International economics, 15e

Robert Carbaugh
The International Economy and Globalization
Chapter 1
Chapter Outline (1 of 2)
Globalization of Economic Activity
Waves of Globalization
The U.S. as an Open Economy
Why is Globalization Important?
Globalization and Competition
Common Fallacies of International Trade
Does Free Trade Apply to Cigarettes?
Chapter Outline (2 of 2)
Is International Trade an Opportunity or a Threat to Workers?
Backlash Against Globalization
Summary
Key Concepts and Terms
Study Questions
The International Economy (1 of 2)
High degree of economic interdependence
No nation exists in an economic isolation
All aspects of a nation’s economy are linked to the economies of its trading partners
Reflects the historical evolution of the world’s economic and political order
Complex and its effects uneven
The International Economy (2 of 2)
High degree of economic interdependence
Steps toward international cooperation
Mutually advantageous for trading nations
Specialization, efficiencies of large scale production
Wider variety of products at lower cost
Protectionist pressures
Developing nations
Liberalized trading system – serves to keep the developing nations in poverty
Globalization of Economic Activity (1 of 2)
Globalization
Greater interdependence
Countries and their citizens
International flows
Goods and services
People
Investments in equipment, factories, stocks, bonds
Non-economic elements
Culture and the environment
Globalization of Economic Activity (2 of 2)
What forces are driving globalization?
Technological changes
Multilateral trade negotiations
Continuing liberalization of trade and investment
Widespread liberalization of investment transactions
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 Development of international financial markets
Waves of Globalization (1 of 11)
First Wave of Globalization: 1870-1914
Decreases in tariff barriers
Technological developments
Declining transportation costs
Shift from sail to steamships; railways
Driven by European and American businesses and individuals
Waves of Globalization (2 of 11)
First Wave of Globalization: 1870-1914 (cont)
Exports as a share of world income
Nearly doubled to 8%
Per capita incomes increased 1.3% per year
Previous 50 years: 0.5% per year
Nations that actively participated in globalization
Became the richest countries in the world
Brought to an end by World War I
Waves of Globalization (3 of 11)
The Great Depression of the 1930s
Governments practiced protectionism
Raised tariffs on imports
Tried to shift demand into domestic markets in order to
Promote sales for domestic companies
Promote jobs for domestic workers
Exports as a share of national income
Falls from 8% to 5%, undoing 80 years of technological progress in transportation
Waves of Globalization (4 of 11)
Second Wave of Globalization: 1945–1980
Horrors of the retreat into nationalism renewed incentive for globalization
Falling transportation costs
Decrease previously established trade barriers
Trade liberalization – not uniform
Which countries participated? Mainly developed countries
Which products were included? Manufactured goods
Waves of Globalization (5 of 11)
Trade liberalization discriminated
Developed countries, manufactured goods
Largely freed of barriers
Greatly increased the exchange of manufactured goods
Raised the incomes of developed countries
Developing countries
Exports from developing countries faced no barriers only for agricultural/primary
goods that were not produced in developed countries
Exports of manufactured goods - sizable barriers
Waves of Globalization (6 of 11)
Second Wave of Globalization: 1945–1980 (cont)
New kind of trade
Rich country specialization in manufacturing niches
Gained productivity through agglomeration economies
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 Firms clustered together
Some clusters produced the same product
Others were connected by vertical linkages
Agglomeration economies
Benefits only those that are in the clusters
No benefit for those that are left out
Waves of Globalization (7 of 11)
Second Wave of Globalization: 1945–1980 (cont)
Most developing countries
Did not participate in the growth of global trade in manufacturing and services
Continuing trade barriers in developed countries
Unfavorable investment climates
Antitrade policies in developing countries
Dependence on agricultural and natural-resource products
Developing countries as a group were being left behind; World inequality
Waves of Globalization (8 of 11)
Latest Wave of Globalization, began in 1980
Many developing countries participated led by
China, India, and Brazil
Entered the world markets for manufactured goods
Other developing countries
Increasingly marginalized in the world economy
Decreasing incomes
Increasing poverty
Significant international capital movements
Waves of Globalization (9 of 11)
Latest Wave of Globalization, began in 1980 (cont)
Some developing countries
Competitive advantage in labor-intensive manufacturing
Bangladesh, Malaysia, Turkey, Mexico, Hungary, Indonesia, Sri Lanka,
Thailand, and the Philippines
Tariff cuts
Lower barriers to foreign investment
Technological progress in transportation and communications
Protectionist policies in developed countries
Waves of Globalization (10 of 11)
Latest Wave of Globalization, began in 1980 (cont)
World
More globalized - international trade, capital flows
Less globalization - labor flows
Foreign outsourcing
Certain aspects of a product’s manufacture are performed in more than one country
Manufacturing moved to wherever costs were lowest
Job losses for blue-collar workers
Cries for the passage of laws to restrict outsourcing
Table 1.1
Manufacturing an H-P Pavilion…
Table 1.2
Globalization Goes White Collar

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Waves of Globalization (11 of 11)
Latest Wave of Globalization, began in 1980 (cont)
By the 2000s, foreign outsourcing of white-collar work
Information Age
Digitization, Internet, and high-speed data networks around the world
Sending upscale jobs offshore
Accounting, chip design, engineering, basic research, and financial analysis
Foreign outsourcing
Reduce costs of a given service: 30 to 50%
The U.S. as an Open Economy(1 of 8)
Trade patterns
Openness
Rough measure of the importance of international trade in a nation’s economy
Nation’s exports and imports as a percentage of its Gross Domestic Product (GDP)
Table 1.3
Fruits of Free Trade: Global Fruit...
The U.S. as an Open Economy(2 of 8)
Openness
Large countries – lower measures of openness
Less reliant on international trade
Many firms in larger countries can attain an optimal production size without having to
export due to the population and economic size
Small countries – higher measures of openness
Table 1.4
Exports & Imports as a % of GDP...
The U.S. as an Open Economy(3 of 8)
Openness of the U.S. economy, 1890 to 2013
Less open to international trade, 1890 to 1950
Relatively high openness in the late 1800s
Rise in world trade: technological improvements in transportation and
communications
Two world wars + Great Depression of the 1930s
Reduced dependence on trade
National security reasons
Protect home industries from import competition
The U.S. as an Open Economy(4 of 8)
Openness of the U.S. economy, 1890 to 2013 (cont)
After World War II - negotiated reductions in trade barriers
Rising world trade
Technological improvements in shipping and communications
U.S. trade
In 1890, mostly raw materials and agricultural products
Today, manufactured goods and services
U.S. producers more affected by foreign competition today than 100 years ago
Figure 1.1
Openness of U.S. Economy, 1890-2013
Table 1.5
Top 10 Countries, U.S. Trades, 2012
The U.S. as an Open Economy(5 of 8)
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Labor mobility in U.S. has not risen in past 100 years
1900, 14% of U.S. population: foreign born
1920s to 1960s – immigration sharply curtailed
Foreign-born U.S. population: 6%
1960s, liberalized restrictions; By 2014
12% the U.S. population was foreign born
Foreigners: 14% percent of the labor force
Half – from Latin America
One quarter – Asians
The U.S. as an Open Economy(6 of 8)
Capital flows to the U.S.
Foreign ownership of U.S. financial assets
Risen since the 1960s
1970s, OPEC - investments in U.S. financial markets
1980s, major flows of investment funds to U.S.
By late 1980s
U.S. - consuming more than it produced
Net borrower from the rest of the world
The U.S. as an Open Economy(7 of 8)
International banking
Average daily turnover in foreign-exchange market
Today: almost $4 trillion
1986: $205 billion
The trading day begins in Tokyo and Sydney and moves around world in unbroken 24 hour
cycle
London - the largest center for foreign-exchange trading
The U.S. as an Open Economy(8 of 8)
Commercial banking
U.S. banks
Worldwide branch networks, 1960s and 1970s
Loans, payments, foreign-exchange trading
Foreign banks
Increased presence in U.S., 1980s and 1990s
Today: 250 foreign banks
Securities firms - globalized their operations
By 1980s, U.S. government securities
Traded on a 24-hour basis
Why is Globalization Important? (1 of 2)
The Law of Comparative Advantage:
Each nation gains by doing things for which they have a relative advantage
If a good or service can be obtained more economically through trade, makes sense to trade for
it, not produce it
International trade also gains from competitive process
Competition essential to innovation, efficient production
Global competition can result in high cost domestic producers exiting the market
Why is Globalization Important? (2 of 2)
Open economies
More competition which lowers prices
More firm turnover
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 Improvements for the industry
Economic growth rates - close relation to:
Openness to trade
Education
Communications infrastructure
Figure 1.2
Tariff Barriers vs. Economic Growth
Globalization and Competition (1 of 3)
Globalization and free trade can provide benefits to many, but can inflict burdens on others
Kodak had 90% camera market share but complacent; did not address competition, new
technology
Fuji entered U.S. market with lower priced film and supplies; Kodak ignored them
By mid-1990s, Fuji had 17% of market, Kodak, 75%
Kodak finally developed digital camera, but undercut by smart phones; filed for Ch 11
bankruptcy
Kodak is now a small digital imaging company
Globalization and Competition (2 of 3)
Globalization and free trade can provide benefits to many, but can inflict burdens on others (cont)
Schwinn bicycles the standard of the industry, surviving the Great Depression with continuous
innovation; bikes durable, stylish, but heavy
Competitors produced mountain bikes & racing bikes; cheap imports entered market
Schwinn moved production to non-union state; obtained parts from foreign countries, but
uneven quality; Schwinn declared bankruptcy; firm purchased
Schwinn bicycles today made in China
Globalization and Competition (3 of 3)
Globalization and free trade can provide benefits to many, but can inflict burdens on others (cont)
Once, 150 US manufacturers of televisions
Imports from Japan, China, South Korea, others
Flat panel TVs lighter, cheaper to ship from Asia
By 2000, no US TV manufacturers
But costs in China rising, US factories more competitive;
2012, Element Electronics became only TV manufacturer in U.S.; all parts imported,
assembled in Detroit
Assembly in Detroit yields distribution efficiencies; avoids tariffs; TVs shipped in boxes with a
“Made in America” logo
Common Fallacies of International Trade (1 of 2)
“Trade is a zero-sum activity”
False; Both partners gain from trade
“Imports reduce employment and burden the economy, while exports promote growth and
employment”
False; Source of this fallacy is the failure to consider the link between imports and exports
Common Fallacies of International Trade (2 of 2)
“Tariffs, quotas, and other import restrictions will save jobs and promote a higher level of
employment”
False; failure to recognize that a reduction in imports does not occur in isolation
Free trade
Increases competition, lowers prices
Makes better products available to consumers
Results in higher consumption
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Does Free Trade Apply to Cigarettes?
Usually, free trade results in higher consumption; but with cigarettes, is this a good thing?
Some contend that cigarettes are not normal “goods” but are in fact “bads” requiring their own set of
regulations; cigarette manufacturers disagree
Distinguish between regulating cigarettes for public health, and regulating them to protect domestic
markets
International Trade: Opportunity or Threat to Workers? (1 of 3)
International trade benefits many workers but not all workers benefit
Cheaper consumption goods
Employers – better technologies/equipment
Workers - more productive
Exports - jobs and income for domestic workers
Cheap Imports - Rising unemployment
Hurts unskilled workers in import-competing industries – lobbying restricting imports
International Trade: Opportunity or Threat to Workers? (2 of 3)
International trade
Domestic prices - aligned with international prices
Wages increase
Workers whose skills are scarce
Wages decrease
Workers who face increased competition
Jobs lost in one industry
Replaced by jobs gained in another industry
International Trade: Opportunity or Threat to Workers? (3 of 3)
The long-run effect of trade barriers
Does not increase total domestic employment
Reallocates workers
Away from export industries
Toward less efficient, import-competing industries
Leads to a less efficient utilization of resources
International trade
Just another kind of technology
Adds value to its inputs
Backlash Against Globalization (1 of 3)
Proponents of free trade and globalization say:
Countries prosper
New ideas and technology flow freely around the world
Productivity growth
Increasing living standards
Lower consumer prices
Increased variety of goods and services
Backlash Against Globalization (2 of 3)
Critics of free trade and globalization say:
Benefits large corporations at the expense of average citizens
Environmentalists
Elitist trade organizations like WTO make undemocratic decisions
Undermine national sovereignty on environmental regulation
Unions
Unfettered trade permits unfair competition
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Backlash Against Globalization (3 of 3)
Critics of free trade and globalization say: (cont)
Human rights activists
World Bank and International Monetary Fund support governments that:
Allow sweatshops
Pursue policies that bail out governmental officials at the expense of local
economies
Table 1.6 – Advantages and
Disadvantages of Globalization