ECON 335 - The International Economy and Globalization

1.) Commercial banking 2.) Securities firms - globalized operations

1. ) U.S. banks - Worldwide branch networks, 1960s and 1970s - Loans, payments, foreign-exchange trading 1 a.) Foreign banks - Increased presence in U.S. in 1980s and 1990s - Today: more than 250 foreign banks operate in U.S. 2.) By 1980s, U.S. government securities traded on 24-hour basis

Why is Globalization Important? International trade also gains from competitive process

Competition essential to innovation, efficiency Global competition can result in high-cost domestic producers exiting market

High degree of economic interdependence: Mutually advantageous for trading nations

-Specialization, efficiencies of large scale production -Wider variety of products at lower cost

Waves of Globalization (Fist Wave): 1870-1914

1.) Decreases in tariff barriers 2.) Technological developments 2a.) Declining transportation costs -Shift from sail to steamships; railways 3.) Driven by European and American businesses and individuals

Greater interdependence between countries and their citizens

1.) Increased international flows of: Goods and services People Investments in equipment, factories, stocks, bonds 2.)Non-economic elements Culture and the environment

Openness 1. Large countries - lower measures of openness 2. Small countries -higher measures of openness Find reason for 1.

- Less reliant on international trade - Many firms in larger countries can attain optimal production size without having to export due to the population and economic size

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)

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)

Globalization

Greater interdependence between countries and their citizens

Waves of Globalization Beginning

History of globalization tied to the evolution of trade

Backlash Against Globalization: Critics of free trade and globalization say

Human rights activists argue that World Bank and International Monetary Fund support governments that Allow sweatshops Pursue policies that bail out government officials at expense of local economies

Common Fallacies of International Trade: Free trade

Increases competition, lowers prices Makes better products available to consumers Results in higher consumption

High degree of economic interdependence: Protectionist pressures

Some developing nations argue that liberalized trading system serves to keep them in poverty

Formula Openess

(Exports + Imports) / GDP

Openness of the U.S. economy, 1890 to 2013: Less open to international trade, 1890 to 1950

1.) Relatively high openness in late 1800s 1a.) Rise in world trade: technological improvements in transportation and communications 2.) Two world wars + Great Depression of the 1930s 2a.) Reduced dependence on trade **National security reasons **Protect home industries from import competition

Globalization and free trade provide benefits to many but impose burdens on others

- Kodak had 90% camera market share but was complacent; did not address competition by adopting 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 was undercut by smart phones; filed for Ch 11 bankruptcy - Kodak now a small digital imaging company

International Trade: Opportunity or 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 less efficient utilization of resources

International Trade: Opportunity or Threat to Workers?International trade

Just another kind of technology Adds value to inputs

Why is Globalization Important? Open economies

More competition, which lowers prices More firm turnover Improvements for industry

A. Fed Policy Incites/Provokes Backlash

-Domestic economic policies have spillover effects on other economies -Quantitative easing by Fed, intended to stimulate U.S. economy during Great Recession, criticized by U.S. trading partners as attempt to improve American competitiveness through depreciation of dollar

History of globalization tied to the evolution of trade

-In late 1700s and 1800s, mass production and improved transportation made international trade easier, making most goods tradeable -Rise of global manufacturing in 1990s characterized by geographical fragmentation of productive processes and offshoring of industrial tasks

Economic Interdependence: High degree of economic interdependence:

-No nation exists in economic isolation -All aspects of a nation's economy linked to economies of trading partners -Reflects historical evolution of the world's economic and political order -Economic interdependence is complex, and its effects are uneven

Economic Interdependence: High degree of economic interdependence: Continue

-Steps toward international cooperation -Mutually advantageous for trading nations -Protectionist pressures

Latest Wave of Globalization (1980 to present) (cont): 1.) Protectionist policies in developed countries 2.) Some developing countries have harnessed competitive advantage in labor-intensive manufacturing is ________

1.) Bangladesh, Malaysia, Turkey, Mexico, Hungary, Indonesia, Sri Lanka, Thailand, and the Philippines 2.) Tariff cuts and lower barriers to foreign investment 3.) Technological progress in transportation and communications

Second Wave of Globalization: 1945-1980 (cont): Developing countries as group left behind Most developing countries did not participate in growth of global trade in manufacturing and services is ________

1.) Continuing trade barriers in developed countries 2.) Unfavorable investment climates 3.) Antitrade policies of developing country governments 4.) Dependence on agricultural and natural-resource products

Developed and developing countries differentially affected during second wave of globalization

1.) Developed countries largely freed of barriers 1a.) Greatly increased the exchange of manufactured goods 1b.) Raised incomes in developed countries 2.) Developing countries 2a.) Exports faced no barriers only for agricultural and primary goods not produced in developed countries 2b.) Exports of manufactured goods faced sizable barriers

Latest Wave of Globalization (1980 to present) (cont): 3.) World more globalized - international trade, capital flows 4.) Foreign outsourcing is ______

1.) Different aspects of a product's manufacture performed in more than one country 2.) Manufacturing moved to wherever costs were lowest **Job losses for blue-collar workers **Cries for passage of laws to restrict outsourcing

Great Depression of 1930s

1.) Governments practiced protectionism 1a.) Raised tariffs on imports -Tried to shift demand into domestic markets to *Promote sales for domestic companies *Promote jobs for domestic workers 2.) Exports as share of national income fell from 8% to 5%, undoing 80 years of technological progress in transportation

Second Wave of Globalization: 1945-1980

1.) Horrors of retreat into nationalism renewed incentive for globalization 2.) Falling transportation costs fostered increased trade 3.) Trade liberalization not uniform 3a) Which countries participated? Mainly developed countries 3b.) Which products were included? Manufactured goods

Latest Wave of Globalization (1980 to present)

1.) Many developing countries have participated, led by 1a.) China, India, and Brazil, which entered world markets for manufactured goods 2.) Other developing countries 2a.) Increasingly marginalized in the world economy, with decreasing incomes and rising poverty 3.) Significant international capital movements

Disadvantage of Globalization

1.) Millions of american lost jobs b/s of imports or shifts in production abroad, need find new jobs pay less 2.) Millions have fear of being laid off, especially in importing 3.) Worker face wage conssessin due to fear of losing jobs 4.) White collar jobs sent overseeas 5.) American loss competitiveness when building state-of-the-art factories in low wage countries

Advantages of Globalization

1.) Productivity increases faster when countries produce goods/ services in which they have comparative advantage = Living standards increase more 2.) Global competition and cheap imports keep constraint on prices, so inflation is less likely to disturb economy 3.) An open economy promotes technological development & innovation with fresh ideas from abroad 4.) Jobs in exporting industries pays up to 18% more than jobs in importing competing industries 5.) Unfettered capital movements provide the U.S.A access to foreign investment and maintain low interests

Second Wave of Globalization: 1945-1980 (cont): New kind of trade

1.) Rich country specialization in manufacturing niches 1a.) Gained productivity through agglomeration (mass) economies *Firms clustered together *Some clusters produced same product; others connected by vertical linkages 2.) Agglomeration economies 2a.) Benefits only those in clusters

Openness of the U.S. economy, 1890 to 2013 (cont) 1.) After World War II - negotiated reductions in trade barriers 2.) U.S. trade Know both

1.) Rising world trade; technological improvements in shipping and communications 2.) In 1890, mostly raw materials and agricultural goods Today, manufactured goods and services U.S. producers more affected by foreign competition today than 100 years ago

What forces are driving globalization?

1.) Technological change 2.) Multilateral trade negotiations - Continuing liberalization of trade and investment 3.) Widespread liberalization of investment transactions 4.) Development of international financial markets

First Wave of Globalization: 1870-1914 (cont)

4.) Exports as share of world income nearly doubled to 8% 5.) Per capita incomes increased 1.3% per year 5a.) Previous 50 years: 0.5% per year 6.) Nations that actively participated in globalization became richest countries in world 7.) Brought to an end by World War I

Latest Wave of Globalization (1980 to present) (cont) 6.) By 2000s, foreign outsourcing of white-collar work 7. ) Foreign outsourcing

6a.) Information Age **Digitization, Internet, and high-speed data networks around world 6b.) Sending upscale jobs offshore ** Accounting, chip design, engineering, basic research, and financial analysis 7a.) Reduce costs of a given service: 30 to 50%

International Trade: Opportunity or Threat to Workers?International trade

Aligns domestic prices with international prices Wages increase for workers whose skills are scarce Wages decrease for workers who face increased competition Jobs lost in one industry replaced by jobs gained in other industries

International banking

Average daily turnover in foreign-exchange market - Today: almost $4 trillion - 1986: $205 billion Trading day begins in Tokyo and Sydney and moves around world in unbroken 24-hour cycle London - largest center for foreign-exchange trading

Backlash Against Globalization: Criticisms of free trade and globalization

Benefits large corporations at expense of average citizens Environmentalists argue that elitist trade organizations like WTO make undemocratic decisions Undermine national sovereignty over environmental regulation Unions argue that unfettered trade permits unfair competition

International Trade: Opportunity or Threat to Workers? International trade benefits many but not all workers

Cheaper consumer 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

Backlash Against Globalization: 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

Why is Globalization Important? Law of Comparative Advantage:

Each nation gains by producing goods in which it has relative advantage If a good or service can be obtained more economically through trade, makes sense to trade for it, not produce it

Common Fallacies of International Trade: Trade is a zero-sum activity"

False; both partners gain from trade

Common Fallacies of International Trade: Tariffs, quotas, and other import restrictions will save jobs and promote a higher level of employment"

False; fails to recognize that a reduction in imports does not occur in isolation

Common Fallacies of International Trade: "Imports reduce employment and burden the economy, while exports promote growth and employment"

False; source of fallacy is failure to consider link between imports and exports

Capital flows to U.S.

Foreign ownership of U.S. financial assets has risen since 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 rest of the world

Globalization and free trade provide benefits to many but impose burdens on others (cont 2): Once, 150 U.S. manufacturers of televisions

Imports from Japan, China, South Korea, others Flat panel TVs lighter, cheaper to ship from Asia By 2000, no U.S. TV manufacturers But costs in China rising, U.S. factories more competitive; In 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 "Made in America" logo

Labor mobility in U.S. has not risen in past 100 years

In 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% of U.S. population foreign born Foreigners: 14% percent of labor force Half - from Latin America One quarter - Asians

Latest Wave of Globalization (1980 to present) (cont) 5.) Digital platforms increasingly enable small companies and individual entrepreneurs to participate in global economy

Integrated factory floor increasingly replaced by network of individual suppliers specializing in specific services or phases of production Boeing 787 Dreamliner is example of trade occurring between different participants of a production chain

Why is Globalization Important? Economic growth rates - closely related to

Openness to trade Education Communications infrastructure

Globalization and free trade provide benefits to many but impose 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

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 "bads," requiring their own regulations Must distinguish between regulating cigarettes for public health and regulating them to protect domestic markets