WHY NATIONS TRADE? Simple trade model TRADE, TRADE AGREEMENTS, & IMMIGRATION. Differences in factor endowments. Benefits from economies of scale

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1 TRADE, TRADE AGREEMENTS, & IMMIGRATION 1. Simple Trade Model 2. Logic behind trading blocs 3. Trade Organizations & U.S. Trade Agreements 4. Trade Agreements and Labor 5. Labor Standards 6. Immigration WHY NATIONS TRADE? Differences in factor endowments Countries differ in endowments in natural resources, infrastructure, capital availability, human capital accumulation Benefits from economies of scale By specializing, countries can produce on a large scale Simple trade model Assumptions: 2 good world: e.g., food and clothes 2 types of inputs capital and labor Regions differ in their endowments of each Both capital and labor are of fixed quantity and immobile Constant returns to scale Consumers in both countries have same taste Can combine capital and labor to produce some mix of food and clothes: result is a production possibilities function.

Ehrenberg & Smith Production Possibilities Diagram Figure 4A.1 Hypothetical Production Possibilities Curves, United States Copyright 2003 by Pearson Education, Inc.

2 Ehrenberg & Smith Production Possibilities Diagram Figure 4A.1 Hypothetical Production Possibilities Curves, United States Copyright 2003 by Pearson Education, Inc. 4-8 Comparative Advantage Regions (countries) differ in the quantity/quality of inputs Costs of producing one good expressed in opportunity costs or foregone production: - I.e., The cost of producing one unit of A means foregoing the production of x units of B Country X is said to have a comparative advantage in producing Good A if the foregone output of Good B is lower than the foregone output of Good B in Country Y. Note: No $$ Discussed Trade as Mutually Beneficial Notion is that countries differ in the relative costs of production. Free trade does not lead to all production being shifted to the lowest cost location

3 Predictions of Simple Model (Heckscher-Ohlin hypothesis) 1. Countries will export goods in which they have a comparative advantage and import those in which they do not. 2. Free trade leads to specialization of production according to comparative advantage 3. Maximized Consumer Welfare (lower product prices) Implementing Free Trade Introduction to Trading Blocs Trading Blocs Definition: Preferential trading agreements Members of bloc favored over non-members Expected Advantages to trading blocs Creation of new markets for producers Lower priced goods/services for consumer Promote political stability & economic prosperity Much of world divided into regional trading blocs

4 4 TYPES OF TRADING BLOCS 1. Trade Preference Association: Members lower govt. barriers on goods from other members only (e.g., Preferred nation designation). 2. Free Trade Area: Members eliminate barriers against other members but maintain individual barriers against goods from non-members (e.g., NAFTA). 4 TYPES OF TRADING BLOCS, CONT. 3. Customs Union: Members eliminate govt. barriers against members imports and establish common tariffs against nonmembers (e.g, EC, Mercosur). 4. Common Market: Barriers to all transactions removed b/n members, incl. transfers of labor, capital, & services. Common barriers against nonmembers (e.g., EU). THEORETICAL PROS & CONS OF TRADING BLOCS: Advantage Trade Creation: Members import goods they previously did not import Efficiency enhancing: Specializing production according to comparative advantage Lower product prices for consumers in bloc Efficiency enhancing Economies of Scale Larger markets allow producers to enjoy economies of scale -> lower production costs Efficiency enhancing

5 THEORETICAL PROS & CONS OF TRADING BLOCS: Disadvantage Trade Diversion: Members now import goods from other members that were previously imported from outside of bloc Assumed that switch is from more efficiently produced to less efficiently produced goods Not efficiency enhancing Features of Trading Blocs One or more small countries linked to larger country (or bloc itself) Small countries often trying to make internal reform Ultimate goal of deeper integration Degree of liberalization relatively modest Smaller countries usually making greater concessions EMPIRICAL RESULTS ON TRADE CREATION Trade creation more likely to occur the: Higher pre-bloc tariffs & trade barriers More member countries More competitive the countries prior to forming bloc Closer the countries geographically

6 WHY PUSH FOR BLOCKS IF BENEFITS MIXED Product of political process where beneficiaries represented Way to reduce political conflicts Way for developing countries to reduce dependence on developed countries Ideological commitment U.S. Trade Agreements Free Trade Agreement (FTA) United States/Canada (1/1989) North American Free Trade Agreement (NAFTA) (1/1994) United States/Canada/Mexico Fast Track CAFTA, FTAA Australia (2004); Israel (1985); Jordan (2000); Morocco (2004); Singapore (2003) Fast Track Authority (TPA Trade Promotion Authority) Executive branch delegated authority to negotiate terms of trade, enter into agreements and change write legislation to reform federal laws as needed Congress can suggest goals but can only vote on entire agreement (20 hrs. debate permitted) Initially created in 1974 Recent Use Used to negotiate NAFTA Requested and Denied, March 1999 Requested and Approved 2002: used in bilateral pact with Singapore and attempted inclusion of Chile in NAFTA, CAFTA (2004) Slow down in momentum for western hemispheric free trade agreements despite US 2005 deadline

7 Barriers reduced or eliminated by FTA and NAFTA Fiscal Barriers: Eliminates or reduces taxes on partner goods and subsidies to native goods Quantitative Barriers: Quotas on Imports of partner goods eliminated Transaction costs associated with Trade: Checking goods at border, paperwork, etc. Some Non-tariff Trade Barriers Reasons for agreements FTA Promote bilateral trade Improve climate for bilateral investment Resolve specific trade difficulties NAFTA Expand goods mkt. Expand invest. opp Stabilize Mexico for US investment Reduce illegal immigration Develop both sides of border WORKPLACE ISSUES IN TRADING AGREEMENTS: AN AFTERTHOUGHT Canada: Expect slight increase in US employment from more competitive firms & goods substitution Mexico: US employment increase from trickle-down : Increased demand in Mexico for US goods => increase in US employment.

8 LABOR STANDARDS IN FREE TRADE AGREEMENTS Link b/n fair labor standards & trade policy Notion of social dumping - League of Nations in 1927 Policies to harmonize and eliminate competition based on failure to respect international standards - ILO in 1950s GATT charged to integrate labor standards but no mechanism Sources of international labor standards: ILO Conventions International Covenant on Civil and Political Rights (ICCPR) NAFTA countries parties to this. Global Trade Organizations: WTO World Trade Organization (WTO) Established 1995; Replaced GATT (General Agreement on Tariffs and Trade) 142 member countries Objectives: facilitate liberalization of trade; eliminate most favored trade status arrangements; encourage competition; help with development of developing countries. Advocate of multi-lateral agreements Global Trade Organizations: ILO International Labour Organization (ILO) Established by Treaty of Versailles in 1919; 177 member countries. Purpose: promotion of social justice and internationally recognized human and labor rights Mechanism: Conventions ratified by member countries (Currently 185 conventions) No enforcement authority

9 Fundamental ILO Conventions Freedom of Association (# 87, 98) Abolition of Forced Labor (#29, 105) Equality (#111, 100) Elimination of Child Labor (#138, 182) Ratification of 8 ILO Fundamental Conventions US: Tied with Myanmar & Oman ratified 2 Sample countries with better ratification records: Sudan (7), Iraq (7), Iran (5) US: Convention 105 (Forced labor) & Convention 182 (Child labor) World-wide average: 6.9 Raises question re: value of using ILO ratifications as standard in free trade agreements. WORK UNDER NAFTA Labor side agreement North American Agreement on Labor Cooperation (NAALC): Point: to protect national sovereignty & right to issue labor standards Agreement to protect: right to bargain, minimum labor standards, safety & health Strive to improve standards and maintain transparent enforcement mechanisms Disputes resolved by multi-step arbitration process starting with country-specific NAO (National Administrative Office)

10 WORK UNDER CAFTA Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, Dominican Republic (signed 2004). Labor Features Requires nations to enforce their own labor laws Chief labor cooperation and standards capacity building: $20 million appropriated by US Congress (2005) to set up program to improve labor rights in Central Am. & Dominican Republic Disputes resolved by Free Trade Commission (FTC) Cabinet level Commission Potential Weaknesses No reference to existing international standards (ILO) Absence of enforcement mechanisms No assurance of continued funding for cooperation High probability of structural weaknesses similar to NAALC Work Under FTAA Parties agree to abide by their ILO obligations; Sovereignty with respect to establishing, interpreting, and enforcing domestic labor standards; Inappropriate to weaken existing laws to gain trade advantage; Parties recognize advantage to cooperation with respect to promoting ILO Fundamental Conventions. Bi-lateral consultation process in event of disputes. Concern about social services and protective standards Jobs, Labor Standards & Free Trade

11 Economic Framework: THEORY OF ECONOMIC LOCATION Basic premise of location theory: Firm locates at minimum cost location Considers production function, spatial variation in factor prices and capital availability, proximity to inputs & markets, transportation costs Labor as a Locational Attribute Cost Compensation and Labor Standards Will affect demand for a location Heterogeneity Skill heterogeneity: will encourage specialization Labor Standards Social contract between nation & its workforce THEORY OF ECONOMIC LOCATION, CONT. Labor Mobility with NAFTA: Severely restricted Some professional services mobile Implication of Labor Immobility Labor as a locational attribute thus part of each country s comparative advantage Labor standards become trade advantage

12 Conceptual Bases for Labor Standards 2 Bases for defining labor standards Rights-based Labor standards as codification of human rights Reflect world-wide norms for treatment of labor Economic Regulation Modifying economic behavior; limits choices of producers &/or consumers Usually penalties for non-compliance Set in context of comparing importing and exporting countries Rationale for Labor Standards Use of police power of state to abridge individual liberties if there is a public benefit Poor conditions of employment associated with weak bargaining power of employees -- a social ill that could be addressed by state intervention DEFINITION OF LABOR STANDARDS A governmentally established procedure, term or condition of employment, or employer requirement that has as its purpose the protection of employees from treatment at the workplace that society considers unfair or unjust. They are mandatory - governmentally imposed and enforced

13 3 Basic Models of Labor Standards Within-Country Legislation or Collective Bargaining Cross-National Legislative, Trade sanctions, Multilateral agreement Voluntary Standards Codes of corporate conduct WHY ARE LABOR STANDARDS- RELATED ISSUES IMPORTANT? ECONOMIC PERSPECTIVE PRODUCERS: Cost concerns EMPLOYEES: Compensation & Welfare POLICY PERSPECTIVES STRATEGIC QUESTIONS: International competitiveness SOVEREIGNTY QUESTIONS: Ability to make laws consistent with national welfare and values Empirical Research on Labor Standards Global Organizations Canada United States Comparison Block & Roberts United States European Union Comparison Block, Roberts, & Berg

14 U.S. Canada Comparison: Key Questions ARE THERE DIFFERENCES IN CANADIAN AND U.S. LABOR STANDARDS? IF SO, WHAT IS THE MAGNITUDE OF THOSE DIFFERENCES? Difference in Statutory Basis between U.S. & Canada U.S For most standards, Federal govt. is mandatory floor Some standards set at state unjust dismissal Canada Provincial sovereignty on most standards Exceptions: Employment (unemployment) insurance & standards governing sectors that operate inter-provincially LABOR STANDARDS ANALYZED STANDARDS THAT REQUIRE EMPLOYER PAYMENTS TO EMPLOYEES OR TO GOVERNMENT MINIMUM WAGE OVERTIME/HOURS OF WORK PAID-TIME OFF UNEMPLOYMENT INSURANCE WORKERS COMPENSATION STANDARDS THAT CONSTRAIN EMPLOYER ACTIONS COLLECTIVE BARGAINING EQUAL EMPLOYMENT /EMPLOYMENT EQUITY UNJUST DISMISSAL OCCUPATIONAL SAFETY AND HEALTH

15 SIX LABOR STANDARDS HIGHER IN CANADA THAN IN U.S. SUBSTANTIALLY HIGHER IN CANADA PAID-TIME OFF COLLECTIVE BARGAINING UNJUST DISMISSAL SLIGHTLY HIGHER IN CANADA WORKERS COMPENSATION EQUAL EMPLOYMENT / EQUITY OCCUPATIONAL SAFETY AND HEALTH TWO STANDARDS COMPARABLE IN CANADA AND U.S. MINIMUM WAGE UNEMPLOYMENT INSURANCE ONE STANDARD HIGHER IN U.S. THAN IN CANADA MAXIMUM HOURS FOR OVERTIME

16 Effect of labor standards on Economic Outcomes Examine US only with state as unit of observation Outcomes: GSP, Employment, Manufacturing Employment, Export Share Labor standards negatively affect GSP, both types of Employment with elasticity between.48 &.69 UI & Unjust Discharge primary drivers U.S. versus EU: Prevailing views Trade-off between worker protection and unconstrained (and therefore efficient) market forces In relative terms: U.S. seen as placing higher value on market EU seen as placing higher value on worker protection Differences in political structure U.S. sovereign country Federally-set standards binding lower bound in all states Enforced (usually) by federal agencies EU political union of member countries European directives issued centrally Member countries each pass legislation and structure enforcement.

17 Standards analyzed: Those promulgated at federal or council level Wage rates (min. wage) Working time Paid time off Unemployment insurance Collective bargaining Anti-Discrimination Unjust dismissal Occupational safety & health Large scale layoffs Employee involvement Parental/family leave Transfers of ownership Results EU higher: Collective Bargaining Unjust dismissal Occupational Safety & Health Employee involvement Transfer of Ownership Paid time off U.S. higher: Minimum wage Unemployment insurance About the same: Discrimination Large scale layoffs Parental leave Understanding Offshoring Why now: India and China have long had wage advantage May be improving in education, though still developing countries Driver: lower transportation and communication costs Off-shoring concentrated in IT, phone & on-line services

18 LABOR IMMIGRATION 1. Brief history of U.S. Law 2. Who migrates and why 3. Effect of Immigration on U.S. Recent History of Immigration Law Immigration Acts of 1921 and U.S. Border Patrol established Immigration & Nationality Act of 1952 Set basic U.S. immigration law framework Defined categories of non-u.s. born individuals 1965 Amendments Abolished quotas & changed priorities Immigration Reform and Control Act of 1986 Major reform of immigration law Created amnesty program & employer sanctions Marriage penalty (separate law) Current Law Immigration Act of 1990 Major reform: set cap on number of immigrants (675K) 1993 Lottery for green cards permanent resident visa Priorities: Family reunification, special skills, refugees

19 Current Statistics Downward trend since 1991: 1.8 Million to 660,000 in 1998 Large increase in employment based immigration: 3.7% in 1990 to 11.7% in 1998 Largest sending regions: North America, followed by Asia Largest receiving states: CA by far, then NY, then FL Neoclassical Framework (Push-Pull) Migration as function of relative attractiveness of 2 areas Attractiveness = f(wages) Migration as equilibrating process Distance as market imperfection Non-zero transaction cost Models of Immigration Basic Neoclassical Framework Migration as an equilibrating process Roy Model Explains net flows from one country to another Migration as a Human Capital Decision Explains individual level decision making

20 Roy Model Basics Assumes 2 countries with different income distributions Country A: Wide dispersion, low mean County B: Narrow dispersion, high mean Model Predictions Low end of A will move to B, but high end of A will not High end of B will move to A, while low end of B will not Roy Model: Income Distributions Country B Country A Migration as Individual Human Capital Investment Same framework as with education: PVB = Σ [(B jt -B ot )/(1+r) t ] Where: B jt are the benefits associated with destination country B ot are the benefits associated with sending country t is length of time expected to be in destination country and r is discount rate Move if PVB/C => 1 C are the direct costs associated with immigration borne by the individual

21 Who migrates to U.S. and why? Older or younger More or less educated Closer countries or further Two types of employmentbased migrants Target earners Migration to high wage region for specified period of time to make target money to send home Permanent migrants Chain migration Family migration: Evidence of longer investment time horizon Is Immigration Good for the US? Two Perspectives Immigrants as substitutes for US workers Increase unemployment Immigrants as complements to US workers: Take jobs US workers do not want Help sustain economic growth

22 Immigration as hurting US workers S D S F + D W 1 W 2 D E 1 E D E3 Simplistic versus likely version of immigrants as hurting US workers Single market Common argument that immigrants substitute for US workers on one-for-one basis More likely reality: addition of immigrants depresses wages below what they would be. If immigrants deported, would be an insufficient supply of domestic workers at new wage. Immigration as helping US workers Migrants as taking certain types of jobs natives do not want Deliberate policy (H-1, H-2) Institutionalized use Employer practices Economy as social structure Need someone in bottom rungs Intergenerational moves up the ladder Natives and Immigrants as non-competing groups

23 Shifts in Population Composition Population Estimates, U.S. Census Bureau 1-Jul-00 1-Jul-50 Population 272, ,686 % Native 90.30% 86.70% Asian - Pacific Islander 11,275 37,589 % of total population 4.13% 9.31% Hispanic 32,478 98,228 % of total population 11.90% 24.33% Source:

Overview of Labor Enforcement Issues in Free Trade Agreements

Overview of Labor Enforcement Issues in Free Trade Agreements Mary Jane Bolle Specialist in International Trade and Finance February 22, 2016 Congressional Research Service 7-5700 www.crs.gov RS22823 Summary