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This weekThis week
1.1. General remarksGeneral remarks
2.2. Implementing free tradeImplementing free trade
3.3. Some controversiesSome controversies
4.4. Global financeGlobal finance
The specificity of capitalism
• Motivation = money
• Private entrepreneurship
• Limited government role– in regulating business– in offering services (education, healthcare,
social services, parks, transit, etc.)
• The need to expand: from domestic market to global market
InvestmentInvestment
SaleSale
ProductionProduction
ProfitProfit
Re-investmentRe-investment
$$
A “perfect” system (supposedly)
• “Division of labour”
• “Comparative advantage”
• Equilibrium of supply & demand
• A win-win situation for all involved
Official goals of free tradeOfficial goals of free trade• Stated in treaties’ preamble Stated in treaties’ preamble (see (see
North American Free Trade Agreement))
• more markets, more customersmore markets, more customers
• more production, more jobsmore production, more jobs
• better wages & salariesbetter wages & salaries
• better working conditionsbetter working conditions
• cheaper productscheaper products
• more environmental protectionmore environmental protection
• More growth as measured by the More growth as measured by the GDPGDPCanadian GDP 2011: $1.4 trillion
Two core principles Two core principles
Most-Favoured Nation Most-Favoured Nation treatmenttreatment
• Refers to treatment of a Refers to treatment of a state’s trade partnersstate’s trade partners
• Equality of all parties & Equality of all parties & their producers & products (their producers & products (GATT 1947, I(1), , NAFTA, Ch. 11))
• The most favoured sets the The most favoured sets the standard for the reststandard for the rest
National TreatmentNational Treatment
• Overcoming protectionismOvercoming protectionism
• Equality of domestic & foreign Equality of domestic & foreign products (products (GATT 1947, art. III))
• Equality of domestic & foreign Equality of domestic & foreign investors (investors (NAFTA, Ch. 11))
• ExceptionsExceptions
Tariffs & Tariffs & technical barriers to tradetechnical barriers to tradeTariffs (a.k.a. duties)Tariffs (a.k.a. duties)• Traditional Traditional
protectionist measureprotectionist measure• Taxes on imported Taxes on imported
productsproducts• Raises the priceRaises the price• ...making them less ...making them less
affordable than affordable than domestic productsdomestic products
Technical barriers to trade Technical barriers to trade (a.k.a. non-tariff barriers)(a.k.a. non-tariff barriers)• More creative measures More creative measures • Emerged in the 1960sEmerged in the 1960s• Bogus regulationsBogus regulations• … … that are not always that are not always bogusbogus
Health, safety & Health, safety & environmental regulationsenvironmental regulations
• Scientific evidence necessaryScientific evidence necessary– defining “evidence”defining “evidence”– 100% certainty doesn’t exist100% certainty doesn’t exist
• Some cases:Some cases:– NAFTA: Metalclad vs. Mexico (toxic waste)NAFTA: Metalclad vs. Mexico (toxic waste)– WTO: Canada + US vs. European Union (beef WTO: Canada + US vs. European Union (beef
raised with hormones)raised with hormones)– NAFTA: Canada & MMT (health/cancer)NAFTA: Canada & MMT (health/cancer)
Trickierto adopt
• Ways to undermine competitorsWays to undermine competitors
Embraer ERJ 145Embraer ERJ 145
Bombardier CRJ 700Bombardier CRJ 700DumpingDumping• Done by corporationsDone by corporations• Selling for less than Selling for less than
costcost• A gambleA gamble
SubsidiesSubsidies• Done by governmentsDone by governments• Support for own corporationsSupport for own corporations• Makes products cheaperMakes products cheaper
Dumping Dumping & subsidies& subsidies
ServicesServices
• What is a service?What is a service?
• Fastest growing sector in Fastest growing sector in many countriesmany countries
• Controversies: health & Controversies: health & educationeducation
PerformancePerformancerequirementsrequirements
• Conditions imposed on Conditions imposed on investors to invest in a stateinvestors to invest in a state
• Promoting national… Promoting national… – contentcontent– re-investmentre-investment– businessbusiness– jobs jobs
2000 Chevrolet Camaro2000 Chevrolet Camaro
• Negotiation, mediation & formal complaintNegotiation, mediation & formal complaint
• Dispute resolution panelsDispute resolution panels– tribunal-like proceduretribunal-like procedure– panelists: “panelists: “well-qualified individuals””
• ControversiesControversies– secrecy secrecy – panel decisions & enforcement problemspanel decisions & enforcement problems– international law vs. economic powerinternational law vs. economic power– NAFTA: corporations can sue governments directlyNAFTA: corporations can sue governments directly
Dispute settlement mechanismsDispute settlement mechanisms
Corporations: powerful actorsCorporations: powerful actors
• Possess capital Possess capital
• Corporation & investors: same thingCorporation & investors: same thing
• Can create jobs but wantCan create jobs but want– favourable “investment climate”favourable “investment climate”– ““investor-friendly” policiesinvestor-friendly” policies– low taxeslow taxes– limited regulationslimited regulations– hardworking, disciplined, skilled & cheap workershardworking, disciplined, skilled & cheap workers
You (and me) and the stock marketYou (and me) and the stock marketYou are also consumers of products made & sold by these You are also consumers of products made & sold by these corporationscorporations
YOUYOU
Students association
Corporation 1 Corporation 3 Corporation nCorporation 5Corporation 4Corporation 2
Taken off paycheque
Insurance policy purchased directly (ex. car insurance,
home insurance)Included in tuition fees
Insurance company
Insurance policy purchased by students association(ex. dental & drug plan)
Mutual funds(investment funds,
incl. RRSPs, RESPs)
Canada Pension Plan (CPP)Régime des rentes du Québec (RRQ)
The vulnerability of workersThe vulnerability of workers
• Pressures on workers by employersPressures on workers by employers– ask more hours & overtimeask more hours & overtime
– offer lower wages & conditions & no benefitsoffer lower wages & conditions & no benefits
– refuse to deal with unions (McDonald’s, Wal-Mart)refuse to deal with unions (McDonald’s, Wal-Mart)
– use of lockouts (keeping workers out)use of lockouts (keeping workers out)
• Government changes to labour lawsGovernment changes to labour laws– weaken unions & strengthen bosses weaken unions & strengthen bosses
– suspend right to strike (back-to-work legislation)suspend right to strike (back-to-work legislation)
• Government changes to unemployment insurance & Government changes to unemployment insurance & welfare programmeswelfare programmes
Difficulties for society or parts of it Difficulties for society or parts of it
• Lower taxes = less revenue for governments• Less money for services
– education
– healthcare
– social services
– public transit
– infrastructure: roads, bridges, water distribution
• Less government regulations or less enforcement– health & safety
– environmental laws
Income and wealth Income and wealth distribution in Canada, 1950s-2011distribution in Canada, 1950s-2011
• Income & wealth trends & top CEO payIncome & wealth trends & top CEO pay– unchanged or decreasing for most peopleunchanged or decreasing for most people**– increasing significantly for the top 20%increasing significantly for the top 20%– increasing dramatically for the top 10%increasing dramatically for the top 10%– skyrocketing for the top 1%skyrocketing for the top 1%
* Despite longer hours, fewer vacations, higher education, more productivity
Income distribution for top Income distribution for top 500 US companies --500 US companies --executives vs. employees:executives vs. employees:- Mid-1960s: 41 to 1- Mid-1960s: 41 to 1- Mid-2000s: 420 to 1- Mid-2000s: 420 to 1
Income distribution for top Income distribution for top 500 US companies --500 US companies --executives vs. employees:executives vs. employees:- Mid-1960s: 41 to 1- Mid-1960s: 41 to 1- Mid-2000s: 420 to 1- Mid-2000s: 420 to 1
DemonstrationsDemonstrations
• Hundreds of demonstrations since the Hundreds of demonstrations since the 1990s1990s
• Turning point: WTO summit in Seattle ’99Turning point: WTO summit in Seattle ’99
• Convergence of groups: labour, Convergence of groups: labour, indigenous, environmental, women, indigenous, environmental, women, human rights, etc.human rights, etc.
• Little impact on government policiesLittle impact on government policies
Current events: Current events: The 2008 crisis, The 2008 crisis, “austerity measures” &“austerity measures” &the Occupy movementthe Occupy movement
Home buyers & banksHome buyers & banks
• Homebuyers get loan to buy houseHomebuyers get loan to buy house
• A house loan is called a A house loan is called a mortgagemortgage
BANK 1BANK 1
More loans, more risky loansMore loans, more risky loans
• How banks decide to loanHow banks decide to loan– credit checkcredit check– income of homebuyersincome of homebuyers– price of houseprice of house– expected ability to repayexpected ability to repay
• Changes in US gov policyChanges in US gov policy– Fanny Mae & Freddy MacFanny Mae & Freddy Mac– private bank loans & teaser rates: sub-prime lendingprivate bank loans & teaser rates: sub-prime lending– ““predatory lending”predatory lending”
Banks’ relations with other banksBanks’ relations with other banks
• BANK 1BANK 1 bundles its mortgages into mortgage bundles its mortgages into mortgage backed securitiesbacked securities
• BANK 1BANK 1 sells MBSs to other banks, who bundle sells MBSs to other banks, who bundle them to sell to still other banksthem to sell to still other banks
BANK 1
BANK 2 BANK 4BANK 3
BANK 2 BANK 4BANK 3 BANK 2 BANK 4BANK 3
And so on including foreign banks
Effects on the rest of society & Effects on the rest of society & the economythe economy• Banks play several roles
– loans to small businesses– loans to contractors– student loans– car loans
• When homebuyers can’t pay back BANK 1– …BANK 1 can’t pay back BANK 2, 3, 4, etc.– who can’t play their roles– ripple effect and cascade of bankruptcies
Bailout of banks by US governmentsBailout of banks by US governments
• ““Too big to fail””
• Stopping the cascade of bankruptcies• One major bank allowed to fail: Lehman
Brothers (many smaller ones, too)
• Troubled Assets Recovery Program (TARP)– money from taxpayers given to banks– money borrow by US government given to
banks
• Allowing bank to resume lending
US$700US$700billionbillion
Bailout of US car companies by Bailout of US car companies by US and Canadian governmentsUS and Canadian governments
• General Motors, Chrysler, Ford
• A separate problem
• Made worse by the crisis
• Cars few people wanted to buy– big, gas-guzzling cars– less appealing than Japanese cars
• Pay & benefits cuts for workers
Economic stimulus: Economic stimulus: Restarting the economyRestarting the economy
No buyersNo buyers
No investment, No investment, no need for workersno need for workers
No need No need to produceto produce
No job creationNo job creation
No income No income (wage & salaries)(wage & salaries)
• Banks & car companies survive
• … but consumers still not spending
• Gov. spending makes up for lack of spending
• Until private spending resumes
Meanwhile…Meanwhile…
• Banks’ & car makers’ profits highest ever– banks that survive buy out failing ones– salaries & bonuses for executives higherst ever
• Stimulus $ = borrowed money = gov. debt– must cut spending to pay back debt– reduce burdens on business (labour,
environment, safety regulations, etc.)
• Some (many? Most?) people very annoyed
The Occupy movementThe Occupy movement
• Origin: Adbusters MagazineOrigin: Adbusters Magazine
• The slogan: The slogan: ““We are the 99%We are the 99%””– as opposed to the 1%as opposed to the 1%– sacrifice the many fosacrifice the many forr mistakesmistakes of the wealthy of the wealthy
• The limitations:The limitations:– illusion of being one united groupillusion of being one united group– the 99% are very diversethe 99% are very diverse– not one alternative set of policies (yet)not one alternative set of policies (yet)
Money: a means of paymentMoney: a means of payment
• Global finance: circulation of money around the Global finance: circulation of money around the globeglobe
• Uses of moneyUses of money– currency currency other other currency currency productproduct– currency currency other currency other currency investment investment
• The need for equivalenciesThe need for equivalencies
• TThe exchange ratehe exchange rate
Floating exchange ratesFloating exchange rates
• No capital controlsNo capital controls
• Private financial marketsPrivate financial markets
• Restricted government roleRestricted government role
• Necessary for global Necessary for global
trade & investmenttrade & investment
Look up an exchange rate at http://www.oanda.com/
Canadian oil & gas exports, the value of the Canadian oil & gas exports, the value of the Canadian dollar, and manufacturingCanadian dollar, and manufacturing
• Thomas Mulcair’s commentsThomas Mulcair’s comments
• The “Dutch disease”The “Dutch disease”
• Oil & gas and the Canadian dollarOil & gas and the Canadian dollar
• The side-effect of a high Canadian dollar The side-effect of a high Canadian dollar for other exporting industriesfor other exporting industries
Conclusion: Conclusion: Why does this matter?Why does this matter?
Global tradeGlobal trade• Inclusion in the global economy is a way to find Inclusion in the global economy is a way to find
markets for a country’s companies’ productsmarkets for a country’s companies’ products• Inclusion in the global economy is a way to Inclusion in the global economy is a way to
obtain products not made in one’s countryobtain products not made in one’s country• A mixed bag at bestA mixed bag at bestGlobal financeGlobal finance• Inclusion in the global economy is a way to find Inclusion in the global economy is a way to find
places to investplaces to invest• Inclusion in the global economy is a way to Inclusion in the global economy is a way to
obtain investment from outsideobtain investment from outside
Appendix 1: Appendix 1: Top-10 jobs categories for the next decadeTop-10 jobs categories for the next decade
1.1. Registered nursesRegistered nurses** 2.2. Home health aidesHome health aides3.3. Customer service repsCustomer service reps4.4. Food preparationFood preparation5.5. Personal and home care aidesPersonal and home care aides6.6. Retails salesRetails sales7.7. Office clerksOffice clerks8.8. Accountants and auditorsAccountants and auditors**9.9. Nurses aides, orderlies and attendantsNurses aides, orderlies and attendants10.10. Postsecondary teachersPostsecondary teachers****
Source: US Bureau of Labor StatisticsSource: US Bureau of Labor Statistics
* Good job* Good job
* * Not as good as * * Not as good as you might thinkyou might think
+
+
Appendix 2: Measuring prosperity Appendix 2: Measuring prosperity using the balance of paymentsusing the balance of payments
1. Current account– trade balance (exports minus imports)
– government transactions and remittances
2. Capital flows (capital coming in minus capital going out)
– foreign investment received– loans and other capital received
3. Foreign reserves (foreign currency in the country)