Globalization 10/5/2011. International Economics. Five Themes of Geography

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1 International Economics G L O B A L I Z A T I O N, T H E F L A T W O R L D, A N D T H E I M P A C T O F T R A D E! Five Themes of Geography Globalization? Location Relative Location Absolute Location Place Human Characteristics Physical Characteristics Human-Environmental Interactions Humans adapt to the environment Humans modify the environment Humans depend on the environment Movement People Goods Ideas Regions Formal Functional Vernacular (perceptual) Globalization E C O N O M I C S 1

2 Benefits and Issues of International Trade KEY CONCEPTS Nation s economic patterns based on factors of production it has patterns change over time; for example, U.S. originally agricultural Specialization occurs when narrow range of products made increased productivity and profit economic interdependence reliance on others for products not made Exports vs. Imports KEY CONCEPTS Exports goods and services produced in one country, sold in others Imports products produced in one country, purchased by another Costs and benefits of international trade vary by nation economists examine impact of exports and imports on prices and quantity What Goods a Nation Will Export? Absolute Advantage An absolute advantage is derived from one country having a lower absolute input cost of producing a particular good than another country. Comparative Advantage An advantage derived from comparing the opportunity costs of production in two countries. Countries export goods in which they have a comparative advantage. 2

3 Sources of Comparative Advantage Productivity Differences This theory is often referred to as the Ricardian model after David Ricardo of the early 19 th century. Factor Abundance This is sometimes called the Heckscher-Ohlin model after the two Swedish economists who developed the original argument. Other theories Some other theories are identified on the figure on the next slide. 3

4 Economic Systems C O M M A N D, M A R K E T, T R A D I T I O N A L, M I X E D Four Economic Systems Market (Free Market Capitalism) Laissez-faire No government involvement Classical/Liberal Traditional (no change) Command (Socialism/Communism) Mixed (99% today) 4

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9 What is Globalization? G L O B A L I Z A T I O N 9

10 What is Globalization? Globalization is a continuing process of economic restructuring which has lead to an increasing cross-border flow of trade in goods, services, and financial assets, along with an increasing international mobility of technology, information, and individuals. As a result, countries are becoming less isolated, so that it makes sense to think more in terms of a global economy. Not every country is participating in the globalization cross-border flows can be greatly limited by government policies. Globalization Globalization : the expanding scale, growing magnitude, speeding up and deepening impact of transcontinental flows and patterns of social interaction 10

11 Globalization (Economic) Globalization: (the) integration of national economies into the international economy through Trade Direct foreign investment short-term Capital flows International flows of workers and humanity generally and flows of technology Four Areas of Globalization Trade (Goods/Services) Capital (Investments) Money Movement of People Spread of Knowledge Technology Technology and Globalization Trade and the movement of people between countries are facilitated by: Falling transportation costs Including faster, easier transportation Falling communications costs Including faster, easier, more convenient communications Computers 11

12 Measuring Globalization An article in Foreign Policy magazine weighs the following factors in ranking the globalization of countries: Political engagement Number of memberships in int l organizations, UN Security Council missions in which it participates, foreign embassies it hosts Technology Number of internet users, internet hosts, secure servers Personal contact Int l travel and tourism, int l telephone traffic, cross-border income transfers Economic integration Int l trade, FDI, portfolio capital flows, income payments and receipts Arguments about Globalization G O O D N E W S A B O U T A S I A N S W E A T S H O P S? Arguments Against Globalization (1) Critics often portray globalization as a vehicle for enriching the corporate elites, to the detriment of poor people and the environment. They argue that free trade agreements (FTAs) put people out of jobs. People working in less competitive countries will find their jobs going to more lower cost producers elsewhere. To compete, governments may abandon environmental safeguards and workers rights. Decision making authority may be moved away from the local area, causing fear and distrust. 12

13 Arguments Against Globalization (2) They argue that international organizations like the World Trade Organization (WTO) is a tool of corporations, operating to enrich corporations at the expense of labor. They argue that international competitiveness arguments are used to justify removing environmental protection regulations. They argue that international competitiveness arguments are used to justify harmful labor practice. Arguments for Globalization (1) Advocates argue that globalization results in an increase in living standards in all countries. They argue that free trade helps countries. In particular, developing countries often have the most to gain from trade. International organizations represent governments and people. Such organizations are funded by governments, not corporations, and are designed to allow a means for communication. Such organizations also provide for transfers of funds from rich to poor countries that would not occur otherwise. Arguments for Globalization (2) The Environment Supporters argue that there is no race to the bottom in which multinational firms move production to countries with lax environmental standards. Some of the worst environmental degradation has occurred at the hands of governments who are least open to economic relationship with the rest of the world. Harmful Labor Practices? There is also no apparent race to the bottom in labor standards. In fact, the opposite seems to be true. Multinational firms tend to pay higher wages and better benefits than local firms. 13

14 The good news about Asian sweatshops Trade makes us richer Trade creates losers Protectionism saves jobs in the short run and slows economic growth in the long run Trade lowers costs for consumers Trade is good for poor countries, too. Trade is based on voluntary exchange Poor countries have a comparative advantage in cheap labor Preferences change with income Arguments for Protection Creation of Domestic Jobs Creation of a level playing field Government Revenue Creation National Defense Infant Industries Strategic Trade Policy 14

15 International Organizations GLOBALIZATION Preferential Trade Agreements Groups of countries sometimes enter into agreements to abolish most barriers to trade among themselves. Well-known examples are the European Union (EU) and NAFTA. Two common forms of such agreements are: Free trade areas (FTAs): member countries eliminate all trade barriers among themselves, but continue to choose their own trade policies with nonmembers. Customs unions (CUs): member countries eliminate all trade barriers among themselves, and impose common trade barriers on nonmembers. 15

16 NAFTA NAFTA is a treaty between Canada, Mexico, and the United States that was designed to foster greater trade between the three countries. NAFTA has been in effect since 1 January It has since been updated with two major additions, the North American Agreement for Economic Cooperation (NAAEC) and the North American Agreement for Labor Cooperation (NAALC). A very recent addition was the Security and Prosperity Partnership of North America, designed to foster cooperation on issues of national security. European Union The European Union is a group of countries whose governments work together. It's a bit like a club. To join you have to agree to follow the rules and in return you get certain benefits. Each country has to pay money to be a member. They mostly do this through taxes. The EU uses the money to change the way people live and do business in Europe. Countries join because they think that they will benefit from the changes the EU makes. International Organizations Bretton Woods also led to the creation of two new organizations: The International Monetary Fund (IMF) was created: To supervise the exchange-rate practices of member countries To lend money to member countries that are experiencing problems meeting their external financial obligations To encourage free convertibility of any currency into any other Each of the 182 member countries pays dues called quotas. The U.S. pays about $48 billion a year. Has about 1700 employees, mostly economists. 16

17 Int l Orgs, continued The World Bank Created to help provide access to funds needed by developing countries. It makes loans at rates that are lower than commercial rates. It sells bonds to raise money for its loans. It also provides experts that advise developing nations in many areas of expertise. Has about 6500 employees. GATT The General Agreement on Tariffs and Trade (typically abbreviated GATT) was originally created by the Bretton Woods Conference as part of a larger plan for economic recovery after World War II. The GATT's main purpose was to reduce barriers to international trade. This was achieved through the reduction of tariff barriers, quantitative restrictions and subsidies on trade through a series of different agreements. The GATT was an agreement, not an organization. What is the WTO? The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world s trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct their business. 17

18 G20 What is the G20? The Group of Twenty Finance Ministers and Central Bank Governors (G- 20, G20, Group of Twenty) is a group of finance ministers and central bank governors from 20 economies: 19 countries plus the European Union, Their heads of government or heads of state have also periodically conferred at EU summits since their initial meeting in Represented by the Collectively, the G-20 President of the European economies comprise 85% of Council and by the global gross national European Central Bank. product, 80% of world trade (including EU intra-trade) and two-thirds of the world population. Brazil China Russia BRIC India Tools of Protectionism A N T I - G L O B A L I Z A T I O N 18

19 Tools of Protectionist Policy Tariffs A tax on imports or exports Quotas Quantity Quota: a limit on the amount of a good that may be imported. Value Quota: a limit on the monetary value of a good that may be imported. Export Subsidies: direct cash, tax reductions, low-interest loans, lowcost insurance, R&D funding, etc. Government Procurement: laws that require the purchase of domestic goods. Health and Safety Standards: are sometimes used to restrict foreign goods from domestic markets under the claim of protecting the public health and safety. Globalization and School E D U C A T I O N Is the World Flat? The World is Flat (Thomas Friedman) Best selling book describing the increased globalization of the world, educational problems, and a host of other problems facing America. Commanding Heights (Daniel Yergin) In depth study of the competition between markets and command economies. 2 Million Minutes (Robert Compton) Documentary covering the impact of Globalization on students in the US, China, and India. 19

20 Dirty Secrets #1 The Numbers Gap #2 The Ambition Gap #3 The Education Gap This Is Not a Test We have the power to shape the civilization that we want. But we need your will, your labor, your hearts, if we are going to build that kind of society So let us from this moment begin our work so that in the future men will look back and say: It was then, after a long and weary way, that man turned the exploits of his genius to the full enrichment of his life. Lyndon B. Johnson, 1964 (Great Society) A Quiet Crisis As the world becomes more competitive (flat earth philosophy) competition in math, science, and engineering will become more difficult. There is a lack of emphasis in American schools on Math and Science. Possible situation where we will no longer be the beacon for other nations to strive for. 20