With the rise of manufactured exports from developing countries, a new movement opposed to globalization has emerged, giving arguments to governments for strategic trade policy. Comment on this assertion.

by natalia_petrovova (student)

University Degree Business and Administrative studies

INTERNATIONAL TRADE EXAMINATION

Natália Petrovová, Erasmus exchange student

“With the rise of manufactured exports from developing countries, a new movement opposed to globalization has emerged, giving arguments to governments for strategic trade policy”.

Could you comment this assertion, using what you have learned during the lessons?

(Maximum 4 pages).

Definitions:

Anti-globalization movement is commonly referred to as the global justice movement, alter-globalization movement, anti-globalist movement, anti-corporate globalization movement, or movement against neoliberal globalization

Strategic Trade policy: Strategic trade policy refers to trade policy that affects the outcome of interactions between firms in an actual or potential international oligopoly.

In the 1990´s a strong debate on the effects of rising international trade on developing countries began to take place and influence the decisions in the terms of trade. The discussion was mainly focused on labour conditions, wage rates, but often was discussed in broader horizon arriving to the issues of environmental damage and policies.

Strategic trade policies became very popular since the emergence of the idea of the free trade. First signs of the strategic trade policies can be seen in the early 80´s and since then it draws the terms of trade across the globe in a great extent. It is especially greatly popular for the main economic players, such as USA and Europe, providing them with a way to control the global markets, here particularly the imperfect ones. Well known are for example R&D subsidies or others forms of public aid, which are unaffordable to be financed by the less developed or developing nations. These policies have large impact on the trade and are often under suspicion of various anti-globalization movements as trade strategic policies often lead to further concentration of income.

This idea was already captured in the paper of Brander and Spencer. The famous example of this paper includes competition in the aircraft industry between Boeing and Airbus, where in the equilibrium only one firm can produce. If we apply this paper onto the world trade, we can see that if it is in the interest of a developed country to have production in the certain developing country, it may use this strategic trade policy and support this country in production – this policy normally aims at augmentation of exports. There are two or more possible countries to produce, with same conditions; hence firstly it is due to chance who will finally produce. Subvention helps the any chosen country to become the producer, but as it was analyzed in the paper this benefit is paid for by other countries – one country benefits, the others loose, hence we have equilibrium with winner and losers. Later I will focus on how the developed country chooses which developing country to subsidise and we will see that the developing country does not necessarily only benefit from it as this strategic policy intervention may lead to the race to the bottom between the countries in order to attract investment.

One remark is that in this paper we are talking about manufactured goods only. In the case of the developing countries they are the majority of what is exported as they account for more than 80 percent of their exports. Developing countries moreover account for one third of the world trade. One of the best known manufactures exports are clothes, which were also there at the start of the anti-globalization movement in early 1990´s. One of the examples which started the debate was a clothing line of a nationwide known American supermarket which was manufactured by poorly paid workers in Honduras. At the end of the 90´s, anti-globalization movement was on the news more regularly than ever. In November 1999 main issues were discussed in Seattle in the name of WTO, followed by Uruguay Round and many other meetings in world capitals of trade. They were seen in the eyes of activists as going against national independence and sovereignty, moreover imposing free-trade ideas which hurt workers in developing countries like above mentioned Honduras. It was the time when the anti-globalization movement became visible.

Anti globalization movement areas of criticism

Labour and income gap: Income gaps have widened in several developing and also advanced economies countrywide and between the countries for several reasons. Due to the rise of manufactured exports, it is explained by higher demand for high skill labour in the developing countries. Many would expect that due to trade liberalization opposite would happen, but according to evidence it has not. A good example is Mexico in 80s, where during the liberalization relative wage of high-skilled workers have risen comparing to the average wage in the country, which caused bigger income gap ...

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Anti globalization movement areas of criticism

There is however the second important insight into the problematic. Developing countries are very attractive to the manufacturing production of the developed countries because of its very low wages. At the end of the 90´s the average wage in apparel industry was 69 cents in the Dominican Republic, 50-54 cents in Mexico, 23 cents in China, 10 cents in Indonesia and just 4 cents in Burma (Myanmar) whilst in the United States it was $8.4. Another reason to come to produce to these countries is small or no cost for environmental and work health protection. Many of these countries have very limited regulations on occupational health and safety, whilst other are not possible to be enforced in practice for which reason is lack of human, financial and technical resources in developing countries. Corruption at all levels of regulations development is other reason for impossible implication of workplace health and safety. And here we come to the major problem - low political interest of the countries to change that. Countries are often indebted; therefore any kind of policy which would discourage investment from developed countries is not taken into account.

This paragraph brings us to the theory of Ricardo (later improved by Heckscher–Ohlin) about the comparative advantage with two factors of production. In the world we have countries rich in labour and others rich in capital. Developing countries have a great comparative advantage in the labour market as they have waste amount of labour (in the model of HO, these countries belong to periphery – to which opposite is the core like developed countries). It is natural process that countries rich in labour focus on the labour-intensive goods production like manufacturing and countries rich on capital focus on the goods which are capital-intensive.

Here we come to what is called Foreign direct investment or FDI of which we know two kinds. One which is supposed to provide the benefits to host-country (of any kind, e.g. also factory etc.) and the second kind – on which we focus - is the FDI of which desirable outcome is to support export. These investments are often paid to these developing countries with comparative advantage, which benefit from high labour endowment. Given the lowest wages in the world, it makes them most suitable for production of anything such as above mentioned clothes and other manufactured products. FDI is provided by these multinational organizations, which take advantage of the countries, keep the higher profits and blind eye on the extremely low wages in their factories in the developing countries. With the rise of globalization these processes of strategic trade policies from abroad became even more famous as the trade/transport cost became lower and smaller barriers between markets made it also cheaper to trade.

In waste majority of these countries there are no independent unions to enforce labour rights. The lack of their labour rights and freedom of the people who produce goods for all of us means that workers cannot fight for health and safety on the workplace and they have no impact on issues such as working hours, production goals, sexual harassment on the job, etc… This paragraph have clearly shown that the globalization stand in the way of developing countries to make the working conditions of the labour more up-to-date because in the current conditions it cannot afford to do so as there is a high opportunity cost of lost investments and production. The Chinese word for crisis consists of two separate characters -- one meaning "danger" and the other meaning "opportunity" — together they mean "crisis." ("The Global Threats to Workers’ Health and Safety on the Job", Garett D.Brown)

Six largest corporations in the world have higher revenues than any other country, apart from USA, and they play an important role. They seek for the world´s cheapest labour. Their incredible power makes it even more difficult to make labour’s working conditions better. The world’s workers´ inability created labour desperate for work, which cannot afford to refuse the most dangerous conditions. Powerful corporations have the financial, human and technical resources to intervene in the lives of the most vulnerable. Rising effort of many groups and individuals in the developed world aims to solve this “crisis”. Campaigns against companies like Nike and Disney developed some improvements in the working condition of many factories around the globe.

Environmental damage: Climate change, cross-boundary water and air pollution, over-fishing, they all need global solutions. Developing countries have increased output and use less strict environmental regulation. Globalization has consequently increased pollution and impacted resources. Current economic growth is not sustainable and the capacity of the world we live in is basically insufficient to the plans of United States, Europe, Japan, China and India.

These environmental challenges can only be solved by an international cooperation. Foreign investment to developing countries may cause them to even lower their environmental resource protection to attract investors from all over the world. The developing countries are the place for toxic waste conservation from the developed countries, as well as for misuse of various pharmaceuticals and pesticides that are prohibited in the developed world. It could lead to further race to the bottom in the developing countries. The global race to the bottom have impact in both developing and developed economies as these corporations look around the globe for the lowest wages, the most insecure labour with the lowest regulation of environmental and health and safety conditions.

In this paragraph the light is on the environmentalism, where it is however important to notice that developing countries do have interest in preservation of their unique environment, for example Peru and Ethiopia encourage economic growth via investments such as ecotourism, education experiences for visitors and via use of low impact ways to use and protect their natural resources. We again should recall the idea that if countries higher their environmental requirements, they become less attractive to multinational corporation as the cost production will increase.

Air: Travels and commuting from one part of the world to another is very common also in the production. Global traffic is now higher than ever, causing increased levels of pollution. Global regulators now play a role and work on agreements such as Kyoto protocol was and are difficult to be discussed and agreed on.

Many other environmental damages are left to be discussed but these are global problems and they do not arise only from the rising exports from the developing countries.

Depending on the stage of development, societies belong to different groups with various levels of importance to the environmental sustainability. Societies where basic materialistic needs were covered, consider the preservation of natural resources as more important issue than societies which are so called materialistic, which did not achieve economic stability yet. However even if we solve the problem of the developing countries, the level of damage of the developed countries remains still too high. It is important to also limit the burden of the environmental damage which is beard by developing nations on the behalf of the developed ones.

Agglomeration of production: It is the third main concern of the anti-globalization movements. It is very likely that the manufacturing sector will be moved away from developed countries and concentrated in the developing countries given the continuous decrease of the trade cost with rising globalization. The rising economies of scales are essential to explain the uneven agglomeration of some economic activities. The explanation of the phenomenon can be seen in the Model of Economic geography, especially in the new theory. Even if the comparative advantage of the country is not significant, given the imperfect market condition, the agglomeration is possible. This idea was captured by for example Paul Krugman and explains why developed countries choose developing countries for their production.

Natural comparative advantage often causes spatial agglomeration, however here we would like to recall something different. A small initial asymmetry or difference between regions can be later emphasized by cumulative causation or other interaction and make the difference between these regions/countries larger. Behind this thesis, there is an important remark that current developing countries were chosen by the history to have agglomerated certain economic activity.

It seems to have a second/spreading effect over near regions, which can explain why the manufacturing production from Japan has spread across the rest of the East Asia – the investors were seeking for other low wage opportunities? The idea behind this seems to be rather unfair. Why should developing countries remain the countries of low-paid labour and destroyed environment? If multinational organizations do not allow them to develop in a proper way, they will stay in this position and their progress will be doomed.

It is however unfortunate for developed countries also as it leads to lower wages there in these sectors or even potential dissolution of certain production from these countries as the production will be concentrated elsewhere. The dirty production will be moved to the countries with the lowest environmental policies, not considering the fact that environmental damage is a cross-boundary problem. Good example of the movement of the production is the case of India, where ships from all over the world are broken. This ship-breaking industry not only caused occupational injuries but it damaged the water around the area of Alang in India. Locals are however proud they have new industry and new jobs. In the modern world this is not considered as a proper attitude as they do not consider the high cost behind. This idea however does not sound too bad to multinational organizations which often have monopolistic power and only seek to maximize profits, which is often disastrous to the developing countries.

Last example is sufficient to show how difficult it is to fight against the unfairness of the global trade for the country itself and the individual. Moreover it proves that these developing countries often do not want to fight for equal standards with developed countries. Inefficient labour unions, low political power of developing countries, debt and other problems are forcing these developing countries to maintain this status of being used for unholy purposes. In this essay I have considered many reasons for abandoning free trade, even though in general free trade is considered by economists as welfare improving. There are many analysis proving this statement, however the newly arising analysis of winners and losers is showing the darker side of the growing free trade. It is a very broad issue and the “yes or no” answer still does not exist due to the various movements and schools of opinions.

References

Brander, James; Barbara Spencer (1985). "Export Subsidies and International Market Share Rivalry". Journal of International Economics 18.

Krugman and Obstfeld, (2006) International Economics, Pearson Education Internat.

Blanchard (2005), Macroeconomics, Prentice Hall

Suranovic S. 2011. International Economics: Theory and Policy : Chapter 11: Evaluating the Controversy between Free Trade and Protectionism. Flatworld Knowledge. 1st edition

Slaughter M.Swagel P. 2007. “Does globalization lower wages and export jobs?” International Monetary Fund

Garrett D.Brown. 2002. “The Global threats to worker´s health and safety on the job”. Social Justice. Vol.29, No.3

TutorGig Encyclopedia. Globalization. http://www.tutorgig.info/ed/Globalization. 14th April 2012

Venables, Anthony , 2008. "New economic geography," The New Palgrave Dictionary of Economics , 2nd Edition.

With the rise of manufactured exports from developing countries, a new movement opposed to globalization has emerged, giving arguments to governments for strategic trade policy. Comment on this assertion.

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