GOV 312L 1st Edition Lecture 19 Outline of Current Lecture I. The summit in ChinaII. What is globalization?III. Why do states trade? Comparative advantageIV. Why does globalization generate political conflict? The distributional consequences of globalizationV. Institutions and US trade policy: The RTAAVI. The Bretton Woods order VII. The World Trade OrganizationVIII. NAFTACurrent LectureTMFPQ: Asia Summit and trade- Obama in China for significant summit (reduced tariffs)- Big trade deal between China and the United States announced on Tuesdayo Expanded IT agreement: Both sides cut tariffs on tech products (semiconductors—25% tariffs, medical devices like MRI—8% tariffs, GPS, etc) and pave way for broader multilateral deal in WTO China hesitates to protect new semiconductor industry Covers over $1 trillion in tradeo Potentially linked to new investment pact between US and China- Pressure from TransPacific Partnership (no China)?o http://www.washingtonpost.com/blogs/wonkblog/wp/2013/12/11/everything-you-need-to-know-about-the-trans-pacific-partnership/These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.o China wants to be part of this, so it’s working with the US now- Republican win in midterms might help Obamao Republicans have always wanted less tariffs and more free trade, so this could help a brotha outTMFPQ: US, China, Climate Change- Major agreement between U.S. and China to control CO2 emissions. Collective action- Classic case of transnational problem needing collective solution (see John Kerry’s op-ed in NYT):o http://www.nytimes.com/2014/11/12/opinion/john-kerry-our-historic-agreement-with-china-on-climate-change.html?partner=rssnyt&emc=rss- China:o Pressure from citizens to clean up smog in major cities?o Does the agreement go far enough?o Can China deliver on promises? maybe not, they rely alot on coal- U.S.:o Republican objections: china was not required to do anything, so why should we??? big cry babieso Can President Obama do this through executive order? yes he has the powero Obama’s legacy? What is Globalization- Will define here in economic terms: Integration of national economies into single global economy through reduction of barriers to tradeo Key barriers: transportation costs, political barriers to trade (tariffs, subsidies)o as national barriers fall, competition intensifies- Enhances competitiono In single economy, most efficient producers win (stay in business); others go bankrupt and have to find another jobo Compare:  US autarkic (no trade): compete with 316.1 million Americans for job Free trade world (no barriers to trade): same individual must compete with 7.125 billionHow to get competition through markets- Economic actors interact through price mechanism in markets- Ability to charge lower prices and stay in business as indicator of efficiency- Inefficient actors either get state support to remain in business or go bankrupto Cheap loanso Government contractso TariffsCompetition via Global Markets- Political barriers to trade increase price of imported goods and DECREASE competition indomestic economyo Example: textile industry in U.S.o Why important? Textiles (shirts, pants, underwear) labor intensive industry—differential labor costs make them cheaper to produce in Bangladesh US—monthly salary for textile worker approx 160 hrs*$12/hr=$1920 Bangladesh—monthly salary approx 160 hrs*$.57/hr=$91o Implications: Bangladeshi producers can sell shirts to American consumers at lower costs than US producerso If no tariffs, US producers could not sell their shirts and would go bankrupt (American consumers buy cheaper shirts)- KEY: Elimination of political barriers to trade (creation of single global economy) forces domestic producers to compete with most efficient producers that exist in single global economy, not just with domestic producersWhy do states trade? Comparative advantage- States allow domestic firms to engage in international trade because it increases national income (generates wealth)- Gains from comparative advantage, specialization, and tradeo Gains created from differences in relative ability (efficiency) to produce goodso Specialize in production of some good where relative efficiency (cost differential with some other supplier) gains are largest- Generalizing what individuals do on a daily basiso We don’t produce everything that we consume. Instead we specialize in production of a few things, make a surplus, and then trade that surplus for goods/services that cost us relatively more to produceAbsolute v. Comparative Advantage- Imagine the following situation:o It takes 100 labor hours in the US to make a mid-sized caro It takes 150 labor hours in Japan to make the same caro It takes 200 labor hours in the US to design the next hot-selling IPAD appo It takes 1000 labor hours in Japan to design the next hot-selling IPAD app- US has absolute advantage in production of both apps and carso Adam Smith: there should be no trade between Japan and US because both goods produced more cheaply in USo Takes fewer labor hours for US to produce cars AND takes fewer labor hours for US to produce apps, but…- To maximize national income, should the US make apps and cars or just one? If just one,which one?o You cannot make assumptions based on absolute advantage. The advantage is much higher in making apps than in cars. So US should make apps, and Japan should make cars. US can make a surplus of apps to trade for apps. This is a comparative advantage. States should specialize in their comparative advantage. - Answering these questions by asking another: do efficiency gains in apps outweigh efficiency gains in cars?- David Ricardo: focus on comparative cost across both goods and countrieso In this case, US efficiency gains much larger (500% v. 150%) in apps than cars Therefore should focus production where relative costs lower i.e. apps Can generate surplus income to purchase things produced more cheaply abroado States always have comparative advantage in something, should specialize in production of that good and then trade Trade as a means of indirect production- Implications: o States can increase aggregate income via production specialization AND trade American auto workers are not just competing with Japanese auto workers for jobs, they are also competing with American software