1. 1 INTERNATIONAL ECONOMICS, ECO 486 NAFTA Int’l Factor Mobility –DFI –Migration

2. 2 Learning Objectives Discuss Chapter 10 & Chapter 10 Homework Review the NAFTA Report Review Chapter 9, International Mobility of Productive Factors, from Kreinin’s International Economics Explain the effects of immigration on the wages of immigrants and native Americans

3. 3 Learning Objectives Discuss Chapter 10 & Chapter 10 Homework Review the NAFTA Report Review Chapter 9, International Mobility of Productive Factors, from Kreinin’s International Economics Explain the effects of immigration on the wages of immigrants and native Americans

4. 4 Learning Objectives Discuss Chapter 10 & Chapter 10 Homework Review the NAFTA Report Review Chapter 9, International Mobility of Productive Factors, from Kreinin’s International Economics Explain the effects of immigration on the wages of immigrants and native Americans

5. 5 Aggregate Effects of NAFTA NAFTA took effect January 1, 1994 –After three year, most tariff provisions in place –Reductions in NTBs continue –Most “rulemaking” obligations are in force ITC found no effects on –US GDP –US growth rates limited time period relative size of US economy

6. 6 Aggregate Effects of NAFTA US Imports from Mexico have increased +1% in 1994 +5.7% in 1995 +6.4% in 1996 US Exports to Mexico have increased +1.3% in 1994 +3.8% in 1995 +3.24% in 1996 No significant effects on trade with Canada

7. 7 Industry trade Studied 200 industries accounting for >85% of US trade with its NAFTA partners Several industries show increased trade A few industries show decreased trade See Table ES-2

8. 8 Table ES-2: Industry trade

9. 9 Labor No effects on agg. employment or earnings 29 of 120 manufacturing industries showed some change in hourly earnings or hours worked. –Found seven industries where lower import prices may cause job losses –Found four industries where lower import prices may increase US employment complements or productivity effects

10. 10 Productivity Lacked data for direct analysis US productivity gains –Where strong competition from imports

11. 11 Qualitative Analysis For 59 of 68 industry sectors, NAFTA had a negligible effect Nine exceptions: –grain and oilseed –raw cotton –textile mill products –apparel –women’s footwear –appliances –vehicles –vehicle parts –leather Services -- only financial services

12. 12 Learning Objectives Discuss Chapter 10 & Chapter 10 Homework Review the NAFTA Report Review Chapter 9, International Mobility of Productive Factors, from Kreinin’s International Economics Explain the effects of immigration on the wages of immigrants and native Americans

13. 13 Scope of DFI DFI -- Direct Foreign Investment –investments that give company headquarters control over the foreign subsidiary MNC -- Multi-National Corporations –40,000 parent firms –250,000 foreign affiliates –Global sales = $5.2 trillion in 1992 –Stock of DFI = $2.6 trillion 1995

14. 14 US Role As Source and Host US DFI = $600 billion DFI in US = $500 billion

15. 15 Motives for DFI Profit expectations (Profit = Revenue -Costs) Revenue –DFI may improve access to foreign markets –Differing growth rates Rapid US growth ‘83-’89 attracted DFI –Marketing considerations

16. 16 Motives for DFI Cost reduction through DFI –Obtain raw materials unavailable or expensive at home complementary to home resources may raise productivity of home’s K & L –Lower labor costs –Lower transportation costs perishable products & products with low value to weight ratio

17. 17 Motives for DFI Cost reduction through DFI –Special tax treatment US foreign tax credit Transfer pricing to avoid taxes –Avoid tariffs and NTBs –When a large company moves abroad, its suppliers may follow –US anti-trust laws may block a merger at home, encouraging merger with foreign companies

18. 18 Does DFI Substitute for Trade? 1996 WTO report found no support for a negative relationship between a country’s DFI and its exports

19. 19 DFI and World Welfare Free movement of resources benefits the world economy DFI (K) is attracted by higher profits –K flows from where it is abundant to where it is scarce –MPP K in source < MPP K host country –Flows cease once returns are equalized –World output increases

20. 20 Host Country’s Welfare New capital boosts output DFI brings other benefits –Managerial skill –Technology –Often trains its labor force –Income, savings, and growth rate increase

21. 21 Host Countries Resent DFI Monopolistic exploitation of natural resources –exaggerated fears, but a possibility –producing countries could form a cartel Most desirable jobs remain in source country (myth?) Resentment has led to restrictions –performance standards

22. 22 Source Country’s Welfare Excessive DFI harms the source country (US) –Returns to capital increase, but –Firms may ignore important risks e.g., confiscation –Revenue loss to US government –Productivity in US of labor & land may suffer –Offset: DFI in extractive industries complements US factors

23. 23 Conclusion Unobstructed international capital flows enhance world welfare

24. 24 Combining Traditional Trade Theories & MNCs Traditional Trade Theories –assume factors are immobile Commodity Composition of Trade –Can it still be explained?

25. 25 Combining Traditional Trade Theories & MNCs Assume a MNC employs four factors –two immobile (skilled & unskilled labor) –two mobile (capital& knowledge) Returns to mobile factors equalized Immobile factors –Abundance varies across countries –Intensity varies across industries Labor skills more important than K/L ratio

26. 26 Combining Traditional Trade Theories & MNCs Predictions: –Mobile factors attracted to countries with better infrastructure –Transport costs and trade barriers induce the MNC to locate near its markets –IRS limit number of production facilities –Large markets confer a CA on home producers in industries with IRS Familiar results

27. 27 International Migration of Labor Consequences parallel those of capital flows Loss to source country is less than gain to host country Labor in the host country loses, but labor in the source country gains “Brain drain” –Compensation?

28. 28 Learning Objectives Discuss Chapter 10 & Chapter 10 Homework Review the NAFTA Report Review Chapter 9, International Mobility of Productive Factors, from Kreinin’s International Economics Explain the effects of immigration on the wages of immigrants and native Americans

29. 29 Immigration Sixty million people have migrated from their country of birth –1.2% of world’s current population Almost 1/3 of them now live in the US –~800,000 legal immigrants per year recently –Significant portion of US population growth

30. 30 Immigration

31. 31 US Immigration Once mainly European –Directly –Indirectly Mexico –> ¼ of legal immigrants –+ 200,000 to 300,000 others

32. 32 Immigration

33. 33 Immigration Scale, Origin, and Skills of U.S. Immigrants –The skills of immigrants vary considerably –On average, immigrants are less productive than native Americans –During the 1960’s, new immigrants earned 17% less than comparable Americans — 1970’s – 28% less — 1980’s – 32% less

34. 34 Immigration Immigrants and the Labor Market –Immigration increases the supply of labor Lowers the wage rates of (low-skilled) US workers –Decreases the supply of labor in the source country This raises their country’s wage rates Let’s see what would happen with free movement of immigrants

35. 35 Factor Price Equalization Quantity of labor (millions) Wage rate (dollars per hour) 0 Quantity of labor (millions) Wage rate (dollars per hour) 5 10 15 20 25 751001251501750 5 10 15 20 25 5075100125 88 1 LD US LD M

36. 36 Factor Price Equalization Quantity of labor (millions Wage rate (dollars per hour) 0 Quantity of labor (millions Wage rate (dollars per hour) 5 10 15 20 25 751001251501750 5 10 15 20 25 5075100125 88 1 LD US LD M World Equilibrium World Equilibrium Employment increases and wage rate falls in United States Employment decreases and wage rate rises in Mexico

37. 37 …Doesn’t Necessarily Occur Actual effects appear to be small –Restrictions slow immigration –Immigration also increases the demand for labor Immigrants purchase goods & services Substitute for native low-skill labor Complement capital & high-skilled labor –Indeterminate result

38. 38 Immigration How Do New Immigrants Perform in the United States? –As a rule, immigrants’ earnings grow more rapidly than the earnings of native Americans. –However, they still do not catch up.

39. 39 Immigration Immigrants and the Government Budget –In 1970, 6% of all native households and 5.9% of immigrant households received some form of welfare –By 1990, the percentages were 7.4% for native households and 9.1% for immigrant households –Rate of return on social security contributions higher for immigrants

40. 40 Next time: Trade problems of developing countries!

41. 41 Learning Objectives Discuss Chapter 10 & Chapter 10 Homework Review the NAFTA Report Review Chapter 9, International Mobility of Productive Factors, from Kreinin’s International Economics Explain the effects of immigration on the wages of immigrants and native Americans Learn some facts about Multi-National Corporations

42. 42 Multi-National Corporations True or False? Globalization made MNCs more “footloose” than ever. Partly true

43. 43 Multi-National Corporations True or False? MNCs are, first and foremost, creatures of their home countries. Not always

44. 44 Multi-National Corporations True or False? All MNCs are large corporations. False

45. 45 Multi-National Corporations True or False? Markets dominated by MNCs are impenetrable to rival companies. False

46. 46 Multi-National Corporations True or False? Only some industries are going global. False

47. 47 Multi-National Corporations True or False? MNCs are bigger than their assets. True

48. 48 Multi-National Corporations True or False? MNCs are inherently exploitative. Yes and no…

49. 49 Multi-National Corporations True or False? Investments by MNCs are good, investments by international money managers are bad. Not necessarily

50. 50 Multi-National Corporations True or False? MNCs are creations of wealthy countries. Not anymore

51. 51 Multi-National Corporations True or False? MNCs are beyond government control Absolutely not!

52. 52 Learning Objectives Review Chapter 10, Trade Policy in Developing Countries, from Krugman & Obstfeld’s International Economics

53. 53 WTO News Items “Millennium Round” Agenda? NTBs (e.g. apples) Activists concerned about –Environment –Workers’ rights –Human rights Comments

54. 54 WTO Enforcement Actions Over 100 Only three involve environmental issues –Tuna –Turtles –What was the third? Environmental restrictions were discriminatory –Revised to be non-discriminatory Greens concerned about NTBs

55. 55 Tony Auth, NY Times editorial cartoon, December 2, 1999

56. 56 Arizona Republic, Sunday editorial cartoon, December 1995

57. 57