Download Kreinin's Chapter 9: International Mobility of Productive

INTERNATIONAL
ECONOMICS, ECO 486
• NAFTA
• Int’l
Factor
Mobility
– DFI
– Migration
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2
Learning Objectives
• Discuss Chapter 10 & Chapter 10 Homework
• Review the NAFTA Report
• Review Chapter 9, International Mobility of
Productive Factors, from Kreinin’s International
Economics
• Explain the effects of immigration on the wages of
immigrants and native Americans
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Aggregate Effects of NAFTA
• NAFTA took effect January 1, 1994
– After three year, most tariff provisions in place
– Reductions in NTBs continue
– Most “rulemaking” obligations are in force
• ITC found no effects on
– US GDP
– US growth rates
• limited time period
• relative size of US economy
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Aggregate Effects of NAFTA
• US Imports from Mexico have increased
+1% in 1994
+5.7% in 1995
+6.4% in 1996
• US Exports to Mexico have increased
+1.3% in 1994
+3.8% in 1995
+3.24% in 1996
• No significant effects on trade with Canada
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Industry trade
• Studied 200 industries accounting for >85%
of US trade with its NAFTA partners
• Several industries show increased trade
• A few industries show decreased trade
• See Table ES-2
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Table ES-2: Industry trade
Number of
Industries
US Exports
-- Mexico
US Imports
-- Mexico
US Exports
-- Canada
US Imports
-- Canada
Sig.
Sig.
Increase Decrease
10
0
Not Sig.
Affected
78
16
7
92
10
8
95
13
8
94
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Labor
• No effects on agg. employment or earnings
• 29 of 120 manufacturing industries showed
some change in hourly earnings or hours
worked.
– Found seven industries where lower import
prices may cause job losses
– Found four industries where lower import
prices may increase US employment
• complements or productivity effects
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Productivity
• Lacked data for direct analysis
• US productivity gains
– Where strong competition from imports
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Qualitative Analysis
• For 59 of 68
industry sectors,
NAFTA had a
negligible effect
• Nine exceptions:
– grain and oilseed
– raw cotton
– textile mill products
–
–
–
–
–
–
apparel
women’s footwear
appliances
vehicles
vehicle parts
leather
• Services -- only
financial services
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Scope of DFI
• DFI -- Direct Foreign Investment
– investments that give company headquarters
control over the foreign subsidiary
• MNC -- Multi-National Corporations
–
–
–
–
40,000 parent firms
250,000 foreign affiliates
Global sales = $5.2 trillion in 1992
Stock of DFI = $2.6 trillion 1995
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Motives for DFI
• Profit expectations (Profit = Revenue -Costs)
• Revenue
– DFI may improve access to foreign markets
– Differing growth rates
• Rapid US growth ‘83-’89 attracted DFI
– Marketing considerations
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Motives for DFI
• Cost reduction through DFI
– Obtain raw materials
• unavailable or expensive at home
• complementary to home resources
• may raise productivity of home’s K & L
– Lower labor costs
– Lower transportation costs
• perishable products &
• products with low value to weight ratio
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Motives for DFI
• Cost reduction through DFI
– Special tax treatment
• US foreign tax credit
• Transfer pricing to avoid taxes
– Avoid tariffs and NTBs
– When a large company moves abroad, its
suppliers may follow
– US anti-trust laws may block a merger at home,
encouraging merger with foreign companies
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Does DFI Substitute for Trade?
• 1996 WTO report found no support for a
negative relationship between a country’s
DFI and its exports
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DFI and World Welfare
• Free movement of resources benefits the
world economy
• DFI (K) is attracted by higher profits
– K flows from where it is abundant to where it is
scarce
– MPPK in source < MPPK host country
– Flows cease once returns are equalized
– World output increases
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Host Country’s Welfare
• New capital boosts output
• DFI brings other benefits
–
–
–
–
Managerial skill
Technology
Often trains its labor force
Income, savings, and growth rate increase
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Host Countries Resent DFI
• Monopolistic exploitation of natural
resources
– exaggerated fears, but a possibility
– producing countries could form a cartel
• Most desirable jobs remain in source
country (myth?)
• Resentment has led to restrictions
– performance standards
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Source Country’s Welfare
• Excessive DFI harms the source country
(US)
– Returns to capital increase, but
– Firms may ignore important risks
• e.g., confiscation
– Revenue loss to US government
– Productivity in US of labor & land may suffer
– Offset: DFI in extractive industries
complements US factors
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Conclusion
• Unobstructed international capital
flows enhance world welfare
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Combining Traditional Trade
Theories & MNCs
• Traditional Trade Theories
– assume factors are immobile
• Commodity Composition of Trade
– Can it still be explained?
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Combining Traditional Trade
Theories & MNCs
• Assume a MNC employs four factors
– two immobile (skilled & unskilled labor)
– two mobile (capital& knowledge)
• Returns to mobile factors equalized
• Immobile factors
– Abundance varies across countries
– Intensity varies across industries
• Labor skills more important than K/L ratio
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Combining Traditional Trade
Theories & MNCs
• Predictions:
– Mobile factors attracted to countries with better
infrastructure
– Transport costs and trade barriers induce the
MNC to locate near its markets
– IRS limit number of production facilities
– Large markets confer a CA on home producers
in industries with IRS
• Familiar results
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International Migration of Labor
• Consequences parallel those of capital flows
• Loss to source country is less than gain to
host country
• Labor in the host country loses, but labor in
the source country gains
• “Brain drain”
– Compensation?
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Immigration
• Sixty million people have migrated from
their country of birth
– 1.2% of world’s current population
• Almost 1/3 of them now live in the US
– ~800,000 legal immigrants per year recently
– Significant portion of US population growth
Immigration
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US Immigration
• Once mainly European
– Directly
– Indirectly
• Mexico
– > ¼ of legal immigrants
– + 200,000 to 300,000 others
Immigration
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Immigration
• Scale, Origin, and Skills of U.S. Immigrants
– The skills of immigrants vary considerably
– On average, immigrants are less productive
than native Americans
– During the 1960’s, new immigrants earned 17%
less than comparable Americans — 1970’s –
28% less — 1980’s – 32% less
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Immigration
• Immigrants and the Labor Market
– Immigration increases the supply of labor
• Lowers the wage rates of (low-skilled) US workers
– Decreases the supply of labor in the source
country
• This raises their country’s wage rates
• Let’s see what would happen with free
movement of immigrants
Wage rate (dollars per hour)
Wage rate (dollars per hour)
Factor Price Equalization
25
20
15
25
20
15
10
10
8
8
5
5
LDUS
0
75 100 125 150 175
Quantity of labor (millions)
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LDM
1
0 25 50 75 100 125
Quantity of labor (millions)
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…Doesn’t Necessarily Occur
• Actual effects appear to be small
– Restrictions slow immigration
– Immigration also increases the demand for
labor
• Immigrants purchase goods & services
• Substitute for native low-skill labor
• Complement capital & high-skilled labor
– Indeterminate result
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Immigration
• How Do New Immigrants Perform in the
United States?
– As a rule, immigrants’ earnings grow more
rapidly than the earnings of native Americans.
– However, they still do not catch up.
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Immigration
• Immigrants and the Government Budget
– In 1970, 6% of all native households and 5.9%
of immigrant households received some form
of welfare
– By 1990, the percentages were 7.4% for native
households and 9.1% for immigrant households
– Rate of return on social security contributions
higher for immigrants
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Multi-National Corporations
True or False?
• Globalization made MNCs more
“footloose” than ever.
• Partly true
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Multi-National Corporations
True or False?
• MNCs are, first and foremost, creatures of
their home countries.
• Not always
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Multi-National Corporations
True or False?
• All MNCs are large corporations.
• False
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Multi-National Corporations
True or False?
• Markets dominated by MNCs are
impenetrable to rival companies.
• False
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Multi-National Corporations
True or False?
• Only some industries are going global.
• False
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Multi-National Corporations
True or False?
• MNCs are bigger than their assets.
• True
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Multi-National Corporations
True or False?
• MNCs are inherently exploitative.
• Yes and no…
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Multi-National Corporations
True or False?
• Investments by MNCs are good,
investments by international money
managers are bad.
• Not necessarily
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Multi-National Corporations
True or False?
• MNCs are creations of wealthy countries.
• Not anymore
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WTO News Items
• “Millennium Round” Agenda?
• NTBs (e.g. apples)
• Activists concerned about
– Environment
– Workers’ rights
– Human rights
• Comments
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WTO Enforcement Actions
• Over 100
• Only three involve environmental issues
– Tuna
– Turtles
– What was the third?
• Environmental restrictions were discriminatory
– Revised to be non-discriminatory
• Greens concerned about NTBs
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Tony Auth, NY Times editorial cartoon, December 2, 1999
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Arizona Republic, Sunday editorial cartoon, December 1995
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