Naked Economics: Chapter 12 Trade and Globalization. Real Life Economics December 11 th, 2012

Transcription

1 Naked Economics: Chapter 12 Trade and Globalization Real Life Economics December 11 th, 2012

2 Imagine a machine that can turn: Corn into a DVD player Soybeans into a sedan Windows software into French wines Boeing 777 into enough fruits and vegetable to feed a city for months It would work in poor countries too; a poor country with access to this machine would become richer faster

3 This machine exists: it is called TRADE We pay others to do or make things we can t (manufacture a car, remove an appendix) We pay others to do things we could do but choose not to (brew coffee, make a sandwich, change the oil, clean the house)

4 Imagine life without TRADE: a small drafty house you made, clothes made from sheep you have, a couple of coffee beans from a scraggly tree, hoping the chicken laid an egg Our standard of living is high because we are able to focus on the tasks that we do best and trade for everything else

5 It s the same for people in all nations People do things because it makes them better off; they hope it will make their lives better Paul Krugman: globalization, driven by the profit motive, has done far more good than all foreign aid and soft loans

6 Globalization is the term that has come to represent the increase of international goods and services A KFC in Bali? cultural homogenization has become a flashpoint for civil unrest The world is becoming more economically interdependent As a share of global GDP, exports rose from 8% in 1950 to 25% today

7 The US, as the rest of the world, has much to gain (despite the hate mail) The benefits of international trade far exceeds the cost The basic ideas are straight-forward and simple

8 Trade makes us richer Abraham Lincoln and rails from Britain The fallacy: why don t we raise a cow rather than giving money to the butcher? Because it would be a great waste of time We trade with others because it frees up resources and time to do things we are better at

9 Countries, like individuals, have natural advantages EG. Saudi Arabia make oil; the US makes corn and soy beans; people in Seattle don t grow rice they make software and airplanes and sell books; rice is grown in Thailand or Indonesia

10 Comparative advantage allows countries to gain even though they are not particularly better at producing anything They provide goods to allow others to specialize Engineers could manufacture shoes and shirts, but instead imports them from Bangladesh, so they could specialize in making jets He hires a nanny to take care of his kids; the nanny is not necessarily better at that task, but it allows him to concentrate on what he does best The world is better off because of it

11 Trade allows us to specialize Specialization makes us productive Productivity makes us rich Trade makes the most efficient use of the world s scarce resources

12 Trade creates losers The wreckage of creative destruction Trade, like technology, can destroy jobs, particularly low-skilled jobs Poor countries may lose jobs too; industries shielded from international competition can be crushed ruthlessly by efficient competition from abroad Ie. Thumbs-Up Cola in India when Coca-Cola entered the market in 1994

13 In the long run, trade facilitates growth, and a growing economy can absorb displaced workers Exports rise and consumers are made richer by cheap imports Trade-related losses are small compared to the economy s capacity to produce new jobs IE. In a post-nafta study, 37,000 jobs were lost to Mexico between 1990 and 1997, while 200,000 jobs/month were being created But what of the human pain and disruption?

14 Displaced workers often lack skills to adapt; Maine shoe workers, a paper mill in Newton Falls, opened in 1894, closes and the town slowly dies Economic gains from trade outweigh losses, but the winners don t write the losers a check But, markets create a new, more efficient order by destroying the old one Mark Twain: I m all for progress; it s change I don t like.

15 Globalization benefits are immense, particularly for the poor Marvin Zonis noted it disrupts everything; all patterns of life We can retrain or relocate workers Provide development assistance Teach skills to make workers adaptable

16 The USA may be at risk: too many Americans aren t seeing their paychecks get bigger Scheve and Slaughter, in an article in Foreign Affairs, suggest a more progressive federal tax system; tax the rich more to save globalization from a protectionist backlash Only the few benefit from the boosted productivity and wealth creation; so the US is becoming more protectionist, deciding globalization is not good for them They propose a New Deal for globalization one that links engagement with the world economy to a substantial redistribution of income

17 Protectionism saves jobs in the short run and slows economic growth in the long run Turns the specialization clock backwards We would be poorer because we would be collectively less productive Imposing economic sanctions forbidding imports and exports have devastating impact Why would the US want to impose trade sanctions on themselves? (this is what protectionism does) What would happen if trade was restricted between two halves of America, divided by the Mississippi?

18 Trade lowers the cost of goods for consumers, which is the same as raising their incomes We can afford to buy more Trade barriers are a tax a hidden tax Tax orange juice? Terrible! A regressive tax as it has more effect on the poor! But, slapping a tariff on Brazilian oranges and orange juice is essentially the same thing

19 Lowering trade barriers has the same impact as cutting taxes In GATT negotiations between 1948 to 1995, average tariffs fell from 40% to 4% Forced domestic producers to make things cheaper to stay competitive Cars in the US; better import selection and better domestic models

20 Trade is good for poor countries too Logic of protesters: world trade is imposed by rich countries on developing nations, something good for the rich must be something bad for the others Zero-sum thinking, again, is wrong in economics The developing nations complained most about the disruption of the talks! Developing nations want the benefits of global trade; want the US and Europe to reduce their agricultural subsidies and trade barriers

21 Trade gives poor countries access to developed markets where there is money being spent Poor countries get richer; export jobs pay higher wages; more competition - thus wages are raised everywhere Workers leave rural areas for better opportunities leaving fewer mouths to feed Foreign companies introduce capital, technology, and new skills; workers become more productive and this spills into other areas of the economy

22 EG. Daewoo was a major textile producer in the 1970s, and US and Europe slapped import quotas So, Daewoo moved to Bangladesh, and brought 130 Bangladeshis to SK to train them; invested in human capital Daewoo severed the Bangladesh relationship, but 115 of the trained workers went on to start their own garment-exporting firms

23 Cheap exports were the path to prosperity for the Asian tigers India was insular; Ghandi was a great leader but a bad economist India reversed course in 1990s If China s 30 provinces were countries, the 20 fastest growing countries between 1978 and 1995 were Chinese GDP doubles every 10 years in China In India and China 100s of millions of people have been lifted from poverty to middle class Authors of AT Kearney study believe 1.4 billion people have escaped poverty because of globalization

24 The bad news is higher rates of income inequality, corruption, and environmental degradation But, as Jeffrey Sachs asked: Is there an example of a single country successfully developing without trading and integrating with the global economy? NO

25 Trade is based on voluntary exchange People don t have to eat at MacDonald s; they do so because they want to Banana leaves vs. paper Hooters in Puerto Vallarta: that is just wrong Cultural homogenization is a common criticism of globalization

26 Should we limit the proliferation of fast-food restaurants? Classic externalities: litter, traffic, and ugly There s a MacDonald s in Moscow; a Starbucks in the Forbidden City in Beijing But, culture is transmitted in all directions: Iranian movies from Netflix, remote craftsman and artists selling on the internet, Novica.com (Peruvian artists don t have to be miners), an obscure Finnish company like Nokia can dominate behemoths like Motorola

27 Sweatshops? Or opportunity? It s not forced labor; it s the best option they have; foreign companies pay twice the domestic wage A Thai 15-year-old laborer works 9 hours a day, 6 days a week, has been injured several times, and paid $2/day; she is thankful for the job and worries about the factory closing! The developed world can not judge what is best for the developing world

28 The comparative advantage of workers in poor countries is cheap labor That is all they have to offer If foreign companies were forced to raise wages, they d move to another country We cannot make them better off by refusing to buy their products Industrialization makes poor countries richer In 1993, Bangladeshi children were found working in factories making products for Wal-mart. They banned those imports, the factories closed and the children ended up in worse jobs, on the streets, or forced into prostitution. -OOPS!

29 Preferences change with income, particularly with regards to the environment What is poor? Buying a Matiz rather than an Equus? Or losing a child to malaria because you cannot afford a mosquito net? What is the world s most important environmental problem? Global warming? Or access to clean water?

30 The first fallacy of trade and environment is that developing countries should be held to the same environmental standards as the developed world We can t avoid waste during production; the cost/benefit analysis will be different when you are starving If we produce more, then we pollute more; as we get richer, we care more about the environment

31 When was London s air quality the worst? -1890! So trade makes poor countries richer, causing pollution, yet the richer the country, the more resources they have to deal with pollution! Motorbike ->diesel->leaded->unleaded ->electric or hydogen?

32 Critics of trade say the countries race to the bottom in terms of pollution Take China! terribly polluted, highly dependent on coal but the more they develop, the more energy the require what s next? NUCLEAR? The more educated uses more energy what should we do? Stop educating?

33 NO. Carbon tax! Now to influence development decisions that will have an effect on the environment for the next 50 years. To keep people poor because it s good for the planet/environment is IMMORAL Poverty sucks, but we have to think; to not buy a good from a developing nation to oppose globalization and trade punishes the poor

34 Global trade is an unstoppable force The world had been global before the World Wars, and now more than ever If government attempts to stop it, both the rich countries and the poor countries would suffer