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Chapter 21: The Global Economy DFI or FDI: Direct Foreign Investment • The purchase of US businesses, stock and real estate by foreigners • Political stability and strict US laws regarding intellectual property ownership (patent law) make the US the most popular country for DFI. Two boys walk past a billboard in Shanghai, China Why is FDI important for American Economic prosperity? • 40% of US government securities and about 6% of US industries are foreign owned. • This frees up US capital for immediate other uses. • When other countries put their money in to buy US debt, they are expecting to gain from interest payments. Example: Canadian FDI shows US strength Global FDI inflows, top 20 economies, 2006, 2007(Billions of US) Global FDI outflows: top 20 economies Projected FDI inflows Economic Imperialism? • Because the US invests in more foreign economies than any other country, we have been called economic imperialists. • Some fear US culture and materialism is seeping into other parts of the world as a result of economic ties. MULTINATIONALS • Firms that do business and have branches in many countries. Is globalization a threat or opportunity? U.S. Global Trade • 3rd largest exporter of goods. Software, medical supplies and chemicals are examples of US products in demand worldwide • #1 exporter of services including education, financial, and medical. How do countries regulate global trade? Barriers and Trade Agreements Trade Barriers • Tariffs: tax on imported goods. • Quotas: limit amount of good to be imported. • Economic Sanctions: punishment for political actions (i.e. embargo on Cuba) • Health and safety regulations. Free Trade Movement • WTO 1995 (World Trade Organization) founded to promote free trade world wide. • EU (1993): Largest trading block in the world. European Union countries eliminated tariffs on each other, adopted a single currency. • NAFTA (1993) North American Free Trade Agreement linking Mexico, U.S. and Canada) • CAFTA (2005) Central America and U.S. Protectionism vs. Free Trade • Protectionists say jobs, infant industries, and national security at risk without trade barriers. • Free trade proponents say specialization and global competition results in higher standard of living and increased cooperation worldwide. Trade Deficit Trade Deficit as % of GDP • Shows decline but still historically high Does globalization lead to unfair labor practices in developing nations? Sweatshops • Officials raided two factories in Long Island NY (2008) they manufactured clothing for Banana Republic, Coldwater Creek, Express, Gap, the Limited, Macy’s, and Victoria’s Secret. • Workers earned $250 per week for 66 hours.