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, 1997Comparative Labor Costs, 1997

Country Hourly Compensation

United States 100

Germany 155

United Kingdom 85

Taiwan 32

Singapore 45

South Korea 40

Sri Lanka 3Source: US Bureau of Labor Statistics, 1999

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.

COMPANY NAME CITY WHAT THEYPRODUCED

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 AssociatedCompanies

High Point trousers, skirts, and shorts

NAFTA IMPORTS

121

NAFTA and Apparel Production In North Carolina

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 beachcoverups

NAFTA IMPORTS

65

Change in North Carolina Exports to Mexico, 1997-2000

-100

-50

0

50

100

150

200

250

Man

ufact

uring

Proce

ssed

Foo

ds

Fabric

Mill

Pro

ducts

Non-Appar

el T

extil

e Pro

duct

s

Appare

l

Wood P

roduct

s

Paper

Pro

ducts

Printin

g and

Relat

ed P

rodu

cts

Chemic

al M

anufa

cture

s

Plast

ic a

nd R

ubber P

roduct

s

Compute

rs a

nd Ele

ctronic

s

Elect

rical

Equip

ment

Furnitu

re a

nd R

elat

ed

Mis

c Man

ufac

ture

s

Crops

Per

cen

t C

han

ge

Source: U.S. International Trade Administration Websitehttp://www.ita.doc.gov/

NAFTA and U.S. Employment, 1993-1996

Sector of the EconomySector of the Economy Change in Employment, Change in Employment, 1993-19961993-1996

AutomotiveAutomotive +14%+14%

Computer (Hardware and Computer (Hardware and SoftwareSoftware

+9%+9%

Consumer GoodsConsumer Goods +13%+13%

Electronic ComponentsElectronic Components +16%+16%

Textiles and ApparelTextiles and Apparel -11%-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 Labor2. 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 PerspectiveMexico's Economy as a Percentage of the U.S. Economy

0

0.01

0.02

0.03

0.04

0.05

0.06

0.07

1991 1992 1993 1994 1995 1996 1997 1998 1999

Source: World Bank, World Development Indicators on CD-ROM, 2001

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 (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