Trading Barbs A Primer on the Globalization Debate

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1 The Regioal Ecoomist October 2007 Tradig Barbs A Primer o the Globalizatio Debate By Kevi L. Kliese Support for free trade i may parts of the world, though still favorable, appears to have waed recetly. This erosio may reflect risig ucertaities associated with job losses i idustries that are exposed to iteratioal competitio. It may also reflect a wideig i the icome distributio that has bee associated with the rise of Chia, Idia ad other fast-growig coutries. O the flip The Uited States is i the midst of a radical trasformatio from idustrial to post-idustrial society. Edward E. Leamer, UCLA professor 1 side, imports of low-priced goods ad services covey measurable beefits to cosumers ad compaies, ad multiatioal firms are resposible for a sigificat portio of the risig U.S. productivity growth over the past doze years. Hece, like most ecoomic developmets, trade produces costs ad beefits. Despite these ups ad dows, ecoomic history shows that icreased ecoomic itegratio is a log-ruig process that ehaces livig stadards for a icreasig share of the world s populatio. Globalizatio: Past ad Preset Globalizatio ca be defied as a pheomeo of icreased ecoomic itegratio amog atios, characterized by the movemet of people, ideas, social customs ad products across borders. This pheomeo has a log history, as attested by the historic trade routes developed durig the Roma Empire, as well as those pioeered by Marco Polo or ocea voyagers like Columbus ad Magella. Globalizatio has bee crucial for ecoomic growth over time. I his ifluetial study The World Ecoomy: A Milleial Perspective, the oted ecoomic historia Agus Maddiso argued that ecoomic advacemet across time was sustaied by three iteractive processes: coquest or settlemet of relatively empty areas that had fertile lad, ew biological resources or a potetial to accommodate trasfers of populatio, crops ad livestock; iteratioal trade ad capital movemets; ad techological ad istitutioal iovatio. As Maddiso ad others have oted, techological iovatios have played a key role i spurrig previous globalizatio episodes. Trasfers of techology from Asia ad Egypt (e.g., silk, spices, textiles, glass blowig ad rice) helped Veice ad its coloies play a key role i the developmet of Europe. Similarly, iovatios i shipbuildig ad avigatio were crucial to developig ew tras-oceaic routes ad to reducig shippig costs. Later, advacemets i sciece ad fiace helped to spur the rise of the Dutch Republic ad Britai as coloial powers ad itellectual hubs (uiversities). As ecoomic itegratio spread across cotiets, political ad fiacial istitutios evolved to ehace ad regulate the global marketplace. The curret globalizatio period, which more or less bega i the 1960s, cotais may of the same aspects of earlier episodes. I today s case, fallig trasportatio costs, the opeig up of ew markets (Asia, Easter Europe ad South America) ad the geeral lowerig of tariffs worldwide have helped boost iteratioal trade as a share of domestic ecoomic activity. [5]

2 NOTE: Trade is the sum of merchadise ad commercial services imports ad exports. SOURCE: World Bak World Developmet Idicators ad author s calculatios A key developmet behid the curret globalizatio wave is the revolutio i iformatio ad commuicatio techologies (ICT). Although the movemet of ships, trucks or railroads carryig merchadise goods is still the domiat form of trade betwee coutries, trade i services that takes place across trasoceaic cables or by satellite is of icreasig importace. As with earlier episodes, fallig real costs of trasportatio, of the processig of iformatio ad of the spread of ew ideas i this case, via the Iteret have bee crucial. The icreased opeess of the Uited States ad the rest of the world to iteratioal trade ca be see i the figure, which shows the sum of imports ad exports of goods ad services as a share of GDP. Whereas the U.S. share of trade is a Iteratioal Trade Exposure: Uited States ad the Rest of the World World except US US % of GDP little more tha a quarter of GDP, the rest of the world s exposure to iteratioal trade is cosiderably larger: 70 percet. From this stadpoit, developmets that affect the movemet of fiacial capital across iteratioal borders the opposite of trade i goods ad services ca sometimes have sigificat cosequeces for may coutries. For example, the 1998 Asia ad Russia fiacial crises showed that whe ecoomic turmoil icreases ucertaity amog iteratioal ivestors, fiacial capital ca move rapidly, causig sigificat chages i livig stadards amog the affected coutries. Sometimes, these disruptios ca affect the viability of firms (Log-Term Capital Maagemet) or spur cetral baks to take actios desiged to calm fiacial markets. The etrace of Chia, Idia, Brazil, Russia ad other coutries that are relatively recet etrats to the global capitalist system also affects the movemet of the meas of productio of goods ad services across borders. Oe aspect of this is foreig direct ivestmet. Accordig to the Orgaisatio for Ecoomic Cooperatio ad Developmet (OECD), these flows are substatial. From 1997 to 2006, foreig direct ivestmet ito the Uited States totaled a little more tha $1.64 trillio. The flow from the Uited States to other coutries over this period was modestly less, about $1.58 trillio. Although maufacturers have bee movig productio facilities across borders for decades, iovatios i ICT equipmet, software ad the developmet of the Iteret have allowed firms to more easily import services they used to produce themselves. The Beefits of Globalizatio Simply put, the beefits of globalizatio exted directly from the beefits of free trade. Iteratioal trade is beeficial because it allows a coutry to specialize i activities it does best, give its edowmets of labor, atural resources ad techology. (This fudametal cocept i trade is kow as comparative advatage.) Adam Smith was amog the first to demostrate the ecoomic beefits of specializatio i 1776 whe he published The Wealth of Natios. Buildig o Smith s aalysis, the British ecoomist David Ricardo demostrated the gais from trade usig the example of Britai (textiles) ad Portugal (wie). As a member of Parliamet, Ricardo put his ideas ito actio by helpig repeal Britai s cor laws i the early 19th cetury. Estimates of the et beefits that flow from free trade are substatial. Iteratioal trade has icreased real household icome by betwee $7,000 ad $13,000 sice the ed of WWII, accordig to a study by ecoomists Scott Bradford, Paul Grieco ad Gary Hufbauer. Removig all existig barriers to trade, they argue, would produce a additioal real icome gai of betwee $4,000 ad $12,000. Relaxig restrictios o the mobility of labor itself across borders would produce the largest possible gais for the world ecoomy, ad for poor coutries i particular, argues Harvard professor Dai Rodrik. (However, he admits that ecoomic, political ad atioal security cocers would probably prevet the full realizatio of these gais.) Aother beefit from trade is the icreased variety of goods ad services available to cosumers. The umber icreased by a factor of four betwee 1972 ad 2001, accordig to Bradford, Grieco ad Hufbauer. 2 Without trade, coffee drikers i the Uited States would pay much higher prices because the atio s supply would deped solely o Hawaiia or Puerto Rica sources. Scarce resources would eed to be redirected to produce more coffee, leavig fewer resources to producig other goods ad services. Similarly, devotees of Hodas or BMWs would be forced to drive Chevrolets or Fords. Give that techological iovatios i the automotive idustry (ad [6]

3 other idustries) ofte arise from competitive pressures i the marketplace, the quality of cars might also be much lower. as the compositio ad variety of goods ad services have evolved over time, some ecoomists have suggested that a modified framework is eeded to explai iteratioal trade. ow, trade is icreasigly viewed as part of a global supply chai, coverig everythig from research ad developmet to productio, as well as marketig ad distributio. as such, the process of producig computers, automobiles ad airplaes ow ivolves both vertical itegratio (usig compoets produced by foreig affiliates of the firm) ad horizotal itegratio (usig compoets produced by other firms). For example, a recet Fiacial Times colum by Joseph Gapper reported that 90 percet of the value of boeig s ew 787 dreamlier is derived from oboeig compaies. 3 Parts from outside boeig iclude the airplae s wigs, fuselage ad ladig gear. the global supply chai pheomeo is widespread. sice 1970, the share of imported iputs i maufacturig productio i advaced coutries has icreased from a little less tha 10 percet to a little less tha 30 percet. 4 services are also icreasigly part of this value chai. May services are of a persoal ature for example, medical, legal, child care, housig ad educatio ad, thus, largely otradable. However, other services, especially those of a more impersoal ature, such as voice or data etry, ca be easily moved offshore to coutries where the average wage is much lower. For example, a software compay located i the uited states may employ egieers i idia, mass-produce the software i chia ad the use its u.s. headquarters to market ad distribute the software. some firms may also move certai services offshore to keep a 24-hour productio cycle. thus, eve though the compositio ad scope of trade i goods ad services has chaged dramatically from smith s ad ricardo s day, ecoomists still support the fudametal coclusios of smith ad ricardo: ecoomic efficiecy is icreased whe resources are allowed to flow to their most productive uses. i short, while globalizatio has greatly icreased competitive pressures o firms, it also has greatly icreased the flexibility of firms i the productio process. a key differece betwee the curret globalizatio episode ad those from the past is the sheer magitude of the umber of workers who have etered the global labor pool. that is, the rise of chia ad idia as importat exporters of goods ad services meas that may of their workers are ow directly competig with workers i coutries like the uited states, Japa or Mexico. ecoomically, a icrease i the supply of labor puts dowward pressure o wages (assumig o chage i labor demad). oe of the argumets that propoets of globalizatio make is that icreased ecoomic itegratio beefits workers i relatively poor coutries by providig them access to ew ideas ad ew techologies; this exposure icreases their productivity ad real wages. the oted ecoomist Jagdish bhagwati, at columbia uiversity i ew York, stresses that whe a foreig firm establishes a productio presece i a poor coutry, the compay brigs with it a level of techology ad maagemet practices that is usually much greater tha that used by local compaies. evetually, may workers who are traied i the foreig multiatioal corporatios either leave to joi local firms or start their ow firms, ehacig societal welfare. overall, accordig to Harvard professor Xavier sala-i-marti, world icome iequality has declied over the past 20 years, The Regioal Ecoomist october 2007 Public Lags ecoomists i ethusiasm for Globalizatio Americas appear udecided whether globalizatio coveys mostly positive or egative beefits. A poll sposored by the Chicago Coucil o Global Affairs i April 2007 foud that 60 percet of Americas had a mostly good view of globalizatio, while a July 2007 Fiacial Times/Harris poll foud that oly about 20 percet thought that globalizatio was havig a positive effect. By cotrast, ecoomists are charter members of the pro-globalizatio society. I a recet survey of 210 members of the America Ecoomic Associatio, early 88 percet of ecoomists agreed that the Uited States should elimiate its remaiig tariffs ad otariff barriers to trade. 8 A slightly larger percetage, 90 percet, thought that the U.S. govermet would be wrog to restrict a firm s ability to substitute foreig labor for domestic labor. [7] 7

4 F o r F u r t h e r r eadig Much has bee writte recetly about the globalizatio pheomeo. Amog the more popular books are The World is Flat: A Brief History of the Twety-First Cetury (Farrar, Straus ad Giroux, 2005) by New York Times columist Thomas Friedma ad Globalizatio ad its Discotets (W.W. Norto & Co., 2002) by Nobel Prize-wiig ecoomist Joseph Stiglitz. pricipally because of the emergece of chia, idia ad the rest of asia as risig ecoomic powers. several researchers have argued that the competitive forces of globalizatio have also bee importat factors i boostig u.s. labor productivity growth i recet years. Federal reserve ecoomists carol corrado, Paul legerma ad larry slifma argue that multiatioal corporatios i the uited states, either foreig-owed or domesticowed, accouted for more tha half of the acceleratio i ofarm labor productivity i the late 1990s. this growth ca occur i a couple of ways. First, icreased competitio spurs domestic firms to ivest i ict equipmet ad software embodied with the latest techology. secod, movig less-skilled labor to low-wage coutries icreases the relative demad for higher-skilled, higher-productive labor. Has Globalizatio Made the Fed s Job Easier? the rise of chia ad idia (ad other coutries) as low-cost producers of goods ad services lowers prices of imports directly, as well as idirectly through the competitive forces uleashed upo domestic producers who compete agaist foreig sellers. i a speech to the america ecoomic associatio meetig i Jauary 2004, former Federal reserve chairma ala Greespa remarked that globalizatio uleashed powerful ew forces of competitio, helpig to create a eviromet particularly coducive to the pursuit of moetary policy. o the other had, rapid growth i coutries like chia ad idia has helped to icrease the demad for commodities like crude oil, copper ad steel. i respose, cosumers ad compaies pay higher prices for items like gasolie. risig gasolie prices, i tur, have spurred public- ad private-sector iitiatives to icrease the supply of gasolie substitutes like ethaol or biodiesel. icreased demad for these alterative forms of eergy has helped to raise the price of cor ad soybeas, which are key iputs i the productio of beef, pork, chicke ad other foodstuffs. recet research o globalizatio s effects o u.s. iflatio rates is far from coclusive, perhaps because of the aforemetioed offsettig iflueces. although the forces of globalizatio have udoubtedly chaged the prices of some goods ad services i the short- to medium-ru (relative price chages), which have perhaps made the u.s. iflatio rate less sesitive to domestic factors, most ecoomists would probably still agree that over time the iflatio rate i a coutry like the uited states will ultimately deped o actios take by the Federal reserve. The Dowside of Globalizatio as a ecoomic propositio, free trade beefits society because it has the potetial to make all citizes better off without makig ay citizes worse off. i reality, while the beefits from trade are positive ad sizable, iteratioal trade also produces losers. chief amog them are workers ad owers of capital (shareholders) i idustries that caot compete with foreig maufacturers. the u.s. textile ad televisio maufacturig idustries are but two examples. Faced with fallig real wages or uemploymet, workers i decliig idustries will eed temporary assistace (uemploymet beefits) ad loger-term assistace (educatio) additioal costs that the worker ad society must bear. these costs may show up as icreased govermet expeditures o uemploymet isurace or worker retraiig programs. icreased ecoomic ucertaity amog workers may also spur legislatio to limit the import of goods ad services (risig protectioism). 5 i a simple model of the domestic labor market, the ability of firms to move part of their productio abroad ca make the demad for labor much more sesitive to the wage rate. thus, a rise i the domestic wage rate will cause a much larger declie i the quatity of domestic labor demaded because firms ca ow substitute a cheaper foreig source of labor. the largest effects are probably amog less-skilled workers employed i mudae productio processes that ca be doe much cheaper overseas. Professor edward leamer of ucla deems this the commoditizatio of work. i these types of idustries, the product ad the process are stadardized (makig t-shirts or baseballs, or readig service mauals at call ceters). as a result, these kids of domestic jobs are icreasigly cotested by low-wage foreig workers. accordig to Priceto uiversity professor ala blider, importig impersoal services from low-wage coutries is othig less tha a ew idustrial revolutio. curretly, though, the iteratioal outsourcig of itermediate services accouts for oly about 1 percet of all itermediate services i the uited states, accordig to the oecd. this percetage may icrease further because chia, idia ad other low-wage coutries will cotiue to boost the share of their (large) populatios holdig college degrees or learig to speak eglish. ideed, blider claims that betwee 22 ad 29 percet of u.s. jobs are potetially able to be moved offshore withi a decade or [8]

5 two. I other words, the cotestability of low-skilled jobs may become more itese i the future. Other ecoomists, like Leamer, are more skeptical about the evetual magitude of the offshore pheomeo i the Uited States. Whatever the outcome, oe would expect that faster ecoomic growth i coutries like Chia ad Idia will cause real wages to icrease i those coutries, arrowig the wage gap (adjusted for productivity differeces) with the Uited States or other idustrialized coutries. A rise i the cotestability of mudae jobs icreased competitio for lower-skilled jobs implies that future job growth may have to come from existig idustries (such as Caterpillar or Wall Street ivestmet baks) or from idustries that produce goods ad services ot yet iveted. Accordig to Staford Uiversity professor Paul Romer, this process is rather straightforward: Ecoomic growth arises from the discovery of ew recipes ad the trasformatio of thigs from low- to high-value cofiguratios. The productio of high-value cofiguratios aturally teds to be doe by workers with high-skill levels. Jobs that ted to be moved offshore are doe by lower-skilled workers. Sice highskilled workers are paid a premium for their labor, movig work offshore thereby icreases the demad for higher-skilled workers relative to the demad for lowerskilled workers. Oe potetial cosequece of this developmet is risig icome iequality betwee low-skilled ad high-skilled workers. Accordig to the OECD, icreases i icome iequality have bee most proouced i the Uited States, the Uited Kigdom ad some smaller Europea coutries. 6 Ecoomists are divided over how much of this icrease is due to globalizatio ad how much is due to the skill bias stemmig from the icreased use of high-tech equipmet i the workplace. Regardless, icreases i the demad for skilled labor are clear market-based icetives to workers to boost their educatio levels ad, perhaps, for firms to icrease their work-force traiig. The demad for high-skilled workers over the log ru ca also be boosted by research ad developmet, which is ofte the geesis of ew ideas that boost ecoomic growth ad livig stadards over time. This brigs us back to achievig ecoomic efficiecy i the face of globalizatio. Sometimes, achievig a efficiet outcome requires the wiers of free trade to compesate the losers. The questio is how best to do that. Because may public policymakers ad workers evidetly associate risig iequality with globalizatio, some ecoomists argue that additioal steps are eeded to prevet a further erosio i the public s support for iteratioal trade. Traditioal resposes to ecoomic dislocatio caused by iteratioal trade are job retraiig, wage isurace or temporary icome assistace, such as that offered through the Trade Adjustmet Assistace Act. 7 Loger term, most ecoomists have stressed the beefits coveyed by icreased educatio, which seems to be a ecessary igrediet for the creatio of ew ideas. However, as professors Keeth Scheve (Yale Uiversity) ad Matthew Slaughter (Dartmouth) have recetly poited out, oly a third of the curret U.S. labor force has graduated from college, ad boostig that percetage will take time. At the ed of WWII, the college-educated share was 6 percet. At that rate, they claim, reachig 50 percet of the labor force would ot come about util To maitai the public s support for free trade, Scheve ad Slaughter propose a New Deal for globalizatio that would boost the take-home pay of those at the lower ed of the icome distributio. Scheve ad Slaughter propose to do this by elimiatig the payroll tax for workers below the atioal media icome. Other ecoomists, such as Rodrik, argue that markets thrive ot uder laissez-faire but uder the watchful eye of the state. Rodrik, thus, argues that atios should be allowed ad, i fact, ecouraged to restrict fiacial capital flows accordig to atioal iterests, while maitaiig a relatively free ad ope eviromet for the trade i goods ad services. As the itroductory discussio suggests, the forces of protectio seem to be risig or, at least, are much more vocal tha i recet years past. Ultimately, policymakers must decide whether the cost of imposig trade restrictios, of expadig public programs to compesate the losers of trade or those who perceive themselves as losers, or of takig other measures is a small price to pay for maitaiig a global ecoomic system that has produced large beefits for most parts of the world. Kevi L. Kliese is a ecoomist at the Federal Reserve Bak of St. Louis. Joshua A. Byrge provided research assistace. The Regioal Ecoomist October 2007 ENDNOTES 1 See Leamer (2007). 2 See Bradford, Grieco ad Hufbauer (2006). 3 July 9, 2007, p See OECD (2007). 5 See Aderso ad Gasco (2007). 6 See OECD (2007). 7 See Coughli (2002). 8 See Whaples (2006). REFERENCES Aderso, Richard G.; ad Gasco, Charles S. The Perils of Globalizatio: Offshorig ad Ecoomic Isecurity of the America Worker. Federal Reserve Bak of St. Louis Workig Paper A, February Bhagwati, Jagdish. Why Multiatioals Help Reduce Poverty. The World Ecoomy, February 2007, Vol. 30, No. 2, pp Blider, Ala S. How May U.S. Jobs Might Be Offshorable? CEPS Workig Paper No. 142, March Bradford, Scott C.; Grieco, Paul L.E.; ad Hufbauer, Gary Clyde. The Payoff to America from Globalisatio. The World Ecoomy, July 2006, Vol. 29, No. 7, pp Corrado, Carol; Legerma, Paul; ad Slifma, Larry. The Cotributio of Multiatioal Corporatios to U.S. Productivity Growth, Board of Goverors of the Federal Reserve System, Fiace ad Ecoomics Discussio Series Workig Paper, , Feb. 9, Coughli, Cletus C. The Cotroversy over Free Trade: The Gap betwee Ecoomists ad the Geeral Public. Federal Reserve Bak of St. Louis Review, Jauary/February 2002, Vol. 84, No. 1, pp Leamer, Edward E. A Flat World, a Level Playig Field, a Small World After All, or Noe of the Above? A Review of Thomas L. Friedma s The World is Flat. Joural of Ecoomic Literature, March 2007, Vol. 45, No. 1, pp Maddiso, Agus. The World Ecoomy: A Milleial Perspective. Paris: The Orgaisatio for Ecoomic Cooperatio ad Developmet, Developmet Cetre, Orgaisatio for Ecoomic Cooperatio ad Developmet. OECD Ecoomic Outlook. Prelimiary Versio, May 2007, Vol. 2007/1, No. 81. Rodrik, Dai. Feasible Globalizatios. Harvard Uiversity, July See Feasglob.pdf. Romer, Paul. Why, Ideed, i America? Theory, History, ad the Origis of Moder Ecoomic Growth. AEA Papers ad Proceedigs, The America Ecoomic Review, May 1996, Vol. 86, No. 2, pp Sala-i-Marti, Xavier. The World Distributio of Icome: Fallig Poverty ad... Covergece, Period. The Quarterly Joural of Ecoomics, May 2006, Vol. 121, No. 2, pp Scheve, Keeth F.; ad Slaughter, Matthew J. A New Deal for Globalizatio. Foreig Affairs, July/August 2007, Vol. 86, No. 4, pp Whaples, Robert. Do Ecoomists Agree o Aythig? Yes! The Ecoomists Voice, The Berkeley Electroic Press, November 2006, Vol. 3, No. 9. See [9]

By Michael Reisch, Ph.D. Colloquium Presented at the University of Washington School of Social Work June 19, 2001

Evisioig the Future of Social Work ad Social Work Educatio By Michael Reisch, Ph.D. Colloquium Preseted at the Uiversity of Washigto School of Social Work Jue 19, 2001 Itroductio Historical Backgroud Cotemporary