public policy
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660-460GLOBALIZATION--LECTURENOTES.docxGLOBALIZATION NOTES: 2 weeks
1. Political stability has allowed capital and technology to flow freely around the world.
2. Strong educational systems are producing tens of millions of highly qualified and motivated workers in the developing world—especially India and China.
3. Inexpensive high band-width communications make it feasible for large workforces to be located and managed anywhere.
4. Here in the United States the concern is and has been if American workers will face direct competition at almost every job level. As we have discussed jobs were lost for many years not to foreign entities so much as to U.S. multinational corporations cutting costs by shifting to low labor cost countries. That has begun to change as these foreign entities have learned from us and how we funded them 50 years ago.
5. Globalization has three major components:
a. Barriers to trade—rules that limit trade with another country—e.g. certain % must be made locally (Local Content) or rules against accepting certain foreign currencies
b. Tariffs—trade allowed but fee must be paid to importing government. This increases cost, making product more expensive—discourages purchase and protects local production
c. Immigration—rules about importing workers. Need workers to produce goods and services. Limit protects local workers but if skills needed can be harmful to economy.
6. Comparative Advantage has been called into question. World benefits when product is made where it is least expensive or it is made better. When David Ricardo first postulated this theory, the resources needed to produce goods were not easily moved across international borders let alone overseas. Those resources include land, labor, entrepreneurship and capital (4 factors of production traditionally). Is comparative advantage undermined when these so called factors of production can relocate with relative ease? Add technology to these basic factors as a fifth factor of production, and yes, they are quite moveable.
7. Thomas Friedman’s GREAT BOOK—The World is Flat—describes our era as Globalization 3.0 (1.0 was 1492-1800—explorers and trade) (2.0 was 1800-2000 (I would make it more like the mid 1800s)—2.0--multi-nationals and transportation improvements and telecommunications began to shrink the world.
8. He says that 10 factors led us into Globalization 3.0 where globalization is individually dominated vs. multi-national
a. Berlin Wall coming down in 1989—capitalism beats communism and entire world can now see us and want what we have
b. Netscape—the first public internet browser in 1995
c. Workflow software in the late 90s—common web-based standards (e.g. Windows)
d. Open source software that allowed computer fanatics to access and improve programs and websites.
e. Outsourcing—India for the most part—moving back office jobs—not physical plants—Y2K
f. Off-shoring—that’s China and actual movement of manufacturing facilities
g. Supply chaining—Walmart—inventory control that reduces need to stockpile products
h. Insourcing—UPS handling orders and deliveries for smaller operations. That’s how Nike started—UPS handled their orders—now everyone can operate like the big ones
i. In-forming---Google, Yahoo, etc.
j. “Steroids”—wireless devices that all accessing internet anywhere
9. OK—so how about a few facts from our readings
a. Global trade grew 35x between 1980 and 2010—has flattened some since --BUT was only 10x before--1950-1980
i. Weaker demand for industrial goods vs. services
a. Initially advanced development moved demand from agriculture to manufactured goods, but as affluence increased, demand for services that accompanies advanced development began to reduce the relative demand for and value of manufactured goods and forces manufacturers to seek lower cost locations. Also, off shore manufacturing makes the rich even richer, furthering this movement toward services.
ii. Increase in protectionism and regulation
b. Foreign investment has continued to grow even though trade has flattened some -PUNCUATED EQUILIBRIUM??
c. Trade was 25% of worldwide GDP in 1960—now 58% (2010 peak was 61%)
i. Developing world = 60% of world GDP –was 20% in 1990
d. Growth since 1995 has been mostly high-skilled jobs
e. Trade represents 41% of American jobs
f. 11 of our top 15 export markets used to be recipients of US aid
g. $1 in US Trade and Development Agency spending begets $85 in exports
i. $7B to Power Africa (energy) leveraged $40B private
10. Advantages of Global Trade:
a. COMPARATIVE ADVANTAGE—discussed last time
b. Reduce worldwide poverty
c. Increase democracy worldwide
d. More business opportunities
e. Economies of scale—bigger = less costly
f. Faster specialization—narrowed product orientation to be more competitive
g. Better for small firms (e.g. auto parts producer need not make entire car)
i. easier access to markets for smaller firms
ii. large multi-nationals now fragmented supply chains
h. Larger markets = more innovation
i. Workers benefit from specialization pay premiums—higher skill= better pay
i. OECD (Organization for Economic Development and Cooperation) – 3-9x raises in pay for open economies vs. closed
ii. Export related jobs pay 18% more
j. Gender equality—more opportunities, global platforms less subject to gender bias
i. Alibaba bigger than Amazon and ebay—small women producers
ii. Increased competition means firms can no longer overpay men and underpay women
a. Gender gap wider in concentrated industries
k. Reduced prices have lowered inflation from the 70s and 80s (= increase in REAL wages)
i. Poor people benefit more from lower prices—spend high %
l. # of goods has doubled
m. Better products—slowdown in productivity not due to Globalization—it is shift to services
n. Faster diffusion of innovations
i. Took 75 years for 1M telephone users
ii. 38 years for 1M radio
iii. 19 years for TV
iv. Internet 4 years to get to 50M
o. Competition drives out less productive firms
p. Huge opportunities in energy and environment
q. Thomas Friedman is an advocate for globalization in principle
i. Efficiency produces wealth, increases in income and spending-human wants and needs are infinite…not zero-sum game
ii. Keys:
a. Reform Wholesale—Legal System: privatization, deregulation of financial markets, foreign investment, low tariffs
b. Reform Retail--education, infrastructure, culture of tolerance (way country relates to world)
c. Two reforms combine to create environment that makes it easy to start business, raise capital, innovate AND easy to close businesses to free up capital—GLOCALIZATION—openness to new ideas from outside
iii. Compares Mexico to China—poor education, poor tax collection (no $$ for infrastructure)—interesting quote about glue production: --READ p. 431—and 433?
iv. There is no way to stop it. You cannot ignore it without great risk to economic well-being. Over the last century those countries that have tried to preserve their systems, jobs, cultures, traditions by keeping the rest of the world out have suffered.
v. Outsourcing is necessary to innovate faster and more cheaply—to gain market share. Goal is to get bigger, faster.
vi. Another benefit: No two countries that are part of a major global supply chain have or will ever fight a war against each other
11. Negatives
a. Increased transportation = increased carbon emissions—(offset by innovations such as solar, wind)
b. Exacerbates inequality among businesses –big vs. small—larger companies can take greater advantage
c. Detrimental to middle class—job loss and wage competition
d. Recessions now worldwide due to interconnectivity
i. Economy that depends on foreign investment will be volatile
ii. REGARDING WORLDWIDE RECESSIONS--- Asia, where Thailand started a collapse called the Asian Contagion in 1997. The crisis started in Thailand with the financial collapse of the Thai baht which was tied to the US dollar but could no longer maintain its value vs the dollar. Capital flight ensued almost immediately, beginning an international chain reaction. At the time, Thailand had acquired a lot of foreign debt.[1] As the crisis spread, most of Southeast Asia and Japan saw slumping currencies,[2] devalued stock markets and other asset prices, and a precipitous rise in private debt.[3]
Indonesia, South Korea, Malaysia were particularly hard hit. Federal Reserve arranged for $3.6 Billion to bail out 14 U.S. financial institutions-- known to some as “When the World Almost Ended”—others----Mexico near collapse in 1995, 2008 recession
e. US share of world economy was 36% in 1970—now 24%--competitors are catching up
f. Inequality among countries is less under globalization BUT inequality within countries increases.
i. Friedman—“Do worry, though, about the low-skilled American workers.” He says that they have to move vertically---BUT HOW? (my comment).……
g. Reduced national sovereignty –a key factor in the Lasurain article. Increased democracy and national sovereignty cannot coexist. He discussed the Global Economy Trilemma:
i. If countries opt for globalization, SUPRAnational democratic organizations end up making the rules (We’ll discuss the WTO next week). These organizations are from large, developed countries.
ii. If opt for national sovereignty, democracy must be limited.
h. Negatives are particularly true in Latin America.
i. [SHOCK DOCTRINE] Another good book is The Shock Doctrine by Naomi Klein. It does get repetitive but makes some key points about the globalizing world that are consistent with some of these negatives.
ii. She paints Milton Friedman as the great enemy.
a. [660—Commanding Heights]
b. [460—Head of School of Economics at University of Chicago—very conservative school—advisor to Nixon]
c. 1950s Univ of Chicago began paying for students to study in their home country and earn Univ of Chicago degrees. Friedman and other professors were given free travel and facilities in Chile, Argentina, Brazil and Mexico. Paid for by the Ford Foundation.
d. At that time 20% of total U.S. foreign investment went to Latin America. U.S. firms had 5400 subsidiaries there. Chilean mining alone sent $7.2 billion back to U.S. corporations.
e. Friedman wrote about something he called the Shock Doctrine in 1962—Capitalism and Freedom—"Only a crisis—actual or perceived—produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That is our basic function—to keep ideas alive and sustainable until the politically impossible becomes the politically inevitable.” [660—that was the point made at Mont Pelerin]
f. Here’s how it worked in Chile. It began with the 1973 assassination of Salvador Allende and the coup led by General Augusto Pinochet in Chile. Allende was socialist who had nationalized many American business interests in Chile. American CIA involvement in the coup, it later turned out, was largely prompted by the economic losses that US multinationals were sustaining under Allende, who had strong popular support within his country. Coup planners recruited several of Friedman’s disciples (known throughout the world as the “Chicago Boys”) in secret to devise an economic blueprint for the new government. (According to later US Senate investigation, the CIA provided over three-quarters of the funding for this economic plan.) In the shock and dislocation of the coup, the slate could be wiped clean and a new economics instituted. Twenty-four hours after Allende’s assassination a new 500-page economic plan was on the desks of the country’s new military government under General Pinochet.
g. It didn’t work out well. Inflation soared to 375%, the economy contracted by 15%, and unemployment went from 3% under Allende to 15% under the new regime. Small business leaders began to realize that free trade was wiping them out and turned against the plan; only the foreign nationals and small groups of Chilean financiers were benefiting, but Pinochet and the Chicago Boys persisted, cutting social services even more, further privatizing national industries. Ralston Purina, Bank of America, and Pfizer Chemicals blocked the flow of U.S. govt. loans to Chile and curtailed their purchases from Chile forcing Chile to borrow from the IMF under terms that were very much University of Chicago teachings.
h. Graduates of the University of Chicago were dominant in the IMF—International Monetary Fund created at Bretton Woods. IMF helps to bail out foreign countries that are in financial trouble but imposes strict conditions—privatize, cut social safety net
In 1982, Chile’s economy crashed: its debt exploded, it faced hyperinflation once again and unemployment hit 30 percent—ten times higher that it was under Allende. Ultimately, even Pinochet retreated from the Chicago Boys orthodoxy, renationalizing many of the companies.
i. Argentina was next—then Uruguay and Brazil
j. The shock therapy prescribed by Milton Friedman to fix ailing economies was now institutionalized. To be eligible for loans, a country had to agree to privatization and free-trade policies as well as to slashing government spending, which meant shredding whatever provisions had been in place to help the poor. In order to pay their debts, countries had to take on the unfettered free markets and minimal government of the Chicago School ideology. It went on to affect Russia, South Africa and many others.
k. Privatization and outside investment had started in Russia during the early/mid 1990s and Milton Freidman was a consultant to help them to take care of the huge debt they assumed from the former Republics.
The Russian government and the Clinton Administration intensively lobbied the IMF Board to approve new funds to bail out Russia. The IMF Board announced "in principle" a $22.5 billion dollar international bailout. The usual conditions were attached about selling off more assets and reducing government programs.
Not long after this loan was approved, Prime Minister Kirienko declared a 90-day foreign debt moratorium and announced a de-facto default on the government's domestic bond obligations.
l. The point of all of this is that the negatives—internal inequality (rich getting richer) and worldwide recessions are risks of globalization that gets out of control.
12. Bretton Woods did many things—the IMF, World Bank, $ as the reserve currency of the world (WE talked about the effect on Deindustrialization making the dollar so attractive) Bretton Woods also created something known as the General Agreement on Tariffs and Trade—the GATT. The GATT set the rules for trade until the World Trade Organization –the WTO--came into being in 1995 – more about that in a minute.
13. Although the GATT was expected to be provisional, it was the only major agreement governing international trade until the creation of the WTO. The GATT system evolved over 47 years to become a de facto global trade organization that eventually involved 130 countries.
14. The GATT was created to form rules to end or restrict the most costly and undesirable features of the prewar protectionist period, namely quantitative trade barriers such as trade controls and quotas. The agreement also provided a system (albeit weak) to arbitrate commercial disputes among nations, and the framework enabled a number of multilateral negotiations for the reduction of tariff barriers.
15. One of the key achievements of the GATT was that of trade without discrimination. Every signatory member of the GATT was to be treated as equal to any other. This is known as the most-favored-nation principle . A practical outcome of this was that once a country had negotiated a tariff cut with some other countries (usually its most important trading partners), this same cut would automatically apply to all GATT countries. Escape clauses did exist, whereby countries could negotiate exceptions if their domestic producers would be particularly harmed by tariff cuts. Most nations adopted the most-favored-nation principle in setting tariffs, which largely replaced quotas, and tariffs were in turn cut steadily in rounds of successive negotiations.
16. The average tariff rate fell from around 22%, when the GATT was first signed in Geneva in 1947, to around 5% by the end of the 1993 at what was known as the Uruguay Round). There were 8 “rounds” of GATT between 1947 and 1993.
17. In 1964 the GATT began to work toward curbing predatory pricing policies and dumping. Dumping is when a country or company exports a product at a price that is lower in the foreign importing market than the price is in the exporter's domestic market. Because dumping typically involves substantial export volumes of a product, it often endangers the financial viability of the product's manufacturer or producer in the importing nation. As the years passed, the countries continued to attack global issues, including trying, but failing, to address agriculture disputes and working to protect intellectual property .—copyrights, movies, music, etc.
18. The GATT ended because the GATT failed to achieve its goals. The weaknesses of the GATT were behind its failure, including a weak structure that was never ratified formally by the individual countries and had a very limited ability to enforce its objectives, particularly in the areas of agriculture and textiles. The European Union and NAFTA,--not exactly most favored nations plans both of which provide trade benefits to neighbors not available to others took place during the GATT. Also during the GATT, the United States was not able to convince Japan and China within the framework of the GATT to open their markets to U.S. goods. In addition, the GATT failed to cover trade in services and intellectual property rights, and the absence of an international mechanism to resolve disputes in international trade .
19.The relationship of trade policy to human rights, labor rights, consumer protection, and the environment were essentially “off the table.” This is because GATT’s role was limited to governing how nations used traditional tools of economic protection such as tariffs and quotas.
20. By the late 1980s, a growing number of nations decided that GATT could better serve global trade expansion if it became a formal international organization. In 1988, the US Congress, in the Omnibus Trade and Competitiveness Act, explicitly called for more effective dispute settlement mechanisms. They pressed for negotiations to formalize GATT and to make it a more powerful and comprehensive organization. The result was the World Trade Organization, (WTO), which was established during the Uruguay Round of GATT negotiations and which absorbed GATT and formally began January 1, 1995. The WTO provides a permanent arena for member governments to address international trade issues and it oversees the implementation of the trade agreements.
21. GATT was provisional. The General Agreement was never ratified in members' parliaments, and it contained no provisions for the creation of a formal organization.
b. GATT dealt with trade in goods. The WTO covers services and intellectual property as well.
c. The WTO dispute settlement system is faster, more automatic than the old GATT system. Its rulings cannot be blocked.
22. The WTO has some issues, too. Despite its broader scope and powers, the WTO has had a mixed record. On the positive side, nations have clamored to join this new organization and receive the benefits of expanded trade and formalized multinational rules. Today the WTO has grown 164 members. But since the WTO was created,
a. Many developing countries believe that their industrialized trading partners have not fully granted them the benefits promised when the WTO was formed. There have been several attempts to mollify their concerns, especially in addressing subsidies, but not enough. Hernando DeSoto would certainly agree.
b. there is concern that the WTO focuses too much on corporate interests
i. Opponents of economic globalization and, in particular, those opposed to the growing power of multinational corporations, argue that the WTO promotes the interests of large corporations at the expense of smaller local firms struggling to cope with import competition.
ii. Environmental and labor groups (especially those from wealthier countries) have claimed that trade liberalization leads to environmental damage and harms the interests of low-skilled unionized workers in their countries.
c. Others say that the WTO has failed to handle China’s abuses or that intellectual property protection is too weak
d. Or that the WTO can overrule national laws and harm national sovereignty (remember the Global Economy Trilemma—to participate globally you must become more democratic and lose some national sovereignty—China might prove otherwise.)
e. Labor standards, it is argued by smaller, low cost countries, are “protectionism in disguise” by large countries
f. and, of course, that it has cost US jobs and hurt wages
23. In India, Latin America, Europe, Canada (Ottawa) and the United States (Seattle), citizens have taken to the streets to protest globalization and in particular what they perceive as the undemocratic nature of the WTO. During the Seattle Meetings in 1999, about 50,000 people protested with some significant violence.
24. Critics of WTO want to see narrower deals that don’t require unanimity—for example,
a. in 2012, 19 members agreed to government procurement rules
b. in 2013, 23 members signed a Trade Services Agreement
c. 2014—14 members—Environmental Goals Agreement
i. Paris Accord (2016) with 194 countries was outside of the WTO and was limited to addressing global warming
d. 2015—53 members—Infrastructure Technology Agreement
26. BUT—1 million manufacturing jobs were lost—2.4 million jobs in total, according to the Council on Foreign Relations.
27. China, on the other hand profited hugely. Its economy is 8 times larger than it was in 2001. It has become the world’s largest exporter—5x what it had been. Trade with the US increased. 400 million people were lifted out of poverty.
28. As for a democratized China…..still highly concentrated with a stronger and richer Communist Party. Some changes, but clearly not democratized and violating some WTO rules.
29. Here are the main complaints against China within the WTO:
a. Illegal state subsidies, tax breaks and cheap bank loans
b. Undervalued currency makes exports cheaper
c. still discriminate against foreign goods with stringent local content rules, required partnerships with Chinese firms, and forced technology transfers—you want to deal with China, share technology with Chinese firms that are owned by government. That is the 2017 Chinese National Intelligence Law.
d. Control over supply chains—they do not want to export materials or parts—they want to export finished products. Foreign companies have very limited access to Chinese raw materials.
30. Helberg’s article about Deindustrialization equaling disarmament is powerful and full of warnings about China. He says that we CANNOT AFFORD NOT TO BRING BACK MANUFACTURING.
31. China wields significant power in medical equipment. We’ve seen that with the pandemic and the medical equipment that they and India dominate. With the technology that we have shared with them, they have launched cyber attacks against us (as have their allies—the North Koreans).
32. American missles depend on a Chinese propellant—military night goggles use Chinese metals. Taiwan produces 50% of computer chips and China has been trying to get Taiwan back since the 50s—look at Hong Kong!!!
33. In Africa, China is building roads and hospitals in exchange for priority access to African raw materials. They are very protective of their own raw materials such as Zinc, Copper, Titanium and Cobalt. They are developing local talent in Africa to serve their economic needs.
34. Helberg says that we need to get busy FAST with artificial intelligence, robotics, computer and cell phone manufacturing. We need to develop key natural resources, skilled industrial workers, and foster innovation or else we will have effectively DISARMED ourselves in the 21st century world.
35.. Just a couple of words about our biggest deal outside of the WTO—NAFTA and something called the TPP that Obama negotiated and Trump quashed. Most of our trade deals are bi-national—just one other country and US. These two are/were multi-national.
36. NAFTA—The North American Free Trade Agreement with Canada and Mexico was approved in 1993 and became effective on January 1, 1994. Without belaboring the vast details of the deal, some of which never really took effect, NAFTA set out to:
a. Eliminate all tariffs between the three countries by 1998.
b. Liberalize financial services trade
c. facilitate cross border travel for business
d. expand size of government procurements available to all countries—especially for energy
e. tri-national panel to resolve disputes
f. set North America content %s that would encourage use of each other’s supplies and materials
g. Some provisions, although weak, for intellectual property
h. rules for transporting goods in all countries
37. On the plus side, NAFTA created the world’s largest free trade area of 500 million people, where trade between the three members quadrupled from $297 billion to $1.14 trillion during the period of 1993-2015.
Further, the agreement likely had the effect of lowering prices for consumers, especially for food, automobiles, clothing, and electronics. It also reduced U.S. reliance on oil from OPEC. In 1994, the United States got 59% of its oil imports from OPEC, but that number is reduced to 44% today as trade with Canada has ramped up. Canada is now the #1 source of foreign oil in the United States…plus we are increasingly self-sufficient.
BUT--NAFTA has led to the movement of auto jobs. While the amount of autos manufactured in North America has increased from 12.5 million (1990) to 18.1 million (2016), the share of that production has shifted to Mexico.
Mexico now produces 20% of all vehicles in North America – and U.S./Canadian shares have shifted down accordingly over the years. The ultimate result is the destruction of hundreds of thousands of jobs in both Michigan and Ontario, Canada.
As a final note, comparing macroeconomic indicators from 1980-1993 (“Pre-NAFTA”) with those from 1994-2016 (“Post-NAFTA”).
For the U.S. in particular, here’s what has changed:
38. Lots of disputes over the safety of Mexican trucks on US side of border, certain Canadian export issues regarding dumping lumber, paper and steel.
39. NAFTA was revised in 2019 as the US-Mexico-Canada Agreement-------------USMCA
40. It made several key changes from NAFTA
a. AUTOMOBILES: The USMCA requires 75% of a vehicle’s parts to be made in one of the three countries – up from the current 62.5% rule – in order to remain free from tariffs when moving between the three signatory countries. It also requires more vehicle parts to be made by workers earning at least $16 an hour, which would hopefully provide a boost to manufacturing in the United States, where wages are higher than in Mexico.
b. LABOR STANDARDS: Manufacturing workers long blamed NAFTA for sending jobs to Mexico, where wages are lower, and it was a priority for Democrats that the USMCA strengthen the enforcement of labor rules, creating a more level playing field for American workers, including a process that allows for the inspections of factories and facilities that are not living up to their obligations.
c. AGRICULTURE: The USMCA will keep agricultural tariffs at zero, while further opening up the Canadian market to US dairy, poultry and eggs. In return, the United States will allow more Canadian dairy, peanuts and peanut products, as well as a limited amount of sugar, to cross the border.
d. DIGITAL: USMCA prohibits Canada and Mexico from forcing US companies to store their data on in-country servers. It also ensures that US companies cannot be sued in Canada and Mexico for content appearing on their platforms.
e. ENVIRONMENT: The agreement provides $600 million to address environmental problems in the region – like sewage spillovers from Tijuana that impact San Diego – and makes regulations easier to enforce by doing away with a requirement to prove that a violation affects trade. While the new enforcement measures pleased most Democrats, they didn’t go far enough to get environmental groups like the Sierra Club to support the agreement.
f. TRADE SECRETS: It includes protections against misappropriation of trade secrets.
g. INTELLECTUAL PROPERTY: Stronger protection and enforcement of Intellectual Property rights that are seen as critical to driving innovation, creating economic growth, and supporting American jobs.
41. Lastly, the Trans-Pacific Partnership (TPP). This was a deal with 10 countries on the Pacific Rim in Asia plus Australia, New Zealand, Mexico and Canada. Not China—the purpose was to get a deal with these countries before China did. Same kind of deal as NAFTA and USMCA, but Trump pulled us out immediately upon taking office. It wasn’t just Trump—the left was against it, too, including Bernie Sanders, farmers, labor unions, tech companies, environmentalists, economists, LGBTQ advocates, and libertarians. Even Hilary Clinton who had favored it as Obama’s Secretary of State opposed it in her campaign. The coalition that formed grew from dozens, to hundreds, to literally thousands of organizations, many working together for the first time, ranging from Black Lives Matter to Doctors Without Borders to the Tea Party.
42. The pact aimed to deepen economic ties among these nations, slashing tariffs and fostering trade to boost growth. Members had also hoped to foster a closer relationship on economic policies and regulation. The agreement was designed so that it could eventually create a new single market, something like that of the European Union and NAFTA, but we were not in the mood back then for more trade deals that COULD cost jobs like NAFTA seemed to do.
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