Economic Globalization

Sociology 2, Class 9

Copyright © 2013 by Evan Schofer

Do not copy or distribute without permission

Announcements• Announcements

• Midterm is approaching… one week!• Midterm review sheet on website• Midterm review session:

– During section on Tuesday-Friday, & following Monday• No section on Tues-Fri after midterm• No section

– Agenda• More on economic globalization

Midterm Info• Exam Format:

• Closed book / closed notes• Mix of short answer/multiple choice, medium length,

and perhaps one short essay question• No bluebook needed

• Topic coverage: • All class lecture material

– Lecture notes on course website

• All readings up through Week 5• Commanding Heights video, Episodes 1 & 3

– Available via course web page…

Asian Financial Crisis• Commanding Heights Video:

• In the 1990s, foreign investors moved capital into Asia• And, foreign banks lent money to Asian companies at

very low interest rates

– Consequence: Rapid economic growth• Economies “heated up”• But, capitalism is prone to boom-bust cycles…• Companies built more factories and housing than

needed– The “boom” ended

• But – global dynamics made the “bust” much worse!

Asian Financial Crisis• How did globalization cause a crisis for Asian

economies in the 1990s?– 1. As the Thai economy faltered, global investors

pulled money out quickly• When capital flows out of a country, the currency values

drop rapidly: “volatility”• Imports became expensive• Companies could no longer pay off loans to foreign

banks– Bankruptcies, unemployment…

Asian Financial Crisis• How did globalization cause a crisis for Asian

economies in the 1990s?– 2. Contagion

• Worries about Thailand spread to other Asian countries– Self-fulfilling prophecy: fear of problems caused investors to

pull out, creating real problems• Also, many US companies were invested in Asia (or had

made loans)… Now they were losing money– Lesson: Integrated economies mean that crises

tend to spread…• Example: US financial crisis caused economic

disruption around the globe.

More Video: Commanding Heights• Topic: Asian financial crisis, spillover to other

regions…• Video: 40:48 to 48:10 (8 minutes)

– Asian economic miracle

• Video: 48:10-1:14:30 (36 minutes)– Asian financial crisis and contagion

Commanding Heights• Asian financial crisis wrap-up

– Long Term Capital Management (LTCM)• A US-based hedge fund; assets $130 billion in 1998

– Controlled much more• Used leverage (borrowed funds) to invest globally• Crisis in Asia/Russia caused LTCM to take huge losses

– LTCM was bankrupt (owed more than it had to US banks)» US banks were threatened with huge losses (like 2008)

– AND: If LTCM was forced to sell remaining assets, markets would fall further – making things worse!

• Strategy: US engineered a private bailout– Banks lent LTCM a huge amount of money to keep going until markets

recovered

– IMF and other lenders also bailed out countries (e.g., Brazil) to end financial crisis.

Asian financial crisis Wrap-up• Remarks:

– The 1998 crisis was ended… but nearly brought down major US banks• And, caused massive suffering in many countries

– The 2008 crisis DID bring down major US banks• Only government intervention saved the financial

system from a TOTAL disaster• Again, massive suffering

– Recession, 10% unemployment– Lack of funds for government services (including cuts to UC)– Contagion in Europe

– Issue: Is this acceptable? Do we need to regulate markets more aggressively? If so, how?

Participation in Globalization• Question: Why do countries want to

participate in globalization?• Esp. given potential for crises (e.g., Mexico, Asia)• What are the benefits? And for whom?

• Answer: International trade and investment can increase economic growth

• Corporations often stand to benefit most... So business elites tend to support globalization

• BUT, other groups in society may also benefit– Investment can create new jobs, employment– Consumers can have access to wider array of goods,

cheaper goods…

Benefits of Investment• Economists predict that foreign capital will

benefit economic growth• Recall: Investment is a major ingredient in long-term

economic growth• Allowing foreigners to invest in a country results in

more overall investment

– Example: FDI. If Sony builds a TV factory in a country, the economy will grow

– And, intangible capital flows can have benefits• Foreign banks may charge lower interest rates• Foreign banks may have more capital to lend• This allows domestic companies to invest more

resulting in more growth

Benefits of Trade• Without trade, every country must produce

all kinds of goods – cars, coffee, toys, etc.• Issue: Countries vary in their ability to

produce goods efficiently• Example: Coffee can be grown in America, but not

very efficiently due to climate• Example: Computers can be built in Kenya, but not

very efficiently due to lack of infrastructure & fewer engineers in the labor force

• Result: Without trade, production is less efficient.

Benefits of Trade• Economists Adam Smith and David

Ricardo argued:• Trade allows nations to specialize in what they do

best… their comparative advantage…– See Stiglitz Ch 3, p. 66-67; also Rodrik Ch 3

– Countries can focus on they produce efficiently• And, trade for things they don’t produce efficiently

– Result: Greater efficiency & economic growth• This can produce a win/win situation, where both

countries are better off– Setting aside, for the moment, possible undesirable

environmental/social consequences, etc.

Reading: Rodrik• The benefits of trade

• An analogy: Trade = technology• Trade, like new technology, allows nations to convert

some products (e.g., raw materials) into something else

– Example: Technology allows us to magically turn raw cotton into cloth• This may cause loss of jobs (people who weave), but

that is the price of greater efficiency…

– By analogy: We can magically turn wheat into electronics… by trading with Japan• Likewise, it may cost jobs but is more efficient• We should re-employ people in agro-industry rather

than making electronics in the US…

Reading: Rodrik• So why doesn’t everyone love free trade?

– 1. benefits of trade involve large shifts in production (“distributional effects”)• To reap benefits of trade, we have to shift production

toward things we produce efficiently• Example: We should shift employment away from

electronics manufacturing (if Japan is more efficient) and employ people growing wheat (if we are efficient)

• Very disruptive– Transitional unemployment; Often permanent loss of wages– Unpleasant, unless a country has a very strong safety net &

job training programs.

Reading: Rodrik• So why doesn’t everyone love free trade?

– 2. Benefits diminish as trade barriers are reduced• Trade barriers were high in 1960s/70s. Initial steps

toward free trade has big benefits in terms of efficiency• Now barriers are fairly low. Lowering them further

would not make production much more efficient– But would cause large “distributional effects”

– Rodrik calculates that we must shift $50 in production to gain $51 in economic efficiency• Ex: If we eliminate $50 in electronics manufacturing we

could replace it with $51 in agricultural production• Benefits might not be worth the disruption to the

economy & to people’s lives

Reading: Rodrik• So why doesn’t everyone love free trade?

– 3. Benefits of trade tend to harm the same people repeatedly• Namely, those without high levels of education/skills

– This differs from the technology analogy… technology doesn’t typically wipe out jobs for the same people over & over

• Example: Merchandise trade between Europe/United States & poor countries in Asia may be harming US manufacturing employment (Krugman articles)

• Rodrik points out: Unless a country has strong “safety nets” and job training, it is understandable that many would resist further reduction of trade barriers…

Benefits of Trade / Investment• Who benefits from global trade/investment?

– 1. Many benefit from greater economic growth• The wealthy usually benefit most…

– 2. Consumers benefit from cheap imports– 3. Multi-national corporations, because they can

move operations to wherever is cheapest– 4. Highly competitive export-oriented companies

benefit from access to new markets– And, workers in those industries tend to benefit

– 5. Investors can invest where profits are big• Ex: individuals, pension funds, Hedge funds

– 6. Companies that can get cheap credit from foreign banks

Problems of Trade / Investment• Who might oppose global trade & investment?

– 1. Corporations in industries that will face greater international competition• Example: steel & auto industries in the US

– 2. Workers in industries that will face competition• And labor unions more generally…

– 3. People & governments concerned about:• Potential for economic crises• Loss of state autonomy

– Pressure to please foreign capital; loss of domestic ownership

• Difficulty regulating global capitalism– Environmental problems, sweatshops, etc.

Barriers to Trade / Investment• Definition: Protectionism = blocking foreign

imports or capital flows• Definition: Liberalization = opening up

markets to greater trade or investment• Also called “opening up markets” • Note: different from typical use of “liberal” in US

Barriers to Trade• Strategies for protectionism• Tariffs – taxes on imported goods and

services• Example: The US government can impose a $2,000

tax on Japanese cars• Fewer people will buy Japanese cars, imports will

decrease

• Quotas – a government-imposed numeric limit on imports

• Example: The US may allow only 500,000 Japanese cars to be imported in any given year.

Barriers to Trade• Strategies for protectionism (continued)• “Non-tariff” barriers – A government

regulation that indirectly limits trade or makes it more expensive– Example: Strong agricultural subsidies make it

hard for foreign imports to compete• Subsidy = giving government money to producers• Tariffs make imported goods more expensive;

subsidies make the domestic ones cheaper…

– Example: The US may impose complex agricultural inspections of imported fruit• Could be legitimate, or a sneaky way to stop trade

Barriers to Investment• Strategies for protectionism (continued)• 4. “Foreign ownership” laws – laws that

limit the ability of foreigners to buy companies• Example: US government could require owners of

corporations to be US citizens

• 5. “Capital controls” – laws designed to prevent the rapid withdrawal of capital/investment

• Example: Law requiring invested capital to remain in the country for one year

– Thus, preventing rapid flows in and out.

Removal of Barriers• How do trade/capital barriers get removed?

• “Liberalization” or “opening markets”

– Answer: When governments agree to remove them…• In direct negotiation with other countries• Or, via international treaties & organizations

– GATT; NAFTA; WTO.

Removal of Barriers• Bilateral trade negotiations & treaties:

• Two countries negotiate trade & investment barriers• Ex: The US negotiates with China

– “You reduce tariffs on American cars, and we’ll reduce import quotas on Chinese textiles”

• Multilateral trade agreements • When groups of countries negotiate together to

reduce barriers• NAFTA – North American Free Trade Agreement• GATT & WTO

– GATT = “General Agreement on Tariffs and Trade”– WTO = World Trade Organization

– “Trade war”: when countries raise barriers due to disputes…

Example: Bi-Lateral Trade Negotiations

• South Korea, U.S. May Hold Farm Trade Talks in March

• SEOUL (Reuters) - The United States and its seventh-largest trading partner began talks on a free trade agreement in June 2006. It would be the biggest free trade deal for the United States since the North American Free Trade Agreement was signed in 1992.

• Agriculture has been one of the toughest sectors to negotiate in a free trade deal between two countries, especially because of intense opposition from South Korean farmers to market liberalization. South Korea's farm ministry repeated Seoul's position that it would continue to insist on exempting rice under a bilateral free trade deal. ``Rice should be excluded."

• South Korea and the United States recently failed to resolve the dispute over U.S. beef imports, which Washington said could threaten the free trade pact.

– Exceprt: New York Times 2/21/07

Free Trade Agreements: NAFTA• NAFTA: A 3-way treaty between US,

Canada, Mexico• Reduced tariffs & removed some investment barriers• Caused worries of huge unemployment in US…

• NAFTA Consequences:• US: 140,000 textile jobs lost to Mexico; but more jobs

created in other industries• Canada: significant job losses (500,000?) mostly due

to increased imports from US• Mexico: 600,000 new textile jobs; growth of

maqiladora factories; Mostly offset by other job losses– Imports & investment from US increased

• Not as good a supporters hoped; not as bad as opponents feared…

Free Trade Agreements: WTO• The GATT & WTO: dozens of countries sitting

down together every few years to negotiate• WTO is a ‘formalization’ of the GATT (General

Agreement on Tariffs and Trade) in 1995

– Ex: “Uruguay Rounds” refer to a series of meetings of 123 countries from 1986-94• Agreement on big reduction on tarrifs for most of world

– Ex: “Doha Round” of negotiations• Initiated in 2001 in Doha, Qatar• Intended goal: address concerns of poor countries• Talks have stalled in part because poor countries have

taken a stand against US/EU agricultural subsidies

Problems With Trade Agreements• Rich/powerful countries have advantages in

negotiating trade agreements– See: Stiglitz, Chapter 3 (optional section of reading)

• Some points to consider:

• 1. Advantages of Rich/powerful countries are biggest in bi-lateral trade negotiations

• Example: US vs. a small Latin American country• US can bully, bring great pressure…• Often, those turn out worse for poor countries than large

multilateral agreements.

Problems With Trade Agreements• 2. Rich/powerful countries disproportionately

control the agenda of agreements• “The United States and Europe have perfected the art

of arguing for free trade, while simultaneously working for trade agreements that protect themselves against imports from developing countries.” Stiglitz Ch 3 p. 78.

• Topics addressed by FTAs benefit rich countries– Ex: focus has been on removing barriers for high-value goods

& investment, not farm products or low-tech stuff

• And, rich countries are savvy at using dispute resolution procedures

– They have lots of lawyers, using technicalities to block imports.

Problems With Trade Agreements• 3. Government trade negotiators are often

influenced by powerful groups• Rather than negotiating for terms that will benefit

everyone in a country, negotiators may cater to big corporations

• Example: Suppose Guatemala is negotiating over a tariff that limits big business, but protects jobs?

– Companies may push the government to get rid of the tariff, even if many workers will be harmed…

Stiglitz: Making Trade Fair• Stiglitz, Chapter 3: Recommendations

– 1. Developing countries should be treated differently from wealthy countries• Previously, most trade agreements focused on equal

treatment, but poor countries can’t really compete…

– 1. A. So, rich countries should simply open their economies to the poorest countries

– This would have a much bigger effect than providing direct aid– NOTE: Europe has started moving in this direction

– 1. B. Poor countries should be allowed to use subsidies to support “infant industries”• Rich countries have little to lose… but benefits are big.

Stiglitz: Recommendations:• 2. Rich countries should stop MASSIVE

agricultural subsidies– Rich countries give huge amounts of money to

(mainly) industrial farms» Or purchase agricultural products to keep profits up

• EU spends >50 billion US$; US spends $20 billion/year • Norway: two-thirds of farm income is from subsidies

– Original purpose was to stabilize food supply– Now congresspeople & agro-industry lobbyists support them

– Result: Farmers in rich countries can sell food at LOW prices and still make a profit• Often below the cost of farmers in poor countries• Farmers in poor countries can’t compete… go broke.

Stiglitz: Recommendations• 3. Escalating tariffs should be ended

• Escalating tariffs: taxing manufactured products at higher rates than raw materials

– Ex: Having no tariffs on raw agricultural goods, but high tariffs on higher-value processed goods

– No tax on apples; high tax on applesauce

• Issue: This prevents poor countries from industrializing– They are stuck farming– While rich countries have cheap source of produce for their

high-value industries.

Stiglitz: Recommendations• 4. Remove barriers to unskilled services &

migration• Rich countries have pushed to remove barriers for high-

tech services (banking, accounting, software)• Barriers remain in low-skill services

– Example: Shipping/trucking. Foreign companies aren’t allowed

• This is one area that poor countries could actually compete…

• Also, allowing more labor flows would provide a huge benefit to poor countries.

Stiglitz: Recommendations• 5. Restrict the use of non-tariff barriers

• There are legitimate reasons for having them… • BUT, more often they are used by rich countries to

protect their own markets – Despite claims of supporting free trade

• 6. Restrict bi-lateral agreements• They are rarely advantageous to poor countries

– Due to asymmetry in power between negotiators

• And, they tend to undermine multilateral agreements

Stiglitz: Recommendations• 7. Reform governance

• Change the rules of organizations like the WTO• Issues (p. 97):

– How decisions get made– What gets put on the agenda– How disagreements are resolved– How rules are enforced

• Currently, rules sometimes favor rich countries• System should be more open/transparent, more

democratic, with better enforcement for small countries.