Globalization David Ricardo ( ) Principle of Comparative Advantage

Globalization Comparative Advantage If nations specialize in those goods and services where they have a comparative advantage, and trade with other nations, then the wealth of all nations increases. The principle of comparative advantage is based upon the relative ratio of production efficiency between nations. Note: Comparative advantage is not the same term as “opportunity costs.” Nations do not trade based upon different opportunity costs, but upon relative ratios of production efficiency.

Because production seems to come from nowhere, comparative advantage seems like magic… But it’s not.

Globalization Comparative Advantage Assumptions No transportation costs. Constant costs across nations. No economies of scale. Complex “calculations” across many countries. Perfect knowledge not possible. Factors of production are mobile. No tariffs or other trade barriers.

Globalization Rules of Trade General Agreement on Tariffs and Trade Plan for economic recovery after World War II. Purpose was to reduce barriers to international trade. Reduction of tariff barriers Quantitative restrictions and subsidies The GATT was an agreement, not an organization. The functions of the GATT have been replaced by the World Trade Organization.

Globalization Rules of Trade World Trade Organization Increase international trade by promoting lower trade barriers. Fundamental principles: 1.A trading system free of discrimination. 2.Few trade barriers (tariffs and non-tariff). 3.Predictable exchange relationships. 4.Promote greater competition. 5.Should be accommodating for less developed countries, giving them more time to adjust, greater flexibility, and more privileges.

Globalization Wallerstein: World Systems Theory Rejects the notion of a “Third World.” There is only one world connected by a complex network of economic exchange relationships. This world-system is characterized by inherent conflict between capital and labor and the endless accumulation of capital by competing agents. The world-system consists of core (wealthy, technologically advanced) countries and host (poor, low technology) countries. The core countries take actions to maintain their relative power position in the world capitalist marketplace.

Globalization Concerns about Globalization 1.Economic Leakage Primary economy Secondary economy Tertiary economy Profit margins move from primary to secondary to tertiary economies. 2.Perpetual Status No subsidies for new industries. 3.Environmental Degradation Equal economic opportunities require equal environmental regulations.

Globalization Brecher and Costello: The Race to the Bottom We all benefit when competition results in lower prices for goods and services. When corporations and governments lower costs by reducing worker benefits, environmental protection, and social welfare contributions, then the results can be malignant. Mass production requires mass consumption. As each workforce, corporation, and country lowers wages, then less money is available for consumption and economies become stagnant, leading to recession.

Globalization Brecher and Costello: The Race to the Bottom "As each country tries to solve its own problems by producing and exporting still more products still more cheaply, the result is a 'downward spiral.'" The "new world economy" has transformed the nature of work for employees of multinational corporations. The power of capital to pick up and leave for lower cost locales undermines the ability of local people to shape their futures through democratic processes. Trade agreements further weaken "local" control, even at the level of the nation state.

Globalization Brecher and Costello: The Race to the Bottom Global corporations have become powerful economic actors. Global corporations have become unaccountable because of a greater concentration of power within fewer and larger corporations. Globalization engenders a destructive global rivalry that might result in global conflict. Globalization and its economic effects are exacerbating racism and extremist nationalism because of the increased level of aggressiveness needed in an increasingly competitive marketplace.

Globalization Brecher and Costello: The Race to the Bottom Globalization is promoting global pillage rather than a global village because the environment is being ignored for the sake of lowering production costs. Globalization has depressed the real earnings of low-wage workers, which has increased gaps between rich and poor. This gap between rich and poor nations is increasing worldwide.

Globalization Research on Globalization The research indicates that the consequences of globalization, overall, are: Higher real incomes for workers. Declines in income inequality within nations. Declines in income gaps between nations. Fewer persons in poverty, worldwide. These effects reflect in part: Technological advances. Educational opportunities. Improvements in transportation and communication.

Globalization Research on Globalization These overall consequences should be examined more carefully: They are influenced strongly by very high rates of advancement in China and India. African nations, particularly in sub-Sahara Africa, lag far behind in development, due in large part to high rates of HIV infections. Developed nations are improving more rapidly than less developed nations (reflecting economic leakage). Income gaps in the U.S. are growing, Mismatches between skills and needs (SF). Race to the bottom (MX).

Globalization Research on Globalization “Perpetual Status” is difficult to assess: The United States has been a world power only since WWII. Germany “took on the burden” of East Germany in the late 20 th century. In the 1980’s, some thought that Japan would be a dominate world power by the turn of the century. The “long run” is a history of the rise and fall of very great, lasting empires.

Globalization Research on Globalization Environmental Degradation: When nations improve economically, they pay more attention to their environment. To advance economically, nations will make sacrifices to their environment. Global warming is man-made? The United States is cleaner now than it was even 50 years ago?