Lecture notes EEP 131 Topic 3, September 19, 2006Major environmental and poverty concerns• Last 50 years population increased by a factor of 2.5, global economy increased by a factor of 5, and trade increased by a factor of 14.• 1.3 billion live on less than a dollar a day• Last 50 years CO2 emissions increased by a factor of 4; 25% of fish stocks are depleted or under threat; increased water shortages.Differing perspectives on globalization and environment• Trade perspective: emphasizes efficiency gains from trade; governments are too responsive to domestic producers and require a “commitment device” (e.g. international rules).• Environmental perspective: emphasizes market failure; also sees government as vulnerable to capture by producer groups.Development perspective• Priority is to reduce current poverty.• Current trade rules unfair. Limited market access; subsidies in key sectors – ag and textiles; TRIPS.• Rich countries will look for loopholes to avoid reforms, e.g. restrictions based on labor or environmental concerns (a “Trojan horse”).• Unfair to require developing countries to sacrifice for global environmental problems.• Tension between environmental NGOs in rich countries, and developing countriesThe extent of globalization• During 1960s – 80s growth rates of world trade and world consumption began converging.• In the 90s trade grew more rapidly than consumption: increasing globalization.• Is wave of globalization during 1990s-present a “repeat” of globalization during late 19th, early 20thcentury? (Earlier wave reversed by war and depression.)Compare current period and 1870s –1913• In both periods trade grew faster than consumption, fall in transportation and communication costs, treaties lower tariffs.• Table shows imports+exports as % of GNP. (Numbers are similar)2127UK86US1610Italy2416Germany1316Australia19901890% Share of value of manufacturing exports as a fraction of manufacturing value added3614US6362 UK5823Germany3927Australia19901890Importance of globalization to US economy• Traded goods sector defined as agriculture, mining and manufacturing.• This sector declined from 33% to 19% of US economy, from 1960 to 1999.• Merchandise exports as a share of GDP has not changed much. (Traded goods sector has shrunk, but trade has become more important to the sector.)• 17% of US labor force in manufacturing, down from 40% in 1960. Similar trend even in developing countries, e.g. China.Increased importance of capital goods in composition of US imports• From 1950 - 2000 the % of consumer goods in trade fell from 38% to 30%, industrial materials and supplies fell from 61% to 25% and capital goods rose from 1% to 45%.• Trade restrictions increase the cost of production, erode a nation’s productivityServices are being traded• Services are becoming more important in economy, and trade is becoming more important in service sector.• In 2000 value of goods and service exports = 11% of GDP (8% merchandise, 3% services) • In 2000 value of goods and service imports approx 15% of GDP (Merchandise imports = 12% and services = 2%).Foreign direct investment (FDI)• US FDI (as a % of GNP) has increased by a factor of three from 1960 – 1996.• In 1998 US companies exported $993 billion worth of goods to foreign consumers and sold $2800 billion through foreign affiliates. • Foreign companies sold $1,100 billion to US consumers by trade, and they sold $1,700 billion to the US through foreign owned affiliates in US.Vertical Specialization• Countries import components, process them, and export the processed goods. Commodities may cross a border several times. • Example of US-Canada auto trade. The US exports engines and parts to Canada and imports finished cars. • In 1998 US imported $93 billion from Mexico, about 14 billion of which was accounted for by US-made components. • Difficult to determine the “true origin” of some products.Early theories for why trade might decrease over timeFor a time economists thought that trade might diminish over time because:i) Spread of technology might lead to smaller differences across nations, hence less reason to trade. ii) Rising income shifts demand toward non-traded goods.Why has trade increased?• (explains 65% of increase) Income growth and changing patterns of consumption (e.g. increased variety).• (explains 25% of effect) Liberalized policies (Examples: the average tariff on manufactured goods has fallen from 40% to 5% in the post WWII period; formation of EC and NAFTA also reduces trade restrictions.• (explains 10% increase) Decreased transport and transactions costs. Decrease in transport costs over past 50 years is equivalent to reducing tariffs from 20% to 5%)Is economic integration large or small• Compared to what?• Compare to historical level (as above)• Compare to an “ideal”. What would be volume of trade if there were no borders or transport costs?• US responsible for about 25% of world production. Absent a “home bias” we would import about 75% of consumption. Instead we import about 12%.Public opinion regarding trade• 1999 poll showed 60% of Americans in favor of globalization.• 1996 poll, 70% thought that trade was good for US economy. Most thought US should reduce trade barriers in exchange for partners’ reductions.• Opinion more divided on specific initiatives (NAFTA, normalized relations with China)More on public opinion• Common perception is business benefits more than workers from trade liberalization.• Large majority thought that protecting labor standards should be part of trade agreements.• People with more education more favorable to trade.• More willing to accept increased trade caused by technological changes (viewed as “natural”) rather than increases caused by policy changes (e.g. normalized relations with
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