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INTERNATIONAL ECONOMICS, ECO 486

INTERNATIONAL ECONOMICS, ECO 486. NAFTA Int’l Factor Mobility DFI Migration. Learning Objectives. Discuss Chapter 10 & Chapter 10 Homework Review the NAFTA Report Review Chapter 9, International Mobility of Productive Factors , from Kreinin’s International Economics

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INTERNATIONAL ECONOMICS, ECO 486

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  1. INTERNATIONAL ECONOMICS, ECO 486 • NAFTA • Int’l Factor Mobility • DFI • Migration

  2. Learning Objectives • Discuss Chapter 10 & Chapter 10 Homework • Review the NAFTA Report • Review Chapter 9, International Mobility of Productive Factors, from Kreinin’s International Economics • Explain the effects of immigration on the wages of immigrants and native Americans

  3. Aggregate Effects of NAFTA • NAFTA took effect January 1, 1994 • After three year, most tariff provisions in place • Reductions in NTBs continue • Most “rulemaking” obligations are in force • ITC found no effects on • US GDP • US growth rates • limited time period • relative size of US economy

  4. Aggregate Effects of NAFTA • US Imports from Mexico have increased +1% in 1994 +5.7% in 1995 +6.4% in 1996 • US Exports to Mexico have increased +1.3% in 1994 +3.8% in 1995 +3.24% in 1996 • No significant effects on trade with Canada

  5. Industry trade • Studied 200 industries accounting for >85% of US trade with its NAFTA partners • Several industries show increased trade • A few industries show decreased trade • See Table ES-2

  6. Table ES-2: Industry trade

  7. Labor • No effects on agg. employment or earnings • 29 of 120 manufacturing industries showed some change in hourly earnings or hours worked. • Found seven industries where lower import prices may cause job losses • Found four industries where lower import prices may increase US employment • complements or productivity effects

  8. Productivity • Lacked data for direct analysis • US productivity gains • Where strong competition from imports

  9. Qualitative Analysis • For 59 of 68 industry sectors, NAFTA had a negligible effect • Nine exceptions: • grain and oilseed • raw cotton • textile mill products • apparel • women’s footwear • appliances • vehicles • vehicle parts • leather • Services -- only financial services

  10. Scope of DFI • DFI -- Direct Foreign Investment • investments that give company headquarters control over the foreign subsidiary • MNC -- Multi-National Corporations • 40,000 parent firms • 250,000 foreign affiliates • Global sales = $5.2 trillion in 1992 • Stock of DFI = $2.6 trillion 1995

  11. Motives for DFI • Profit expectations (Profit = Revenue -Costs) • Revenue • DFI may improve access to foreign markets • Differing growth rates • Rapid US growth ‘83-’89 attracted DFI • Marketing considerations

  12. Motives for DFI • Cost reduction through DFI • Obtain raw materials • unavailable or expensive at home • complementary to home resources • may raise productivity of home’s K & L • Lower labor costs • Lower transportation costs • perishable products & • products with low value to weight ratio

  13. Motives for DFI • Cost reduction through DFI • Special tax treatment • US foreign tax credit • Transfer pricing to avoid taxes • Avoid tariffs and NTBs • When a large company moves abroad, its suppliers may follow • US anti-trust laws may block a merger at home, encouraging merger with foreign companies

  14. Does DFI Substitute for Trade? • 1996 WTO report found no support for a negative relationship between a country’s DFI and its exports

  15. DFI and World Welfare • Free movement of resources benefits the world economy • DFI (K) is attracted by higher profits • K flows from where it is abundant to where it is scarce • MPPK in source < MPPK host country • Flows cease once returns are equalized • World output increases

  16. Host Country’s Welfare • New capital boosts output • DFI brings other benefits • Managerial skill • Technology • Often trains its labor force • Income, savings, and growth rate increase

  17. Host Countries Resent DFI • Monopolistic exploitation of natural resources • exaggerated fears, but a possibility • producing countries could form a cartel • Most desirable jobs remain in source country (myth?) • Resentment has led to restrictions • performance standards

  18. Source Country’s Welfare • Excessive DFI harms the source country (US) • Returns to capital increase, but • Firms may ignore important risks • e.g., confiscation • Revenue loss to US government • Productivity in US of labor & land may suffer • Offset: DFI in extractive industries complements US factors

  19. Conclusion • Unobstructed international capital flows enhance world welfare

  20. Combining Traditional Trade Theories & MNCs • Traditional Trade Theories • assume factors are immobile • Commodity Composition of Trade • Can it still be explained?

  21. Combining Traditional Trade Theories & MNCs • Assume a MNC employs four factors • two immobile (skilled & unskilled labor) • two mobile (capital& knowledge) • Returns to mobile factors equalized • Immobile factors • Abundance varies across countries • Intensity varies across industries • Labor skills more important than K/L ratio

  22. Combining Traditional Trade Theories & MNCs • Predictions: • Mobile factors attracted to countries with better infrastructure • Transport costs and trade barriers induce the MNC to locate near its markets • IRS limit number of production facilities • Large markets confer a CA on home producers in industries with IRS • Familiar results

  23. International Migration of Labor • Consequences parallel those of capital flows • Loss to source country is less than gain to host country • Labor in the host country loses, but labor in the source country gains • “Brain drain” • Compensation?

  24. Immigration • Sixty million people have migrated from their country of birth • 1.2% of world’s current population • Almost 1/3 of them now live in the US • ~800,000 legal immigrants per year recently • Significant portion of US population growth

  25. Immigration

  26. US Immigration • Once mainly European • Directly • Indirectly • Mexico • > ¼ of legal immigrants • + 200,000 to 300,000 others

  27. Immigration

  28. Immigration • Scale, Origin, and Skills of U.S. Immigrants • The skills of immigrants vary considerably • On average, immigrants are less productive than native Americans • During the 1960’s, new immigrants earned 17% less than comparable Americans — 1970’s – 28% less — 1980’s – 32% less

  29. Immigration • Immigrants and the Labor Market • Immigration increases the supply of labor • Lowers the wage rates of (low-skilled) US workers • Decreases the supply of labor in the source country • This raises their country’s wage rates • Let’s see what would happen with free movement of immigrants

  30. Factor Price Equalization 25 25 Wage rate (dollars per hour) Wage rate (dollars per hour) 20 20 15 15 10 10 8 8 5 5 LDUS LDM 1 0 75 100 125 150 175 0 25 50 75 100 125 Quantity of labor (millions) Quantity of labor (millions)

  31. …Doesn’t Necessarily Occur • Actual effects appear to be small • Restrictions slow immigration • Immigration also increases the demand for labor • Immigrants purchase goods & services • Substitute for native low-skill labor • Complement capital & high-skilled labor • Indeterminate result

  32. Immigration • How Do New Immigrants Perform in the United States? • As a rule, immigrants’ earnings grow more rapidly than the earnings of native Americans. • However, they still do not catch up.

  33. Immigration • Immigrants and the Government Budget • In 1970, 6% of all native households and 5.9% of immigrant households received some form of welfare • By 1990, the percentages were 7.4% for native households and 9.1% for immigrant households • Rate of return on social security contributions higher for immigrants

  34. Multi-National CorporationsTrue or False? • Globalization made MNCs more “footloose” than ever. • Partly true

  35. Multi-National CorporationsTrue or False? • MNCs are, first and foremost, creatures of their home countries. • Not always

  36. Multi-National CorporationsTrue or False? • All MNCs are large corporations. • False

  37. Multi-National CorporationsTrue or False? • Markets dominated by MNCs are impenetrable to rival companies. • False

  38. Multi-National CorporationsTrue or False? • Only some industries are going global. • False

  39. Multi-National CorporationsTrue or False? • MNCs are bigger than their assets. • True

  40. Multi-National CorporationsTrue or False? • MNCs are inherently exploitative. • Yes and no…

  41. Multi-National CorporationsTrue or False? • Investments by MNCs are good, investments by international money managers are bad. • Not necessarily

  42. Multi-National CorporationsTrue or False? • MNCs are creations of wealthy countries. • Not anymore

  43. WTO News Items • “Millennium Round” Agenda? • NTBs (e.g. apples) • Activists concerned about • Environment • Workers’ rights • Human rights • Comments

  44. WTO Enforcement Actions • Over 100 • Only three involve environmental issues • Tuna • Turtles • What was the third? • Environmental restrictions were discriminatory • Revised to be non-discriminatory • Greens concerned about NTBs

  45. Tony Auth, NY Times editorial cartoon, December 2, 1999

  46. Arizona Republic, Sunday editorial cartoon, December 1995

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