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Winners and Losers in the Global Economy Lecture 18.

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Presentation on theme: "Winners and Losers in the Global Economy Lecture 18."— Presentation transcript:

1 Winners and Losers in the Global Economy Lecture 18

2 Who Wins and Who Loses from Globalization? Three Possible Answers 1. Everybody Wins (Classical Trade Theories)

3 2. The “New Left” Answer “Capitalists” Win— Especially the Evil MNCs “Labor” is the Big Loser If You Want More Nuance: American Labor Can’t Compete Against Third World Workers “Who Aren’t Even Paid a Living Wage.”

4 Comparative Labor Costs, 1997 CountryHourly Compensation United States100 Germany155 United Kingdom85 Taiwan32 Singapore45 South Korea40 Sri Lanka3 Source: US Bureau of Labor Statistics, 1999

5 A. It’s the Wrong Way to Think About Wages.

6 B. It’s Simply Not Correct

7 3. It Depends Upon… What Kind of Work You Do. Where You Live. Factor Price Equalization International Trade Should Equalize the Cost of Labor and Capital (Factor Prices) Across Borders. In an Economy Open to Trade: The Price of a Country’s Abundant Factor Will Rise—Abundant Factors’ Incomes Will Rise The Price of a Country’s Scarce Factor Will Fall—Scarce Factors’ Incomes Will Fall

8 The Law of One Price: In an Integrated Market, Identical Goods Will Sell For the Same Price Everywhere. If Price Differences Arise, People Will Engage in Arbitrage—Buy Where Good is Cheap and Sell Where Good is Expensive. Arbitrage Will Eliminate the Price Difference International Trade in Goods is Actually International Trade in Factors. Import Shirts From China into U.S.: Buying Labor Where it is Abundant and Cheap and Selling it Where it is Scarce and Expensive. These Trade Flows Make Labor Relatively Less Abundant in China and Relatively More Abundant in the U.S. As Labor Abundance Falls in China, Wages Rise; As Labor Scarcity Decreases in the U.S., Wages Fall.

9 Implications of FPE In Advanced Industrialized Countries FPE Implies: Globalization Raises the Price of (and therefore the incomes of) Capital and High-Skill Labor. Globalization Lowers the Price of (and therefore the incomes of) Low-Skill Labor. In Developing Countries FPE Implies: Globalization Raises the Price of Low-Skill Labor. Globalization Lowers the Price of Capital and High-Skill Labor.

10 Who Wins and Who Loses From Globalization? It Depends. Whether You Win or Lose Depends Upon Where You Work The Kind of Work You Do The Country in Which You Live Developing Country Workers Win from Globalization and Core Country Capitalists Win From Globalization. Whether Workers in Advanced Industrialized Countries Gain Depends Upon Their Skill Level.

11 An Example: FPE and the NAFTA El Paso, Texas Between 1962 and 1989, El Paso garment industry more than doubled, even as employment in the American apparel industry fell by 14%. Since 1994: 6,472 certified NATFA-related job losses in El Paso. Most in the apparel industry. El Paso’s unemployment rate has climbed to about 11%, the highest in Texas.

12 Juarez, Mexico: Across the Rio Grande From El Paso 275 American, Asian, and European manufacturing plants employ about 175,000 low-skill Mexican workers. Employ low-skilled workers to assemble imported components into finished goods. These Goods are Exported to the United States. Thus, Employment in Labor Intensive Industry in Labor Scarce Country—the United States—Falls, Placing Downward Pressure on Wages. While Employment in Labor Intensive Industry in Labor Abundant Country—Mexico—Rises, Placing Upward Pressure on Wages.

13 COMPANY NAMECITYWHAT THEY PRODUCED CAUSEJob Losses Oxford of BurgawBurgawladies' sportswear and dresses MOVED TO MEXICO 87 Lakedale Manufacturing Fayettevillegirls bathing suitsMOVED TO MEXICO 102 Clevemont MillsKings Mountain sweat pants and shirts MOVED TO CANADA 400 Rives Associated Companies High Pointtrousers, skirts, and shorts NAFTA IMPORTS 121 NAFTA and Apparel Production In North Carolina

14 Holiday HosieryHudsonhosieryMEXICAN IMPORTS 90 U.S. ColorsRocky Mount dyeing, washing & finishing t ‑ shirts and jeans NAFTA IMPORTS 86 RoyalsHigh Pointdenim jeansNAFTA IMPORTS 150 Will KnitClaytoncircular knit fabricNAFTA IMPORTS 14 Andover TogsClintonchildren's apparelNAFTA IMPORTS 143 General TextilesMurphymen's and women's tank tops and shorts MOVED TO MEXICO 97

15 CWS FashionsLenoirchildren's active wear NAFTA IMPORTS 142 Mannis and SingerCharlottesweatshirts and t ‑ shirts NAFTA IMPORTS 20 Mannis and SingerMonroesweatshirts and t ‑ shirts NAFTA IMPORTS 200 Carolina KnitsStatesvilleknit fabricsMEXICAN IMPORTS 70 Kahn Lucas LancasterMiddlesexchildren's dressesNAFTA IMPORTS 20 Burlington IndustriesDentonknitting fabricsNAFTA IMPORTS 350 Kings CreekFergusonladies' bath robes and beach coverups NAFTA IMPORTS 65

16 Source: U.S. International Trade Administration Website

17 NAFTA and U.S. Employment, 1993-1996 Sector of the Economy Change in Employment, 1993-1996 Automotive+14% Computer (Hardware and Software +9% Consumer Goods +13% Electronic Components +16% Textiles and Apparel -11% Source: United States Trade Representative, 1997. Study of the Operation and Effect of the North American Free Trade Agreement

18 Broader Consequences of the NAFTA Low Skilled Workers in the United States Lose. Job Losses and/or Falling Wages Low Skilled Workers in Mexico Win. Increased Job Opportunities, Rising Wages High Skilled Workers and Owners of Capital in the United States Win. High Skilled Workers and Owners of Capital in Mexico Lose. This is Factor-Price Equalization at Work.

19 Globalization, FPE, and American “Labor:” 1.Reduce Incomes of Low Skill Labor 2.Raise Incomes of High Skill Labor

20 Putting FPE in Perspective How Important is Trade to the U.S. Economy? Import less than 10% of GDP, thus Not Highly Integrated With Rest of World. How Important is Trade with Low-Income Countries to the U.S. Economy? Less than 30% of U.S. Imports Come from Developing Countries. Changes in Income in Lower and Upper Portions of Distribution, therefore, Not Caused Primarily By Trade. Technological Change is More Important Factor High Return to Education

21 Mexico In Perspective Source: World Bank, World Development Indicators on CD-ROM, 2001

22 Where’s The Politics?

23 World Trade Organization Summit, Seattle November-December, 1999 Governments Intended to Prepare for a New Round of Trade Negotiations

24 Domestic Politics: U.S. Labor Unions (AFL- CIO), which tend to represent Low-Skill Labor, Protesting Against Free Trade Under WTO International Politics: Labor Unions Advocating Creation of Global Labor Standards Regime Altruism—no “sweatshops” everybody gets a “living wage” Self-interested—higher wages in developing world that result from global labor standards regime will protect high-paying low-skill jobs in the United States

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