1. Economic Globalization
Sociology 2, Class 6
Copyright © 2014 by Evan Schofer
Do not copy or distribute without permission

2. Announcements
Announcements
None!
Agenda
Today: Economic Globalization

3. States, Markets, Globalization
Since around 1980 governments have shifted
Keynesian / Welfare-state systems  free markets
Why?
Commanding Heights:
Success of Hayek’s ideas; Elections (Reagan/Thatcher)
Reich (Supercapitalism)
New technologies & greater competition
New/smaller companies could compete with the “giants”… challenged old regulations

4. Economic Globalization
Simple definition: When economic activity that was formally local or national scale becomes organized on a global scale
Spanning countries, rather than contained within them
Examples: Globalization of…
Trade / exchange
Production
Corporations
Labor
“Direct” Investment
Capital
I’ll define & discuss each.

5. Globalization: Trade Trade: The exchange of goods & services History:
Historically, trade was local
But, the word has become synonymous with “international trade”, which is global by definition
History:
Global trade was common in the late 19th century
International trade amounted to 8% of GDP by 1913
But, trade collapsed during WWI, Depression, WWII
Since World War II, trade has grown rapidly
Trade surpassed 17% of world GDP in the 1990s
NOTE: trade is concentrated among wealthy nations.

6. Global Trade

7. Trade: manufacturing vs agriculture
Red indicates exports of manufactured goods

8. Globalization of Production
Production: Creating products and services
Example: Building a car
Where do the raw materials come from? Where are parts made? Where is assembly done?
In the past, auto production was primarily local
Ex: raw materials were imported, but rest was local
Now, it is common for auto production to span dozens of nations
Parts made in various places, assembled in various places…
Ex: Toyota’s globalized production system (on next slide).

9. Toyota’s Global Production System

10. Globalization of Production
Global supply chains
A “supply chain” refers to the steps through which raw materials are transformed into components and finally into a final product
Cotton  woven cloth  shirt
Because of decreased transportation costs, “The old [mass] production system could now be fragmented and parceled out around the world to wherever pieces could be done best or most cheaply.”
Reich, ch 3 p 62.

11. Supply Chain: TV

12. Globalization of Production
Reich “Supercapitalism”
With globalization, America began to import much of what it consumes
BUT: Aggregate trade statistics hide the fact that much of the trade occurs WITHIN American companies
Part of supply chains…
Implication: It is an oversimplification to say that foreign companies are ‘outcompeting’ US firms
“Rather than American companies ‘losing their competitiveness’ … America started losing solely American companies.”
The success of American companies no longer implies better wages & conditions for US workers.

13. Globalization of Production
The globalization of production has limitations
Issue: Economies of Agglomeration
Geographical concentrations of knowledge, expertise, and production capacity create big benefits
When you get lots of production concentrated in one place, companies can coordinate better
1. Detroit, Michigan (auto industry), 1950s-1970s
Parts suppliers/factories/skilled workers all plentiful
2. Silicon Valley (computer industry)
Stanford U (engineering expertise), venture capital, factories
3. Shenzen, China (electronics manufacturing)
Engineering expertise, cheap labor, factories

14. Economies of Agglomeration
Why are iphones made in China?
NYT article:
“In part, Asia was attractive because the semiskilled workers there were cheaper. But that wasn’t driving Apple. For technology companies, the cost of labor is minimal compared with the expense of buying parts and managing supply chains that bring together components and services from hundreds of companies. [It] “came down to two things,” said one former high-ranking Apple executive. Factories in Asia “can scale up and down faster and “Asian supply chains have surpassed what’s in the US”
“The entire supply chain is in China now,” said another former high-ranking Apple executive. “You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours.”
“Another critical advantage for Apple was that China provided engineers at a scale the United States could not match. Apple’s executives had estimated that about 8,700 industrial engineers were needed to oversee and guide the 200,000 assembly-line workers eventually involved in manufacturing iPhones. The company’s analysts had forecast it would take as long as nine months to find that many qualified engineers in the United States.” In China, it took 15 days.

15. Foreign Direct Investment (FDI)
Definition: Investing assets from one country into organizations, structures, and equipment in another
Example: building (or buying) a factory in another country
FDI does not include “intangible” investments, such as buying stock or currency in another country
Recall: investment increases economic growth
Countries like to attract FDI…

16. Capital Flows
Capital Flows: Movement of assets (money) across national borders to purchase intangible investments
Also called: Financial flows, globalization of capital markets, capital market integration
Example: Buying stocks & bonds in another country
Example: Buying other currencies for purposes of speculation (i.e., profit)
Unlike FDI, capital investments can move quickly… flowing in and out of countries
Elwood reading: “Pinball capital”
Can precipitate or worsen economic crises

17. Labor (workers) Labor: people who work in the economy
People can move across national borders: Immigration
Historical perspective:
Like trade, immigration was common in the late 19th century, but dropped in the mid 20th century
Due to immigration laws, migration remains constrained
Migrants represent a small fraction of the global population
Moreover, labor flows tend to be regional
Labor is an example of something that isn’t very globalized
Mainly due to laws limiting immigration.

18. Multinational Corporations

19. Corporations Corporations can span national nations…
Called: Multi-national corporations (MNCs); Multi-national Enterprises (MNEs); Trans-national corporations (TNCs)
Firms can vary in extent they are global
Sometimes only 1 or 2 factories overseas
Or, they can be spread literally across the globe
The majority of companies are still local
But, multinationals have grow in number and size
Some dwarf the economic capacity of entire countries…

20. What is most globalized?
Some things are more globalized than others…
How Global?
Extremely
Capital flows
Very
Trade
Moderately
Corporations, FDI, Production
Not so much
Labor (workers)

21. Video: Commanding Heights
Episode 3, chapters 3-6
Time: 3:30 (or 6:15) to 28:00
Basic issues regarding trade, capital flows
Global link:
Local link: Video\PBS.Commanding.Heights.Ep3.The.New.Rules.of.the.Game.DivX6.avi

22. Economic Globalization: Origins
Basic requirements for global economy
1. Inexpensive transportation & communication
2. International financial (money) system
3. Countries that are willing to participate
Absence of legal or regulatory “barriers”
Shift from Keynesian policies  free markets.

23. Transportation
Historically, people only traded lightweight, valuable items… spices, silk, ivory, etc…
Things that could be easily carried long distances
Global economic activity requires cost-effective transportation systems
Otherwise most business activity remains localized
Most changes are pretty obvious: increase in cars, trucks, planes, trains, ships…
But, one change matters more than others: containerized shipping

24. Transportation
Containerized shipping = a huge revolution in global transportation
Started in the 1970’s
Shipping containers: a standard 40ft box
Easy to load and unload onto ships, trains, trucks
Drastically reduced cost of shipping
Huge ships can hold thousands of containers!

25. Containerized Shipping: Pics
Ships can hold hundreds of containers!

26. Containerized Shipping: Pics
Containers allow mechanical loading
Pics: from Maersk Sealand Website

27. Containerized Shipping: Pics
Containers can be transferred to trains, trucks

28. Containerized Shipping
A 40 foot container can hold 10,000 pairs of shoes
Cost to send a 40 foot shipping container with 10,000 pounds of cargo from Shanghai, China to the port at Long Beach
Around $3,500
Taxes, insurance, etc. make it cost a bit more…

29. Containerized Shipping
Consequence: Containerized shipping resulted in a dramatic increase in global trade
Example: Container holds 10,000 pairs of shoes
Container costs $3,500 to ship (including taxes)
Total cost of shipping per pair: 35 cents!
If cost of making a shoe in China is 36 cents less than in US, then there is an incentive to ship…
Higher costs might come from: more expensive labor, costs of adhering to environmental laws, etc.

30. International Financial System
Another barrier to the global economy: Money
Suppose I build and sell computers…
What if someone from Japanwants to buy one?
They only have Japanese money: Yen
Problems:
1. Yen aren’t useful to me in the US
2. How much is my computer worth in Yen?
Even if I would accept the money, I don’t know the value…

31. International Financial System
In order to conduct trade, there must be an international system to handle currencies
Example: The Gold Standard
For every dollar the government prints, they hold a corresponding amount of gold in the bank
Value of all currencies = tied to a common “standard”
Example: US$1 = 1/35 ounce of gold
Other currencies might have a different value: Example: Euro = 1/20 ounce, Yen 1/300 ounce

32. The Gold Standard
The gold standard is one solution to trade in a world of multiple currencies
If someone in Japan wants to buy my computer, they can convert Yen to gold
International transactions paid in gold
Then, I can convert gold to US$
Result: International trade is possible!

33. The Gold Standard The gold standard fell apart in the depression
Governments wanted to boost their economies…
Question: What are some ways the government can boost their economy?
Governments increased spending
The “New Deal” used stimulus to hire lots of workers & build infrastructure
Goal was to boost the economy in the depression
This required printing more money… even though gold supply didn’t expand
Currencies were no longer tied to gold…
Trade became difficult.

34. Bretton Woods
Plan B: The Bretton Woods agreement helped to re-establish an international financial system
New plan: U.S. Dollars would serve as the currency for international transactions
US dollars would have a fixed value vs. gold
Other currencies would have a fixed exchange rate versus the dollar
Everybody was happy again… for a while…

35. Bretton Woods The Bretton Woods system also fell apart
Basic Problem: The fixed exchange rates works only if trade and capital flows are small
… compared to the size of the US economy
Eventually, when global trade flows harmed the US economy, the US changed the system…
The process is described by Herman Schwartz: “International Money, Capital Flows, and Domestic Politics.”

36. Floating Exchange Rates
Plan C: The system of floating exchange rates
Value of currencies is determined by market
Like the price of commodities: oil, wheat, etc.
Selling a computer to someone in Japan:
Person in Japan goes to the currency market (bank) to buy US dollars
Current exchange rate: 103 Yen per dollar
Therefore, a US$ 1,000 computer costs 103,000 Yen

37. Currency Value Examples
Country
Currency
Number per US$
Europe
Euro
0.73
Canada
Dollar
.987
China
Yuan/RMB
6.05
India
Rupee
62.08
Japan
Yen
103
Mexico
Peso
13.4
South Korea
Won
1077
Thailand
Baht
32.8
United Kingdom
Pound
.60
As of Jan 23, 2014

38. Trade & Exchange Rates Currency values affect trade:
Example: Suppose the Yen becomes more valuable relative to the dollar:
From 103 yen per US$  10 yen per doller
How much would a US$ 1,000 computer cost to a European?
Answer: 10,000 Yen (as opposed to 103,000)
When YOUR currency goes up relative to others, it is cheap to import
If currency value drops, imports become expensive.

39. Trade & Exchange Rates
Who benefits if Yen goes up relative to the US$?
1. Japanese consumers – they can buy American products cheaply
2. American exporters – they can sell lots more to Japan
Who Loses?
1. American consumers – Japanese imports costs more
2. Japanese companies – can’t compete with cheap US imports

40. Floating Exchange Rates
Why do currency values “float” (change)?
What forces affect supply and demand?
1. Asymmetric trade
If a country imports more than it exports, its currency drops
Ex: US has a current accounts deficit with Japan (imports more than it exports)
To purchase Japanese goods, Americans must sell dollars, buy Japanese Yen
Demand drives up value of Yen relative to the dollar.

41. Floating Exchange Rates
Example: The effects of asymmetric trade on currency values
Suppose I sell 10,000,000 computers
Japanese will sell 103 billion Yento banks in order to purchase 10 billion US$…
If banks (currency markets) are flooded with Yen, supply increases, value drops…
Currency markets don’t want more Yen
Banks will give fewer US$ in exchange

42. Floating Exchange Rates
What forces affect currency values?
2. Asymmetric capital flows
If capital moves into a country, its currency goes up
Ex: In early 1990s, global investors moved money into Thailand, Mexico… raising the value of currency
If capital moves out of a country, its currency goes down
Investors feared problems in Mexico, Thailand… pulled money out
Thai Baht and Mexican Peso dropped in value

43. Floating Exchange Rates
What causes asymmetric capital flows?
2. a. Interest rates
If a country raises interest rates, its currency goes up
Reason: Foreign investors prefer high rates
The “electronic herd” is attracted to high rates…
If a country cuts interest rates, its currency drops
Investors would prefer moving money into countries where banks pay higher interest…
Important issue: Globalization limits the ability of governments to control their own monetary policy
Sometimes countries want to lower interest rates to boost the economy…
But can’t because it would hurt their currency

44. Floating Exchange Rates
What causes asymmetric capital flows?
2. b. Anything else that “scares” investors
Government instability
Concern that an economy isn’t going to do well
Ex: Fears that Thailand was going “bust”
Policy changes that investors don’t like
Ex: big increase in taxes
Shift away from free-market policies (“golden straightjacket”)
All of these things can cause investors to pull their money out of a country quickly, harming currency values.

45. Floating Exchange Rates
What forces affect currency values?
3. Countries can intervene strategically to alter their currency values
Governments can sell their currency to lower its value
They buy other currencies on global markets
Governments can buy their own currency to raise its value
They spend “reserves” of gold or other currencies on global markets
This requires lots of money, so rich countries can do it more.

46. Trade & Exchange Rates
Issue: Countries can strategically alter their currency values to gain an advantage in trade
Asymmetric trade with China should cause Chinese Yuan to rise relative to the US$
The US imports much more than it exports
But: China floods market with Yuan, buys US$
Yuan value stays low compared to US$
Result: Chinese exports remain cheap for Americans
Result: American manufacturing companies = Angry!
Note: Only big/wealthy countries can do this
US did a similar thing in the 1970s
Thailand tried, but ran out of money… it’s currency suddenly plummeted.

47. Financial Flows & Exchange Rates
Issue: Trade & financial flows have same impact on currencies
Asymmetrical flows cause currency values to change
But remember: Investment flows are larger than trade flows, and they can happen much faster
Elwood: “pinball capital”
Result: global investors can cause currency values to change rapidly
Called: market volatility (rapid change in value)
If a currency value falls too low, serious economic problems arise.

48. Exchange Rates & Volatility
Capital flows and resulting currency volatility can produce severe crises
Example: Mexico in 1994
Global investors bought lots of stock, investments in Mexico over several years…
This caused a slow rise in the peso. Not a problem.
A minor political crisis led to panic selling in 1994
The stock market began to plummet
Global investors rushed to sell stocks, converted pesos to dollars
Result: Selling of pesos made the value of pesos plummet!

49. Video
Commanding Heights, Ep 3, chapter 7
Time: 27:50 – 32:45.

50. Exchange Rates & Volatility
Why was it bad for the value of pesos to drop severely, rapidly?
1. Suddenly, imports were very expensive
Price of gas shot up
Businesses dependent on imports couldn’t afford costs; potential for bankruptcies
2. Many Mexican companies had borrowed money from US banks
US banks must paid in $, not pesos
If pesos are worth little, suddenly can’t afford to pay loans
Result: More bankruptcies, economic recession.

51. Exchange Rates & Volatility
In the case of the 1994 peso crisis, the US government stepped in
Provided emergency loans, etc., to prevent massive bankruptcy
But, that was just a small crisis… It is clear that crises could occur that are too large to stop so easily.

52. Asian Financial Crisis
Commanding Heights Video:
In the 1990s, foreign investors moved capital into Asia
And, foreign banks lent money to Asian companies at very low interest rates
Consequence: Rapid economic growth
Economies “heated up”
But, capitalism is prone to boom-bust cycles…
Companies built more factories and housing than needed
The “boom” ended
But – global dynamics made the “bust” much worse!

53. Asian Financial Crisis
How did globalization prompt a crisis for Asian economies in the 1990s?
1. Investors pulled out quickly – affecting currencies
Asian currency valued dropped…
Imports became expensive
Companies could no longer pay off loans to foreign banks
Bankruptcies, unemployment…

54. Asian Financial Crisis
How did globalization prompt a crisis for Asian economies in the 1990s?
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
Lesson: Integrated economies mean that crises tend to spread…
Example: US financial crisis caused economic disruption around the globe.

55. More Video: Commanding Heights
Topic: Asian financial crisis, spillover to other regions…
Video: 40:48 to 48:10
Asian economic miracle
Video: 48:10-1:14:30
Asian financial crisis and contagion