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2 The International Economy and Globalization1

3 Chapter Outline (1 of 2) Economic Interdependence: Federal Reserve Incites Global Backlash Globalization of Economic Activity Waves of Globalization The U.S. as an Open Economy Why is Globalization Important? Globalization and Competition Common Fallacies of International Trade

4 Chapter Outline (2 of 2) Does Free Trade Apply to Cigarettes?Is International Trade an Opportunity or a Threat to Workers? Backlash Against Globalization The Plan of This Text Summary Key Concepts and Terms Study Questions

5 Economic Interdependence (1 of 2)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

6 The International Economy (2 of 2)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 Some developing nations argue that liberalized trading system serves to keep them in poverty

7 Economic Interdependence: Fed Policy Incites BacklashDomestic 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

8 Globalization of Economic Activity (1 of 2)Greater interdependence between countries and their citizens Increased international flows of Goods and services People Investments in equipment, factories, stocks, bonds Non-economic elements Culture and the environment

9 Globalization of Economic Activity (2 of 2)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

10 Waves of Globalization (1 of 13)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

11 Waves of Globalization (2 of 13)First Wave of Globalization: Decreases in tariff barriers Technological developments Declining transportation costs Shift from sail to steamships; railways Driven by European and American businesses and individuals

12 Waves of Globalization (3 of 13)First Wave of Globalization: (cont) Exports as share of world income nearly doubled to 8% Per capita incomes increased 1.3% per year Previous 50 years: 0.5% per year Nations that actively participated in globalization became richest countries in world Brought to an end by World War I

13 Waves of Globalization (4 of 13)Great Depression of 1930s Governments practiced protectionism Raised tariffs on imports Tried to shift demand into domestic markets to Promote sales for domestic companies Promote jobs for domestic workers Exports as share of national income fell from 8% to 5%, undoing 80 years of technological progress in transportation

14 Waves of Globalization (5 of 13)Second Wave of Globalization: 1945–1980 Horrors of retreat into nationalism renewed incentive for globalization Falling transportation costs fostered increased trade Trade liberalization not uniform Which countries participated? Mainly developed countries Which products were included? Manufactured goods

15 Waves of Globalization (6 of 13)Developed and developing countries differentially affected during second wave of globalization Developed countries largely freed of barriers Greatly increased the exchange of manufactured goods Raised incomes in developed countries Developing countries Exports faced no barriers only for agricultural and primary goods not produced in developed countries Exports of manufactured goods faced sizable barriers

16 Waves of Globalization (7 of 13)Second Wave of Globalization: 1945–1980 (cont) New kind of trade Rich country specialization in manufacturing niches Gained productivity through agglomeration economies Firms clustered together Some clusters produced same product; others connected by vertical linkages Agglomeration economies Benefits only those in clusters

17 Waves of Globalization (8 of 13)Second Wave of Globalization: 1945–1980 (cont) Most developing countries did not participate in growth of global trade in manufacturing and services Continuing trade barriers in developed countries Unfavorable investment climates Antitrade policies of developing country governments Dependence on agricultural and natural-resource products Developing countries as group left behind

18 Waves of Globalization (9 of 13)Latest Wave of Globalization (1980 to present) Many developing countries have participated, led by China, India, and Brazil, which entered world markets for manufactured goods Other developing countries Increasingly marginalized in the world economy, with decreasing incomes and rising poverty Significant international capital movements

19 Waves of Globalization (10 of 13)Latest Wave of Globalization (1980 to present) (cont) Some developing countries have harnessed competitive advantage in labor-intensive manufacturing Bangladesh, Malaysia, Turkey, Mexico, Hungary, Indonesia, Sri Lanka, Thailand, and the Philippines Tariff cuts and lower barriers to foreign investment Technological progress in transportation and communications Protectionist policies in developed countries

20 Waves of Globalization (11 of 13)Latest Wave of Globalization (1980 to present) (cont) World more globalized - international trade, capital flows Foreign outsourcing Different aspects of a product’s manufacture performed in more than one country Manufacturing moved to wherever costs were lowest Job losses for blue-collar workers Cries for passage of laws to restrict outsourcing

21 Waves of Globalization (12 of 13)Latest Wave of Globalization (1980 to present) (cont) 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

22 Waves of Globalization (13 of 13)Latest Wave of Globalization (1980 to present) (cont) By 2000s, foreign outsourcing of white-collar work Information Age Digitization, Internet, and high-speed data networks around 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%

23 The U.S. as an Open Economy(1 of 8)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)

24 The Fruits of Free Trade: A Global Fruit Basket1.3

25 The U.S. as an Open Economy(2 of 8)Openness Large countries – lower measures of openness 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 Small countries – higher measures of openness

26 1.4 Exports & Imports as a % of GDP...

27 The U.S. as an Open Economy(3 of 8)Openness of the U.S. economy, 1890 to 2013 Less open to international trade, 1890 to 1950 Relatively high openness in 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

28 The U.S. as an Open Economy(4 of 8)Openness of the U.S. economy, 1890 to 2013 (cont) 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 goods Today, manufactured goods and services U.S. producers more affected by foreign competition today than 100 years ago

29 Openness of the U.S. Economy, 1890-20131.1

30 The U.S. as an Open Economy(5 of 8)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

31 The U.S. as an Open Economy(6 of 8)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

32 The U.S. as an Open Economy(7 of 8)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

33 The U.S. as an Open Economy(8 of 8)Commercial banking U.S. banks Worldwide branch networks, 1960s and 1970s Loans, payments, foreign-exchange trading Foreign banks Increased presence in U.S. in 1980s and 1990s Today: more than 250 foreign banks operate in U.S. Securities firms - globalized operations By 1980s, U.S. government securities traded on 24-hour basis

34 Why is Globalization Important? (1 of 2)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 International trade also gains from competitive process Competition essential to innovation, efficiency Global competition can result in high-cost domestic producers exiting market

35 Why is Globalization Important? (2 of 2)Open economies More competition, which lowers prices More firm turnover Improvements for industry Economic growth rates - closely related to Openness to trade Education Communications infrastructure

36 Globalization and Competition (1 of 3)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

37 Globalization and Competition (2 of 3)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

38 Globalization and Competition (3 of 3)Globalization and free trade provide benefits to many but impose burdens on others (cont) 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

39 Common Fallacies of International Trade (1 of 2)“Trade is a zero-sum activity” False; both partners gain from 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

40 Common Fallacies of International Trade (2 of 2)“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 Free trade Increases competition, lowers prices Makes better products available to consumers Results in higher consumption

41 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

42 International Trade: Opportunity or Threat to Workers? (1 of 3)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

43 International Trade: Opportunity or Threat to Workers? (2 of 3)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

44 International Trade: Opportunity or Threat to Workers? (3 of 3)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 Just another kind of technology Adds value to inputs

45 Backlash Against Globalization (1 of 3)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

46 Backlash Against Globalization (2 of 3)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

47 Backlash Against Globalization (3 of 3)Critics of free trade and globalization say: (cont) 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