1. Class 10: Economic Globalization 5
Sociology 2
Copyright © 2008 by Evan Schofer
Do not copy or distribute without permission

2. Announcements First midterm coming up: May 6 Today:
Midterm review sheet handed out previously
Available on course website
Section this week: Midterm review
Midterm week: NO SECTION!!! (May 5-May 9)
Today:
Wrap up economic globalization
Discuss some readings relevant to the midterm.

3. Review: Participation in Globalization
Issue: Economic globalization presents dangers
Economic crises, loss of state autonomy, etc.
Given the dangers, why do some countries want to participate in globalization?
Answer: International trade and capital flows can increase economic growth
Trade allows countries to specialize in their comparative advantage, resulting in greater production efficiency
Investment is a major ingredient in economic growth.

4. Review: Barriers to Trade
Strategies for protectionism
1. Tariffs – taxes on imported goods and services
2. Quotas – a government-imposed numeric limit on imports
3. “Non-tariff” barriers – Government regulation that indirectly limits trade or makes it more expensive
Subsidies
Health/environmental regulations, inspections, etc.
4. “Foreign ownership” laws – laws that limit the ability of foreigners to buy companies
5. “Capital controls” – laws designed to prevent the rapid withdrawal of capital/investment.

5. Review: Barriers to Trade / Investment
Definition: Protectionism = blocking foreign imports or capital flows
Opposite: “Liberalization” or “opening up markets”
Note: different from typical use of “liberal” in US
Reasons to pursue protectionism:
1. Protect domestic companies or industries from foreign competition
Prevent bankruptcies, job loss in inefficient industries
2. To reduce risk of financial crises.
3. Prevent foreign ownership and/or control of the companies or the economy
Example: People get nervous when Chinese companies buy major US oil or computer companies

6. Removal of Barriers How do trade/capital barriers get removed?
“Liberalization” or “opening markets”
Answer: When governments decide to remove them!
In direct negotiation with other countries
Or, via international treaties & organizations
GATT; NAFTA; WTO.

7. Removal of Barriers Bi-lateral negotiations & treaties:
When two countries negotiate trade & investment barriers
Ex: The US negotiates with China, haggling over barriers
“You reduce tariffs on American cars, and we’ll reduce import quotas on Chinese textiles”
Note: Barriers can also be raised as coercion
Example: US threatens to impose quotas on Chinese steel products, if China doesn’t lower tariff
China might respond by threatening to raise tariffs on the US
Escalation of this is called a “trade war.”

8. 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 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."
On the issue of resuming U.S. beef imports, the deputy minister said beef would not be an issue in the meeting and the country would stick to its stance of importing only boneless beef from the United States.
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

9. Free Trade Agreements Multilateral agreements
When many countries negotiate together to reduce barriers
Ex: NAFTA; also negotiations under GATT, WTO
Quick review of NAFTA consequences:
Schaeffer, p. 242
More info in Stiglitz, Ch 3 and elsewhere
US:
Slight increase in exports; ,000 added jobs;
140,000 textile jobs lost to Mexico
Canada
Lost 500,000 jobs
Given the size of Canada, this was huge
Canada imports heavily from US; currency devalued.

10. Free Trade Agreements Impact of NAFTA (cont’d) Mexico Other losers?
600,000 new textile jobs; offset by other job losses
Imports from US increase
This was one factor leading up to the crisis in 1994
Other losers?
Organized labor (Unions)
From commanding heights video:
Other winners?
Consumers (who didn’t lose jobs)
Multi-national corporations
Possible long-term increase in efficiency, growth.

11. Problems With Trade Agreements
Rich/powerful countries have big advantages in negotiating trade agreements
See: Stiglitz, Chapter 3
1. Rich/powerful countries have a huge advantage in bi-lateral negotiations…
Often, those turn out worse for poor countries than large multilateral agreements

12. Problems With Trade Agreements
2. Rich/powerful countries disproportionately control the agenda of agreements
They created them, after all…
“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.” 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, righ countries are savvy at using dispute resolution procedures
They have lots of lawyers, using technicalities to block imports.

13. 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…

14. Stiglitz: Making Trade Fair
Stiglitz, Chapter 3: Recommendations
1. Developing countries should be treated differently
Previously, most trade agreements focused on equal treatment
But, poor countries can’t compete on equal footing…
And, rich countries have little to lose by treating them better
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
B. Poor countries should be allowed to use subsidies to support “infant industries”
Again, rich countries have little to lose… but benefits are big.

15. Stiglitz: Recommendations:
2. Agricultural subsidies: Rich countries should stop the MASSIVE subsidies to their farmers
Rich countries give huge amounts of money to (mainly) industrial farms
Result: Farmers in poor countries can’t compete
Their farm products cost more because they don’t have subsidies
Result: Global prices are kept down, hurting farmers around the entire world.

16. 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.

17. 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.

18. 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

19. Stiglitz: Recommendations
7. Reform governance
Change the rules of international 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 favor rich countries
System should be more open/transparent, more democratic, with better enforcement for small countries.
This is the topic we will address next week, after the midterm!