Archive for the 'Globalization' Category

Sep 30 2010

Free Trade Debate: to what extent has globalization based on free trade contributed to global economic growth and development?

Today in class, my IB year 2 students undertook a debate on the extent to which free trade has contributed to or hurt the well-being of the world’s people. In preparation for this debate, students were asked to research and bookmark to our class’s Diigo group one article offering evidence in support of their argument.

The debate was framed around a quote from Paul Krugman from chapter 11 of the excellent book, Naked Economics.

“You could say that globalization, driven not by human goodness but by the profit motive, has done far more good for more people than all the foreign aid and soft loans provided by well-intentioned governments and aid agencies.”
I was very impressed with their well thought out viewpoints, considering we have only just started our Unit 4: International Trade section of the IB course. Below are the summaries of my student’s arguments for and against free trade. Next to their names are links to the articles they found to support their argument.
Anti-trade arguments
  • 80% of the toys sold in America are made in China.
  • Foreign companies make toys in factories operated and owned by Chinese.
  • Working conditions in China are horrible with a minimum wages that is far too low.
  • In addition to low wages, standards of worker safety are lower than the United States, leading to exploitation of labor to produce cheap toys for Americans.
  • To make matters worse, the prices of a certain toy may vary greatly from rich country to rich country. For example, a doll that sells for $29 in the USA sells for $64 in Holland. How is this fair?
  • The cost of labor makes up less than 5% of the price of the toy.
  • Free trade only increases the profits of the capitalists, but does not help the workers in the poor countries where products are manufactured.
Koen: The Negative Impact of Free Trade |
  • Due to free trade, demand for labor in more developed countries decreases since production occurs in other countries where it’s cheaper to produce.
  • This means jobs lost in rich countries, so less economic growth, less consumption, lower incomes.
  • Growth in some countries comes at the expense of growth in other countries. There are winners and LOSERS in free trade.
Sarah: Doha trade deal ‘will hurt Africa’ | Environment | The Guardian
  • Under free trade as we call it today, subsidies to farmers in Europe make it difficult for African farmers to compete.
  • Africa accounts for less of the total trade in the world today than it did in 1990, mostly because of its inability to export produce due to subsidies to farmers in Europe.
  • With less access to advanced capital and the lack of government  subsidies, African farmers find it difficult to compete on the global produce market.
  • Free trade hurts poor countries’ farmers and therefore increases the gap between rich and poor.
  • Trade liberalization creates some losers as it increases the gap between those with skills to work in the global market and those who don’t have those skills.
  • Trade leads to an increase in inequality and more relative poverty.
  • Trade creates severe tensions between big and small firms and workers who succeed and those who lag behind.
  • Export growth can exacerbate the exploitation of natural resources. Without environmental protection, trade may make us richer but at the price of future development.
Pro-trade arguments
Duy Anh: Africa: Free Trade Area for East, Southern Africa Making Progress
  • Africa is establishing Free Trade Areas to improve the flow of goods and services across country. If trade were not beneficial, then why would so many countries be clamoring to enter a free trade area?
  • When workers can move freely in a region it can lead to better, more efficient resource allocation. The same is true of capital, goods and services. Larger markets lead to more efficiency and greater opportunities for employment and for business operators.
  • Reducing tariffs, quotas and other barriers to trade increases efficiency and allows for more opportunities for all those who live within a free trade areal.

Christopher: Foreign Trade, Not Foreign Aid « John Stossel

  • If we help developing countries improve and increase their trade with each other and the rest of the world, it will create jobs, allow entrepreneurs to start companies and therefore reduce unemployment.
  • Greater opportunities and less unemployment leads to more social stability, reduction in poverty, and less likelihood that the poor people of the world will become “extremists” or result to violence and terrorism to express their dissatisfaction with the world.
  • More trade and international relationships reduces likelihood of conflict between and within poor countries.
  • We should expect to see social and political stability arising from increased economic opportunity.
  • Free trade WILL increase economic opportunities in poor countries.
General comments from the class after both sides have presented their arguments
  • Unlike aid, free trade cannot be “used up”. Aid is a one-off, when it’s gone it’s over, but trade can be self-perpetuating.
  • On the other hand, Sarah says,  “but it all depends on the kind of aid and how it is used!”
  • Aid can be invested responsibly, but often times it is not.
  • So maybe there is room for BOTH aid AND trade.
  • Lara says,  “In extreme circumstances, aid is necessary. In other, trade is better as a long-run means of achieving growth and development”

The exercise of debating the pros and cons of free trade for rich and poor countries was rewarding and provided an interesting and engaging way to introduce Unit 4 of the IB Economics course. The final two units, on International Trade and Economic Development, are closely tied, as one of the main strategies for achieving improvements in people’s standards of living is to improve the unfettered access to resource, good and service markets across national boundaries. We will be revisiting the debate on the effectiveness of trade versus aid at promoting the objectives of economic development repeatedly throughout the rest of the second year of IB economics.

For now, some questions went unresolved in today’s debate, and I will ask my student and any other interested reader to respond to those questions in the comments below.

Discussion questions:

  1. Is it possible that free trade has increased not only the relative poverty in the world, but also the number of people living in absolute poverty? In other words, trade makes the rich get richer, but does it make the poor get poorer? Or do the poor just feel poorer due to increased wealth and income of the rich?
  2. In 1970, the economies of China and Africa were roughly the same size, and the average income of a Chinese person was around the same as an African’s. Today, China’s economy is more than three time’s the size of Africa’s. What has China done differently than Africa to lead to such a huge income gap between the two regions?
  3. Why should people in Europe, America and other high income regions of the world care about the economic development of the world’s poorest countries? Does improving the lives of Africans require that we in Europe and the rich West make sacrifices in our own standards of living?
  4. African countries want Europe to stop subsidizing its farmers to make it easier for African farmers to compete. But doing so would mean the loss of an important part of European history and culture. Why would less subsidies to farmers in Europe help Africa, and should Europe listen to Africa on this issue or not?

11 responses so far

Sep 14 2009

The Lord of the Ring of Free Trade: Is globalization really a force of evil in the world?

YouTube – Lord of the Rings: Fellowship of the Ring of Free Trade

Free trade: one of the most contentious issues in economics. The consensus seems to be in among economists: specialization and trade among nations based on the principle of comparative advantage leads to improvements in access to goods and services, as well as increased wealth and welfare among all countries involved. But that does not mean it’s easy to convince everyone in society to adopt free trade.

In his book “Bound Together”, Yale University Economic Historian Nayan Chanda has this to say about the word “globalization”:

Since the word globalization appeared in the dictionary, its meaning has undergone a massive transformation. Just two of the dozens of definitions of globalization illustrate the problem in grappling with this phenomenon. Writing in the Encyclopedia Britannica, Jeffrey L. Watson defines globalization in cultural terms-as “the process by which the experience of everyday life, marked by the diffusion of commodities and ideas, can foster a standardization of cultural expressions around the world.”

The official World Bank definition of globalization is stated, not surprisingly, in purely economic terms, as the “freedom and ability of individuals and firms to initiate voluntary economic transactions with residents of other countries.”

Left-wing critics, echoing Karl Marx’s observation about the “werewolfsh hunger” of capitalism reaching the four corners of the world, see globalization as synonymous with expansionist and exploitative capitalism.

Looking at globalization through the prism of business and economics helps one to understand the Internet, the mobile phone, and the cable TV-connected world we inhabit, but it does not explain how human life was globalized long before capitalism was formulated or electricity invented.

According to Chanda, globalization and the internationalization of our markets has been going on for thousands of years throughout human history. The anti-globalization views expressed in the video below portray the phenomenon as a recent, oppressive, capitalistic phenomenon. Watch the video and discuss the questions below.

Discussion Questions:

  1. Describe the view of free trade depicted in the video. Which of the three definitions in Chanda’s book does the video seem to align itself with?
  2. Why does the anti-globalization movement unite such disparate groups as environmentalists, liberals, and labor unions?
  3. What is free trade and how can it “foster a standardization of cultural expressions around the world.” Is this a bad thing or a good thing in your opinion?

232 responses so far

Nov 17 2008

A call FOR protectionism! | The Economists’ Forum | The case for forward-looking protectionism in the US

Free trade is an ideal. This is a theme of my IB Economics class which I emphasize repeatedly during year two of the course. Free trade, defined as the exchange of goods, services, resources, and financial assets based on the principle of comparative advantage, results in a more efficient allocation of the world’s resources, an increase in total world output and welfare, and increases the opportunity for growth and development for all countries that prescribe to its principles. This is the ideal, at least.

In the real world, free trade is rarely practiced. Free trade agreements between nations represent managed trade; the selected removal of protections such as tariffs, quotas and subsidies on the exchange of particular goods does not represent free trade, rather managed trade. The problem with free trade in the real world is simply that it has never been truly practiced, therefore the adjustments that both developed and developing countries would have to undergo to adopt widespread free trade would be extremely disruptive both economically and socially. Entire industries would disappear from the developed countries as manufacturing resources were reallocated to low cost countries. Poor countries trying to build their manufacturing industries would lose any competitive advantage offered by protectionism, forcing their “infant industries” to wither and die in the face of global competition from countries that long ago achieved economies of scale in manufacturing. Farmers used to heavy subsidies would see their livelihoods disappear as the world’s food would be sourced from the countries with true comparative advantages in agriculture. Simply stated, the social costs of the widespread adoption of free trade are not politically palatable, thus leaders have only hesitantly pursued this ideal on the world stage.

For decades, America has stood for the ideal of free trade, proselytizing its advantages and urging developing countries to reduce or remove their barriers to the free flow of resources and goods from nation to nation. Today, however, the United States faces the very fate free trade prophesized as its own automobile industries teeters on the edge of collapse. As many as 3 million American jobs stand to be lost if the auto industry goes under. Today, America faces the ultimate test of its will to stand for and defend free trade in the world. Should America erect new barriers to trade, bail out its auto industry, and save this dying sector from collapse to avoid the political hardships its death would incur? Or should America stand for the ideal of market liberalization and allow the auto industry to disolve as the principle of comparative advantage indicates it should?

The question is dire, and it’s one that Barack Obama will be forced to address early in his term as president. Cambridge economcis professor Ha-Joon Chang argues the case for protectionism by America in this time of economic turmoil:

Mr Obama’s trade policy… is already causing controversy. He has vowed to protect American jobs and even argued for re-negotiating the NAFTA. There is already some hand wringing among free-trade economists, worrying that his protectionist policies may destroy the world trading system in the same way the infamous Smoot-Hawley Tariffs of 1930 did after the Great Depression. They counsel that the US should maintain its historical commitment to free trade.

However, contrary to what most people think, the US is the true home of protectionism. Between the 1830s and the 1940s, against superior European competition, the US developed its industries behind literally the highest tariff wall in the world, with the average industrial tariff rate ranging between 35% and 55%. Even the Smoot-Hawley Tariffs were not an aberration – the average US industrial tariff in 1931 was, at 48%, well within the historical range.

Moreover, the theory that justified such protectionism, namely, the ‘infant industry’ argument, had been first developed by none other than the first Treasury Secretary of the US – Alexander Hamilton (that’s the guy you see on the $10 bill). Hamilton argued that producers in relatively backward economies needed to be protected and nurtured through tariffs, subsidies, and other government policies before they mature and can compete with producers from more economically developed countries.

Of course, the protectionism that Mr Obama is advocating is protection to ease the adjustment of mature industries, rather than to promote infant industries. The case for such protectionism is not as overwhelming as that of infant industry protection. However, well-designed and time-bound protection of mature industries can facilitate, rather than hinder, trade adjustment and industrial upgrading. Japan and some European countries in the aftermath of the 1970s Oil Shocks come to mind.

Mr Obama should use protectionism in a similarly forward-looking way. Industries that can be revived through re-tooling of its factories and re-training of its workers should be given protection, but only if they fulfill certain conditions regarding investment and training. Industries that have no future should be given strictly temporary protection to ease phasing-out through orderly liquidation and redundancy.

…Keeping its market open is not enough for the US to play a genuinely positive role in the world trading system. The US should also stop pushing for trade liberalization in developing countries and give them the chance to use (intelligently-designed, of course) infant industry protection, which it invented and benefited so much from. Mr Obama should take a lead in creating a world trading system that allows asymmetric protectionism between the rich countries and the poor countries, with the latter protecting their markets more and gradually opening up in line with their economic development.

All these call for a much more activist role for the US government than it has been the norm. Providing protectionism to facilitate structural changes, and not just to protect existing jobs, would require a much closer coordination between trade policy and those policies to upgrade American industries, such as R&D support and worker training. Redesigning the welfare state as a vehicle to promote skills upgrading and labor mobility would push the US government into an uncharted territory.

These are big challenges. However, the US cannot continue its peculiar mixture of free-trade mythology and uncoordinated, ‘reactive’ protectionism that has served ordinary Americans and the developing nations so poorly.

Mr Obama has turned a new chapter in US history by becoming the country’s first Afro-American president. He will turn a new chapter in world history if he can come up with a forward-looking protectionist strategy that that both protects American jobs better in the long run and help developing countries develop faster.

Discussion Questions:

  1. What is the difference between the protectionism America needs today and the protectionism it used in the late 19th and early 20th centuries?
  2. How could protectionism be used responsibly by developing countries to promote economic growth and development?
  3. Professor Chang argues that responsible protectionism should allow industries with no future to be phased out “through orderly liquidation and redundancy”. What does he mean by this and why is such a policy so hard to accomplish politically?

113 responses so far

Sep 15 2008

Globalization in a Balinese produce market

The summer before last, I spent three weeks exploring the mountains, beaches, volcanoes and temples of the Indonesian island of Bali. While crossing Bali’s central mountain range, I stopped at a produce market where local fruits, vegetables, coffee and nuts were brought in from the surrounding hills to be sold. As I strolled the market snapping pictures, I caught out of the corner of my eye a flash of a familiar shade of red. Upon closer inspection, I was surprised to find a “Blue Chelan” apple from Washington state (my home state!).

Washington apples in BaliI could not help but be shocked to see a fresh red apple grown on another continent in another hemisphere on the Eastern slopes of the Cascade mountain range of Washington state for sale in a farmer’s market in a remote village 60 km from the nearest port. It got me thinking about globalization, trade, specialization and comparative advantage. So I pose these questions to you, my Econ students:

Discussion Questions:

  1. How did a ripe apple grown 9,000 miles away in the United States end up fresh and shiny in a market 1500 meters up in the mountains of Bali? I mean, literally, HOW did it get there?
  2. Why would Indonesia import apples from so far away when surely it could grow apples domestically and avoid the hassle of transoceanic transport?
  3. Where did Indonesians get the dollars to buy US grown apples?
  4. How does trade between Indonesia and the US affect consumers? Producers? Is trade between these distant countries good or bad? Discuss.

25 responses so far

Sep 12 2008

“In-sourcing”: a new trend among US manufacturers?

U.S. companies are rethinking manufacturing in China – Sep. 11, 2008

As the US presidential campaign trudges ever forward, both Obama and McCain have had much to say about “job creation” in the USA. Elaborate plans aimed at retraining workers displaced by globalization, arming them with 21st century skills that will enable them to thrive in our advanced economy, and assure that the hardships imposed by free trade are minimal and all Americans have the skills they need to find employment. These are good goals for America, but even as they preach their job creation plans across the country, right under the candidates’ noses jobs are being created thanks to the invisible hand of the market economy.

Talk of a reverse migration of manufacturing from China to the U.S. has been buzzing across union halls and factory floors, corporate boardrooms and Wall Street.

The cost of shipping outsourced goods from China to U.S. customers has doubled in just two years thanks to high oil prices, and labor costs in China are rising sharply.

“There’s a shortage of technical and managerial talent,” reports Anand Sharma, CEO of TBM Consulting Group. “To attract managers Chinese companies are talking about salary increases of 15% to 30% year-over-year.”

The phenomenon of jobs being “in-sourced” to America after a decade or two of being done by Chinese workers may seem surprising. Certainly, wages are still lower in China than in the US labor market. This is true, however, the demand for highly skilled labor in China is driving wages up higher and higher, due to its relative scarcity in a country where reliable, well-educated factory managers are nearly fully employed by the thousands of foreign and Chinese firms operating plants there. Competition among producers means the only way to attract new managers is to continually offer higher wages. This leads to a form of “wage-spiral inflation” where rising costs lead to higher priced output.

Despite its much smaller work force, the percentage of American workers with the managerial and technical skills needed to run a plant is much higher than in China, and the weak manufacturing sector growth in the US has meant relative wages between the US and China are closer than ever before.

Take into consideration the rising cost of fuel and the fact that China’s economy is producing at or beyond full employment, and it becomes clear why manufacturing certain products in China has become less attractive to American firms. To be sure, not all manufacturing jobs are being “in-sourced” back to the US. As Chinese wages climb and skilled labor becomes more scarce, the giant’s Asian neighbors are beginning to enjoy the re-allocative effects of the “invisible hand”.

…plenty of manufacturers will continue looking for ever cheaper places to produce. In fact, as the cost of doing business in China rises, many companies – including Chinese firms – are shifting their production to less expensive markets, such as Vietnam.

Discussion questions:

  1. What is the “invisible hand” referred to in the post above?
  2. How do higher wages in China benefit Americans? How do they harm Americans?
  3. Some critics of free trade argue that multi-national corporations exploit workers in developing countries. Does the article above illustrate give an example of exploitation? Discuss…

10 responses so far

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