IV. The overall results of globalization
B. Empirical FAQs

    Example of wage changes in LDCs: shoes in Korea

    Nike and Reebok design and market shoes
    They contract out the actual manufacture of shoes
    In the 1970s, they began outsourcing shoe production to countries like South Korea

    Figure 1

    Prediction regarding impact on wages in SK?
    This was in the days before global watchdog agencies shined a spotlight on wages and working conditions in foreign factories.

    Figure 2

    Is this what you expected?

    Figure 3

    Prediction regarding impact on exports and wages in SK?

   (handout) With globalization, industries leave a country for two alternative reasons:

    (1) Lower wages abroad pull an industry out
    => DL shifts left
    --this is most common as extra LDCs decide to globalize
    The problem: we are not yet a fully globalized economy
    We are still in the process of reducing trade barriers, and that raises the possibility of the first scenario:
    Example: the controversy about China's textile and apparel exports with the end of trade restrictions in 2005.

    (2) Higher wages at home push an industry out
    => SL shifts left
        --this is most common as existing globalizers grow
    Figure 4 (handout -- print in landscape)
    SK is an example: it is the typical outsourcing scenario for an established global economy
    workers get more productive and better opportunities open up elsewhere
    In that scenario, outsourcing is a positive indicator about the progress of an economy

    What sort of overall story does Figure 4 tell?
    (1) SK started out as a low-income country with a comparative advantage in basic manufactures such as shoes
    (2) Shoe exports helped raise wages
    (3) Worker productivity and wages rose over time
    (4) SK's comparative advantage shifted away from shoes to other opportunities offering higher wages

    To finish up:
    The good news: Much DC trade is with each other.
    This type of trade enhances choice and lowers production costs without causing friction between capital- and labor-owners.
    Because of its prevalence, a case can be made that, overall, both DC capital and labor have gained from trade, even without income redistribution.
    --more innovation
    --more variety
    --lower unit costs
    --reduced market power

    Bad news: HO model applies most to DC/LDC trade
    This is the kind of trade that creates friction between capital- and labor-owners.
    The nature of DC/LDC trade complicates the relationship between DCs and LDCs
    Makes trade liberalization harder between them.

    A sea change in attitudes from 1970 to now.

Now: a role reversal:

    DC's press for "managed trade" and restrictions on imports from LDCs
    LDCs are the ones pressing for more open markets in agriculture and manufacturing
        Few countries pursue self-sufficiency (North Korea, Burma, Eritrea)

    Foroohar (2002). The Poor Speak Up
    Notes: the activists are anti-globalization
    LDCs themselves are not

    former Mexican president Ernesto Zedillo: managed trade is a plan "to save the people of developing countries from developing." (Davos 2000)
    and would slow the pace of globalization.

    Brazil's chief trade negotiator, Sergio Amaral: "There is no Third World anymore, but there is a unanimity among the developing countries that protectionism is the common enemy."

    2010 Nobel prizewinner in literature, Mario Vargas Llosa: "Countries today can choose to be prosperous," he wrote. "The most harmful myth of our time, now deeply embedded in the consciousness of the Third World, is that poor countries live in poverty because of a conspiracy of the rich countries which have arranged things to keep them underdeveloped, in order to exploit them."

Part 2: Governments and the global economy

    So far, we've focused on how global markets affect prosperity:
    Found a mixed bag: promotes efficiency--growing the global pie
    But not everyone has come out ahead: 
    Ex1: low skill workers in rich countries
    Ex2: While theory predicts that unskilled workers gain in poor countries, the evidence has been mixed:
Globalizers have grown more rapidly than nonglobalizers
Poverty has been reduced
        Incomes have not in general become more equal (Dollar and Kraay; Oxfam)

    Focus now: what governments can do to affect the situation

    2 key concerns:
    (1) How does globalization affect the ability of government to achieve its usual objectives?
    (2) What additional objectives arise because of globalization?

    Annan: governments "take binding decisions and make binding agreements on behalf of all their citizens."

I. The fundamentals of trade policy

    General conclusions:
    with efficient markets: government intervention reduces efficiency
        True for trade policies, just as it is for domestic policies
    with inefficient markets: government intervention can increase efficiency
        But: trade policy is generally not the first-best intervention policy

A. Trade restrictions

    Despite the apparent benefits of free trade, intervention in tradables markets is commonplace.
    Trade policies target imports and exports

    Some target price: Examples:
        tariffs
        export taxes
        export subsidies
    Some target quantities: Examples:
        import quotas
        export quotas

    Context for basic analysis: small open economy

    Pf = fixed world price
    An open economy divorces domestic buyers from domestic sellers
    Buyers do not depend on domestic sellers; they just buy what they want at Pf
    Sellers do not depend on domestic buyers; they just sell what they want at Pf

1. Tariffs

    Tariff (tar) = a tax on imports

    Types:
    (1) Specific: $/unit
        Ex: FCOJ: 1990: 29.6 cents/gal
                2009: 11 cents/gal
    --doesn't change with price
    ? Over time, what happens to it as a percentage of price?

    (2) ad valorem: % of the import price
    --$ amount rises as P rises
        Ex: baby blouses: 14.9%

    General tip: show policy S&D curves as dotted lines
    --Why? Because the original solid S&D curves measure true MB and MC, which we must refer back to to figure out welfare effects.

    Do tariff worksheet