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Economic Globalization
Sociology 2, Class 8
Copyright © 2010 by Evan Schofer
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permission
Announcements
• Announcements
• Midterm is approaching… less than 2 weeks
• Midterm review sheet handed out now
• Next week: review In section… and maybe a little on
Thursday Feb 4
• Agenda
– Today: More on economic globalization
• Trade and trade agreements
• Next week: governance…
Midterm Info
• Topic coverage:
– All class lecture material
• Lecture notes on course website
– All readings up through Week 5
– Commanding Heights video, Episodes 1 & 3
• Available via course web page…
– Exam Format:
• Closed book / closed notes
• Mix of short answer/multiple choice, medium length,
and perhaps one short essay question.
Review: Currency Values
• Currency values are affected by:
• 1. Asymmetric trade flows
• Currency drops when a country imports more than it
exports
• 2. Asymmetric capital flows
• Currency drops when money flows OUT of a country
• Reasons:
– Fear of political instability
– Fear of economic instability
– A government enacts policies that investors don’t like
» Tax increases, interest rates low compared to others
» Essentially, most Keynesian policies…
• 3. Strategic manipulation of currencies
• But, it takes a lot of money to do this…
Review: Asian Financial Crisis
• How did capital flows harm Asian economies?
– 1. Investors pulled out quickly, affecting currencies
• Currency values dropped… and so:
• Imports became expensive
• Companies couldn’t pay off loans to foreign banks
– Bankruptcies, unemployment…
– 2. Contagion
• Worries about Thailand spread to other Asian countries
– Self-fulfilling prophecy: fear of problems caused investors to pull
out, creating real problems
• Also, many US companies were invested in Asia (or had
made loans)… Now they were losing money
– Integrated economies mean that crises tend to spread…
Participation in Globalization
• Question: Given the dangers, why do some
countries want to participate in globalization?
• What are the benefits? And for whom?
• International trade and capital flows can
increase economic growth
• Corporations often stand to benefit most... So
business elites tend to support globalization
• BUT, other groups in society may also benefit
– Investment can create new jobs, employment
– Consumers can have access to wider array of goods,
cheaper goods.
Benefits of Trade / Investment
• Without trade, every country must produce
all kinds of goods – cars, coffee, computers,
etc.
• Issue: Countries vary in their ability to
produce goods efficiently
• Example: Coffee can be grown in America, but not
very efficiently due to climate
• Example: Computers can be built in Indonesia, but
not very efficiently due to lack of technology,
infrastructure
• Result: Without trade, production is less efficient.
Benefits of Trade / Investment
• Economists Adam Smith and David
Ricardo argued:
• Trade allows nations to specialize in what they do
best… their comparative advantage…
– See Stiglitz Ch 3, p. 66-67
– Countries can focus on things they produce
efficiently
• And, trade for things they don’t produce efficiently
– Result: Greater efficiency & economic growth
• This can produce a win/win situation, where both
countries are better off
– Not counting environmental consequences, etc
– Recall: the straightjacket is “golden”…
Benefits of Trade / Investment
• Also, economists predict that foreign capital
will benefit economic growth
– Recall: Investment is a major ingredient in longterm economic growth
• Allowing foreigners to invest in a country results in
more overall investment
• Example: If Sony builds a TV factory in a country, the
economy will grow
– And, intangible capital flows can have benefits
• Example: Foreign banks may lend money at low rates
– Access to capital allows domestic companies to invest
• Lower rates and investment help economic growth.
Benefits of Trade / Investment
• Many people – including sociologists – have
criticized the Smith/Ricardo model of trade
• We’ll explore that later: “World-system theory”
• Critics have shown lots of bad side-effects from
globalization:
– Increasing inequality, crises, environmental problems, etc…
– BUT, research evidence doesn’t typically find
disastrous economic effects of trade/investment
• Extreme fears about the dangers of globalization do not
seem warranted…
Krugman: Myths About Trade
• A response to “pop-internationalists”
• Alarmist warnings about globalization
• 1. “We need a new paradigm”… everything is
different now
– Response: NO, globalization doesn’t radically
change how economies operate…
– Ex: Trade has similar effects to new technologies
• That cheaply convert raw materials to manufactured
goods…
• Effects on jobs are similar.
Krugman: Myths About Trade
• 2. Countries are in competition, just like
businesses…
– NO: trade can be “mutually beneficial” – win/win
• Of course, Krugman does point out cases where things
don’t work out that way
– Ex: Article on China, currency values, and jobs in US
• But: Overall image that we are in “competition” with
China or Japan is not accurate.
Krugman: Myths About Trade
• 3. We need to compete to have “high
productivity” workers
• Response: Increases in productivity are great for an
economy
• But, globalization doesn’t make productivity any more
important…
• We need to compete in “high value” sectors
• Ex: We need to have “high tech” industries
• Response: Efficient production will be profitable,
regardless of the industry.
Krugman: Myths About Trade
• 5. Obsession with “jobs”…
• Discussions about NAFTA or trade with China always
emphasize jobs…
– Krugman: Trade tends to have only modest
effects on jobs
• Lots of other things have much bigger impact compared
to trade…
• Exception (discussed in his later work): Trade between
high wage and low wage countries does tend to
depress wages of low-skill workers.
Krugman: Myths About Trade
• 6. We need a “new partnership”… the
government needs to help industries compete
• Again, imagery of competition is unfounded
• A bigger concern is competition within US industries…
why help some rather than others?
– That is “zero sum”.
Benefits of Trade / Investment
• Who benefits from global trade/investment?
– 1. Many benefit from greater economic growth
• The wealthy usually benefit a great deal…
– 2. Consumers benefit from cheap imports
– 3. Multi-national corporations, because they can
move operations to wherever is cheapest
– 4. Highly competitive export-oriented companies
benefit from access to new markets
– And, workers in those industries tend to benefit
– 5. Investors can invest where profits are big
• Ex: CalPERS, LTCM.
Problems of Trade / Investment
• Who might oppose global trade & investment?
– 1. Corporations in industries that will face greater
international competition
• Example: steel & auto industries in the US
– 2. Workers in industries that will face competition
• And labor unions more generally…
– 3. People & governments concerned about:
• Potential for economic crises
• Loss of state autonomy
– Pressure to please foreign capital; loss of domestic ownership
• Difficulty regulating global capitalism
– Environmental problems, sweatshops, etc.
Barriers to Trade / Investment
• Definition: Protectionism = blocking foreign
imports or capital flows
• Opposite: “Liberalization” or “opening up markets”
• Note: different from typical use of “liberal” in US
• Reasons to pursue protectionism:
– 1. Protect domestic companies or industries
from foreign competition
• Prevent bankruptcies, job loss in inefficient industries
– 2. To reduce risk of financial crises.
– 3. Prevent foreign ownership and/or control of
the companies or the economy
• Example: People get nervous when Chinese
companies buy major US oil or computer companies
Barriers to Trade
• Strategies for protectionism
• 1. Tariffs – taxes on imported goods and
services
• Example: The US government can impose a $2,000
tax on Japanese cars
• Fewer people will buy Japanese cars, imports will
decrease
• 2. Quotas – a government-imposed numeric
limit on imports
• Example: The US may allow only 500,000 Japanese
cars to be imported in any given year.
Barriers to Trade
• Strategies for protectionism (continued)
• 3. “Non-tariff” barriers – A government
regulation that indirectly limits trade or
makes it more expensive
– Example: Strong agricultural subsidies make it
impossible for foreign imports to compete
• NOTE: Subsidies block imports, just like tariffs…
– Example: The US may impose complex
agricultural inspections that delay or discourage
imported fruit
• Could be legitimate, or simply a way of stopping
imports.
Barriers to Investment
• Strategies for protectionism (continued)
• 4. “Foreign ownership” laws – laws that
limit the ability of foreigners to buy companies
• Example: US government could require owners of
corporations to be US citizens
• 5. “Capital controls” – laws designed to
prevent the rapid withdrawal of
capital/investment
• Example: Law requiring invested capital to remain in
the country for one year
– Thus, preventing rapid flows in and out.
Removal of Barriers
• How do trade/capital barriers get removed?
• “Liberalization” or “opening markets”
• Answer: When governments agree to
remove them…
• In direct negotiation with other countries
• Or, via international treaties & organizations
– GATT; NAFTA; WTO.
Removal of Barriers
• Bi-lateral negotiations & treaties:
• When two countries negotiate trade & investment
barriers
• Ex: The US negotiates with China, haggling over
barriers
– “You reduce tariffs on American cars, and we’ll reduce import
quotas on Chinese textiles”
– Note: Barriers can also be raised as coercion
• Example: US threatens to impose quotas on Chinese
steel products, if China doesn’t lower tariff
– China might respond by threatening to raise tariffs on the US
• Escalation of this is called a “trade war.”
Example: Bi-Lateral Trade Negotiations
• South Korea, U.S. May Hold Farm Trade Talks in
March
• SEOUL (Reuters) - The United States and its seventh-largest
trading partner began talks on a free trade agreement in June
2006. It would be the biggest free trade deal for the United
States since the North American Free Trade Agreement was
signed in 1992.
• Agriculture has been one of the toughest sectors to negotiate in
a free trade deal between two countries, especially because of
intense opposition from South Korean farmers to market
liberalization. South Korea's farm ministry repeated Seoul's
position that it would continue to insist on exempting rice under
a bilateral free trade deal. ``Rice should be excluded."
• South Korea and the United States recently failed to resolve the
dispute over U.S. beef imports, which Washington said could
threaten the free trade pact.
– Exceprt: New York Times 2/21/07
Free Trade Agreements
• Multilateral agreements
• When groups of countries negotiate together to
reduce barriers
• Ex: NAFTA; also negotiations under GATT, WTO
• Quick review of NAFTA consequences:
– Schaeffer, p. 242; also Stiglitz Ch 3
– US:
• Slight increase in exports; 90-160,000 added jobs;
• 140,000 textile jobs lost to Mexico
– Canada
• Lost 500,000 jobs
– Given the size of Canada, this was huge
• Canada imports heavily from US; currency devalued.
Free Trade Agreements
• Impact of NAFTA (cont’d)
– Mexico
• 600,000 new textile jobs; offset by other job losses
• Imports from US increase
– This was one factor leading up to the crisis in 1994
– Other losers?
• Organized labor (Unions)
– From commanding heights video:
– Other winners?
• Consumers
• Multi-national corporations
• Possible long-term increase in efficiency, growth.
Problems With Trade Agreements
• Rich/powerful countries have numerous
advantages in negotiating trade agreements
– See: Stiglitz, Chapter 3
• Some points to consider:
• 1. Advantages of Rich/powerful countries are
biggest in bi-lateral trade negotiations
• Example: US vs. a small Latin American country
• US can bully, bring great pressure…
• Often, those turn out worse for poor countries than large
multilateral agreements.
Problems With Trade Agreements
• 2. Rich/powerful countries disproportionately
control the agenda of agreements
• “The United States and Europe have perfected the art
of arguing for free trade, while simultaneously working
for trade agreements that protect themselves against
imports from developing countries.” Stiglitz Ch 3 p. 78.
• Topics addressed by FTAs benefit rich countries
– Ex: focus has been on removing barriers for high-value goods
& investment, not farm products or low-tech stuff
• And, rich countries are savvy at using dispute resolution
procedures
– They have lots of lawyers, using technicalities to block imports.
Problems With Trade Agreements
• 3. Government trade negotiators are often
influenced by powerful groups
• Rather than negotiating for terms that will benefit
everyone in a country, negotiators may cater to big
corporations
• Example: Suppose Guatemala is negotiating over a
tariff that limits big business, but protects jobs?
– Companies may push the government to get rid of the tariff,
even if many workers will be harmed…
Stiglitz: Making Trade Fair
• Stiglitz, Chapter 3: Recommendations
– 1. Developing countries should be treated
differently from wealthy countries
• Previously, most trade agreements focused on equal
treatment, but poor countries can’t really compete…
– 1. A. So, rich countries should simply open their
economies to the poorest countries
– This would have a much bigger effect than providing direct aid
– NOTE: Europe has started moving in this direction
– 1. B. Poor countries should be allowed to use
subsidies to support “infant industries”
• Rich countries have little to lose… but benefits are big.
Stiglitz: Recommendations:
• 2. Rich countries should stop MASSIVE
agricultural subsidies
– Rich countries give huge amounts of money to
(mainly) industrial farms
– Norway: two-thirds of farm income is from subsidies
– EU spends 80 billion US$; US spends
– Consequences:
• Farmers in rich countries can sell food at LOW prices
and still make a profit
– Often below the cost of farmers in poor countries
• Farmers in poor countries can’t compete… go broke.
Stiglitz: Recommendations
• 3. Escalating tariffs should be ended
• Escalating tariffs: taxing manufactured products at
higher rates than raw materials
– Ex: Having no tariffs on raw agricultural goods, but high tariffs
on higher-value processed goods
– No tax on apples; high tax on applesauce
• Issue: This prevents poor countries from industrializing
– They are stuck farming
– While rich countries have cheap source of produce for their
high-value industries.
Stiglitz: Recommendations
• 4. Remove barriers to unskilled services &
migration
• Rich countries have pushed to remove barriers for hightech services (banking, accounting, software)
• Barriers remain in low-skill services
– Example: Shipping/trucking. Foreign companies aren’t
allowed
• This is one area that poor countries could actually
compete…
• Also, allowing more labor flows would provide a huge
benefit to poor countries.
Stiglitz: Recommendations
• 5. Restrict the use of non-tariff barriers
• There are legitimate reasons for having them…
• BUT, more often they are used by rich countries to
protect their own markets
– Despite claims of supporting free trade
• 6. Restrict bi-lateral agreements
• They are rarely advantageous to poor countries
– Due to asymmetry in power between negotiators
• And, they tend to undermine multilateral agreements
Stiglitz: Recommendations
• 7. Reform governance
• Change the rules of organizations like the WTO
• Issues (p. 97):
–
–
–
–
How decisions get made
What gets put on the agenda
How disagreements are resolved
How rules are enforced
• Currently, rules sometimes favor rich countries
• System should be more open/transparent, more
democratic, with better enforcement for small countries.
Globalization: Consequences
• Taking stock… what are the consequences of
economic globalization?
• Overview: Greico and Ikenberry: Economic
Globalization and Political Backlash
•
•
•
•
•
For peace
For the economy
For economic inequality
For governments
For cultures / cultural autonomy.
Globalization: Consequences
• 1. Economic globalization and world peace?
– A. Globalization as a source of peace
• Globalization = interdependence
• Argument: The more interdependent we are, the more
we have to lose by fighting…
• Example: War between the US and China = disastrous
– B. Contrasting view: a source of conflict
• Globalization creates potential for new disagreements
– Ex: over trade, currencies, etc
– C. Globalization is a source of peace, but only for
democracies… which are accountable
• Totalitarian rulers may not be deterred…
Globalization: Consequences
• Economic globalization and national economic
welfare
– 1. Argument: Economic globalization increases
the risk of “external shocks”
• Complexity of global markets creates possibility for
unforeseen disasters
• Interconnectedness of global economy means that
problems in one place may spread across the system
• Example: Crisis in Asia due to rapid capital flows and
“contagion”
• Example: Collapse of LTCM (a Hedge fund) in the US
due to economic crises in Russia and other places.
Globalization: Consequences
• Economic and Economic Independence
– 1. Globalization may worsen inequality
• Trade may reduce demand for low-skilled workers
• Ex: Imports from low-wage countries wiped out
manufacturing jobs in the US.
– 2. The “Golden Straightjacket” (friedman)
• Governments can’t pursue Keynesian policies… for fear
that companies & investors will flee
– 3. The “Race to the Bottom”
• An extension of the prior argument
• Countries may compete to cut social services or
environmental protections to attract foreign companies.
Globalization: Consequences
• Economic and cultural autonomy
– 1. American / Western domination of the global
economy has prompted concerns
• In short: American/global culture may be erasing local
cultures
• We’ll explore this more in future weeks.
Globalization and Governance
• Definitions:
• Governance: Ruling, governing, or
managing
• Sovereignty: Supreme power over a body
politic; freedom from external control
(Webster)
• Related term: autonomy
Globalization and Governance
• Issue #1. Economic globalization poses new
challenges for national governance:
• Due to globalization, it may be harder for states to
control markets, multi-national corporations, etc.
• And, states may be constrained in policy choices
– Ex: The golden straightjacket
• Issues to reflect on: Is state sovereignty in decline?
Is the state becoming irrelevant?
Globalization and Governance
• 2. Economic globalization may shift the
balance of power within countries
• Issue: Will free markets result in the dominance of
conservative parties?
• Or, will globalization eventually spur a strong
response from the left?
– Related issue: Who supports globalization and
who opposes it?
• Will globalization generate strong countermovements?
Globalization and Governance
• 3. In addition to economic globalization,
there has also been globalization of
governance
• International treaties and organizations (e.g. the WTO)
increasingly govern what goes on in the world
• Issue to reflect on: Is this good or bad?
• Some argue that globalized governance is the only
way to control a global economy
• Others fear the concentration of power in global
institutions, and the demise of the nation-state.
• Issue to reflect on: Who should be involved
in global governance?
Globalization and Governance
• 4. In addition to globalization of economy
and governance, there is also globalization of
citizen organizations, protest, and social
movements
• This is often referred to as global civil society
• Questions:
• Does global civil society wield much power?
• Can it counteract the power of global capital?
Key Players in Global Governance