PSCI 152 Midterm 2
Balance of payments
- Balance of payments: accounting device that records all international transactions between a particular country and the rest of the world for a given period. - Current account: records all of the current non financial transactions between the US and the rest of the world (trade, services, income, and unilateral transfers) - Capital account: records all financial flows between the US and the rest of the world (stocks, bonds, purchase of factories). - Current and capital account must be mirror images of each other (if one is a deficit, the other is a surplus).
Locational advantages (and FDI)
- Derive from specific country characteristics - Locational advantages in natural resource investments arise from the presence of large deposits of a particular natural resource in a foreign country - Natural resources: resource extraction, mining, drilling, rare earth metals (for cell phones, only in Africa) - Market access: Large protected markets and emerging economies are profitable - large consumer markets that are expected to grow rapidly over time, have a small number of domestic firms in that particular industry (example: auto industry) - Gains in efficiency: comparative advantage in factor endowments - availability of factors used intensively in production of a specific product at a lower cost
Economic crisis (1980s)
- Economic crisis because governments borrowed through foreign loans to finance budget and current-account deficits (not inherently bad), but because the funds were used for large infrastructure projects or domestic consumption - Developing countries hit with three international shocks: 1) Oil prices increased 2) Deteriorating terms of trade between primary commodities and manufactured goods 3) Higher interest rates on foreign debt - Countries turn to the IMF and the World Bank which had a lot of leverage
U.S.-Canada Free Trade Agreement of 1989
- Eliminated all tariffs by 1998 - National treatment for covered services - Binational dispute settlement panel created to solve disagreements fairly
Exchange rates
- Exchange rate: price of one currency in terms of another - Fixed exchange rate system: government establishes a fixed price for their currency in terms of an external standard such as gold or another country's currency. Governments practice foreign exchange market intervention to maintain the fixed price by buying and selling foreign currencies - when the dollar appreciates the US sells dollars and buys yen (to increase supply), and when dollar depreciates US sells yen and purchases dollars (to decrease supply). - Flexible/floating exchange rate system: No limits on how much a currency can move in foreign exchange market - value of currency wholly determined by activities of private actors as they buy/sell currencies. High demand for US goods leads to high demand for USD which leads to the USD appreciating (when demand increases currency appreciates). When the Fed increases the money supply there are more USD available and the USD depreciates (when supply increases currency depreciates). - Fixed-but-adjustable exchange rate system: Currencies are given a fixed exchange rate against a standard and governments have to maintain the rate but can change it occasionally. - Managed float: Governments intervene in the market to influence their currency's value, but there are no rules about when this intervention can occur (current international monetary system).
State-owned enterprises
- Governments nationalized or created companies (like the oil industry) - State was the largest producer in many countries - Many weren't profitable and drained state-resources
Structural adjustment programs
- IMF and WB linked financial assistance to economic reform - Liberalized trade - Created stable macroeconomic environments - Privatized state-owned enterprises - Many countries implemented SAPs between 1983-1995 - Incomes fell sharply - Redistributed income from urban sector to agriculture and emerging export-oriented industries - Large job losses - Economic performance has been uneven - poverty rates and inequality remain high - Evidence suggests that the short term costs have been followed by stronger growth than would have occurred in the absence of reform - Politically challenging to reform, governments relied on urban political support, economic crisis reduced the credability of the old policies
Balance of payments adjustment
- Imbalance of payments arises when the current and capital accounts don't balance with other out (for example, a current account surplus where you are spending less than earning in income, or a current account deficit where you are spending more than earning in income - this can happen when other countries keep lending to you so you can have a sustained deficit). - In a fixed exchange rate system adjustment occurs through changes in domestic prices - governments intervene to maintain the fixed exchange rate. - In floating exchange rate system the currency will appreciate or depreciate until the market clears and the balance is corrected. This will make the exchange rate change but not affect domestic prices. - In both systems the country with the deficit will have decreasing prices and will export more goods. - Governments cannot have stable fixed exchange rates and stable domestic prices.
Specific Assets
- Investment for specific long-term relationship - Challenge: owner of that asset may be exploited - It's hard to write and enforce long-term contracts because of the incentives for opportunistic behavior - Solution: vertical integration
Intangible asset
- Knowledge or skills possessed by a firm - Challenge: how does a buyer price an unknown skill? - Hiding what you are buying - don't want to sell away your proprietary knowledge but people won't pay for something they don't know - Solution: horizontal integration - Subject to the paradox of information
Horizontal integration
- Solution to intangible assets - Multiple production facilities for the same good - Don't have to sell away ideas to increase production, can keep it all within the same corporation - Benefit from intangible asset in each factory - Example: Ben and Jerry's
Vertical integration
- Solution to specific assets - When firms internalize their transactions for intermediate goods - Example: railroad buys shipping company because it is going to take advantage of otherwise - Oil companies often do this
East Asian Development Model
- South Korea, Singapore, Taiwan, and South Korea - Per capita income, manufacturing output, and exports grew remarkably from 1965-1990 - Exhausted benefits of ISI, then exported - 2 explanations for this success: 1. IMF and World Bank explanation: successful because adopted a neoliberal approach to development. Selective import liberalization, and stable macroeconomic environments (low inflation, maintained appropriately values exchange rates, and pursued conservative fiscal policy). 2. Other scholars explanation: successful because the government intervenes to guide development. Unlike ISI, focus on exports. Preferential access to low-cost credit for exporters - export performance determined access to credit. Infant industry protection (like computers). Undervalued exchange rates - goods cheaper/more competitive in international markets. Investment in human capital through education - increased enrollment in schools, massive growth in per student budget. 3 stable elements of macroeconomic environment: low inflation, appropriately valued exchange rates, and conservative fiscal policies. 3 stages of development: (don't think is as important) - Industrial policy promoting labor intensive light industry - Industrial policy promoting heavy industry - Governments targeting research and development intensive consumer durables and industrial machinery
Chinese economic reforms (three pillars)
- Started transition as centrally planned economy - Gradualism (after 1976, China starts to slowly open to the market) 3 pillars: 1) 1970s - market incentives in agriculture 2) 1984 - market incentives for manugacturing (SOEs start getting privatized) 3) 1980s - open door (special economic zones, liberalizing FDI and trade, more MNCs could invest in China) - GDP dramatically increased since 1995, growth since the 1980s - Percent living in poverty has dropped from 53% to 8% - 400 million less in extreme poverty than 25 years ago
North American Environmental Cooperation
- Went into effect the same day as NAFTA - Required enforcement of environmental laws/standards - Very contentious issue in US domestic policy, and this was a good opportunity to set a global standard for environmental regulations
North American Labor Cooperation
- Went into effect the same day as NAFTA - Required enforcement of labor laws - Allows for cross-border enforcement of laws - Example: If Mexico violating a domestic labor law, the US can sue - Very contentious issue in US domestic policy - people thought that because of Mexico's law labor laws they got an unfair advantage since they didn't have to pay workers as much
Market imperfections (incentivizing to MNCs)
1. Intangible assets - horizontal integration 2. Specific assets - vertical integration Integration happens when intangible assets or specific assets are present as well as locational advantage. If only specific assets are present, you'll see a vertically integrated domestic firm. If only intangible assets are present, you'll see a horizontally integrated domestic firm.
Backward linkages
A term applied to the industrialization process that refers to instances when the creation of a domestic industry increases demand in domestic industries that supply inputs to the original industry. For example, the creation of a domestic auto industry may increase the demand for domestic auto parts such as batteries, glass, tires, etc. Was the goal in secondary ISI.
Investor-state dispute settlement (ISDS) (Pros, cons, concerns)
Bilateral Investment Treaties (BITS) - Agreement between two countries for the reciprocal encouragement, promotion, and protection of investment in each other's territories by companies based in either country - Include dispute settlement process - Number being signed going up each year until 2000 - Growing number of disputes (more than 600 in recent years) - most are ruled on in secret, isn't very transparent at all - 95% of complainants are firms from developed countries, respondents (governments being sued) are 86% developing countries - Bounded rationality: governments who signed BITs weren't thinking that critically, didn't realize that they would allow MNCs to sue them (once they get sued they stop signing any more treaties) - Strong backlash against BITs by governments and the public - Media coverage of ISDS increased a ton in 2015 because more prolific cases with potential negative externalities for the public - US and NAFTA ISDS: Canada suing US over Obama's rejection of keystone XL pipeline, US has never lost an ISDS lawsuit, US firms initiate over 65% of firms - Getting sued generates 2 times the media coverage BUT IDK IF THESE ARE PROS/CONS/CONCERNS???
Foreign-direct investment (FDI)
Definition: an investment made to acquire lasting interest in enterprises outside the investor's economy. - FDI occurs when a firm based in one country builds a new plant or factory, or purchase an existing one, in a second country. - Inflows: abroad investment in your country - Outflows: investment from your country abroad - MNC operations are concentrated in the advanced industrial world - largest recipients of the world's FDI. - Uneven distribution of FDI among developing countries (a few rating American and asian countries get the most, Africa left out, US top inflows and outflows of FDI) - FDI most important flow of money across countries (more than remittances, Official Development Assistance)
Deteriorating terms of trade
Definition: when the average price of exports falls relative to the average price of imports. Structuralism believed that this would happen in developing countries because of the income elasticity of demand for primary and manufactured goods.
Export-oriented strategy
East Asian Development Model - emphasized producing manufactured goods that can be sold in the international market.
Economies of scale
Economies of scale is the competitive advantage that large entities have over smaller ones. The larger the business, non-profit, or government, the lower its per-unit costs. It can spread fixed costs, like administration, over more units of production. ISI countries didn't have these and that's one reason why they had persistent current account deficits.
Multinational corporations
Firms that control and manage production establishments (plants) in at least two countries. MNC investment in the developing world had increased, but the majority of this investment has been concentrated in a very small number of developing countries. - International trade and investment - Became significant in the 1800s but started much earlier - slow growth in MNCs until the last 35 years - MNCs account for 1/3 of global exports - MNC value chains account for 80% of all trade - You trade internally - buy from your own factories in different countries - Transnational corporations: don't have subsidiaries but just many companies, no centralized management system, able to gain more interest in local markets - MNCs exist to cut costs - take advantage of foreign markets
ISI and Economic Imbalances
Government budget deficits - Major investments - SOEs ran major deficits - Subsidies for infrastructure and services - Expanded civil service (building new working class in urban setting), but inefficient form of economic development Current account deficit - Current account = total exports minus imports of goods and services - ISI relied on imports for machinery - Domestic production not competitive - lacked economies of scale - Agricultural taxes reduced production and exports (developing countries had a comparative advantage in agriculture so it didn't make sense that they walked away from it) - exchange rates - overvalued currency - Imports were relatively cheaper, exports weren't competitive - Efforts to revalue currency were met with protests - States lacked revenue to sustain ISI independently (ran out of money) - Foreign borrowing - states used loans to fund programs - Risk of loans increased and became unsustainable (loans were in foreign currency, the currencies of developing countries might depreciate but the foreign currencies don't, and Western countries viewed it as risky to loan to Latin America so high interest rates) - In Latin America and many other countries ISI brought modest growth but high government deficits ISI distributional effects - targeted agriculture: governments taxed agriculture exports through marketing boards which set the prices farmers received for crops - raised domestic prices for manufactured goods - redistributed income - promoted rapid economic growth Why ISI failed - distributional consequences - government budget deficits (led to debt crisis) - domestic production was not competitive - current account deficit - still relied on imports of intermediate goods which were expensive - overvalued currency
Income elasticity of demand for commodities
High for manufactured goods, low for primary commodities.
Obsolescing bargain
In natural-resource industries, bargaining power initially favors the MNC because many countries have resources, few firms have capital and technology to extract, and uncertain return on investment. But over time shifts to the host country because the MNC can't easily remove the fixed investment from the country so becomes a hostage (like a copper mine) and technology is transferred to the local workers and business people, and uncertainty is reduced over time (like once you dug the mine you know how much copper there is). The widespread nationalization during the 60s and 70s was an example of this.
Neoliberalism
In the past 30 years neoliberalism has replaced structuralism as the guiding philosophy of economic development. This shift emerged because of three developments in the international economy: 1) ISI generating two economic imbalances 2) Small group of East Asian economies were outperforming all the other developing countries based on what many viewed as a neoliberal strategy 3) Severe economic crisis in the early 1980s forced governments to reform and the IMF and World Bank encouraged them to base reform on neoliberal model. Neoliberal reforms: - Lower trade barriers - Decreased role of the state - Increased average growth - Uneven impacts on income distribution
Preferences toward FDI (Hosts versus Home, State, labor, etc.)
MNC: - Maximize well-being of stake-holders (profit) - Corporate/social responsibility (effective marketing strategy) Government: - Stay in power - Maximize well-being of country Home: - Seek protections of investments Host: - Seek autonomy to regulate investments
Regulatory arbitrage
MNCs seek countries with favorable regulations. Reduced regulation can reduce production costs, but there are concerns regarding labor and the environment. however, there are also incentives to avoid the bottom - MNCs want high quality labor (kids in school, workers showing up every day); MNCs actually want some basic regulations.
Expropriation / nationalization
Many developing countries expropriated MNCs and domestic corporations under ISI and creates SOEs.
Complementary demand
Market imperfection structuralists believed in. The initial transformation from an agricultural economy to a manufacturing economy can't happen without state intervention because in an economy in which only a few people earn wages (since most are farmers) a single firm won't be able to sell its products unless a lot of other manufacturing industries start simultaneously. Collective action problem - no one wants to be the first mover.
Pecuniary external economies
Market imperfection structuralists believed in. Two firms (steel and auto) are complementary - when production increases in one it increases their income and incentivizes the other plant to expand as well. This simultaneous expansion will raise national welfare. However, plants face coordination problems - one won't increase production unless it is positive that the other one will also. Input producers need a strong market to expand, but have to move simultaneously.
Regulation of FDI and MNCs (nationally and internationally)
Nationally: - Bargaining to reach an agreement on how the income generated from an investment will be distributed between the MNC parent and the host country - Distribution depends on each side's relative bargaining power - Bargaining power arises from the extent to which each side exerts monopolistic control over things valued by the other - In labor-intensive manufacturing industries, MNCs have more bargaining power because no host country has a monopoly on low-skill labor and these investments aren't susceptible to the obsolescing bargain - Bargaining: host countries offering locational incentives (packages that increase the return or reduce the cost or risk of an investment), usually tax incentives, tax holidays, infrastructure development, import duty exceptions, or grants - Both have monopoly: bargaining power even (Democratic Republic of the Congo and cobalt) - Both don't have monopoly: bargaining power even (most economic sectors) - Only host country has monopoly (luxury brands and China) - Only MNC has monopoly (Google and worldwide internet services) East Asian Countries - Export Development -Singapore & Hong Kong : very open to FDI-South Korea & Taiwan: directed FDI (strategic industries open to FDI, export-processing zones) Internationally: - There are no comprehensive rules governing MNCS - Four historic principles: 1) FDI is private property - national treatment applies 2) Expropriation only for public purpose 3) "Adequate, effective, and prompt" compensation 4) Right to appeal to home country in dispute - Post WWI these principles are challenged - Latin America challenges right of home government to intervene - USSR rejects premise of private property - Expropriations increase for "public purposes" - Host countries seek right to expropriate - Res. on Permanent Sovereignty of Natural Resources - Home countries seek global standards (pursue Multilateral Agreement on Investment (MAI), move negotiations to OECD, no agreement) - Growth in bilateral investment treaties (BITs): agreement between two countries for the reciprocal encouragement, promotion, and protection of investment in each other's territories by companies based in either country
Bretton Woods System
Pre WWI: Gold standard - Each country fixed exchange rate to gold, nations currencies fixed against each other - The dollar exchanged for gold at $20.67 per ounce (1834-1933) - Prices rose as gold flows in, prices drop as gold flows out, domestic price volatility Bretton Woods System (1944 - 1971) - The dollar is fixed to gold at $35 per ounce - First attempt to make exchange rates a matter of international cooperation - Created IMF to manage stabilization fund - Dollars became the system's primary reserve assets - Failed because US was continually in deficit and dollar was devalued, and governments would have had to accept the domestic consequences of balance-of-payments adjustment, and none were willing
Singer-Prebisch Theory
Participation in trade would make it harder for developing countries to industrialize. An improvement in terms of trade (the price of exports/the price of imports) makes countries richer. Developing countries have steadily deteriorating terms of trade over time because developing countries export primary commodities and import manufactured goods and primary commodity prices fall relative to manufactured goods prives because income elasticity for demand (when someone gets richer will they purchase/consume more of the good?) is low for primary commodities and high for manufactured goods.
ISI (two stages)
Pre-WWI developing economies - Colonies or legacies of colonialism - Comparative advantage in land, held by big land owners - Economic model - exporting raw materials and agriculture to core, importing manufactured goods from core During Great Depression/WWII - Developed countries reduced imports (particularly agriculture) - Falling commodity prices, less export revenue and purchasing power - Plan of substituting important with domestic products, but internal demand low What changes? - Self reliance - production of manufactures goods - Import-competing interests pressure government for favorable policies - Process of democratization 1. Easy phase - Domestic manufacturing of simple goods (beer, soda) - Domestic demand for goods (previously purchased imports) - Acquire production technology from other countries - Employ low-skill labor - Goals: increase wage-based employment, workers develop human capital (management skills, preparation for more complicated development) After easy fase: - Domestic demand for simple goods will max out - Option 1: switch to export substitution (export simple goods) - Option 2: Switch to manufacturing more complex goods 1. Secondary ISI - Manufacturing more complex goods - Backward linkages: increased demand for supplies from other industries - Example: Latin American countries requiring domestic production - Brazil: ROO for auto industry - 90% of cars had to be made locally, also subsidized investment to encourage development - gov planning - investment policy - trade barriers - Govs owned or controlled financial sector - SOEs
Effects of FDI on host countries (pros and cons)
Pros: - MNCs can bring resources to host countries that aren't easily acquired otherwise - FDI can transfer savings from one country to another - MNCs can bring teach and managerial experience to host countries - can generate positive externalities with wider implications for development - MNCS can enable host-country producers to become integrated in the global marketing chain - Increases productivity of labor, demand for labor, and wages for labor (highly skilled labor benefits the most 50-70% higher wages in MNCs, but low skill wages also rise 10-30% higher) - Lower prices benefit domestic consumers Cons: - MNCs make decisions about how resources will be used in the host country - MNCs can decrease the amount of funds available for investment in the host country - MNCs might drive established host-country firms out of business - MNCS might maintain tight control over managerial positions or tech positions - MNC decisions about how to use revenues generated by affiliated might not be related to host country government's economic objectives - Limit government direction of investment - MNCs don't have much control over how they spend their resources/profits, but this isn't that different from private domestic firms - Political challenges - FDI in US getting higher level of scrutiny recently
Patterns of FDI (developed versus developing countries, and over time)
Regulating MNCs in the advanced industrialized countries: - Have been more open to FDI but have prohibited foreign ownership in critical sectors such as national security or public utilities - Have been less inclined to restrict MNC activity because: industrial countries didn't pursue ISI, developing countries have been more vulnerable to foreign domination, and there is a strong correlation between countries' role as a home for MNCs and the policies towards FDI Regulating MNCs in developing countries: - Post WWII most developing countries were distrustful of MNCs because they were concentrated in former colonial powers - MNCs controlled large segments of manufacturing in developing countries (which were critical sectors), which prompted political and economic concerns, especially in ISI countries - Ways they regulated MNCs: ownership limits (prohibit the MNC from owning the majority share of the company), limit repatriation of profits (MNC has to invest them in the host country and can't send them home), and performance requirements such as sourcing requirements which promote backward linkages, export requirements, and local research and development. - Also responded by nationalizing and expropriating strategic industries, state control of development (SOEs), politically popular (because they were able to attack "foreign exploitation"). - Liberalization towards FDI is likely to increase because: nationalization and regulation hindered development, reduced incentives to bring in high tech, and nationalized industries did poorly Sovereign Wealth Funds: - Government owned funds that purchase private assets in foreign markets - Many SWFs are funded with revenues generated by state-controlled oil companies in countries that aren't necessarily US allies (such as China, Kuwait, Saudi Arabia) - For example a Dubai Port company tried to build a port on the East Coast of the US - Committee on Foreign Investment in the US (CFIUS) - Evaluates security risks of foreign investment, reformed in August 2018 -expanded Powers
Trade-related Investment Measures in the WTO
TRIMS - industrialized countries were able to include in the WTO which guaranteed national treatment of FDI (which protects MNCs and takes away the power from the host country). Prevent host countries from regulating imports and exports.
Steele and aluminum tariffs (imposed by Trump)
Tariffs against China hit non-Chinese supply chains harder than Chinese firms. Tariffs are hurting American consumers because they are causing domestic prices to rise. Trump blames China for being inflexible in negotiations but he has actually been the inflexible one. US trade deficit increased, but this is actually a sign that our economy is doing well. Trump has claimed China has been manipulating their currency because it is so devalued, but a report has shown that China hasn't been doing this.
Structuralism
The belief that the market would not promote industrialization and it would only occur if the state intervened. Two coordination problems that would limit investment in manufacturing industries: 1. Complementary demand 2. Pecuniary external economies - you can overcome these coordination problems with a state-led big push. The state runs multiple links in the production chain. - Deteriorating terms of trade. Terms of trade are the relationship between how much money a country pays for its imports and how much it brings in from sports. Improving terms of trade - when price of a country's exports increase over price of its imports. Deteriorating terms of trade - when price of exports decreases over price of imports. - Singer-Prebisch Theory
Internalize transactions (for MNCs)
Vertically or horizontally integrate when specific or intangible assets are present.
Urbanization
There was massive urbanization that was kind of a catalyst for ISI. A lot more people living in cities, which shifted political power away from farmers and towards people working in manufacturing sectors.
Role of state in development
Three tools in ISI: 1. Government planning such as five-year plans 2. Investment policy such as nationalize or heavily control the financial sector in order to direct financial resources to targeted industries 3. Trade barriers such as super high tariffs (200-300%), countries banning imports of goods with local substitutes
UNCTAD
United Nations Conference On Trade and Development held in Geneva in 1964 is a forum for an examination of economic problems plaguing developing countries and measures to improve the development of them. Competing organization to the GATT. Created the G77 - developing countries who signed joint declaration for reform. They had ambitious goals like direct financial transfers from industrialized countries, commodity price stabilization, and access to core markets. G77 tried to have this plan called the New International Economic Order but it failed, it was kind of a wishlist anyway.
Fair trade (benefits, drawbacks, concerns)
What is it: Concern for social, economic, and environmental well-being of marginalized small producers. - Have to pay to be certified - Certification agency guarantees you a minimum price for a product Pros: - Potentially higher income to producers - Infrastructure development - money is going back to the communities - Consumers are willing to pay more for FT Cons: - Higher incomes are often offset by cost of certification - Creates price floor - no additional profit when prices are above floors - Investments often go to bureaucratic development as opposed to schools - Inefficient transfers to consumers - barely any of the additional money consumers are paying actually goes to the producers - Underperforms as a development strategy (water vaccines way better) - Ambitious goals and agenda but falls short in so many ways - Minimum guaranteed price incentivizes lower quality products, hurts non-fair trade producers Concerns: - Could hide protectionist preferences - Conflict of interest with labeling process
TPP (know examples of key areas of liberalization & know examples of key reasons for opposition in the U.S. from lecture)
What it Is: - Trade agreement between 12 countries - Began with negotiations with 4 countries, US joined negotiations in 2008, signed in February 2016 - Would have covered 40% of global trade - Trump withdrew from the TPP, TPP moved ahead without the US with a new name - Without the US reduced copyright and intellectual property protections, and scaled back ISDS Key areas of liberalization: - Market access, tariffs would go to 0% - Agriculture: Japan, Vietnam and US would eliminate or lower beef tariffs - Japan would have reduced tariffs and quotas on rice - Textile: eliminates all import tariffs - Auto: eliminates all tariffs - Digital: expanded the freedom of internet, no more firewalls in specific countries, consumer protections - Intellectual property rights: 5-8 years of copyright protection, increases international protection - Dispute settlement: consultations, panel, retaliation allowed, transparent - submissions, hearings, and rulings are public Most important sections for US: - Access for services - Investment - Good deal for US - IP protections - ISDS Why Trump pulled out: - The pharmaceutical lobby in the US was really strong and wanted double digit years of copyright protection (and the TPP only had single digit) - the US current provide 12 years of protection domestically
NAFTA
What's in NAFTA: - Signed into law in 1994, was bipartisan (Bush and Clinton) - Gradually eliminates all tariffs on goods and most non tariff barriers - Given US-Canada FTA of 1989, most liberalization was with Mexico - Textiles and apparel removed all duties based on ROOs (yarn and everything after had to be produced in NAFTA countries - The auto industry removed all tariffs but was subject to 62% ROO for most cars - Agriculture - removed most NTBs, phased out tariffs - Provided investment protections - Established basic rules for trade in services - Included enforceable intellectual property rights - Dispute settlement: NAFTA Trade Commissions, arbitration - this was all controversial, US wanted an opt-in system where you had to opt-in to be sued - Didn't include labor and environmental standards Pros: - Created jobs - Allows countries to specialize in what they have a comp adv in - Increased trade - Increased diplomatic ties Cons: - Certain sectors could lose jobs - Substandard working conditions for Mexican workers - Barely any benefits for US economy Effects: - Mixed reviews: challenging to identify the effects of NAFTA vs broader market trends - Overall, effects in US economy are small (US trade w/ Mexico only 1.4% GSP, NAFTA probably increased US GDP by a couple billion dollars) Rules of Origin: - Origin is often determined by identifying the last country in which a product underwent substantial transformation - Methods to determine substantial transformation: change of tariff classification - product transformed when changed from one classification of good to another Trade in value added: - How much of the value of a good has been added in a specific country - How much the overall value of a good changes in a specific country - Also counting non tangible things like value of computer programming - If a country produces a lot of product domestically then they actually gain more from trade than if the goods used for production are mainly sources from other countries (trade deficits look different if we look at value added versus gross trade balance) NAFTA renegotiations: - Sunset provisions: In 5 years the deal will end unless we all agree to keep it - would incentivize countries to cheat like in PD - Stricter ROO - would result in companies avoiding preferential treatment and paying the tariff because cheaper, would decrease production in Mexico - New deal: USMCA
Race to the bottom
When production locates in countries with the lowest environmental, labor, or human rights standards, putting pressure on all countries to reduce their environmental standards. The Rivoli reading describes this process with the textile industry - it keeps on moving to the country with the lowest wages. However, she argues that the race to the bottom isn't a bad thing because the countries that "lost" the race to the bottom have become some of the more advanced economies in the world specifically because the cotton mills and sweatshops ignited the industrial revolution, urbanization, and the liberation of women. Sweatshops are actually better than the alternative (farms) for the workers. Also, throughout time activists have pushed for labor restrictions, safety standards have improved, and many workers no longer suffer from job-induced health problems, now there are minimum wages, and now machines are doing the most dangerous jobs. Also the environmental kuznets curve argues that the environment will be harmed while countries industrialize but then pollution will decrease as incomes rise.
Export-processing zones
Zones established by many countries in the periphery and semi-periphery where they offer favorable tax, regulatory, and trade arrangements to attract foreign trade and investment. East Asian Model of Development - selective import liberalization using these. Intermediate goods enter duty-free.