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The International Economy and Globalization

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PowerPoint slides prepared by:

Andreea Chiritescu

Eastern Illinois University

The International Economy

High degree of economic interdependence

No nation exists in 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

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

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

What forces are driving globalization?

Technological change

Multilateral trade negotiations

Continuing liberalization of trade and investment

Widespread liberalization of investment transactions

Development of international financial markets

Waves of Globalization

First Wave of Globalization: 1870–1914

Decreases in tariff barriers & new technologies

Declining transportation costs

Shift from sail to steamships; Railways

Driven by European and American businesses and individuals

Waves of Globalization

First Wave of Globalization: 1870–1914

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

Countries that actively participated in globalization

Became the richest countries in the world

Brought to an end by World War I

Waves of Globalization

Great Depression of the 1930s

Governments – protectionism

Tariffs on imports

Try to shift demand into domestic markets

Promote sales for domestic companies

Promote jobs for domestic workers

Exports as a share of national income

Falls to 5%

Waves of Globalization

Second Wave of Globalization: 1945–1980

Horrors of the retreat into nationalism

Falling transportation costs

Decrease previously established trade barriers

Trade liberalization – discrimination

Which countries participated

Which products were included

Waves of Globalization

Trade liberalization – discrimination

Developed countries, manufactured goods

Largely freed of barriers

Greatly increased the exchange of manufactured goods

Raise the incomes of developed countries

Developing countries

Eliminate barriers only for those agricultural products that did not compete with agriculture in developed countries

Manufactured goods - sizable barriers

Waves of Globalization

Second Wave of Globalization: 1945–1980

New kind of trade

Rich country specialization in manufacturing niches

Gained productivity through agglomeration economies

Firms clustered together

Some clusters produced the same product

Others were connected by vertical linkages

Agglomeration economies

Benefit those in the clusters

Bad news for those who are left out

Waves of Globalization

Second Wave of Globalization: 1945–1980

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

Waves of Globalization

Second Wave of Globalization: 1945–1980

Increased per capita incomes within the developed countries

Developing countries as a group were being left behind

World inequality

Waves of Globalization

Latest Wave of Globalization, began in 1980

A large number of developing countries

China, India, and Brazil

Broke into the world markets for manufacturers

Other developing countries

Increasingly marginalized in the world economy

Decreasing incomes

Increasing poverty

Significant international capital movements

Waves of Globalization

Latest Wave of Globalization, began in 1980

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

Latest Wave of Globalization, began in 1980

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 the lowest

Job losses for blue-collar workers

Cries for the passage of laws to restrict outsourcing

Manufacturing an HP Pavilion, ZD8000 laptop computer

TABLE 1.1

Waves of Globalization

Latest Wave of Globalization, began in 1980

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%

Globalization goes white collar

TABLE 1.2

The United States as an Open Economy

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)

The fruits of free trade: a global fruit basket

TABLE 1.3

The United States as an Open Economy

Openness

Large countries – lower measures of openness

Less reliant on international trade

Many of their companies can attain an optimal production size without having to export to foreign nations

Small countries – higher measures of openness

Exports & imports of goods & services, percentage of GDP, 2007

TABLE 1.4

The United States as an Open Economy

Openness of the U.S. economy, 1890 to 2007

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 United States as an Open Economy

Openness of the U.S. economy, 1890 to 2007

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

The figure shows that for the United States the importance of international trade has increased by more than 50 percent from 1890 to the early 2000s.

Openness of the U.S. economy, 1890–2007

FIGURE 1.1

Leading trade partners of the U.S., 2008

TABLE 1.5

The United States as an Open Economy

Labor and Capital

Movements in factors of production

Measure of economic interdependence

Labor mobility in U.S.

1900, 14% of U.S. population: foreign born

1920s to 1960s

Sharply curtailed immigration

Foreign-born U.S. population: 6%

The United States as an Open Economy

Labor mobility in U.S.

1960s, liberalized restrictions

By 2009

12% the U.S. population was foreign born

Foreigners: 14% percent of the labor force

Half – from Latin America

One quarter – Asians

The United States as an Open Economy

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 United States as an Open Economy

International banking

Average daily turnover in foreign-exchange market

Today: almost $2 trillion

1986: $205 billion

London - the largest center for foreign-exchange trading

The United States as an Open Economy

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?

Law of comparative advantage

Citizens of each nation can gain

Spend more of their time and resources doing those things in which they have a relative advantage

If a good or service can be obtained more economically through trade

Trade for it instead of producing it domestically

How the available resources can be used to obtain each good at the lowest possible cost

Why Is Globalization Important?

Open economies

Produce a larger joint output

Competition - essential to both innovation and efficient production

International competition

Domestic producers - strong incentive to improve the quality of their products

Weakens monopolies

World imports relative to U.S. consumption have doubled over the past four decades, making more of what consumers purchase subject to increased competition inherent in international trade. This added competition tends to hold down the cost of goods and services as seen for the period 1987 to 2003.

Global competition lowers inflation

FIGURE 1.2

Why Is Globalization Important?

Open economies

More competition

More firm turnover

Improvements for the industry

Economic growth rates - close relation to:

Openness to trade

Education

Communications infrastructure

The figure shows the weighted average tariff rate and per-capita growth rate in GDP for 23 nations in 2002. According to the figure, there is evidence of an inverse relationship between the level of tariff barriers and the economic growth of nations.

Tariff barriers versus economic growth

FIGURE 1.3

Why Is Globalization Important?

Globalization

Rapid growth in some countries

Increased demand for commodities

Crude oil, cooper, steel - higher prices

Increased supply of substitutes

Biodiesel, ethanol

Domestic economy

Vulnerable to disturbances initiated overseas

Increased competition from abroad

Schwinn Bicycle Company, Dell Computer Corporation

The Global Recession of 2007 – 2009

Immediate cause of the global economic crisis

Collapse of the U.S. housing market

Resulting surge in mortgage loan defaults

Undermined the financial institutions that originated and invested in them

Creditors and uninsured depositors

Pulled their funds and cashed out of securities issued by risky institutions

Invested in U.S. Treasury securities

GLOBALIZATION

The Global Recession of 2007 – 2009

Immediate cause of the global economic crisis

Many institutions failed, others struggled to survive

Banks - fearful about making loans

The credit spigot closed

The global economy withered

Global stock investors dumped their holdings

Self-reinforcing adverse economic downturn

Crisis in confidence

GLOBALIZATION

The Global Recession of 2007 – 2009

Roots of the problem

Lack of fear - booming housing market of 2006

Mortgage-backed securities

Booming housing market

Government pressured banks to serve poor borrowers and poor regions of the country

Community Reinvestment Act

Default mortgages

GLOBALIZATION

The Global Recession of 2007 – 2009

The crisis goes global

Europe

Exposure to defaulted mortgages in the U.S.

Emerging economies

Lacked resources

Extremely poor countries

Decrease in foreign aid

China - depressed its export markets

Crisis in confidence

GLOBALIZATION

The Global Recession of 2007 – 2009

Combating a crisis in confidence

Pump liquidity into troubled financial institutions

Provide increased or unlimited deposit insurance

Central banks

Coordinated interest-rate reductions

Purchased commercial paper & money market instruments

GLOBALIZATION

The Global Recession of 2007 – 2009

Combating a crisis in confidence

Governments

Large fiscal stimulus packages

Tax cuts

Increased government spending

International Monetary Fund

Financial aid to emerging countries

GLOBALIZATION

Common Fallacies of International Trade

“Trade is a zero-sum activity”

Both partners gain from trade

“Imports reduce employment and act as a drag on the economy, while exports promote growth and employment”

Failure to consider the link between imports and exports

Common Fallacies of International Trade

“Tariffs, quotas, and other import restrictions will save jobs and promote a higher level of employment”

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

Higher consumption

Does Free Trade Apply to Cigarettes?

Free cigarettes trade

Higher consumption

More smoking, disease, and death

Globally - 4 million people die each year from:

Lung cancer, emphysema

Other smoking-related diseases

Antismoking activists

Cigarettes are “bads”

Require their own set of regulations

Benefits of free trade do not apply to cigarettes

Does Free Trade Apply to Cigarettes?

World Health Organization

Some nations

Support provisions to emphasize antismoking measures over free-trade rules

United States

Promoted freer trade in cigarettes

Challenged rules imposed to aid local cigarette makers

Current trade rules

Countries can enact measures to protect the health and safety of their citizens

Is International Trade an Opportunity or a Threat to Workers?

International trade benefits many workers

Cheaper consumption goods

Employers – better technologies and equipment

Workers - more productive

Exports - generates jobs and income for domestic workers

Is International Trade an Opportunity or a Threat to Workers?

Not all workers gain from international trade

Cheap imports

Rising unemployment and wage inequality

Threatening to unskilled workers in the import-competing sectors

Lobby to restrict imports

Is International Trade an Opportunity or a Threat to Workers?

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

Is International Trade an Opportunity or a Threat to Workers?

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

Proponents of free trade and globalization

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

Critics of free trade and globalization

Benefit large corporations

Rather than average citizens

Environmentalists

Elitist trade organizations make undemocratic decisions

Undermine national sovereignty on environmental regulation

Unions

Unfettered trade permits unfair competition

Backlash Against Globalization

Critics of free trade and globalization

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

Advantages and disadvantages of globalization

TABLE 1.6

Advantages

Disadvantages

Productivity increases faster when countries produce goods and services in which they have a comparative advantage. Living standards can increase more rapidly. Global competition and cheap imports keep a constraint on prices, so inflation is less likely to disrupt economic growth. An open economy promotes technological development and innovation, with fresh ideas from abroad. Jobs in export industries tend to pay about 15 percent more than jobs in import-competing industries. Unfettered capital movements provide the United States access to foreign investment and maintain low interest rates.

Millions of Americans have lost jobs because of imports or shifts in production abroad. Most find new jobs that pay less. Millions of other Americans fear getting laid off, especially at those firms operating in import-competing industries. Workers face demands of wage concessions from their employers, which often threaten to export jobs abroad if wage concessions are not accepted. Besides blue-collar jobs, service and white-collar jobs are increasingly vulnerable to operations being sent overseas. American employees can lose their competitiveness when companies build state-of-the-art factories in low-wage countries, making them as productive as those in the United States.

Terrorism Jolts the Global Economy

Continuing terrorism

Companies – increased security costs

Heightened border inspections

Slow shipments of cargo

Companies - stock more inventory

Tighter immigration policies

Reduce inflows of skilled and blue-collar laborers

Greater preoccupation with political risk

Companies – fewer investments

Terrorism Jolts the Global Economy

International trade

Weapon in the war against terrorism in the long-run

Increasing living standards in impoverished regions

Eliminating an important cause of war and terror

Competition in the World Steel Industry

1982, average cost per ton of steel

U.S. producers: $685 per ton

52% higher than for Japanese producers

Cost differential

Strong U.S. dollar

Higher U.S. costs of labor (25% of total cost)

Higher U.S. cost of raw materials (45% of total cost)

High fixed costs of production

TRADE CONFLICTS

Competition in the World Steel Industry

U.S. steelmakers

Reduce production costs, regain competitiveness

Long-term contracts for raw materials (lower prices)

Labor contracts - 20 to 40 percent improvement in labor productivity

Problems

Large unfunded pension obligations

Large healthcare costs for retirees

Shrinking employee base

TRADE CONFLICTS

World steel cost comparisons: cost per ton of steel, 2009

TABLE 1.7

(

)

Exports + Imports

Openness =

GDP