Transcript In Developing Countries FPE Implies

Winners and Losers in the Global
Economy
Lecture 18
Who Wins and Who Loses from
Globalization?
• Three Possible Answers
• 1. Everybody Wins (Classical Trade
Theories)
2. The “New Left” Answer
• “Capitalists” Win—
Especially the Evil MNCs
• “Labor” is the Big Loser
• If You Want More
Nuance: American Labor
Can’t Compete Against
Third World Workers
“Who Aren’t Even Paid a
Living Wage.”
Comparative Labor Costs, 1997
Country
Hourly
Compensation
United States
100
Germany
155
United Kingdom
85
Taiwan
32
Singapore
45
South Korea
40
Sri Lanka
Source: US Bureau of Labor Statistics, 1999
3
A. It’s the Wrong Way to Think
About Wages.
B. It’s Simply Not Correct
3. It Depends Upon…
• What Kind of Work You Do.
• Where You Live.
Factor Price Equalization
• International Trade Should Equalize the Cost of
Labor and Capital (Factor Prices) Across Borders.
In an Economy Open to Trade:
• The Price of a Country’s Abundant Factor Will
Rise—Abundant Factors’ Incomes Will Rise
• The Price of a Country’s Scarce Factor Will Fall—
Scarce Factors’ Incomes Will Fall
• The Law of One Price: In an Integrated Market, Identical
Goods Will Sell For the Same Price Everywhere.
• If Price Differences Arise, People Will Engage in Arbitrage—Buy
Where Good is Cheap and Sell Where Good is Expensive.
• Arbitrage Will Eliminate the Price Difference
• International Trade in Goods is Actually International
Trade in Factors.
• Import Shirts From China into U.S.: Buying Labor Where it is
Abundant and Cheap and Selling it Where it is Scarce and
Expensive.
• These Trade Flows Make Labor Relatively Less Abundant in
China and Relatively More Abundant in the U.S.
• As Labor Abundance Falls in China, Wages Rise; As Labor
Scarcity Decreases in the U.S., Wages Fall.
Implications of FPE
In Advanced Industrialized Countries FPE Implies:
• Globalization Raises the Price of (and therefore
the incomes of) Capital and High-Skill Labor.
• Globalization Lowers the Price of (and therefore
the incomes of) Low-Skill Labor.
In Developing Countries FPE Implies:
• Globalization Raises the Price of Low-Skill Labor.
• Globalization Lowers the Price of Capital and
High-Skill Labor.
Who Wins and Who Loses From
Globalization? It Depends.
• Whether You Win or Lose Depends Upon Where
You Work
• The Kind of Work You Do
• The Country in Which You Live
• Developing Country Workers Win from
Globalization and Core Country Capitalists Win
From Globalization.
• Whether Workers in Advanced Industrialized
Countries Gain Depends Upon Their Skill Level.
An Example: FPE and the NAFTA
• El Paso, Texas
• Between 1962 and 1989, El Paso garment industry
more than doubled, even as employment in the
American apparel industry fell by 14%.
• Since 1994: 6,472 certified NATFA-related job
losses in El Paso. Most in the apparel industry.
• El Paso’s unemployment rate has climbed to about
11%, the highest in Texas.
• Juarez, Mexico: Across the Rio Grande From El Paso
• 275 American, Asian, and European manufacturing plants
•
•
•
•
employ about 175,000 low-skill Mexican workers.
Employ low-skilled workers to assemble imported
components into finished goods.
These Goods are Exported to the United States.
Thus, Employment in Labor Intensive Industry in Labor
Scarce Country—the United States—Falls, Placing
Downward Pressure on Wages.
While Employment in Labor Intensive Industry in Labor
Abundant Country—Mexico—Rises, Placing Upward
Pressure on Wages.
NAFTA and Apparel Production
In North Carolina
COMPANY NAME
CITY
WHAT THEY
PRODUCED
CAUSE
Job
Losses
Oxford of Burgaw
Burgaw
ladies' sportswear
and dresses
MOVED TO
MEXICO
87
Lakedale
Manufacturing
Fayetteville
girls bathing suits
MOVED TO
MEXICO
102
Clevemont Mills
Kings
Mountain
sweat pants and
shirts
MOVED TO
CANADA
400
Rives Associated
Companies
High Point
trousers, skirts, and
shorts
NAFTA
IMPORTS
121
Holiday Hosiery
Hudson
hosiery
MEXICAN
IMPORTS
90
U.S. Colors
Rocky
Mount
dyeing, washing &
finishing t-shirts
and jeans
NAFTA
IMPORTS
86
Royals
High Point
denim jeans
NAFTA
IMPORTS
150
Will Knit
Clayton
circular knit fabric
NAFTA
IMPORTS
14
Andover Togs
Clinton
children's apparel
NAFTA
IMPORTS
143
General Textiles
Murphy
men's and women's
tank tops and
shorts
MOVED TO
MEXICO
97
CWS Fashions
Lenoir
children's active
wear
NAFTA
IMPORTS
142
Mannis and Singer
Charlotte
sweatshirts and
t-shirts
NAFTA
IMPORTS
20
Mannis and Singer
Monroe
sweatshirts and
t-shirts
NAFTA
IMPORTS
200
Carolina Knits
Statesville
knit fabrics
MEXICAN
IMPORTS
70
Kahn Lucas Lancaster
Middlesex
children's dresses
NAFTA
IMPORTS
20
Burlington Industries
Denton
knitting fabrics
NAFTA
IMPORTS
350
Kings Creek
Ferguson
ladies' bath robes
and beach
coverups
NAFTA
IMPORTS
65
Source: U.S. International Trade Administration Website
http://www.ita.doc.gov/
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Percent Change
Change in North Carolina Exports to Mexico, 1997-2000
250
200
150
100
50
0
NAFTA and U.S. Employment,
1993-1996
Sector of the Economy Change in Employment,
1993-1996
Automotive
+14%
Computer (Hardware and +9%
Software
Consumer Goods
+13%
Electronic Components
+16%
Textiles and Apparel
-11%
Source: United States Trade Representative, 1997. Study of the Operation and Effect of the North American Free Trade Agreement
Broader Consequences of the
NAFTA
• Low Skilled Workers in the United States Lose.
• Job Losses and/or Falling Wages
• Low Skilled Workers in Mexico Win.
• Increased Job Opportunities, Rising Wages
• High Skilled Workers and Owners of Capital in
the United States Win.
• High Skilled Workers and Owners of Capital in
Mexico Lose.
• This is Factor-Price Equalization at Work.
Globalization, FPE, and American “Labor:”
1. Reduce Incomes of Low Skill Labor
2. Raise Incomes of High Skill Labor
Putting FPE in Perspective
• How Important is Trade to the U.S. Economy?
• Import less than 10% of GDP, thus Not Highly
Integrated With Rest of World.
• How Important is Trade with Low-Income
Countries to the U.S. Economy?
• Less than 30% of U.S. Imports Come from Developing
Countries.
• Changes in Income in Lower and Upper Portions
of Distribution, therefore, Not Caused Primarily
By Trade.
• Technological Change is More Important Factor
• High Return to Education
Mexico In Perspective
Mexico's Economy as a Percentage of the U.S. Economy
0.07
0.06
0.05
0.04
0.03
0.02
0.01
0
1991
1992
1993
1994
1995
1996
Source: World Bank, World Development Indicators on CD-ROM, 2001
1997
1998
1999
Where’s The Politics?
• World Trade Organization Summit, Seattle
November-December, 1999
• Governments Intended to Prepare for a New
Round of Trade Negotiations
• Domestic Politics: U.S. Labor Unions (AFLCIO), which tend to represent Low-Skill Labor,
Protesting Against Free Trade Under WTO
• International Politics: Labor Unions Advocating
Creation of Global Labor Standards Regime
• Altruism—no “sweatshops” everybody gets a “living
wage”
• Self-interested—higher wages in developing world that
result from global labor standards regime will protect
high-paying low-skill jobs in the United States