Economic Globalization

Sociology 2, Class 9

Copyright © 2011 by Evan Schofer

Do not copy or distribute without permission

Announcements

• Announcements– Midterm in one week: Feb 8

• Midterm review sheet handed out previously– Available on the course website

– NO SECTION on Tues-Friday during week of midterm!!!

• Sections will meet on Monday Feb 7 (midterm review)

• Agenda• Today: Taking stock: Consequences of globalization• Thursday: governance & more midterm review.

Midterm Info

• Exam Format: • Closed book / closed notes• Mix of short answer/multiple choice, medium length, and

perhaps one short essay question• No bluebook needed

• Topic coverage: • All class lecture material

– Lecture notes on course website

• All readings up through Week 5• Commanding Heights video, Episodes 1 & 3

– Available via course web page…

Benefits of Trade / Investment• Who benefits from global trade/investment?

– 1. Many benefit from greater economic growth• The wealthy usually benefit a great deal

– 2. Consumers benefit from cheap imports– 3. Multi-national corporations, because they can

move operations to wherever is cheapest– 4. Highly competitive export-oriented companies

benefit from access to new markets– And, workers in those industries tend to benefit

– 5. Investors can invest where profits are biggest• Ex: pension funds (CalPERS), other funds (LTCM)

– 6. Companies that can get cheap credit from foreign banks

Problems of Trade / Investment

• Who might oppose global trade & investment?– 1. Corporations in industries that will face greater

international competition• Example: steel & auto industries in the US

– 2. Workers in industries that will face competition• And labor unions more generally…

– 3. People & governments concerned about:• Potential for economic crises• Loss of state autonomy

– Pressure to please foreign capital; loss of domestic ownership

• Difficulty regulating global capitalism– Environmental problems, sweatshops, etc.

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

Barriers to Trade

• Strategies for protectionism

• 1. Tariffs – taxes on imported goods and services

• Example: The US government can impose a $2,000 tax on Japanese cars

• Fewer people will buy Japanese cars, imports will decrease

• 2. Quotas – a government-imposed numeric limit on imports

• Example: The US may allow only 500,000 Japanese cars to be imported in any given year.

Barriers to Trade

• Strategies for protectionism (continued)

• 3. “Non-tariff” barriers – A government regulation that indirectly limits trade or makes it more expensive– Example: Strong agricultural subsidies make it

impossible for foreign imports to compete• NOTE: Subsidies block imports, just like tariffs…

– Example: The US may impose complex agricultural inspections that delay or discourage imported fruit

• Could be legitimate, or simply a way of stopping imports.

Barriers to Investment

• Strategies for protectionism (continued)

• 4. “Foreign ownership” laws – laws that limit the ability of foreigners to buy companies

• Example: US government could require owners of corporations to be US citizens

• 5. “Capital controls” – laws designed to prevent the rapid withdrawal of capital/investment

• Example: Law requiring invested capital to remain in the country for one year

– Thus, preventing rapid flows in and out.

Removal of Barriers

• How do trade/capital barriers get removed?• “Liberalization” or “opening markets”

• Answer: When governments agree 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 we’ll 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 doesn’t 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 2006. 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."

• 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 groups of countries negotiate together to reduce barriers

• Ex: NAFTA; also negotiations under GATT, WTO

• Quick review of NAFTA consequences:– Schaeffer, p. 242; also Stiglitz Ch 3

– US: • Slight increase in exports; 90-160,000 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 (cont’d)– 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• Multi-national corporations• Possible long-term increase in efficiency, growth.

Problems With Trade Agreements

• Rich/powerful countries have numerous advantages in negotiating trade agreements

– See: Stiglitz, Chapter 3

• Some points to consider:

• 1. Advantages of Rich/powerful countries are biggest in bi-lateral trade negotiations

• Example: US vs. a small Latin American country• US can bully, bring great pressure…• 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

• “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.” Stiglitz Ch 3 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, rich 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 from wealthy countries• Previously, most trade agreements focused on equal

treatment, but poor countries can’t really compete…

– 1. 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

– 1. B. Poor countries should be allowed to use subsidies to support “infant industries”

• Rich countries have little to lose… but benefits are big.

Stiglitz: Recommendations:

• 2. Rich countries should stop MASSIVE agricultural subsidies– Rich countries give huge amounts of money to

(mainly) industrial farms– Norway: two-thirds of farm income is from subsidies– EU spends 80 billion US$; US spends

– Consequences: • Farmers in rich countries can sell food at LOW prices

and still make a profit– Often below the cost of farmers in poor countries

• Farmers in poor countries can’t compete… go broke.

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 aren’t

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 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 sometimes favor rich countries• System should be more open/transparent, more

democratic, with better enforcement for small countries.

Globalization: Consequences

• Taking stock… what are the consequences of economic globalization?

• Overview: Greico and Ikenberry: Economic Globalization and Political Backlash

• For peace• For the economy• For economic inequality• For governments• For cultures / cultural autonomy.

Globalization: Consequences• 1. Economic globalization and world peace?

• Several views… no definitive consensus

– A. Globalization as a source of peace• Globalization = interdependence• Argument: The more interdependent we are, the more

we have to lose by fighting…• Example: War between the US and China = disastrous

– B. Contrasting view: a source of conflict• Globalization creates potential for new disagreements

– Ex: over trade, currencies, etc

– C. Globalization is a source of peace, but only for democracies… which are accountable

• Totalitarian rulers may not be deterred…

Globalization: Consequences

• 2. Economic globalization and national economic welfare– Argument: Economic globalization increases the

risk of “external shocks”• Complexity of global markets creates possibility for

unforeseen disasters• Interconnectedness of global economy means that

problems in one place may spread across the system• Example: Crisis in Asia due to rapid capital flows and

“contagion”• Example: Collapse of LTCM (a Hedge fund) in the US

due to economic crises in Russia and other places.

Globalization: Consequences

• 3. Economic and Economic Independence– A. Globalization may worsen inequality

• Trade may reduce demand for low-skilled workers• Ex: Imports from low-wage countries wiped out

manufacturing jobs in the US.

– B. The “Golden Straightjacket” (friedman)• Governments can’t pursue Keynesian policies… for fear

that companies & investors will flee

– C. The “Race to the Bottom”• An extension of the prior argument• Countries may compete to cut social services or

environmental protections to attract foreign companies.

Globalization: Consequences

• 4. Economic and cultural autonomy– A. American / Western domination of the global

economy has prompted concerns• In short: American/global culture may be erasing local

cultures• We’ll explore this more in future weeks.

Globalization and Governance

• Issue: Can we do anything about the negative consequences of globalization

• As Stiglitz recommends we “reform governance”• What does he mean?

• Governance: Ruling, governing, or managing

• Sovereignty: Supreme power over a body politic; freedom from external control (Webster)

• Related term: autonomy

Video: Commanding Heights

• Issue: Who “writes the rules” of global governance?

• Episode 3, Chapters 15-17 (12 minutes)• Time index: 1:14:35 – 1:25:50

Governance: Definitions

• Treaty: An agreement among nations to follow certain rules

• Ex: GATT: “General Agreement on Tariffs and Trade”– Set rules for global trade, prior to the WTO

• Ex: Montreal Protocol on CFC emissions– An environmental treaty, in which countries agreed to ban the

use of chemicals that damaged the Ozone layer.

Governance: Definitions• IGO: Inter-governmental Organization: An

organization whose members are governments– Again, purpose is usually to negotiate or enforce agreements

among governments

• Ex: The World Trade Organization (WTO)– Members created it as a forum to manage world trade

• Ex: The World Bank– Governments created it to reduce poverty and encourage

development via loans and projects

• Ex: European Union– An supra-national government that coordinates (and in some

cases has the power to set) economic & trade policies for member countries

• Ex: UNEP: The United Nations Environment Program– Branch of the UN; urges nations to address environmental issues

Governance: Global Civil Society

• Issue: States and corporations are not the only players in global governance

• Civil society: citizen activity in the public sphere that is not part of the state or business sector

• Includes things like: Citizen participation in organizations, protest activities

• Social movements: Sustained efforts by members of civil society to challenge existing governance and produce social change.

Governance: Definitions

• Some components of civil society:

• NGO: Non-governmental Organization• A domestic association

– Clean Water Action; The Nature Conservancy

• Also sometimes called “non-profits” or “associations”

• INGO: International non-governmental organization

• An association that is international in membership and (typically) scope

• Ex: Greenpeace, WWF

Key Players in Global Governance

Video: Commanding Heights

• Wrap up: Inequality, governance, and the future of globalization

• Episode 3, Chapters 17-end (28 minutes)– If time allows…