2 Announcements First midterm coming up: May 6 Today: Midterm review sheet handed out previouslyAvailable on course websiteSection this week: Midterm reviewMidterm week: NO SECTION!!! (May 5-May 9)Today:Wrap up economic globalizationDiscuss some readings relevant to the midterm.
3 Review: Participation in Globalization Issue: Economic globalization presents dangersEconomic 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 growthTrade allows countries to specialize in their comparative advantage, resulting in greater production efficiencyInvestment is a major ingredient in economic growth.
4 Review: Barriers to Trade Strategies for protectionism1. Tariffs – taxes on imported goods and services2. Quotas – a government-imposed numeric limit on imports3. “Non-tariff” barriers – Government regulation that indirectly limits trade or makes it more expensiveSubsidiesHealth/environmental regulations, inspections, etc.4. “Foreign ownership” laws – laws that limit the ability of foreigners to buy companies5. “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 flowsOpposite: “Liberalization” or “opening up markets”Note: different from typical use of “liberal” in USReasons to pursue protectionism:1. Protect domestic companies or industries from foreign competitionPrevent bankruptcies, job loss in inefficient industries2. To reduce risk of financial crises.3. Prevent foreign ownership and/or control of the companies or the economyExample: 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 countriesOr, via international treaties & organizationsGATT; NAFTA; WTO.
7 Removal of Barriers Bi-lateral negotiations & treaties: When two countries negotiate trade & investment barriersEx: 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 coercionExample: US threatens to impose quotas on Chinese steel products, if China doesn’t lower tariffChina might respond by threatening to raise tariffs on the USEscalation of this is called a “trade war.”
8 Example: Bi-Lateral Trade Negotiations South Korea, U.S. May Hold Farm Trade Talks in MarchSEOUL (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 barriersEx: NAFTA; also negotiations under GATT, WTOQuick review of NAFTA consequences:Schaeffer, p. 242More info in Stiglitz, Ch 3 and elsewhereUS:Slight increase in exports; ,000 added jobs;140,000 textile jobs lost to MexicoCanadaLost 500,000 jobsGiven the size of Canada, this was hugeCanada 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 lossesImports from US increaseThis was one factor leading up to the crisis in 1994Other losers?Organized labor (Unions)From commanding heights video:Other winners?Consumers (who didn’t lose jobs)Multi-national corporationsPossible long-term increase in efficiency, growth.
11 Problems With Trade Agreements Rich/powerful countries have big advantages in negotiating trade agreementsSee: Stiglitz, Chapter 31. 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 agreementsThey 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 countriesEx: focus has been on removing barriers for high-value goods & investment, not farm products or low-tech stuffAnd, righ countries are savvy at using dispute resolution proceduresThey have lots of lawyers, using technicalities to block imports.
13 Problems With Trade Agreements 3. Government trade negotiators are often influenced by powerful groupsRather than negotiating for terms that will benefit everyone in a country, negotiators may cater to big corporationsExample: 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: Recommendations1. Developing countries should be treated differentlyPreviously, most trade agreements focused on equal treatmentBut, poor countries can’t compete on equal footing…And, rich countries have little to lose by treating them betterA. So, rich countries should simply open their economies to the poorest countriesThis would have a much bigger effect than providing direct aidNOTE: Europe has started moving in this directionB. 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 farmersRich countries give huge amounts of money to (mainly) industrial farmsResult: Farmers in poor countries can’t competeTheir farm products cost more because they don’t have subsidiesResult: Global prices are kept down, hurting farmers around the entire world.
16 Stiglitz: Recommendations 3. Escalating tariffs should be endedEscalating tariffs: taxing manufactured products at higher rates than raw materialsEx: Having no tariffs on raw agricultural goods, but high tariffs on higher-value processed goodsNo tax on apples; high tax on applesauceIssue: This prevents poor countries from industrializingThey are stuck farmingWhile rich countries have cheap source of produce for their high-value industries.
17 Stiglitz: Recommendations 4. Remove barriers to unskilled services & migrationRich countries have pushed to remove barriers for high-tech services (banking, accounting, software)Barriers remain in low-skill servicesExample: Shipping/trucking. Foreign companies aren’t allowedThis 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 barriersThere 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 agreementsThey are rarely advantageous to poor countriesDue to asymmetry in power between negotiatorsAnd, they tend to undermine multilateral agreements
19 Stiglitz: Recommendations 7. Reform governanceChange the rules of international organizations like the WTOIssues (p. 97):How decisions get madeWhat gets put on the agendaHow disagreements are resolvedHow rules are enforcedCurrently, rules favor rich countriesSystem 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!