Announcements First midterm coming up: May 6 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.
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.
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.
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
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.
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 well 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 doesnt lower tariff –China might respond by threatening to raise tariffs on the US Escalation of this is called a trade war.
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 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
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.
Free Trade Agreements Impact of NAFTA (contd) –Mexico 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 didnt lose jobs) Multi-national corporations Possible long-term increase in efficiency, growth.
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
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.
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 Previously, most trade agreements focused on equal treatment But, poor countries cant 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.
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 cant compete –Their farm products cost more because they dont have subsidies Result: Global prices are kept down, hurting farmers around the entire world.
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 arent 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 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!