1. The Debate over Globalization:
by David Hummels,
Purdue University
Focus Globalization
NCEE

2. What is Globalization?
Telephone call centers in India providing service to American customers who bought Japanese electronics while vacationing in France

3. Giant Multinational firms with operations in every time zone
What is Globalization?
Giant Multinational firms with operations in every time zone

4. What is Globalization?
Fleets of container ships moving trillions of dollars worth of goods across the oceans

5. Or is Globalization… Erosion of labor and environmental standards
Loss of sovereignty to international institutions not accountable to citizens of any nation

6. Generally, globalization refers to increases in the degree of integration between national economies.

7. Integration encompasses all of the ways national economies are connected in international markets

8. Integration Trade in goods, services, and ideas
International movements of factors of production
Coordination of public policies

9. US Trade in Goods & Services
Exports
increase by 800%*
Imports
increase by 1300%*
(w/ inflation adjustment)

10. Part of this growth (1960-2003) simply reflects the growth in the US economy which expanded by 400%

11. International trade grew faster than the national economy.

12. US Trade in Goods & Services
Imports grew from 4.2% to 13.8% of the economy
Exports increased from 4.9%-9.3%

13. 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

14. 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

15. 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.

16. 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

17. 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.

18. 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

19. 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.

20. 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

21. 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

22. International Mobility of Labor and Capital
A sizable fraction
of the total US capital stock
is owned by foreign citizens

23. 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.

24. Integration: Old and New
So why do many observers claim
that we are experiencing an
unprecedented era of globalization? 24

25. 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.

26. 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!

27. Integration: Old and New So, What’s New?
Laptop
No natural deposits
Value comes from technology
Technology can be reused
Increasingly rare to find a purely American or Japanese computer
Coal
Mine
Buy
Use (heat)
Transaction done

28. Integration: Old and New Multinational Corporations
MNC
When goods and Ideas are produced in many different countries

29. 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

30. Multinational Corporations & Foreign Direct Investment
Because production and trade have become more complex, international treaties governing trade have also become more complex.

31. 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.

32. Multinational Corporations & Foreign Direct Investment
These issues are highly controversial and difficult to negotiate. 32

33. Why Do Countries Trade?

34. Because nations specialize
Because nations specialize. They produce more of some goods than they consume, but produce less than they consume of many other goods.

35. Why do countries specialize in producing some goods or services, but not others?

36. 1. Arbitrage 2. Absolute Advantage 3. Comparative Advantage

37. Arbitrage
“Buying low
and
selling high”

38. Shirts made in Mexico vs. US
Smart entrepreneur(s) uses arbitrage to buy shirts in Mexico and sell in US
Import/Export
Shirt production increases in Mexico

39. Shirt production in Mexico must increase to meet the higher demand, while shirt production in the US will fall.

41. Arbitrage causes the price of goods to converge and eventually equalize on both sides of the border.

42. How does the US pay for the imported shirts
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?

43. To answer these questions we must understand Absolute and Comparative advantage.

44. 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.

45. 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.

46. The Gains from Trade
Arbitrage and trade opportunities do not depend on absolute advantage, but only on comparative advantage.

47. Sources of Comparative Advantage
Differences in endowments of natural resources are important in some industries.
Agricultural productivity: climate and soil
Energy productivity: crude oil, rivers, wind

48. Sources of Comparative Advantage
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

49. Sources of Comparative Advantage
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

50. Sources of Comparative Advantage
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.

51. 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.

52. 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.

53. 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.

54. Other Reasons for Trade
Trade between similar countries (North-North; Northern hemisphere’s rich countries)
Differentiated Products such as in cars; consumers prefer different features in vehicles often produced in other countries.

55. Other Reasons for Trade
Increases Product diversity in styling and other characteristics
Greater degree of world wide convergence in consumer culture.

56. Other Reasons for Trade
Possible negatives:
Loss of unique national cultures
Large multinational firms driving small local firms out of business

57. Proponents of globalization point out that no one forces consumers to eat at McDonalds, drink French wine, or play Nintendo.

58. Increasingly, firms that produce differentiated goods are moving production facilities closer to their final consumers in different countries. They are becoming multinational firms.

59. Toyota & Honda are good examples of companies that built factories in the 80’s.

60. 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.

61. Reasons for Trade: Comparative Advantage Differentiated Products
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.

62. Trade Policy

63. Most economist view free trade as a desirable policy.

64. Despite this consensus among economists; however, governments routinely interfere with international trade by imposing a variety of policy restrictions.

65. Tariffs and Trade Barriers Tariff: sales tax on imported goods Average US tariff=5%

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. 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

68. 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

69. 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

70. Others willing to do the job for less
Workers displaced because of import competition experience more difficulty in becoming re-employed mainly because of the characteristics of the workers themselves.
Location-Education-
Others willing to do the job for less 70

71. Trade and International Institutions
All governments face a tug-of-war between economic self-interests and free trade policies.

72. 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.

73. 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

74. WTO NAFTA And that takes us to Seattle in 1999…