TRADE AND THE GLOBAL ECONOMY

"Governments influence the patterns of imports and exports by tariffs, quotas and other trade
restrictions. People involved in business should learn the reasons for these policies."

California History/Social Science Framework

ASSUMPTION

Globalization of the economy is often talked about today as inevitable, necessary and desirable.
It is often assumed that trade benefits everyone, and the more the better. While increased trade
among countries provides certain benefits to businesses and consumers, a wholesale
acceptance of and optimism towards free trade should be questioned. The environmental and
social costs of globalization should be considered when assessing the impact of expanded
world trade.

DESCRIPTION

Trade has become an increasingly complex topic. Now that multinational corporations gather
inputs, produce and sell in many countries, what constitutes an export and what constitutes an
import are no longer simple concepts. Students will learn to think through these complexities to
better understand core issues in international trade. Once students have gained a basic
knowledge of global trade, they will assess what is imported into the United States, the role of
the World Trade Organization and the idea of import substitution.

Trade has been a major part of human history. The early days of simple barter between groups
of people are long gone. Now trade is largely facilitated by electronic money, takes place
between a wide range of businesses, consumers and governments and involves an immense
variety of products ranging from a synthetic rubber shoe sole to a passenger jet. Products can
be exported and imported from the same country before delivery to the marketplace. For
example, logs are exported from the United States to countries such as Japan, Mexico and
Germany to be processed and shipped back to the United States to be sold. As illustrated in
activity 6-1, products as seemingly simple as shoes can be produced piece by piece in a variety
of places and countries, assembled in another nation and shipped to yet another. Trade is no
simple matter these days.

International trade has expanded rapidly since World War II, and even more so in the 1990s. In
1950, total merchandise exports in the world were $58 billion. In 1990 that figure was $3.5
trillion, and in 1997 it was $5.3 trillion. In 1997, world exports grew by over 9.5%, three times
greater than world output growth of 3%. Over 3/4 of the world trade is in merchandise or goods -
primarily industrial equipment, consumer goods, oil and agricultural products. Almost 1/4 of
world trade is in services, mostly in banking, insurance, transport, telecommunication,
engineering and tourism. Since the 1950s, transportation costs, based on cheap oil, as well as
communication costs, have steadily declined. This has helped fuel the explosion in global trade.
Trade is based on specialization. The logic is clear - trade what you make the best and
exchange it for what others make the best. Trade competition among countries is much more
complicated. Much of it depends on the resources or factors of production available in a certain
area or country. In general terms, countries or areas will have a resource focus to their economy
and consequently to their exports. A country can be labor intensive, where its competitiveness is
based on cheap and available labor. These countries are often poorer and have large
populations. Or a country can be capital intensive where its competitiveness is based on the
productivity and skill of its labor force with high levels of education and/or available technology
and machinery. Or a country can be land intensive, where its competitiveness depends more on
an abundance of valuable natural resources such as timber, minerals and farmland.

A central debate for many years has concerned the virtues of free trade versus protectionism. In
simple terms, free trade means the absence of restriction on trade. Essentially, a government
pursuing free trade removes barriers to imports and encourages exports. The following
arguments for free trade are often made: 1) that more imports will lead to more choices for
consumers; 2) that competition from imports makes domestic businesses more competitive
which leads to lower prices and better quality for consumers; 3) that imports can provide
valuable and/or cheaper inputs for businesses; 4) that welcoming imports can promote trade
relations with other countries making it easier for the US to export; and 5) that increased exports
will lead to more income and jobs in export industries.

Traditionally, protectionism has meant using barriers to imports that compete with domestic
industries. Current arguments for protectionist measures in the US show this definition is
expanding, as reasons to limit imports are not just confined to protecting domestic industry.
Arguments for protectionism include: 1) protecting import-competing companies and their
workers; 2) encouraging local production to substitute for certain imports and therefore keeping
more money and jobs in local communities; 3) reducing direct environmental costs: the energy
and packaging used to transport goods over long distances; and 4) disagreement with the
country where certain imports come from because of its human rights record, labor practices,
lax environmental protection, etc. Protectionist measures include tariffs (taxes on imports),
quotas (monetary or quantity limits on imports) and non-tariff barriers (restrictions on imports
such as standards enforced on imported goods, special tests or markings required on goods
and time delays in clearing goods for importation).

Free trade agreements have aimed to reduce these barriers. Free trade is dominating trade
policy in the 90s as more and more agreements are being negotiated or considered to increase
trade among countries. The most well known and influential has been GATT, the General
Agreement on Tariffs and Trade, started in 1947. Through several rounds of talk since then,
tariffs have been significantly reduced among the over 70 member nations that account for over
80% of world trade. NAFTA, started in 1993, has significantly reduced tariffs between the US,
Canada and Mexico. In the 1990's, the European Union (EU) has removed almost all trade
barriers among its member nations.
The World Trade Organization (WTO), established in 1995 to administer and enforce
agreements made at the Uruguay Round of GATT, has taken free trade to a new level. Many
recent rulings by the WTO have been aimed at removing non-tariff barriers, in particular health
and environmental standards on imports, claiming that these represent unfair trade barriers.
Many critics suggest that free trade under the WTO is challenging the sovereignty of nations
affected by their rulings. [For updates and criticisms on WTO activity, visit the website of Public
Citizen's Global Trade Watch at www.citizen.org.]

Who's in control of this increasingly complex world trade system and the trade organizations
that govern it? Multinational corporations are becoming less loyal and responsible to any one
nation and its laws. Various multinationals have moved operations to countries where
production costs are lower or because of lax environmental and labor laws. Where laws are
stronger, multinationals may make an effort to change or circumvent those laws. A recent ruling
at the WTO serves to demonstrate this trend. In March 1997, the WTO ruled that the European
Union must open its markets more to bananas from Latin American countries, mostly Chiquita
bananas. The European Union has favored bananas from Caribbean nations mostly grown on
small, family farms. Many Caribbean economies depend largely on these exports. The United
States had brought this case to the WTO at the urging of Chiquita. Chiquita is based in
Cincinnati, Ohio but most of its 45,000 workers are in Guatemala and Honduras where the
bananas are harvested. Carl Lindner , the CEO of Chiquita, was a major donor to the
Democratic Party. Multinational corporations, like Chiquita, were created by law in their nations
of origin but as their global reach has expanded, so too has their ability to influence international
trade agreements and organizations like the WTO.

In addition to issues of national sovereignty, there is also concern over how certain imports are
produced and the impact such production has across borders. Health, environmental and social
standards in poorer countries that export to the US are often considerably below those of the
US. Human rights violations in China and Nigeria, devastating pollution in Korea and China and
extremely low wages in Indonesia are examples that reflect these different standards. By buying
from these countries, some argue we are supporting their policies. In other cases, the actual
production of goods exported to the US have had a direct effect on the health and environment
in the US. During a visit to Tijuana in 1997, Carl Pope, Director of the Sierra Club, pointed out
that pesticides banned in the US are made in California, used in Mexico and then shipped back
to the US on fruits and vegetables. More recently on a visit to Tijuana Mexico, Pope learned
about hazardous industrial wastes discharged into a local river from electronics factories that
largely export to the US and Canada. Not only has this harmed the health of those who live in
Tijuana (producing,for example, a high incidence of birth defects) but this river flows to Imperial
Beach, California where many others surf and swim. Another report in Time magazine (May
1997) revealed high incidences of serious birth defects in Brownsville, Texas from 1988 to 1992.
This was also a time when US companies like General Motors, Kemet Electronics and Trico, a
windshield wiper manufacturer, set up factories across the Rio Grande in Matamoros, Mexico. It
is widely believed that pollution from these factories led to this health crisis. Differences in
environmental regulations between the US and Mexico have been a central concern of those
opposed to NAFTA.
A final concern about the expansion of the global economy is that many countries, especially
the United States, are becoming more (and too) dependent on imports. This condition of
interdependence, while predicated on countries specializing in what they produce most
competitively, can leave trading partners vulnerable. In a world rife with civil wars in distant
places, subject to sudden changes in their economies and shifts in government authority,
anticipated exchanges may go awry. With these concerns among others, there is a growing
school of thought suggesting we restrict what we import. This "protectionism" does not have to
come about through government measures like higher tariffs or quotas. Rather, a coordinated
effort to support, invest in and boost local production of essential products could lead to a
gradual replacement of imports. With a focus on essentials like food, shelter and energy, this
would leave communities less vulnerable to the risks involved in relying on products from
hundreds and thousands of miles away. This is part of Michael Shuman's thesis in his 1998
book, Going Local. Shuman further argues that replacing imports with local products can
improve the local economy by creating jobs and keeping income in the community. Limiting
imports of essential goods to protect local communities from outside forces also reduces the
environmental costs of transportation over great distances. While import replacement does not
eliminate trade, it may help to constrain trade when it does not promote a better quality of life.

Vocabulary

globalization, interdependence, specialization, resource focus, capital intensive, labor intensive

land intensive

Activity Procedure

1. Have students look at clothing labels. Create a list from student responses of all countries
and areas in the world where their clothes are made. Derive concept of globalization. Ask
students why clothing is made in these places (cheap labor, etc.).

2. Have class discuss why we trade. Derive concept of specialization, exports and imports.

3. Have students discuss and elaborate on resource focus/specialization to help determine

where different phases/parts of production take place.