.8 million migrants in the US including 20 million in the work force. 17 International Mobility of Labor and Capital Migrants represent: –13.9% of the labor force –11% of the population Both percentages are twice as high as they were in the 60’s & 70’s 18 International Mobility of Labor and Capital Capital is the other mobile factor of production. There are many ways to invest capital in a foreign country. 19 International Mobility of Labor and Capital Private Investors can: – Buy government or corporate bonds to earn interest – Buy shares in foreign stock markets Private Firms engage in FDI: (Foreign Direct Investment) by building or purchasing affiliate operations in other countries (FDI company controls the affiliate operation). 20 International Mobility of Labor and Capital 2003 – US agents* owned $7.8 trillion of foreign financial assets – Foreign agents owned $10.5 trillion dollars of US financial assets 3.4 trillion of US corporate bonds 2.4 trillion in foreign direct investment 1.7 trillion in government bonds *Individual citizens, banks, or corporations & gov’t agencies 21 International Mobility of Labor and Capital A sizable fraction of the total US capital stock is owned by foreign citizens 22 Integration: Old and New Migration and merchandise trade has gone on for thousands of years The level of US trade today is roughly comparable in size to trade a century ago, Migrants are a considerably small portion of the labor force than they were 150 years ago. 23 Integration: Old and New So why do many observers claim that we are experiencing an unprecedented era of globalization? 24 Integration: Old and New So, What’s New? The kinds of things being traded are very different from what was traded in earlier eras. The ways countries are integrated now go far beyond the simple trading of goods. 25 Integration: Old and New So, What’s New? 1800’s bulk commodities – Coal, wheat, cotton, and iron ore – Some very simple manufactured products Today manufactured products & services – Still some bulk: coal wheat cotton & iron ore – And much, much more! 26 Integration: Old and New So, What’s New? Laptop Coal – No natural deposits – Mine – Value comes from – Buy technology – Use (heat) – Technology can be reused – Transaction done – Increasingly rare to find a purely American or Japanese computer 27 Integration: Old and New Multinational Corporations MNC When goods and Ideas are produced in many different countries 28 Multinational Corporations & Foreign Direct Investment MNCs & FDIs have skyrocketed in recent decades Currently over 60,000 multinational corporations direct nearly one million affiliates. 2003 investments = $8.2 trillion 29 Multinational Corporations & Foreign Direct Investment Because production and trade have become more complex, international treaties governing trade have also become more complex. 30 Multinational Corporations & Foreign Direct Investment International agreements must now be negotiated and ratified dealing with protection of intellectual property, regulation of foreign investment and monopoly power, and mobility of highly skilled scientists and other workers. 31 Multinational Corporations & Foreign Direct Investment These issues are highly controversial and difficult to negotiate. 32 Why Do Countries Trade? 33 Because nations specialize. They produce more of some goods than they consume, but produce less than they consume of many other goods. 34 Why do countries specialize in producing some goods or services, but not others? 35 1. Arbitrage 2. Absolute Advantage 3. Comparative Advantage 36 Arbitrage “Buying low and selling high” 37 Shirts made in Mexico vs. US $10 vs. $15 Smart entrepreneur(s) uses arbitrage to buy shirts in Mexico and sell in US Import/Export Shirt production increases in Mexico 38 Shirt production in Mexico must increase to meet the higher demand, while shirt production in the US will fall. 39 45 40 35 30 25 20 15 10 5 0 $10 $15 Supply $20 $25 Demand 40 Arbitrage causes the price of goods to converge and eventually equalize on both sides of the border. 41 How does the US pay for the imported shirts? Are Mexico & the US better or worse off as a result of the trade? Why are the costs of production different in the United States and Mexico? 42 To answer these questions we must understand Absolute and Comparative advantage. 43 Absolute advantage is the ability to make a good or service with fewer inputs than another individual, company or county would use to produce it. 44 Comparative advantage is the ability to make a good or service at a lower opportunity cost * than someone else. *Opportunity Cost is what you gave up when making a choice. 45 The Gains from Trade Arbitrage and trade opportunities do not depend on absolute advantage, but only on comparative advantage. 46 Sources of Comparative Advantage 1. Differences in endowments of natural resources are important in some industries. – Agricultural productivity: climate and soil – Energy productivity: crude oil, rivers, wind 47 Sources of Comparative Advantage 2. Government services and regulations also play a role in shaping productivity. – School quality & subject emphasis depending on gov’t standards – Gov’t regulations of factory emissions: pollution vs. clean industries 48 Sources of Comparative Advantage 3. Probably most important, the source of comparative advantage and production differences results from decisions by firms to invest in technology. – US strong Comparative Advantage especially in airplane manufacturing and pharmaceuticals because these US firms have spent billions in research and development 49 Sources of Comparative Advantage 4. The sources of comparative advantage are the differences in the supply of key inputs. – Land for agriculture – Usually need multiple inputs: natural resources, skilled labor, capital, energy, and material supplies. 50 Sources of Comparative Advantage Example: Producing aluminum uses electricity intensively, which is why Canada, with relatively abundant supplies of low-cost hydroelectric energy, has a comparative advantage in aluminum production. 51 Sources of Comparative Advantage Example: Textiles and apparel use unskilled labor intensively, so China, with an abundant supply of unskilled labor, has a comparative advantage in textile and apparel production. 52 Sources of Comparative Advantage Example: Automobiles use capital intensively, and so Japan, with relatively abundant supplies of capital (reflecting its high national savings rate), has a comparative advantage in automobile production. 53 Other Reasons for Trade Trade between similar countries (NorthNorth; Northern hemisphere’s rich countries) Differentiated Products such as in cars; consumers prefer different features in vehicles often produced in other countries. Other Reasons for Trade Increases Product diversity in styling and other characteristics Greater degree of world wide convergence in consumer culture. Other Reasons for Trade Possible negatives: – Loss of unique national cultures – Large multinational firms driving small local firms out of business Proponents of globalization point out that no one forces consumers to eat at McDonalds, drink French wine, or play Nintendo. Increasingly, firms that produce differentiated goods are moving production facilities closer to their final consumers in different countries. They are becoming multinational firms. Toyota & Honda are good examples of companies that built factories in the 80’s. Surge of Japanese auto exports to the US in the 80’s displaced sales by US automobile firms. Created a backlash that eventually led to quotas or limits on the number of Japanese cars that could be sold in the US Moved production to US – Allowed these firms to avoid trade restrictions. – Eliminated the cost of shipping. – Customized products to meet specific demands of consumers. Reasons for Trade: Comparative Advantage – Trade is driven entirely by cost differences – The low-cost supplier will be the exporter Differentiated Products – Cost is still an issue – Consumers may be willing to pay more for a higher priced product if it has the characteristics they prefer. Trade Policy 62 Most economist view free trade as a desirable policy. 63 Despite this consensus among economists; however, governments routinely interfere with international trade by imposing a variety of policy restrictions. 64 Tariffs and Trade Barriers Tariff: sales tax on imported goods Average US tariff=5% 65 Loss from Trade in Factor Markets When countries specialize and trade, Efficient sectors expand production and export goods Inefficient sectors decline and are replaced 66 Loss from Trade in Factor Markets When countries specialize and trade, Efficient sectors expand production and export goods Inefficient sectors decline and are replaced 67 There is no question that specialization and trade causes some redirection of resources in the economy. Indeed, there can be no gains from trade without eliminating inefficient firms. What are the consequences of this dislocation for workers at inefficient firms in the short and long run? 68 Generally, studies show that workers suffer greater earnings losses from displacement when they have been employed at the same firm for a long time and are unable to find work in the same sector of employment. 69 Workers displaced because of import competition experience more difficulty in becoming re-employed mainly because of the characteristics of the workers themselves. Location-EducationOthers willing to do the job for less 70 Trade and International Institutions All governments face a tug-of-war between economic self-interests and free trade policies. Free trade is viewed as the best economic policy for a country as a whole. But, there is pressure to create trade barriers to protect domestic producers and workers. Recognizing this, most nations in the world have now joined international institutions or signed international agreements that limit how much they can impede trade. WTO NAFTA WTO NAFTA And that takes us to Seattle in 1999…