Globalization and Free Trade Chapter Eleven Shift in course to international level This chapter: globalization & neoliberalism, free trade versus protectionism, trade regimes 1 Definition Globalization is an umbrella term for a complex series of economic, social, technological, cultural, and political changes that are seen as increasing interdependence, integration, and interaction between people and companies in disparate locations. Video: https://www.youtube.com/watch?v=xPD477FuqtY Today is a great age of globalism. For perspective, remember that this is NOT the first age of globalism. Consider: Alexander the Great The Romans The Age of Exploration and Colonization (1492-1650) Past and present drivers of globalism Military force Trade opportunities and wealth creation Technology enhancements Public awareness of the globe New waves of globalization brought increasingly intensive levels of integration Alexandrian empire: conquest and temporary subjugation Roman empire: conquest, followed by internal trade and some technological advancements in roads, bridges, infrastructure, increased awareness among elite Age of exploration: conquest of new lands, resource extraction and trade opportunities, technology (improved navigation and tools of war), increased awareness (e.g., increased literacy and widespread use of the printing press) Current age (defined here as after the Cold War): little conquest and an emphasis on trade, massive technological advancements in machinery and computers, and increased mobility of interaction and ideas around the world via globalized communication systems. Neoliberalism and globalism Elevates the (global) market and downplays the importance of the nation state. Specifically: Free trade: removal of trade barriers, like tariffs, subsidies, and regulatory restrictions Privatization: transfer of previously-public-owned enterprises, goods, and services to the private sector Competitive exchange rates: accepting market-determined exchange rates, as opposed to government-fixed exchange rates Undistorted market prices: refraining from policies that would alter market prices Limited intervention: with only exceptions for promoting exports, education, or infrastructural development Fiscal rectitude: cutting government expenditures and/or raising taxes to maintain a budget surplus Free Trade Free trade, advanced by neoliberalism, refers to a policy by which governments do not discriminate against imports or exports. It has long been a debatable topic. Three simple arguments for free trade: As the market served expands from a national to world stage, there are gains, with declining per-unit production (greater efficiency) Gains result from the reduction in declining monopoly power of domestic firms (less market distortion) Consumers gain with increased product variety and lower market costs (greater consumer variety) Side benefits include increased investment and savings and b ...

1. Globalization and
Free Trade
Chapter Eleven
Shift in course to international level
This chapter:
globalization & neoliberalism,
free trade versus protectionism,
trade regimes
1
Definition
Globalization is an umbrella term for a complex series of
economic, social, technological, cultural, and political changes
that are seen as increasing interdependence, integration, and
interaction between people and companies in disparate
locations.
Video: https://www.youtube.com/watch?v=xPD477FuqtY
Today is a
great age of globalism.
For perspective, remember that this is NOT the first age of
globalism. Consider:
Alexander the Great
The Romans

2. The Age of Exploration and Colonization (1492-1650)
Past and present drivers of globalism
Military force
Trade opportunities and wealth creation
Technology enhancements
Public awareness of the globe
New waves of globalization brought increasingly intensive
levels of integration
Alexandrian empire: conquest and temporary subjugation
Roman empire: conquest, followed by internal trade and some
technological advancements in roads, bridges, infrastructure,
increased awareness among elite
Age of exploration: conquest of new lands, resource extraction
and trade opportunities, technology (improved navigation and
tools of war), increased awareness (e.g., increased literacy and
widespread use of the printing press)
Current age (defined here as after the Cold War): little
conquest and an emphasis on trade, massive technological
advancements in machinery and computers, and increased
mobility of interaction and ideas around the world via
globalized communication systems.

3. Neoliberalism and globalism
Elevates the (global) market and downplays the importance of
the nation state. Specifically:
Free trade: removal of trade barriers, like tariffs, subsidies, and
regulatory restrictions
Privatization: transfer of previously-public-owned enterprises,
goods, and services to the private sector
Competitive exchange rates: accepting market-determined
exchange rates, as opposed to government-fixed exchange rates
Undistorted market prices: refraining from policies that would
alter market prices
Limited intervention: with only exceptions for promoting
exports, education, or infrastructural development
Fiscal rectitude: cutting government expenditures and/or raising
taxes to maintain a budget surplus
Free Trade
Free trade, advanced by neoliberalism, refers to a policy by
which governments do not discriminate against imports or
exports. It has long been a debatable topic. Three simple
arguments for free trade:
As the market served expands from a national to world stage,
there are gains, with declining per-unit production (greater
efficiency)
Gains result from the reduction in declining monopoly power of
domestic firms (less market distortion)
Consumers gain with increased product variety and lower
market costs (greater consumer variety)
Side benefits include increased investment and savings and
better diffusion of technology.
One reason for trade: the mutual gain of absolute advantage

4. (Smith)
Absolute advantage is when one country is more efficient than
another in a type of product or service. When one country has
an absolute advantage in one area, and another country has an
advantage in a second product, then the rational for trade is
obvious and overwhelming.
(Absolute advantage only tells part of the story…)
A highly developed country may be more efficient in most
areas, and thus perceive that it has little need to trade except
for resource deficiencies. However, …
A second reason for trade: comparative advantage (Ricardo)
The theory of comparative advantage holds that if one country
has an advantage over another country in the production of
several goods, it should produce the good in which it has the
greatest advantage and buy the good in which it has the least
advantage from the other country. Such a principle results in
mutual gain because of the enhancement of natural efficiency in
both countries.
In addition, employing the theory of comparative advantage also
aids in enhancing specialization – a concentration of labor and
other resources for producing a single product, a practice which
can lead to greater skill and productivity than would be
achieved by the same number of workers and resources being
devoted to the production of a variety of goods and services.
U.S. government agencies to promote trade
Federal government:
Department of Commerce (local offices in LA and San Rafael)

5. Export-Import Bank (Exim Bank) http://www.exim.gov/
Overseas Private Investment Corporation (OPIC)
http://export.gov/ : U.S. Government portal
State government
Development (CA Agriculture)
https://www.cdfa.ca.gov/exec/public_affairs/trade.html
Trade missions
Local government
Free Trade Zones (FTZs)
The Challenges to Free Trade and the Arguments for
Protectionism
The Challenge to Free Trade:
Trade Protectionism: 6 Forms
These three forms protect domestic markets.
Tariffs: taxes on incoming goods
E.g., sugar coming into the U.S. from non-Mexican sources
Import quotas: maximum amount of goods that may be brought
in. E.g., limits on amount of sugar from Mexico until high
tariffs are triggered
Those goods often demand higher prices as scare items (i.e.,
automobiles)
More restrictive than a tariff
E.g., import quotas on Chinese goods (knit fabrics, dressing
gowns, cotton shirts, etc.)
Regulatory barriers: many types
High product standards (e.g., genetically modified foods?)
Obscure rules

6. These three forms promote domestic goods in foreign markets.
Subsidies:
Tax credits, direct subsidies (loans)
Example: U.S. Sugar Policy (source: sugarcane.org)
Price Support
The U.S. Department of Agriculture (USDA) provides loans to
sugarcane and sugar beet producers and processors that
guarantee a minimum price regardless of the true market
conditions. At the end of the loan term (generally 9 months),
sugar producers and processors make one of two choices:
Turn over to the government the sugar they produced as
payment for the loan, or
Sell their sugar on the market if the going price is higher than
the USDA loan amount
Recently the loan rate was US$ 18.75 cents per pound for raw
cane sugar and US$ 24.09 cents per pound for refined beet
sugar.
Infrastructure subsidies or free resources such as water or use of
public lands at little cost
Exchange controls:
Currency values can be controlled and that affects the trading
relationship
Currencies with low valuation can encourage low imports and
high exports by keeping value of money low against other
currencies
E.g., Chinese government policies for many decades
Dumping: selling a product in another country at a cost lower
than its production cost
Generally made up by government subsidy

7. E.g., Korean automobile industry
Frequently charges of dumping are flimsy or the term is used
inappropriately to simply mean selling well below the U.S.
market rate (even though production is genuinely cheaper in
another country)
Shoe Example
China keeps the Yuan (RMB) low (low currency valuation)
China reduces the taxes on export-oriented shoe companies in
China (subsidy). This lack of tax is so dramatic and has such a
large impact that the U.S. charges China with “dumping”
Results in…
US limits the number of pairs from China to 1,000,000 per year
and all-leather shoes to be limited to 100,000 pairs (import
quota)
US requires a high percentage of leather (i.e., the soles) to be
called “leather” shoes *(regulatory requirement)
US charges each incoming pair of shoes from China a $2.00 tax
(tariff)
It requires additional resources from other industries; output in
other domestic industries is reduced.
Consumers are harmed by reduced consumption of protected
items and less ability to consume other items as well.
Costs of protectionism: major arguments
Video promoting the virtues of free trade:

8. http://www.bing.com/videos/search?q=arguments+against+prote
ctionism&FORM=HDRSC3#view=detail&mid=97499EC753CD0
3D9C5AC97499EC753CD03D9C5AC
Arguments for restricting trade and their rebuttal by neoliberal
economists
National defense:
Retain minimum capacity, especially in key areas such as
armaments
-used argument (very few industries qualify)
Income distribution:
Help select disadvantaged groups such as farmers
pers with market and unfair to other groups
Improving the balance of trade:
Improve the trade deficit by reducing imports
in the short term
Protection of jobs:
Protect select industries (reasons for legislators in democracies
to listen to this argument; those whose jobs are affected care
more than general consumers), agriculture, clothing,
manufacturing,
etc.
these workers to migrate to more efficient industries
Infant industries:
Give the industry time to mature; build critical mass

9. -used argument,
subsidies
Spillover effects:
Protect industries that provide social usefulness (i.e., domestic
R&D)
Strategic trade policy:
Design select trade policies by reason rather than the market
when market is limited
ly leads to market distortion and political
manipulation
Two Neoliberal Tracks:
Global and Regional
Two main currents in the world:
Globalism (Examined more in Chapter 13 with International
Finance Institutions)
A globalized market for goods and services
A globalization of financial markets
International manufacturing plants and services
Regionalism
Regional economic integration
refers to agreements among countries in a geographic region to
reduce, and ultimately remove, tariff and non-tariff barriers to
the free flow of goods, services, and factors of production
between each other

10. Preferential Trade Area
A trading bloc that gives trade preferences for certain products
to a set of trading partners covered in an agreement. A PTA
attempts to reduce tariffs among participants, but does not
completely abolish them. The line between a PTA and an FTA
may be blurred, as many PTAs today have the goal of eventually
becoming an FTA.
Free Trade Area (FTA)
Aims to remove tariffs and other trade barriers among the
members (however, each country may establish its own trade
policies with nonmember countries) (i.e., NAFTA)
Customs Union
A customs union goes beyond removing trade barriers among
themselves and sets a common level of trade barriers against
outsiders (i.e., European Union & Turkey Customs Union; New
Southern Africa Customs Union)
Common Market
Includes not only the free exchange of goods and services but
also the free movement of factors of production (i.e., labor and
capital) among members (i.e., Common Market for Eastern and
Southern Africa)
Economic Union
Involves the creation of common national economic policies (a
common currency or common taxes) (i.e., European Union)
Political Union
A central political apparatus coordinates the economic, social,
and foreign policy of the member states (i.e. UAE, unification
of East and West Germany, )
Degree of Economic Integration
Political

11. Union
Economic Union
Common Market
Customs Union
Free Trade Area
Preferential Trade Area
Preferential trade area ___
Free trade area ___
Customs union ___
Common market ___
Economic union ___
Political union ___
Goes beyond removing trade barriers among trading countries
and sets a common level of trade barriers against outsiders
A central political apparatus coordinates the economic, social,
and foreign policy of the member states
A trading bloc that gives trade preferences for certain products
to a set of trading partners covered in an agreement
Aims to remove tariffs and other trade barriers among the
members
Involves the creation of common national economic policies
Includes not only the free exchange of goods and services but

12. also the free movement of factors of production
Trade examples involving the U.S.
Member of the world trading community through the World
Trade Organization, and the world economic currency and
exchange community through the International Monetary Fund
(Ch. 13)
Numerous Free Trade Agreements
Several multilateral trade agreements
NAFTA
CAFTA
24
The United States has free trade agreements in force with 20
countries. These are:
Australia Israel
Bahrain Jordan
Canada Korea
Chile Mexico
Colombia Morocco
Costa Rica Nicaragua
Dominican Rep. Oman
El Salvador Peru
Guatemala Panama
Honduras Singapore
(Countries in bold are a part of multilateral agreements)
The United States is negotiating bilateral and multilateral free
trade agreements with the following countries and blocs:
Free Trade Area of the Americas (FTAA; incl. all countries on
the Western Hemisphere, except Cuba) U.S.–Middle East

13. Free Trade Area (US-MEFTA; incl. most countries in
the Middle East) Transatlantic Free Trade
Area (TAFTA; European Union)
Thailand: United States–Thailand Free Trade Agreement (on
hold since the 2006 Thai coup d'état) New Zealand: US–New
Zealand Free Trade Agreement[1]
Ghana: US–Ghana Free Trade AgreementIndonesia: US–
Indonesia Free Trade AgreementKenya: US–Kenya Free Trade
Agreement
Kuwait: US–Kuwait Free Trade Agreement (Expert-level trade
talks held in February 2006) Malaysia: US–Malaysia Free
Trade Agreement (last meeting was in July 2008)
Mauritius: US–Mauritius Free Trade Agreement
Mozambique: US–Mozambique Free Trade Agreement
Taiwan: US–Taiwan Free Trade Agreement
United Arab Emirates: US–United Arab Emirates Free Trade
Agreement (5th round of talks are yet to be scheduled)
US–Southern African Customs Union Free Trade
Agreement (US-SAUC; incl. South
Africa, Botswana, Lesotho, Swaziland, and Namibia; on hold
since 2006 due to US demands on intellectual property rights,
government procurement rights and investment)
Ecuador: US–Ecuador Free Trade Agreement
Qatar: US–Qatar Free Trade Agreement (on hold since 2006)
Trans-Pacific Strategic Economic Partnership
25
Economic Integration among the Americas
1988 (signed) CUSFTA
Canada and US
1993 (signed) NAFTA
Canada, US, Mexico
2005 (signed) CAFTA
US, El Salvador, Nicaragua, Guatemala, Honduras,
Costa Rica, Dominican Republic

14. Proposed but stalled/vetoed: FTAA; recently TPP (Trans
Pacific Partnership)
26
Content of NAFTA treaty
Within 15 years, all tariffs to be eliminated
Removal of most barriers on cross-border flow of services
Removal of restrictions on FDI except in certain sectors (i.e.,
Mexican railway and energy, US airline and radio
communications, Canadian culture)
Protection of intellectual property rights
Applies national environmental standards
Establishment of commission to police violations
27
Pros
Enlarged and productive regional base
Labor-intensive industries move to Mexico
Mexico gets investment and employment
Mexican firms become more efficient
Increased Mexican income to buy US/Canadian goods
Demand for goods increases jobs
Consumers get lower prices
Cons
Loss of jobs to Mexico
Mexican firms have to compete against efficient US/Canadian
firms

15. Environmental degradation
Loss of national sovereignty
28
NAFTA results…
Recent surveys indicate that NAFTA’s overall impact has been
small but positive
From 1993 to 2004, trade between NAFTA’s partners grew by
250 percent
Canada’s trade with NAFTA partners increased from 70% to
more than 80% of all Canadian foreign trade
Mexico’s trade with NAFTA partners increased from 66% to
80% of all Mexican foreign trade
All countries experienced strong productivity growth
The United States has lost 110,000 jobs per year due to NAFTA
Many economists dispute this figure because more than 2
million jobs a year were created in the US during the same time
period
The most significant impact of NAFTA has not been economic,
but political
NAFTA helped create the background for increased political
stability in Mexico (GINI coefficient has been dropping since
1999)
Nonetheless, NAFTA has not been without its critics arguing

16. that the blue collar labor market in the US has been decimated,
and that wealth concentration in US has gotten worse, among
others
CAFTA
Ratified in 2005; approved by razor-thin majority
Formal name: Dominican Republic - Central America Free
Trade Area but informally called CAFTA
Phases out tariffs between participating countries over the
course of the following decade (Costa Rica, El Salvador,
Guatemala, Honduras, and Nicaragua -- and the Dominican
Republic)
US proponents suggest it will:
Expand economic opportunities for US investors,
manufacturers, workers, and farmers; strengthen intellectual
property rights
Level the playing field for US businesses selling in Central
America
Advance the US trade agenda, and
Support democracy, economic reform, and regional integration
Critics: loss of US jobs, unfair competition for certain
industries (especially sugar), would encourage environmental
degradation, continued corporatization of agriculture
DR-CAFTA: case study on the challenges: sugar industry (see
analytic case, p. 333)
American agriculture divided on CAFTA; meat industry and
dairy in favor where market advantage heavily supported US
side; sugar industry highly opposed because of the relative
strength of cane sugar in Central America

17. Case study, cont.
US sugar had always enjoyed considerable protection via tariffs
externally, and price supports domestically; especially critical
for sugar beet producers.
CAFTA allowed more sugar to enter US’s price-inflated market
Sugarcane is more productive; in US the biggest pressure is
opportunity cost of land (Louisiana and Florida)
Sugar beets are less productive and more sensitive to
fluctuations due to competition (Midwest, CA)
Ultimately, after CAFTA there was…
Mild affect on sugar industry as a whole; production increased
but profits squeezed modestly
Some sugarcane consolidation in most efficient areas
Substantial consolidation of sugar beet industry; 20% loss of
small farms in just a few years; significant increase corporate
farms
FTAA
Free Trade Area of the Americas http://www.ftaa-
alca.org/alca_e.asp
Talks have faltered since 2005
Two stumbling blocks include intellectual property rights and
reductions in agriculture subsidies
Discussions have faltered over similar points as the Doha
Development Round of World Trade Organization(WTO) talks;
developed nations seek expanded trade in services and
increased intellectual property rights, while less developed
nations seek an end to agricultural subsidies and free trade in

18. agricultural goods. Similar to the WTO talks, Brazil has taken a
leadership role among the less developed nations, while the
United States has taken a similar role for the developed nations.
34