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Module9Lecture.pptxGlobalization and Free Trade
Chapter Eleven
Shift in course to international level
This chapter:
globalization & neoliberalism,
free trade versus protectionism,
trade regimes
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Definition
Globalization is an umbrella term for a complex series of economic, social, technological, cultural, and political changes that are seen as increasing interdependence, integration, and interaction between people and companies in disparate locations.
Video: https://www.youtube.com/watch?v=xPD477FuqtY
Today is a
great age of globalism.
For perspective, remember that this is NOT the first age of globalism. Consider:
Alexander the Great
The Romans
The Age of Exploration and Colonization (1492-1650)
Past and present drivers of globalism
Military force
Trade opportunities and wealth creation
Technology enhancements
Public awareness of the globe
New waves of globalization brought increasingly intensive levels of integration
Alexandrian empire: conquest and temporary subjugation
Roman empire: conquest, followed by internal trade and some technological advancements in roads, bridges, infrastructure, increased awareness among elite
Age of exploration: conquest of new lands, resource extraction and trade opportunities, technology (improved navigation and tools of war), increased awareness (e.g., increased literacy and widespread use of the printing press)
Current age (defined here as after the Cold War): little conquest and an emphasis on trade, massive technological advancements in machinery and computers, and increased mobility of interaction and ideas around the world via globalized communication systems.
Neoliberalism and globalism
Elevates the (global) market and downplays the importance of the nation state. Specifically:
Free trade: removal of trade barriers, like tariffs, subsidies, and regulatory restrictions
Privatization: transfer of previously-public-owned enterprises, goods, and services to the private sector
Competitive exchange rates: accepting market-determined exchange rates, as opposed to government-fixed exchange rates
Undistorted market prices: refraining from policies that would alter market prices
Limited intervention: with only exceptions for promoting exports, education, or infrastructural development
Fiscal rectitude: cutting government expenditures and/or raising taxes to maintain a budget surplus
Free Trade
Free trade, advanced by neoliberalism, refers to a policy by which governments do not discriminate against imports or exports. It has long been a debatable topic. Three simple arguments for free trade:
As the market served expands from a national to world stage, there are gains, with declining per-unit production (greater efficiency)
Gains result from the reduction in declining monopoly power of domestic firms (less market distortion)
Consumers gain with increased product variety and lower market costs (greater consumer variety)
Side benefits include increased investment and savings and better diffusion of technology.
One reason for trade: the mutual gain of absolute advantage (Smith)
Absolute advantage is when one country is more efficient than another in a type of product or service. When one country has an absolute advantage in one area, and another country has an advantage in a second product, then the rational for trade is obvious and overwhelming.
(Absolute advantage only tells part of the story…)
A highly developed country may be more efficient in most areas, and thus perceive that it has little need to trade except for resource deficiencies. However, …
A second reason for trade: comparative advantage (Ricardo)
The theory of comparative advantage holds that if one country has an advantage over another country in the production of several goods, it should produce the good in which it has the greatest advantage and buy the good in which it has the least advantage from the other country. Such a principle results in mutual gain because of the enhancement of natural efficiency in both countries.
In addition, employing the theory of comparative advantage also aids in enhancing specialization – a concentration of labor and other resources for producing a single product, a practice which can lead to greater skill and productivity than would be achieved by the same number of workers and resources being devoted to the production of a variety of goods and services.
U.S. government agencies to promote trade
Federal government:
Department of Commerce (local offices in LA and San Rafael)
Export-Import Bank (Exim Bank) http://www.exim.gov/
Overseas Private Investment Corporation (OPIC)
http://export.gov/ : U.S. Government portal
State government
Development (CA Agriculture) https://www.cdfa.ca.gov/exec/public_affairs/trade.html
Trade missions
Local government
Free Trade Zones (FTZs)
The Challenges to Free Trade and the Arguments for Protectionism
The Challenge to Free Trade: Trade Protectionism: 6 Forms
These three forms protect domestic markets.
Tariffs: taxes on incoming goods
E.g., sugar coming into the U.S. from non-Mexican sources
Import quotas: maximum amount of goods that may be brought in. E.g., limits on amount of sugar from Mexico until high tariffs are triggered
Those goods often demand higher prices as scare items (i.e., automobiles)
More restrictive than a tariff
E.g., import quotas on Chinese goods (knit fabrics, dressing gowns, cotton shirts, etc.)
Regulatory barriers: many types
High product standards (e.g., genetically modified foods?)
Obscure rules
These three forms promote domestic goods in foreign markets.
Subsidies:
Tax credits, direct subsidies (loans)
Example: U.S. Sugar Policy (source: sugarcane.org)
Price Support
The U.S. Department of Agriculture (USDA) provides loans to sugarcane and sugar beet producers and processors that guarantee a minimum price regardless of the true market conditions. At the end of the loan term (generally 9 months), sugar producers and processors make one of two choices:
Turn over to the government the sugar they produced as payment for the loan, or
Sell their sugar on the market if the going price is higher than the USDA loan amount
Recently the loan rate was US$ 18.75 cents per pound for raw cane sugar and US$ 24.09 cents per pound for refined beet sugar.
Infrastructure subsidies or free resources such as water or use of public lands at little cost
Exchange controls:
Currency values can be controlled and that affects the trading relationship
Currencies with low valuation can encourage low imports and high exports by keeping value of money low against other currencies
E.g., Chinese government policies for many decades
Dumping: selling a product in another country at a cost lower than its production cost
Generally made up by government subsidy
E.g., Korean automobile industry
Frequently charges of dumping are flimsy or the term is used inappropriately to simply mean selling well below the U.S. market rate (even though production is genuinely cheaper in another country)
Shoe Example
China keeps the Yuan (RMB) low (low currency valuation)
China reduces the taxes on export-oriented shoe companies in China (subsidy). This lack of tax is so dramatic and has such a large impact that the U.S. charges China with “dumping”
Results in…
US limits the number of pairs from China to 1,000,000 per year and all-leather shoes to be limited to 100,000 pairs (import quota)
US requires a high percentage of leather (i.e., the soles) to be called “leather” shoes *(regulatory requirement)
US charges each incoming pair of shoes from China a $2.00 tax (tariff)
It requires additional resources from other industries; output in other domestic industries is reduced.
Consumers are harmed by reduced consumption of protected items and less ability to consume other items as well.
Costs of protectionism: major arguments Video promoting the virtues of free trade: http://www.bing.com/videos/search?q=arguments+against+protectionism&FORM=HDRSC3#view=detail&mid=97499EC753CD03D9C5AC97499EC753CD03D9C5AC
Arguments for restricting trade and their rebuttal by neoliberal economists
National defense:
Retain minimum capacity, especially in key areas such as armaments
over-used argument (very few industries qualify)
Income distribution:
Help select disadvantaged groups such as farmers
but tampers with market and unfair to other groups
Improving the balance of trade:
Improve the trade deficit by reducing imports
still a distortion of market, should only be used sparingly and in the short term
Protection of jobs:
Protect select industries (reasons for legislators in democracies
to listen to this argument; those whose jobs are affected care
more than general consumers), agriculture, clothing, manufacturing,
etc.
yes, there is pain for those involved but need to assist
these workers to migrate to more efficient industries
Infant industries:
Give the industry time to mature; build critical mass
needs to be extremely limited and is over-used argument,
extremely difficult to wean industries off infant industry subsidies
Spillover effects:
Protect industries that provide social usefulness (i.e., domestic R&D)
the market should promote these, not government
Strategic trade policy:
Design select trade policies by reason rather than the market when market is limited
too easily leads to market distortion and political manipulation
Two Neoliberal Tracks: Global and Regional
Two main currents in the world:
Globalism (Examined more in Chapter 13 with International Finance Institutions)
A globalized market for goods and services
A globalization of financial markets
International manufacturing plants and services
Regionalism
Regional economic integration
refers to agreements among countries in a geographic region to reduce, and ultimately remove, tariff and non-tariff barriers to the free flow of goods, services, and factors of production between each other
Preferential Trade Area
A trading bloc that gives trade preferences for certain products to a set of trading partners covered in an agreement. A PTA attempts to reduce tariffs among participants, but does not completely abolish them. The line between a PTA and an FTA may be blurred, as many PTAs today have the goal of eventually becoming an FTA.
Free Trade Area (FTA)
Aims to remove tariffs and other trade barriers among the members (however, each country may establish its own trade policies with nonmember countries) (i.e., NAFTA)
Customs Union
A customs union goes beyond removing trade barriers among themselves and sets a common level of trade barriers against outsiders (i.e., European Union & Turkey Customs Union; New Southern Africa Customs Union)
Common Market
Includes not only the free exchange of goods and services but also the free movement of factors of production (i.e., labor and capital) among members (i.e., Common Market for Eastern and Southern Africa)
Economic Union
Involves the creation of common national economic policies (a common currency or common taxes) (i.e., European Union)
Political Union
A central political apparatus coordinates the economic, social, and foreign policy of the member states (i.e. UAE, unification of East and West Germany, )
Degree of Economic Integration
Political
Union
Economic Union
Common Market
Customs Union
Free Trade Area
Preferential Trade Area
Preferential trade area ___
Free trade area ___
Customs union ___
Common market ___
Economic union ___
Political union ___
Goes beyond removing trade barriers among trading countries and sets a common level of trade barriers against outsiders
A central political apparatus coordinates the economic, social, and foreign policy of the member states
A trading bloc that gives trade preferences for certain products to a set of trading partners covered in an agreement
Aims to remove tariffs and other trade barriers among the members
Involves the creation of common national economic policies
Includes not only the free exchange of goods and services but also the free movement of factors of production
Trade examples involving the U.S.
Member of the world trading community through the World Trade Organization, and the world economic currency and exchange community through the International Monetary Fund (Ch. 13)
Numerous Free Trade Agreements
Several multilateral trade agreements
NAFTA
CAFTA
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The United States has free trade agreements in force with 20 countries. These are:
Australia Israel
Bahrain Jordan
Canada Korea
Chile Mexico
Colombia Morocco
Costa Rica Nicaragua
Dominican Rep. Oman
El Salvador Peru
Guatemala Panama
Honduras Singapore
(Countries in bold are a part of multilateral agreements)
The United States is negotiating bilateral and multilateral free trade agreements with the following countries and blocs:
Free Trade Area of the Americas (FTAA; incl. all countries on the Western Hemisphere, except Cuba) U.S.–Middle East Free Trade Area (US-MEFTA; incl. most countries in the Middle East) Transatlantic Free Trade Area (TAFTA; European Union)
Thailand: United States–Thailand Free Trade Agreement (on hold since the 2006 Thai coup d'état) New Zealand: US–New Zealand Free Trade Agreement [1]
Ghana: US–Ghana Free Trade Agreement Indonesia: US–Indonesia Free Trade Agreement Kenya: US–Kenya Free Trade Agreement
Kuwait: US–Kuwait Free Trade Agreement (Expert-level trade talks held in February 2006) Malaysia: US–Malaysia Free Trade Agreement (last meeting was in July 2008)
Mauritius: US–Mauritius Free Trade Agreement
Mozambique: US–Mozambique Free Trade Agreement
Taiwan: US–Taiwan Free Trade Agreement
United Arab Emirates: US–United Arab Emirates Free Trade Agreement (5th round of talks are yet to be scheduled)
US–Southern African Customs Union Free Trade Agreement (US-SAUC; incl. South Africa, Botswana, Lesotho, Swaziland, and Namibia; on hold since 2006 due to US demands on intellectual property rights, government procurement rights and investment) Ecuador: US–Ecuador Free Trade Agreement
Qatar: US–Qatar Free Trade Agreement (on hold since 2006)
Trans-Pacific Strategic Economic Partnership
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Economic Integration among the Americas
1988 (signed) CUSFTA
Canada and US
1993 (signed) NAFTA
Canada, US, Mexico
2005 (signed) CAFTA
US, El Salvador, Nicaragua, Guatemala, Honduras,
Costa Rica, Dominican Republic
Proposed but stalled/vetoed: FTAA; recently TPP (Trans Pacific Partnership)
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Content of NAFTA treaty
Within 15 years, all tariffs to be eliminated
Removal of most barriers on cross-border flow of services
Removal of restrictions on FDI except in certain sectors (i.e., Mexican railway and energy, US airline and radio communications, Canadian culture)
Protection of intellectual property rights
Applies national environmental standards
Establishment of commission to police violations
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Pros
Enlarged and productive regional base
Labor-intensive industries move to Mexico
Mexico gets investment and employment
Mexican firms become more efficient
Increased Mexican income to buy US/Canadian goods
Demand for goods increases jobs
Consumers get lower prices
Cons
Loss of jobs to Mexico
Mexican firms have to compete against efficient US/Canadian firms
Environmental degradation
Loss of national sovereignty
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NAFTA results…
Recent surveys indicate that NAFTA’s overall impact has been small but positive
From 1993 to 2004, trade between NAFTA’s partners grew by 250 percent
Canada’s trade with NAFTA partners increased from 70% to more than 80% of all Canadian foreign trade
Mexico’s trade with NAFTA partners increased from 66% to 80% of all Mexican foreign trade
All countries experienced strong productivity growth
The United States has lost 110,000 jobs per year due to NAFTA
Many economists dispute this figure because more than 2 million jobs a year were created in the US during the same time period
The most significant impact of NAFTA has not been economic, but political
NAFTA helped create the background for increased political stability in Mexico (GINI coefficient has been dropping since 1999)
Nonetheless, NAFTA has not been without its critics arguing that the blue collar labor market in the US has been decimated, and that wealth concentration in US has gotten worse, among others
CAFTA
Ratified in 2005; approved by razor-thin majority
Formal name: Dominican Republic - Central America Free Trade Area but informally called CAFTA
Phases out tariffs between participating countries over the course of the following decade (Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua -- and the Dominican Republic)
US proponents suggest it will:
Expand economic opportunities for US investors, manufacturers, workers, and farmers; strengthen intellectual property rights
Level the playing field for US businesses selling in Central America
Advance the US trade agenda, and
Support democracy, economic reform, and regional integration
Critics: loss of US jobs, unfair competition for certain industries (especially sugar), would encourage environmental degradation, continued corporatization of agriculture
DR-CAFTA: case study on the challenges: sugar industry (see analytic case, p. 333)
American agriculture divided on CAFTA; meat industry and dairy in favor where market advantage heavily supported US side; sugar industry highly opposed because of the relative strength of cane sugar in Central America
Case study, cont.
US sugar had always enjoyed considerable protection via tariffs externally, and price supports domestically; especially critical for sugar beet producers.
CAFTA allowed more sugar to enter US’s price-inflated market
Sugarcane is more productive; in US the biggest pressure is opportunity cost of land (Louisiana and Florida)
Sugar beets are less productive and more sensitive to fluctuations due to competition (Midwest, CA)
Ultimately, after CAFTA there was…
Mild affect on sugar industry as a whole; production increased but profits squeezed modestly
Some sugarcane consolidation in most efficient areas
Substantial consolidation of sugar beet industry; 20% loss of small farms in just a few years; significant increase corporate farms
FTAA
Free Trade Area of the Americas http://www.ftaa-alca.org/alca_e.asp
Talks have faltered since 2005
Two stumbling blocks include intellectual property rights and reductions in agriculture subsidies
Discussions have faltered over similar points as the Doha Development Round of World Trade Organization(WTO) talks; developed nations seek expanded trade in services and increased intellectual property rights, while less developed nations seek an end to agricultural subsidies and free trade in agricultural goods. Similar to the WTO talks, Brazil has taken a leadership role among the less developed nations, while the United States has taken a similar role for the developed nations.
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