Winners and Losers in the Global Economy

1. Winners and Losers in the Global Economy Lecture 18

2. Who Wins and Who Loses from Globalization? • Three Possible Answers • 1. Everybody Wins (Classical Trade Theories)

3. 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.”

4. Comparative Labor Costs, 1997

5. A. It’s the Wrong Way to Think About Wages.

6. B. It’s Simply Not Correct

7. 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

8. 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.

9. 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.

10. 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.

11. 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.

12. 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.

13. 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 NAFTA and Apparel Production In North Carolina

14. 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

15. 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

16. Source: U.S. International Trade Administration Website http://www.ita.doc.gov/

17. NAFTA and U.S. Employment, 1993-1996 Source: United States Trade Representative, 1997. Study of the Operation and Effect of the North American Free Trade Agreement

18. 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.

19. Globalization, FPE, and American “Labor:” • Reduce Incomes of Low Skill Labor • Raise Incomes of High Skill Labor

20. 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

21. Mexico In Perspective Source: World Bank, World Development Indicators on CD-ROM, 2001

22. Where’s The Politics?

23. World Trade Organization Summit, Seattle November-December, 1999 • Governments Intended to Prepare for a New Round of Trade Negotiations

24. Domestic Politics: U.S. Labor Unions (AFL-CIO), 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