Transcript Class 7: Economic Globalization 2

Economic Globalization 2
Sociology 2, Class 7
Copyright © 2008 by Evan Schofer
Do not copy or distribute without
permission
Announcements
• Agenda
• Today: Lecture on Economic Globalization
• Midterm in 2 weeks: May 6
– I will provide info about format soon – probably Thursday.
– I will provide a review sheet
– There will be a midterm review in section.
Economic Globalization: Background
• Economic globalization:
• Broad definition: When economic activity that was formally
local becomes organized on a global scale
– Spanning countries, rather than contained within them
• Examples: Globalization of…
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Production
Trade / exchange
Corporations
Labor
“Direct” Investment
Capital
– I’ll define & discuss each.
Econ Globalization: Production
• Production: The creation of products and services
• Example: Building a car
• Where do the raw materials come from? Where are parts
made? Where is assembly done?
– In the past, auto production was primarily local
• Or, it was a little bit global
• Ex: raw materials were imported, but all else was local
– Now, it is common for auto production to span dozens
of nations
• Parts made in various places, assembled in various places…
– Ex: Picture in Knox/Agnew/McCarthy text (on next slide).
Toyota’s Global Production System
Econ Globalization: Production
• Extent to which production is global: Moderate
• Much more global than in the past…
• But, a lot of production remains within national borders.
Econ Globalization: Production/Trade
• Trade: The exchange of goods & services
• Historically, trade was local
• But, the word has become synonymous with “international
trade”, which is global by definition
• Extent of globalization: High
– Global trade was fairly common in the late 19th century
• International trade amounted to 8% of GDP by 1913
• But, trade collapsed during WWI, Depression, WWII
– Since World War II, trade has grown rapidly
• Trade surpassed 17% of world GDP in the 1990s
• BUT: trade is primarily concentrated among wealthy nations
– It isn’t global in the sense that all nations participate a lot…
Econ Globalization: Capital
• Capital Flows: Movement of assets (money)
across national borders to purchase intangible
investments
• Also called: Financial flows, globalization of capital markets
• Example: Buying stocks & bonds in another country
• Example: Buying other currencies for purposes of
speculation (i.e., profit)
– Unlike FDI, capital investments can move quickly…
flowing in and out of countries
• Causes much concern… Elwood mentions: “Pinball capital”
• Extent of globalization: Extremely high
• But, again, mainly concentrated among rich countries.
Econ Globalization: Labor
• Labor: people who work in the economy
• Like capital or goods, people can move across national
borders: Immigration
– Extent of globalization: LOW, arguably decreasing
• Like trade, immigration was common in the late 19th century,
but dropped in the mid 20th century
• Due to immigration laws, migration remains constrained
– Migrants represent a tiny fraction of the global population
– Moreover, labor flows tend to be regional, rarely global.
Econ Globalization: Corporations
• Corporations can span national nations…
• Called: Multi-national corporations (MNCs); Multi-national
Enterprises (MNEs); Trans-national corporations (TNCs)
– Firms can vary in extent they are global
• They can have a main country, with 1 or 2 factories overseas
• Or, they can be spread literally across the globe
– Extent to which corporations are “global”: Moderate
• The vast majority of companies are still local
– And many multinationals are concentrated in a few countries
• But, multinationals have grow in number and size
– Some dwarf the economic capacity of entire countries…
• More on this later…
Econ Globalization: Direct Investment
• Foreign Direct Investment (FDI):
• Definition: Investing assets (i.e., money) from one country
into organizations, structure, and equipment in another
• Example: building (or buying) a factory in another country
• Note: does not include “intangible” investments, such as
buying stock in a company
• Extent of global FDI: Moderate
• Most investment is between wealthy, industrialized countries;
Poor countries don’t participate much.
Economic Globalization: Origins
• Question: What are some basic things that are
absolutely required in order to have a global
economy?
– 1. Inexpensive transportation & communication
– 2. International financial (money) system
– 3. Countries that are willing to participate
• Removal of legal or regulatory “barriers”
Transportation
• Historically, people only traded lightweight,
valuable items… spices, silk, ivory, etc…
• Things that could be easily carried long distances
• Global economic activity requires cost-effective
transportation systems
• Otherwise most business activity remains localized
• Most changes are pretty obvious: increase in cars, trucks,
planes, trains, ships…
• But, one change matters more than others: containerized
shipping
Transportation
• Containerized shipping = a huge revolution in
global transportation
• Started in the 1970’s
• Shipping containers: a standard 40ft long box
• Easy to load and unload onto ships, trains, trucks
• Drastically reduced cost of shipping
• Huge ships can hold thousands of containers!
Containerized Shipping: Pics
• Ships can hold hundreds (or 1000’s) of containers!
Containerized Shipping: Pics
• Containers allow mechanical loading/unloading
Pics: from Maersk Sealand Website
Containerized Shipping: Pics
• Containers can be transferred to trains, trucks…
Containerized Shipping
• Question: Guess how much it costs to send a 40
foot shipping container with 10,000 pounds of
cargo from Shanghai, China to Los Angeles?
• Answer: Less than $4,000
• Taxes, tariffs, etc. make it cost a bit more…
• Question: How many pairs of Nike shoes fit in a
container?
• Answer: over 10,000!
Containerized Shipping
• Consequence: Containerized shipping resulted in a
dramatic increase in global trade
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Example:
Container holds 10,000 pairs of shoes
Container costs $5,000 to ship (including taxes)
Total cost of shipping per pair: 50 cents!
• If cost of making a shoe in China is 51 cents less
than in US, then there is an incentive to ship…
• Higher costs might come from: more expensive labor, costs
of adhering to environmental laws, etc.
Containerized Shipping
• Containerized shipping has indirect consequences
for the environment… Some examples:
• Companies can dump garbage in other countries
• Anything that is costly to dispose of in the US
• Hazardous waste; Old computers
• Mass shipping leads to spread of “invasive” nonnative species
• Examples: Asian Tiger mosquito, Zebra mussel arrived in
cargo ships.
International Financial System
• Another barrier to the global economy: Money
• Example: Suppose I build and sell computers…
• What if someone from Europe wants to buy one?
• They only have European money: Euros
– Problems:
– 1. I don’t want Euros – they are useless to me
– 2. How much is my computer worth in Euros money?
• Even if I would accept the money, I don’t know the value…
International Financial System
• In order to conduct trade, there must be an
international system to handle currencies
• Example: The Gold Standard
• For every dollar the government prints, they hold a
corresponding amount of gold in the bank
• Value of all currencies = tied to a common “standard”
• Example: US$1 = 1/35 ounce of gold
• Other currencies might have a different value: Example:
Euro = 1/20 ounce.
The Gold Standard
• The gold standard is one solution to trade in a
world of multiple currencies
• To sell a computer to someone in Europe, I can
directly convert price
• US$ 1,000 computer = 35 ounces of gold = 700 Euros
• European gives 700 Euros to his bank… converts to gold
• Gold is given to US central bank; US$ 1,000 given to me
• Result: International trade is possible!
The Gold Standard
• Issue: If trade is one sided, gold drains from one
country to another
• A “trade imbalance”, or a “current accounts deficit”
• Consequence
– European banks have less gold, issue fewer Euros
• Money supply shrinks
– European economy slows down, imports reduce…
• Result: System prevents asymmetric trade; system stays in
equilibrium.
The Gold Standard
• The gold standard fell apart in the depression
• Governments wanted to boost their economies…
• Question: What are some ways the government
can boost their economy?
• Governments increased spending (e.g., hired
people to build roads) to increase consumption
• This required printing more money… even though gold
supply didn’t expand
• Currencies were no longer tied to gold…
• Trade became difficult.
Bretton Woods
• Plan B: The Bretton Woods agreement helped to
re-establish an international financial system
• New plan: U.S. Dollars would serve as the
currency for international transactions
• US dollars would have a fixed value vs. gold
• Other currencies would have a fixed exchange rate versus
the dollar
• Everybody was happy again… for a while…
Bretton Woods
• The Bretton Woods system also fell apart
• The process is described by Herman Schwartz:
“International Money, Capital Flows, and Domestic
Politics.”
– Basic Problem: The fixed exchange rates works only
if trade and capital flows are small
• … compared to the size of the US economy
• Eventually, when global trade flows harmed the US
economy, the US changed the system…
Floating Exchange Rates
• Plan C: The system of floating exchange rates
• Value of currencies is determined by market
• Like the price of commodities: oil, wheat, etc.
• Ex: Selling a computer to someone in Europe
• European goes to the currency market (bank) to
buy US dollars – to pay me for the computer
– Current exchange rate: .63
• European pays .63 Euros to get each US$
– Therefore, a US$ 1,000 computer costs 630 Euros…
Currency Value Examples
Country
Currency
Number per US$
Europe
Canada
China
India
Japan
Mexico
South Korea
Thailand
Euro
Dollar
Yuan/RMB
Rupee
Yen
Peso
Won
Baht
0.77
1.18
7.76
43.95
120.35
10.92
932.95
41.29
United Kingdom
Pound
.507
As of February 6, 2007
Floating Exchange Rates
• Why do currencies “float”?
• Float = change values compared to each other
• Answer: Changing supply and demand affects value
• Example: Suppose I sell 10,000,000 computers
– Europeans will sell 6.3 billion Euros to banks in order
to purchase 1 billion US$…
– If banks (currency markets) are flooded with Euros,
supply increases, value drops…
• Currency markets don’t want more Euros
• Banks will give fewer US$ in exchange
Floating Exchange Rates
• Trading patterns are in an equilibrium with
currency exchange rates
• If trade is balanced, currencies stay the same
• Balanced means Europeans buy US goods just as much as
US citizens by European goods
• Both countries exchange an equal amount of currency
• If trade is imbalanced one side must sell more of
their currency
• Ex: If Europeans import more, they sell currency and the
Euro loses value
• Result: Low currency value makes imports “expensive”;
Thus, imports slow down…
Trade & Exchange Rates
• As currency values change, trade is affected
• Example: Suppose the Euro becomes more
valuable relative to the dollar:
• Value of dollar drops from .63 Euros to .10 Euros
– Euro worth 1.58 US$, goes up to 10 US$
• How much would a US$ 1,000 computer cost to a
European?
• Answer: Only 100 Euros!
• When a currency goes up relative to others, it is
cheap to import
• If currency value drops, imports become expensive.
Trade & Exchange Rates
• Who benefits if Euro goes up relative to the US$?
– 1. European consumers – they can buy American
products cheaply
– 2. American exporters – they can sell lots more to
Europe
• Who Loses?
– 1. American consumers – European imports costs
more
– 2. European companies – can’t compete with cheap
US imports
Trade & Exchange Rates
• Recent news article:
• WASHINGTON (AP) -- America's
beleaguered manufacturing companies,
chafing over the loss of 2.7 million jobs over
the last three years, vowed Wednesday to
press ahead harder to get China to stop
manipulating its currency to gain trade
advantages. (Associated Press)
• Issue: China keeps value of currency low
• Aids exporters, at expense of US companies
Trade & Exchange Rates
• Issue: Countries can strategically alter their
currency values to gain an advantage in trade
• Example: High US imports should cause
Chinese Yuan to rise relative to the US$
– But: China floods market with Yuan, buys US$s
• Yuan value stays low compared to US$
• Result: Chinese exports remain cheap for Americans
• Result: American manufacturing companies = Angry!
• Note: US did the same thing in the 1970s.
Exchange Rates & Volatility
• Capital flows and currency volatility can
produce severe crises
• Example: Mexico in 1994
– Companies bought lots of stock, investments in
Mexico over several years…
– Panic selling in 1994 made stock market plummet
– Investors sold stocks, converted pesos to dollars
– Result: Value of pesos plummeted!
• Made the financial problems much worse.