International Economics, 15E: Robert Carbaugh

Robert Carbaugh
INTERNATIONAL
ECONOMICS, 15E
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The International Economy and
Globalization
Chapter 1
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
Chapter Outline (1 of 2)
 Globalization of Economic Activity
 Waves of Globalization
 The U.S. as an Open Economy
 Why is Globalization Important?
 Globalization and Competition
 Common Fallacies of International Trade
 Does Free Trade Apply to Cigarettes?
Chapter Outline (2 of 2)
 Is International Trade an Opportunity or a
Threat to Workers?
 Backlash Against Globalization
 Summary
 Key Concepts and Terms
 Study Questions
The International Economy (1 of 2)
 High degree of economic
interdependence
◦ No nation exists in an economic isolation
◦ All aspects of a nation’s economy are linked
to the economies of its trading partners
◦ Reflects the historical evolution of the world’s
economic and political order
◦ Complex and its effects uneven
The International Economy (2 of 2)
 High degree of economic
interdependence
◦ Steps toward international cooperation
◦ Mutually advantageous for trading nations
 Specialization, efficiencies of large scale production
 Wider variety of products at lower cost
◦ Protectionist pressures
◦ Developing nations
 Liberalized trading system – serves to keep the
developing nations in poverty
Globalization of Economic Activity
(1 of 2)
 Globalization
◦ Greater interdependence
 Countries and their citizens
◦ International flows
 Goods and services
 People
 Investments in equipment, factories, stocks, bonds
 Non-economic elements
 Culture and the environment
Globalization of Economic Activity
(2 of 2)
 What forces are driving globalization?

◦ Technological changes
◦ Multilateral trade negotiations
 Continuing liberalization of trade and investment
◦ Widespread liberalization of investment
transactions
◦ Development of international financial
markets
Waves of Globalization (1 of 11)
 First Wave of Globalization: 1870-1914
 Decreases in tariff barriers
 Technological developments
◦ Declining transportation costs
 Shift from sail to steamships; railways
◦ Driven by European and American businesses
and individuals
 First Wave of Globalization: 1870-1914 (cont)
◦ Exports as a share of world income
 Nearly doubled to 8%
◦ Per capita incomes increased 1.3% per year
 Previous 50 years: 0.5% per year
◦ Nations that actively participated in
globalization
 Became the richest countries in the world
◦ Brought to an end by World War I
 The Great Depression of the 1930s
◦ Governments practiced protectionism
 Raised tariffs on imports
 Tried to shift demand into domestic markets in order to
 Promote sales for domestic companies
 Promote jobs for domestic workers
◦ Exports as a share of national income
 Falls from 8% to 5%, undoing 80 years of
technological progress in transportation
 Second Wave of Globalization: 1945–1980
◦ Horrors of the retreat into nationalism
renewed incentive for globalization
◦ Falling transportation costs
◦ Decrease previously established trade barriers
◦ Trade liberalization – not uniform
 Which countries participated? Mainly developed
countries
 Which products were included? Manufactured goods
 Trade liberalization discriminated
◦ Developed countries, manufactured goods
 Largely freed of barriers
 Greatly increased the exchange of manufactured goods
 Raised the incomes of developed countries
◦ Developing countries
 Exports from developing countries faced no barriers
only for agricultural/primary goods that were not
produced in developed countries
 Exports of manufactured goods - sizable barriers
(cont)
◦ New kind of trade

 Rich country specialization in manufacturing niches
 Gained productivity through agglomeration economies
 Firms clustered together
 Some clusters produced the same product
 Others were connected by vertical linkages
◦ Agglomeration economies
 Benefits only those that are in the clusters
 No benefit for those that are left out
(cont)
◦ Most developing countries

 Did not participate in the growth of global trade in
manufacturing and services
 Continuing trade barriers in developed countries
 Unfavorable investment climates
 Antitrade policies in developing countries
 Dependence on agricultural and natural-resource
products
◦ Developing countries as a group were being left
behind; World inequality
 Latest Wave of Globalization, began in 1980
◦ Many developing countries participated led by
 China, India, and Brazil
 Entered the world markets for manufactured goods
◦ Other developing countries
 Increasingly marginalized in the world economy
 Decreasing incomes
 Increasing poverty
◦ Significant international capital movements
(cont)
◦ Some developing countries

 Competitive advantage in labor-intensive
manufacturing
 Bangladesh, Malaysia, Turkey, Mexico, Hungary, Indonesia, Sri
Lanka, Thailand, and the Philippines
 Tariff cuts
 Lower barriers to foreign investment
 Technological progress in transportation and communications
◦ Protectionist policies in developed countries
(cont)
◦ World
 More globalized - international trade, capital flows
 Less globalization - labor flows
◦ Foreign outsourcing
 Certain aspects of a product’s manufacture are
performed in more than one country
 Manufacturing moved to wherever costs were lowest
 Job losses for blue-collar workers
 Cries for the passage of laws to restrict outsourcing
Table 1.1
Manufacturing an H-P Pavilion…
Table 1.2
Globalization Goes White Collar
(cont)
◦ By the 2000s, foreign outsourcing of white-

collar work
 Information Age
 Digitization, Internet, and high-speed data networks around
the world
 Sending upscale jobs offshore
 Accounting, chip design, engineering, basic research, and
financial analysis
◦ Foreign outsourcing
 Reduce costs of a given service: 30 to 50%
The U.S. as an Open Economy(1 of 8)
 Trade patterns
◦ Openness
 Rough measure of the importance of international
trade in a nation’s economy
 Nation’s exports and imports as a percentage of its
Gross Domestic Product (GDP)
Table 1.3
Fruits of Free Trade: Global Fruit...
 Openness
◦ Large countries – lower measures of openness
 Less reliant on international trade
 Many firms in larger countries can attain an optimal
production size without having to export due to the
population and economic size
◦ Small countries – higher measures of openness
Table 1.4
Exports & Imports as a % of GDP...
 Openness of the U.S. economy, 1890 to
2013
◦ Less open to international trade, 1890 to 1950
 Relatively high openness in the late 1800s
 Rise in world trade: technological improvements in
transportation and communications
 Two world wars + Great Depression of the 1930s
 Reduced dependence on trade
 National security reasons
 Protect home industries from import competition
 Openness of the U.S. economy, 1890 to 2013
(cont)
◦ After World War II - negotiated reductions in

trade barriers
 Rising world trade
 Technological improvements in shipping and communications
◦ U.S. trade
 In 1890, mostly raw materials and agricultural products
 Today, manufactured goods and services
 U.S. producers more affected by foreign competition today
than 100 years ago
Figure 1.1
Openness of U.S. Economy, 1890-2013
Table 1.5
Top 10 Countries, U.S. Trades, 2012
 Labor mobility in U.S. has not risen in past
100 years
◦ 1900, 14% of U.S. population: foreign born
◦ 1920s to 1960s – immigration sharply curtailed
 Foreign-born U.S. population: 6%
◦ 1960s, liberalized restrictions; By 2014
 12% the U.S. population was foreign born
 Foreigners: 14% percent of the labor force
 Half – from Latin America
 One quarter – Asians
 Capital flows to the U.S.
◦ Foreign ownership of U.S. financial assets
 Risen since the 1960s
◦ 1970s, OPEC - investments in U.S. financial
markets
◦ 1980s, major flows of investment funds to U.S.
◦ By late 1980s
 U.S. - consuming more than it produced
 Net borrower from the rest of the world
 International banking
◦ Average daily turnover in foreign-exchange
market
 Today: almost $4 trillion
 1986: $205 billion
◦ The trading day begins in Tokyo and Sydney and
moves around world in unbroken 24 hour cycle
◦ London - the largest center for foreign-exchange
trading
 Commercial banking
◦ U.S. banks
 Worldwide branch networks, 1960s and 1970s
 Loans, payments, foreign-exchange trading
◦ Foreign banks
 Increased presence in U.S., 1980s and 1990s
 Today: 250 foreign banks
 Securities firms - globalized their operations
◦ By 1980s, U.S. government securities
 Traded on a 24-hour basis
Why is Globalization Important? (1 of 2)
 The Law of Comparative Advantage:
◦ Each nation gains by doing things for which they have a
relative advantage
◦ If a good or service can be obtained more economically
through trade, makes sense to trade for it, not produce it
 International trade also gains from
competitive process
◦ Competition essential to innovation, efficient production
◦ Global competition can result in high cost domestic
producers exiting the market
Why is Globalization Important? (2 of 2)
 Open economies
◦ More competition which lowers prices
◦ More firm turnover
 Improvements for the industry
 Economic growth rates - close relation to:
◦ Openness to trade
◦ Education
◦ Communications infrastructure
Figure 1.2
Tariff Barriers vs. Economic Growth
Globalization and Competition (1 of 3)
 Globalization and free trade can provide benefits
to many, but can inflict burdens on others
◦ Kodak had 90% camera market share but complacent; did
not address competition, new technology
◦ Fuji entered U.S. market with lower priced film and
supplies; Kodak ignored them
◦ By mid-1990s, Fuji had 17% of market, Kodak, 75%
◦ Kodak finally developed digital camera, but undercut by
smart phones; filed for Ch 11 bankruptcy
◦ Kodak is now a small digital imaging company
to many, but can inflict burdens on others (cont)
◦ Schwinn bicycles the standard of the industry, surviving the
Great Depression with continuous innovation; bikes
durable, stylish, but heavy
◦ Competitors produced mountain bikes & racing bikes;
cheap imports entered market
◦ Schwinn moved production to non-union state; obtained
parts from foreign countries, but uneven quality; Schwinn
declared bankruptcy; firm purchased
◦ Schwinn bicycles today made in China
to many, but can inflict burdens on others (cont)
◦ Once, 150 US manufacturers of televisions
◦ Imports from Japan, China, South Korea, others
◦ Flat panel TVs lighter, cheaper to ship from Asia
◦ By 2000, no US TV manufacturers
◦ But costs in China rising, US factories more competitive;
◦ 2012, Element Electronics became only TV manufacturer in
U.S.; all parts imported, assembled in Detroit
◦ Assembly in Detroit yields distribution efficiencies; avoids
tariffs; TVs shipped in boxes with a “Made in America” logo
Common Fallacies of International Trade
(1 of 2)
 “Trade is a zero-sum activity”

◦ False; Both partners gain from trade
 “Imports reduce employment and burden the
economy, while exports promote growth and
employment”
◦ False; Source of this fallacy is the failure to
consider the link between imports and exports
Common Fallacies of International Trade
(2 of 2)
 “Tariffs, quotas, and other import restrictions

will save jobs and promote a higher level of
employment”
◦ False; failure to recognize that a reduction in
imports does not occur in isolation
 Free trade
◦ Increases competition, lowers prices
◦ Makes better products available to consumers
◦ Results in higher consumption
Does Free Trade Apply to Cigarettes?
 Usually, free trade results in higher consumption;
but with cigarettes, is this a good thing?
 Some contend that cigarettes are not normal
“goods” but are in fact “bads” requiring their
own set of regulations; cigarette manufacturers
disagree
 Distinguish between regulating cigarettes for
public health, and regulating them to protect
domestic markets
International Trade: Opportunity or
Threat to Workers? (1 of 3)
 International trade benefits many workers

but not all workers benefit
◦ Cheaper consumption goods
◦ Employers – better technologies/equipment
◦ Workers - more productive
◦ Exports - jobs and income for domestic workers
◦ Cheap Imports - Rising unemployment
◦ Hurts unskilled workers in import-competing
industries – lobbying restricting imports
 International trade
◦ Domestic prices - aligned with international
prices
◦ Wages increase
 Workers whose skills are scarce
◦ Wages decrease
 Workers who face increased competition
◦ Jobs lost in one industry
 Replaced by jobs gained in another industry
 The long-run effect of trade barriers

◦ Does not increase total domestic employment
◦ Reallocates workers
 Away from export industries
 Toward less efficient, import-competing industries
 Leads to a less efficient utilization of resources
 International trade
◦ Just another kind of technology
◦ Adds value to its inputs
Backlash Against Globalization (1 of 3)
 Proponents of free trade and globalization

say:
◦ Countries prosper
◦ New ideas and technology flow freely around the
world
◦ Productivity growth
◦ Increasing living standards
◦ Lower consumer prices
◦ Increased variety of goods and services
 Critics of free trade and globalization say:

◦ Benefits large corporations at the expense of
average citizens
◦ Environmentalists
 Elitist trade organizations like WTO make undemocratic
decisions
 Undermine national sovereignty on environmental regulation
◦ Unions
 Unfettered trade permits unfair competition
 Critics of free trade and globalization say: (cont)

◦ Human rights activists
 World Bank and International Monetary Fund support
governments that:
 Allow sweatshops
 Pursue policies that bail out governmental officials at the expense
of local economies
Table 1.6 – Advantages and
Disadvantages of Globalization

International Economics, 15E: Robert Carbaugh

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Robert Carbaugh

 What forces are driving globalization?

◦ New kind of trade

◦ Most developing countries

◦ Some developing countries

◦ By the 2000s, foreign outsourcing of white-

◦ After World War II - negotiated reductions in

 “Trade is a zero-sum activity”

 “Tariffs, quotas, and other import restrictions

 International trade benefits many workers

 The long-run effect of trade barriers

 Proponents of free trade and globalization

 Critics of free trade and globalization say:

 Critics of free trade and globalization say: (cont)

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