1 Globalization is Good First Lecture for International Trade Policy Craig Parsons 2012

2 What is Globalization? To economists it typically means: an increase in international transactions in markets for goods, services, and some factors of production (some capital and some labor, i.e. migration) Plus the growth and expanded scope of institutions that straddle national borders- including firms, governments, international institutions, and non- governmental organizations (NGOs).

3 For some, globalization is disagreeable At the most basic level “globalization” is the growth of international trade, but also growth in MNCs, integration of world capital markets, and the resulting financial capital flows (in and out), the extraterritorial reach of government policies. Such rapid growth in these areas has made some people experience an increasing sense of helplessness. Perhaps small countries have always had to confront this. But now big countries (such as the US, and EU) are confronting it for the first time. For many, this sense of helplessness is “disagreeable.”

4 Has globalization really increased?

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6 More recent data (imports) source: Great Trade Collapse, Baldwin ed., free online

7 What has caused these dramatic increases over 50 years or so? Overall GDP growth has increased total trade Technology Policy (freer trade) One paper estimates that income growth accounts for 67% of total growth in trade; 25% due to tariff rate reductions; 8% to technology (transportation cost declines.)

8 Increase in Foreign Assets

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10 Increase in Immigration

11 Immigration as % of Population Source: WDI, 2006

12 Average Tariff Declines

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15 Trade: Whom does it help? Whom does is hurt? There are static and dynamic effects of trade. Also, while it has been shown in many ways both in theory and empirically that countries that trade more do better than those who do not, Often the people hurt, get hurt soon, while the benefits, while much larger, take a longer time to take effect. (According to Huber (1971), post-Meiji Japan’s income grew by 65% (!) in 15 years following the end of the sakoku policies.) Thus, we see the bad effects before the good effects.

16 The fundamental case for trade and globalization is that it raises the average person’s standard of living. However, the benefits are typically not evenly distributed. In wealthy countries such as the US, Japan, and the EU, capital are the relatively abundant factors. Thus, with more free trade, the static effect is that capital owners (and those with lots of education) have the most to gain. Labor, especially low-skilled labor, the scarce factor in wealthy countries may lose from free trade, at least in the short run, if the government doesn’t help them out. (Which they often do help out.) Conversely, LABOR should BENEFIT more than owners of capital in in LDCs.

17 In the long run, we all gain However, in the longer run, old industries will shrink and die and new ones will appear and existing ones that remain competitive will expand. In the long run, there will be more jobs and better jobs at higher salaries for the next generation. Thus, in a very real sense, in the long-run, everyone gains from freer trade, and there are no losers. This is because total average income rises with more trade and growth.

18 Growth is Good for the Poor (part I) “When America sneezes, the world catches a cold.” Some estimates find that a fall in US GDP by 1% causes a 3% fall in the GDP of developing countries. Certainly as the second largest economy, the link between Japanese growth and the world is also important. Therefore, prosperity for Japan and the US implies, prosperity for the poor countries in the world as well. Pinkovskiy and Sala-i-Martin (2010) also found, contrary to popular belief, Africa is also benefiting.

19 Growth is Good for the Poor (Part II) According to several studies including Dollar and Kray (2000): – Poor countries that do NOT trade become poorer; countries that trade “converge” – Growth increases income of the poor about the same as the rich within poor countries. – Of course many other conditions are necessary for raising the income of poor countries, namely: Rule of law; property rights Stable Macro policies Lower inflation

References Dollar, D. and A. Kraay (2000), “Growth is Good for the Poor,” World Bank Working Paper. Deardorff, A. and R. Stern (2002), “What you should know about Globalization and the WTO,” Review of Int’l Economics. Vol. 10(3). Pinkovskiy, M. and X. Sala-i-Martin, “African Poverty is Falling...Much Faster than You Think!” (2009, 2010) NBER Working Paper and new version here: 2.pdf 20

21 Next Lecture: Effects of a Tariff (Krugman & Obstfeld handout, in Japanese)