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1 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 1

2 The International Economy and Globalization © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 2 PowerPoint slides prepared by: Andreea Chiritescu Eastern Illinois University

3 The International Economy High degree of economic interdependence No nation exists in economic isolation All aspects of a nation’s economy are linked to the economies of its trading partners Reflects the historical evolution of the world’s economic and political order Complex and its effects uneven © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 3

4 The International Economy 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 Developing nations Liberalized trading system - serves to keep the developing nations in poverty © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 4

5 Globalization of Economic Activity Globalization Greater interdependence Countries and their citizens International flows Goods and services People Investments in equipment, factories, stocks, bonds Non-economic elements Culture and the environment © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 5

6 Globalization of Economic Activity 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 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 6

7 Waves of Globalization First Wave of Globalization: 1870–1914 Decreases in tariff barriers & new technologies Declining transportation costs Shift from sail to steamships; Railways Driven by European and American businesses and individuals © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 7

8 Waves of Globalization First Wave of Globalization: 1870–1914 Exports as a share of world income Nearly doubled to 8% Per capita incomes increased 1.3% per year Previous 50 years: 0.5% per year Countries that actively participated in globalization Became the richest countries in the world Brought to an end by World War I © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 8

9 Waves of Globalization Great Depression of the 1930s Governments – protectionism Tariffs on imports Try to shift demand into domestic markets Promote sales for domestic companies Promote jobs for domestic workers Exports as a share of national income Falls to 5% © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 9

10 Waves of Globalization Second Wave of Globalization: 1945–1980 Horrors of the retreat into nationalism Falling transportation costs Decrease previously established trade barriers Trade liberalization – discrimination Which countries participated Which products were included © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 10

11 Waves of Globalization Trade liberalization – discrimination Developed countries, manufactured goods Largely freed of barriers Greatly increased the exchange of manufactured goods Raise the incomes of developed countries Developing countries Eliminate barriers only for those agricultural products that did not compete with agriculture in developed countries Manufactured goods - sizable barriers © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 11

12 Waves of Globalization Second Wave of Globalization: 1945–1980 New kind of trade Rich country specialization in manufacturing niches Gained productivity through agglomeration economies Firms clustered together Some clusters produced the same product Others were connected by vertical linkages Agglomeration economies Benefit those in the clusters Bad news for those who are left out © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 12

13 Waves of Globalization Second Wave of Globalization: 1945–1980 Most developing countries Did not participate in the growth of global trade in manufacturing and services Continuing trade barriers in developed countries Unfavorable investment climates Antitrade policies in developing countries Dependence on agricultural and natural-resource products © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 13

14 Waves of Globalization Second Wave of Globalization: 1945–1980 Increased per capita incomes within the developed countries Developing countries as a group were being left behind World inequality © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 14

15 Waves of Globalization Latest Wave of Globalization, began in 1980 A large number of developing countries China, India, and Brazil Broke into the world markets for manufacturers Other developing countries Increasingly marginalized in the world economy Decreasing incomes Increasing poverty Significant international capital movements © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 15

16 Waves of Globalization Latest Wave of Globalization, began in 1980 Some developing countries Competitive advantage in labor-intensive manufacturing Bangladesh, Malaysia, Turkey, Mexico, Hungary, Indonesia, Sri Lanka, Thailand, and the Philippines Tariff cuts Lower barriers to foreign investment Technological progress in transportation and communications Protectionist policies in developed countries © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 16

17 Waves of Globalization Latest Wave of Globalization, began in 1980 World More globalized - international trade, capital flows Less globalization - labor flows Foreign outsourcing Certain aspects of a product’s manufacture are performed in more than one country Manufacturing - moved to wherever costs were the lowest Job losses for blue-collar workers Cries for the passage of laws to restrict outsourcing © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 17

18 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 18 Manufacturing an HP Pavilion, ZD8000 laptop computer TABLE 1.1

19 Waves of Globalization Latest Wave of Globalization, began in 1980 By the 2000s, foreign outsourcing of white- collar work Information Age Digitization, Internet, and high-speed data networks around the 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% © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 19

20 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 20 Globalization goes white collar TABLE 1.2

21 The United States as an Open Economy 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) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 21

22 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 22 The fruits of free trade: a global fruit basket TABLE 1.3

23 The United States as an Open Economy Openness Large countries – lower measures of openness Less reliant on international trade Many of their companies can attain an optimal production size without having to export to foreign nations Small countries – higher measures of openness © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 23

24 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 24 Exports & imports of goods & services, percentage of GDP, 2007 TABLE 1.4

25 The United States as an Open Economy Openness of the U.S. economy, 1890 to 2007 Less open to international trade, 1890 to 1950 Relatively high openness in the 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 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 25

26 The United States as an Open Economy Openness of the U.S. economy, 1890 to 2007 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 products Today, manufactured goods and services © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 26

27 The figure shows that for the United States the importance of international trade has increased by more than 50 percent from 1890 to the early 2000s. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 27 Openness of the U.S. economy, 1890–2007 FIGURE 1.1

28 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 28 Leading trade partners of the U.S., 2008 TABLE 1.5

29 The United States as an Open Economy Labor and Capital Movements in factors of production Measure of economic interdependence Labor mobility in U.S. 1900, 14% of U.S. population: foreign born 1920s to 1960s Sharply curtailed immigration Foreign-born U.S. population: 6% © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 29

30 The United States as an Open Economy Labor mobility in U.S. 1960s, liberalized restrictions By 2009 12% the U.S. population was foreign born Foreigners: 14% percent of the labor force Half – from Latin America One quarter – Asians © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 30

31 The United States as an Open Economy Capital flows to the U.S. Foreign ownership of U.S. financial assets Risen since the 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 the rest of the world © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 31

32 The United States as an Open Economy International banking Average daily turnover in foreign-exchange market Today: almost $2 trillion 1986: $205 billion London - the largest center for foreign- exchange trading © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 32

33 The United States as an Open Economy Commercial banking U.S. banks Worldwide branch networks, 1960s and 1970s Loans, payments, foreign-exchange trading Foreign banks Increased presence in U.S., 1980s and 1990s Today: 250 foreign banks Securities firms - globalized their operations By 1980s, U.S. government securities Traded on a 24-hour basis © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 33

34 Why Is Globalization Important? Law of comparative advantage Citizens of each nation can gain Spend more of their time and resources doing those things in which they have a relative advantage If a good or service can be obtained more economically through trade Trade for it instead of producing it domestically How the available resources can be used to obtain each good at the lowest possible cost © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 34

35 Why Is Globalization Important? Open economies Produce a larger joint output Competition - essential to both innovation and efficient production International competition Domestic producers - strong incentive to improve the quality of their products Weakens monopolies © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 35

36 World imports relative to U.S. consumption have doubled over the past four decades, making more of what consumers purchase subject to increased competition inherent in international trade. This added competition tends to hold down the cost of goods and services as seen for the period 1987 to 2003. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 36 Global competition lowers inflation FIGURE 1.2

37 Why Is Globalization Important? Open economies More competition More firm turnover Improvements for the industry Economic growth rates - close relation to: Openness to trade Education Communications infrastructure © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 37

38 The figure shows the weighted average tariff rate and per-capita growth rate in GDP for 23 nations in 2002. According to the figure, there is evidence of an inverse relationship between the level of tariff barriers and the economic growth of nations. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 38 Tariff barriers versus economic growth FIGURE 1.3

39 Why Is Globalization Important? Globalization Rapid growth in some countries Increased demand for commodities Crude oil, cooper, steel - higher prices Increased supply of substitutes Biodiesel, ethanol Domestic economy Vulnerable to disturbances initiated overseas Increased competition from abroad Schwinn Bicycle Company, Dell Computer Corporation © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 39

40 GLOBALIZATION The Global Recession of 2007 – 2009 Immediate cause of the global economic crisis Collapse of the U.S. housing market Resulting surge in mortgage loan defaults Undermined the financial institutions that originated and invested in them Creditors and uninsured depositors Pulled their funds and cashed out of securities issued by risky institutions Invested in U.S. Treasury securities © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 40

41 GLOBALIZATION The Global Recession of 2007 – 2009 Immediate cause of the global economic crisis Many institutions failed, others struggled to survive Banks - fearful about making loans The credit spigot closed The global economy withered Global stock investors dumped their holdings Self-reinforcing adverse economic downturn Crisis in confidence © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 41

42 GLOBALIZATION The Global Recession of 2007 – 2009 Roots of the problem Lack of fear - booming housing market of 2006 Mortgage-backed securities Booming housing market Government pressured banks to serve poor borrowers and poor regions of the country Community Reinvestment Act Default mortgages © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 42

43 GLOBALIZATION The Global Recession of 2007 – 2009 The crisis goes global Europe Exposure to defaulted mortgages in the U.S. Emerging economies Lacked resources Extremely poor countries Decrease in foreign aid China - depressed its export markets Crisis in confidence © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 43

44 GLOBALIZATION The Global Recession of 2007 – 2009 Combating a crisis in confidence Pump liquidity into troubled financial institutions Provide increased or unlimited deposit insurance Central banks Coordinated interest-rate reductions Purchased commercial paper & money market instruments © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 44

45 GLOBALIZATION The Global Recession of 2007 – 2009 Combating a crisis in confidence Governments Large fiscal stimulus packages Tax cuts Increased government spending International Monetary Fund Financial aid to emerging countries © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 45

46 Common Fallacies of International Trade “Trade is a zero-sum activity” Both partners gain from trade “Imports reduce employment and act as a drag on the economy, while exports promote growth and employment” Failure to consider the link between imports and exports © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 46

47 Common Fallacies of International Trade “Tariffs, quotas, and other import restrictions will save jobs and promote a higher level of employment” Failure to recognize that a reduction in imports does not occur in isolation Free trade Increases competition, lowers prices Makes better products available to consumers Higher consumption © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 47

48 Does Free Trade Apply to Cigarettes? Free cigarettes trade Higher consumption More smoking, disease, and death Globally - 4 million people die each year from: Lung cancer, emphysema Other smoking-related diseases Antismoking activists Cigarettes are “bads” Require their own set of regulations Benefits of free trade do not apply to cigarettes © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 48

49 Does Free Trade Apply to Cigarettes? World Health Organization Some nations Support provisions to emphasize antismoking measures over free-trade rules United States Promoted freer trade in cigarettes Challenged rules imposed to aid local cigarette makers Current trade rules Countries can enact measures to protect the health and safety of their citizens © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 49

50 Is International Trade an Opportunity or a Threat to Workers? International trade benefits many workers Cheaper consumption goods Employers – better technologies and equipment Workers - more productive Exports - generates jobs and income for domestic workers © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 50

51 Is International Trade an Opportunity or a Threat to Workers? Not all workers gain from international trade Cheap imports Rising unemployment and wage inequality Threatening to unskilled workers in the import- competing sectors Lobby to restrict imports © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 51

52 Is International Trade an Opportunity or a Threat to Workers? International trade Domestic prices - aligned with international prices Wages increase Workers whose skills are scarce Wages decrease Workers who face increased competition Jobs lost in one industry Replaced by jobs gained in another industry © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 52

53 Is International Trade an Opportunity or a Threat to Workers? 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 a less efficient utilization of resources International trade Just another kind of technology Adds value to its inputs © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 53

54 Backlash Against Globalization Proponents of free trade and globalization 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 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 54

55 Backlash Against Globalization Critics of free trade and globalization Benefit large corporations Rather than average citizens Environmentalists Elitist trade organizations make undemocratic decisions Undermine national sovereignty on environmental regulation Unions Unfettered trade permits unfair competition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 55

56 Backlash Against Globalization Critics of free trade and globalization Human rights activists World Bank and International Monetary Fund support governments that: Allow sweatshops Pursue policies that bail out governmental officials at the expense of local economies © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 56

57 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 57 Advantages and disadvantages of globalization TABLE 1.6 AdvantagesDisadvantages Productivity increases faster when countries produce goods and services in which they have a comparative advantage. Living standards can increase more rapidly. Global competition and cheap imports keep a constraint on prices, so inflation is less likely to disrupt economic growth. An open economy promotes technological development and innovation, with fresh ideas from abroad. Jobs in export industries tend to pay about 15 percent more than jobs in import- competing industries. Unfettered capital movements provide the United States access to foreign investment and maintain low interest rates. Millions of Americans have lost jobs because of imports or shifts in production abroad. Most find new jobs that pay less. Millions of other Americans fear getting laid off, especially at those firms operating in import-competing industries. Workers face demands of wage concessions from their employers, which often threaten to export jobs abroad if wage concessions are not accepted. Besides blue-collar jobs, service and white-collar jobs are increasingly vulnerable to operations being sent overseas. American employees can lose their competitiveness when companies build state-of-the-art factories in low-wage countries, making them as productive as those in the United States.

58 Terrorism Jolts the Global Economy Continuing terrorism Companies – increased security costs Heightened border inspections Slow shipments of cargo Companies - stock more inventory Tighter immigration policies Reduce inflows of skilled and blue-collar laborers Greater preoccupation with political risk Companies – fewer investments © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 58

59 Terrorism Jolts the Global Economy International trade Weapon in the war against terrorism in the long-run Increasing living standards in impoverished regions Eliminating an important cause of war and terror © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 59

60 TRADE CONFLICTS Competition in the World Steel Industry 1982, average cost per ton of steel U.S. producers: $685 per ton 52% higher than for Japanese producers Cost differential Strong U.S. dollar Higher U.S. costs of labor (25% of total cost) Higher U.S. cost of raw materials (45% of total cost) High fixed costs of production © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 60

61 TRADE CONFLICTS Competition in the World Steel Industry U.S. steelmakers Reduce production costs, regain competitiveness Long-term contracts for raw materials (lower prices) Labor contracts - 20 to 40 percent improvement in labor productivity Problems Large unfunded pension obligations Large healthcare costs for retirees Shrinking employee base © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 61

62 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 62 World steel cost comparisons: cost per ton of steel, 2009 TABLE 1.7


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