1. Economic Globalization Sociology 2, Class 8 Copyright © 2010 by Evan Schofer Do not copy or distribute without permission

2. 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…

3. 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.

4. 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…

5. 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…

6. 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.

7. 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.

8. 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”…

9. Benefits of Trade / Investment Also, economists predict that foreign capital will benefit economic growth –Recall: Investment is a major ingredient in long- term 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.

10. 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…

11. 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.

12. 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.

13. 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.

14. 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.

15. 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”.

16. 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.

17. 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.

18. 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

19. 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.

20. 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.

21. 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.

22. 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.

23. 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.”

24. 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

25. 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.

26. 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.

27. 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.

28. 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.

29. 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…

30. 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.

31. 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.

32. 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.

33. Stiglitz: Recommendations 4. Remove barriers to unskilled services & migration Rich countries have pushed to remove barriers for high- tech 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.

34. 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

35. 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.

36. 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.

37. 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…

38. 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.

39. 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.

40. 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.

41. Globalization and Governance Definitions: Governance: Ruling, governing, or managing Sovereignty: Supreme power over a body politic; freedom from external control (Webster) Related term: autonomy

42. 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?

43. 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 counter- movements?

44. 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? Citizens? Government leaders? MNCs? Protest groups?

45. 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?

46. Key Players in Global Governance