Global Trade & Global Finance

1. Global Trade & Global Finance

2. This week • General remarks • Implementing free trade • Some controversies • Global finance

3. General remarks

4. $ The specificity of capitalism Investment • Motivation = money • Private entrepreneurship • Limited government role • in regulating business • in offering services (education, healthcare, social services, parks, transit, etc.) • The need to expand: from domestic market to global market Production Re-investment Profit Sale

5. A “perfect” system (supposedly) • “Division of labour” • “Comparative advantage” • Equilibrium of supply & demand • A win-win situation for all involved

6. Implementing free trade

7. Official goals of free trade • Stated in treaties’ preamble (see North American Free Trade Agreement) • more markets, more customers • more production, more jobs • better wages & salaries • better working conditions • cheaper products • more environmental protection • More growth as measured by the GDP Canadian GDP 2011: $1.4 trillion

8. Most-Favoured Nation treatment Refers to treatment of a state’s trade partners Equality of all parties & their producers & products (GATT 1947, I(1), NAFTA, Ch. 11) The most favoured sets the standard for the rest National Treatment Overcoming protectionism Equality of domestic & foreign products (GATT 1947, art. III) Equality of domestic & foreign investors (NAFTA, Ch. 11) Exceptions Two core principles

9. Tariffs & technical barriers to trade Tariffs (a.k.a. duties) • Traditional protectionist measure • Taxes on imported products • Raises the price • ...making them less affordable than domestic products Technical barriers to trade (a.k.a. non-tariff barriers) • More creative measures • Emerged in the 1960s • Bogus regulations • … that are not always bogus

10. Trickier to adopt Health, safety & environmental regulations • Scientific evidence necessary • defining “evidence” • 100% certainty doesn’t exist • Some cases: • NAFTA: Metalclad vs. Mexico (toxic waste) • WTO: Canada + US vs. European Union (beef raised with hormones) • NAFTA: Canada & MMT (health/cancer)

11. Dumping & subsidies Embraer ERJ 145 • Ways to undermine competitors Bombardier CRJ 700 • Dumping • Done by corporations • Selling for less than cost • A gamble • Subsidies • Done by governments • Support for own corporations • Makes products cheaper

12. Services • What is a service? • Fastest growing sector in many countries • Controversies: health & education

13. Performancerequirements • Conditions imposed on investors to invest in a state • Promoting national… • content • re-investment • business • jobs 2000 Chevrolet Camaro

14. Dispute settlement mechanisms • Negotiation, mediation & formal complaint • Dispute resolution panels • tribunal-like procedure • panelists: “well-qualified individuals” • Controversies • secrecy • panel decisions & enforcement problems • international law vs. economic power • NAFTA: corporations can sue governments directly

15. Controversies

16. Corporations: powerful actors • Possess capital • Corporation & investors: same thing • Can create jobs but want • favourable “investment climate” • “investor-friendly” policies • low taxes • limited regulations • hardworking, disciplined, skilled & cheap workers

17. You (and me) and the stock marketYou are also consumers of products made & sold by these corporations Corporation 1 Corporation 2 Corporation 3 Corporation 4 Corporation 5 Corporation n Insurance company Insurance policy purchased by students association (ex. dental & drug plan) Mutual funds (investment funds, incl. RRSPs, RESPs) Canada Pension Plan (CPP) Régime des rentes du Québec (RRQ) Students association Insurance policy purchased directly (ex. car insurance, home insurance) Included in tuition fees Taken off paycheque YOU

18. The vulnerability of workers • Pressures on workers by employers • ask more hours & overtime • offer lower wages & conditions & no benefits • refuse to deal with unions (McDonald’s, Wal-Mart) • use of lockouts (keeping workers out) • Government changes to labour laws • weaken unions & strengthen bosses • suspend right to strike (back-to-work legislation) • Government changes to unemployment insurance & welfare programmes

19. Difficulties for society or parts of it • Lower taxes = less revenue for governments • Less money for services • education • healthcare • social services • public transit • infrastructure: roads, bridges, water distribution • Less government regulations or less enforcement • health & safety • environmental laws

20. Income and wealth distribution in Canada, 1950s-2011 • Income & wealth trends & top CEO pay • unchanged or decreasing for most people* • increasing significantly for the top 20% • increasing dramatically for the top 10% • skyrocketing for the top 1% Income distribution for top 500 US companies --executives vs. employees: - Mid-1960s: 41 to 1 - Mid-2000s: 420 to 1 * Despite longer hours, fewer vacations, higher education, more productivity

21. Demonstrations • Hundreds of demonstrations since the 1990s • Turning point: WTO summit in Seattle ’99 • Convergence of groups: labour, indigenous, environmental, women, human rights, etc. • Little impact on government policies

22. Current events: The 2008 crisis, “austerity measures” &the Occupy movement

23. Home buyers & banks • Homebuyers get loan to buy house • A house loan is called a mortgage BANK 1

24. More loans, more risky loans • How banks decide to loan • credit check • income of homebuyers • price of house • expected ability to repay • Changes in US gov policy • Fanny Mae & Freddy Mac • private bank loans & teaser rates: sub-prime lending • “predatory lending”

25. Banks’ relations with other banks • BANK 1 bundles its mortgages into mortgage backed securities • BANK 1 sells MBSs to other banks, who bundle them to sell to still other banks BANK 1 BANK 2 BANK 3 BANK 4 BANK 2 BANK 3 BANK 4 BANK 2 BANK 3 BANK 4 And so on including foreign banks

26. Effects on the rest of society & the economy • Banks play several roles • loans to small businesses • loans to contractors • student loans • car loans • When homebuyers can’t pay back BANK 1 • …BANK 1 can’t pay back BANK 2, 3, 4, etc. • who can’t play their roles • ripple effect and cascade of bankruptcies

27. Bailout of banks by US governments • “Too big to fail” • Stopping the cascade of bankruptcies • One major bank allowed to fail: Lehman Brothers (many smaller ones, too) • Troubled Assets Recovery Program (TARP) • money from taxpayers given to banks • money borrow by US government given to banks • Allowing bank to resume lending US$700 billion

28. Bailout of US car companies by US and Canadian governments • General Motors, Chrysler, Ford • A separate problem • Made worse by the crisis • Cars few people wanted to buy • big, gas-guzzling cars • less appealing than Japanese cars • Pay & benefits cuts for workers

29. Economic stimulus: Restarting the economy • Banks & car companies survive • … but consumers still not spending • Gov. spending makes up for lack of spending • Until private spending resumes No buyers No need to produce No income (wage & salaries) No investment, no need for workers No job creation

30. Meanwhile… • Banks’ & car makers’ profits highest ever • banks that survive buy out failing ones • salaries & bonuses for executives higherst ever • Stimulus $ = borrowed money = gov. debt • must cut spending to pay back debt • reduce burdens on business (labour, environment, safety regulations, etc.) • Some (many? Most?) people very annoyed

31. The Occupy movement • Origin: Adbusters Magazine • The slogan: “We are the 99%” • as opposed to the 1% • sacrifice the many formistakes of the wealthy • The limitations: • illusion of being one united group • the 99% are very diverse • not one alternative set of policies (yet)

32. Global finance

33. Money: a means of payment • Global finance: circulation of money around the globe • Uses of money • currency  other currency  product • currency  other currency  investment • The need for equivalencies • The exchange rate

34. Floating exchange rates • No capital controls • Private financial markets • Restricted government role • Necessary for global trade & investment Look up an exchange rate at http://www.oanda.com/

35. Canadian oil & gas exports, the value of the Canadian dollar, and manufacturing • Thomas Mulcair’s comments • The “Dutch disease” • Oil & gas and the Canadian dollar • The side-effect of a high Canadian dollar for other exporting industries

36. Conclusion: Why does this matter? Global trade • Inclusion in the global economy is a way to find markets for a country’s companies’ products • Inclusion in the global economy is a way to obtain products not made in one’s country • A mixed bag at best Global finance • Inclusion in the global economy is a way to find places to invest • Inclusion in the global economy is a way to obtain investment from outside

37. Appendix 1: Top-10 jobs categories for the next decade • Registered nurses* • Home health aides • Customer service reps • Food preparation • Personal and home care aides • Retails sales • Office clerks • Accountants and auditors* • Nurses aides, orderlies and attendants • Postsecondary teachers** * Good job * * Not as good as you might think Source: US Bureau of Labor Statistics

38. Appendix 2: Measuring prosperity using the balance of payments • 1. Current account • trade balance (exports minus imports) • government transactions and remittances + • 2. Capital flows (capital coming in minus capital going out) • foreign investment received • loans and other capital received + 3. Foreign reserves(foreign currency in the country)