International Political Economy

1. International Political Economy

2. Termiflex, Wally, and the EU MBB-Aerospatiale Surface-to-Surface Missiles Termiflex Industrial Computer Terminals Volvo Robotics Rediffusion Flight Simulators

3. Factors/Issues of Globalization Economic Cultural Political Legal Competitive Technology

4. GlobalizationThe Objective Realities • The integration of national economies into the international economy through: • Trade • Foreign direct investment • Capital flows • Technology

5. Global Corporate “Chess Board”

6. GlobalizationThe Human Factor • …driven by a combination of economic, technological, sociocultural, political and biological factors • …the transnational dissemination of ideas, languages, or popular culture

7. Fair Trade and Outsourcing …in the media In politics…

8. Globalization and Life Off-shoring manufacturing to Honduras, El Salvador

9. Globalization and Life In-shoring of manufacturing to Louisiana, Texas via immigration

10. Globalization and Life Appliance Call Center Bangalore Unemployment Center Detroit

11. GlobalizationSome Unintended Consequences • Unemployment in some industry sectors and some skill levels • Bankruptcies in some industry sectors • Resurgence in economic and cultural nationalism • Brain drain • Easier transmission of H1N1 virus • Transnational pollution and CO2 flows

12. What is Globalization?Perspective of Countries • How are countries connected globally? • How big is globalization? • Why does it happen? • Who’s doing it? • Is it connected to prosperity?

13. A.T. Kearney/Foreign Policy Globalization Index

14. Foreign Policy and A.T. Kearney Annual Globalization Report Ireland Global Top-20 Singapore U.S. Czech Republic • Globalization Index = • Political Engagement + • Technology Contact/Transfer + • Personal Contact + • Trade and FDI Politica

15. Merchandise Exports(US$ billions) U.S. Germany Japan France UK Kor Mex Ire

16. Merchandise Imports (US$ billions) U.S. Germany Japan UK France Kor Mex Ire

17. Foreign Direct Investment - Out(% of World Total) U.S. UK Germany Japan France

18. Foreign Direct Investment - In(% of World Total) U.S. UK France Germ Japan

19. Comparative Advantage • Germany: • 10 units of factor inputs (labor & capital) to produce 1 keg of beer • 2 units of factor inputs (labor & capital) to produce 1 box of pretzels • United States: • 15 units of factor inputs to produce 1 keg of beer; • 5 units of factor inputs to produce 1 box of pretzels; Which country should manufacture and export only beer? Which country should manufacture and export only pretzels?

20. Comparative Advantage Germany: 10 laborpretzels = 5 pretzels per beer * beer 2 labor US: 15 laborpretzels = 3 pretzels per beer * beer 5 labor = = * Opportunity Costs … price of beer in terms of pretzels, using labor as common denominator

21. Comparative Advantage Germany: 10 laborpretzels = 5 pretzels per beer beer 2 labor US: 15 laborpretzels = 3 pretzels per beer beer 5 labor • Germany has absolute advantage in both beer and pretzels • U.S. has comparative advantage in beer, and should manufacture and export beer to Germany • Germany has comparative advantage in pretzels, and should manufacture and export pretzels to the U.S.

22. Growth in TradeIndexed: 1950 = 100 1600 1200 800 400 100 Trade GDP 1950 1960 1970 1980 1990 2000 2010

23. What is Globalization?Perspective of Multinational Corporations(MNCs) • Motivations for global operations and reach • How are companies engaging in globalization? • How big is their involvement? • What are the effects on managers, customers, employees, profits, etc.?

26. Extent of Globalization for MNCs

27. Orange = Percentage of exports to the U.S. by intra-firm trade (via FDI) to total exports (This is NOT volume of total exports) Green = Globalization Index

28. Growth in TradeIndexed: 1950 = 100 1600 1200 800 400 100 Trade GDP 1950 1960 1970 1980 1990 2000 2010

29. Trade and Investment Policy

30. Free Trade?

31. How Nations Influence Trade and Investment Activity Through Policy • Overt/Visible Policies • Supporting/Strategic Policies • Follow-up Questions: • How well to these policies work? • What are the side effects? • Retaliation? • How might managers of MNCs respond?

32. Overt Policy Alternatives • Restrict Imports (tariffs, quotas, VERs) • Restrict FDI • Incoming (F/X controls, local content) • Outgoing (tax code, expatriation disincentives) • Restrict Exports (DoD restrictive munitions) • Export Promotion (subsidies, tax credits) • Import Promotion (tax credits, favors) • FDI Incentives (subsidies for infrastructure, training & development, market access) • Preferential Govt. Procurement

33. Cost of Import ProtectionJapanese Rice Market Domestic Supply World Price Domestic Demand Domestic Quantity Produced Domestic Quantity Consumed

34. Cost of Import ProtectionJapanese Rice Market Domestic Supply Tariff Price World Price Domestic Demand New Domestic Quantity Produced New Domestic Quantity Consumed

35. Cost of Import ProtectionJapanese Rice Market Domestic Supply Deadweight Loss Tariff Price Extra Revenue Tariff World Price Domestic Demand New Domestic Quantity Produced New Domestic Quantity Consumed

36. Cost of Import ProtectionJapanese Rice Market Domestic Supply Deadweight Loss Tariff Price Extra Revenue Tariff World Price Domestic Demand New Domestic Quantity Produced New Domestic Quantity Consumed # Jobs saved? At what price?

37. Cost to Domestic Consumers per Job Saved Extra Revenue for Firm Tariff Revenue to Government Deadweight Loss + $800 million $800 million 10,000 jobs = $80,000 /job

38. What is Globalization?Perspective of Consumers vs. “Regular Joes” • Outsourcing • Cheaper Products vs. Job Loss • Fair Trade -- Product and Production Standards • Working standards • Living wage • Environmental standards

39. Outsourcing Bogeyman • “…a new way of doing international trade…a good thing” Gregory Mankiw, Bush Administration Economic Adviser • “…CEOs who outsource are economic ‘Benedict Arnolds’” John Kerry, 2004 Presidential Candidate • “…owe apology to every worker in America” Tom Daschle, 2004 Senate Minority Leader Job Losses in Manufacturing…? • What kind of jobs? • Causal factors • Outsourcing vs. technology and productivity gains? • Would occur anyway

40. “Voluntary” Export Restraints

41. Managerial Responses to VERs TMM-K Georgetown • Shift Production to U.S. • Sell pricier, more profitable cars 1971 Honda 2008 Acura MDX

42. FDI: Host Country Perspective

43. FDI: Home Country Perspective

44. Economic Integration

45. Global Linkages Country A Country B Policy Linkages

46. Global Linkages Country B Country A Integration

47. Regionalization of Economic Activity • Levels of Economic Integration • Free Trade Area • Customs Union • Common Market • Economic Union • Questions and Issues • Effects on trade and FDI patterns • Evolution toward worldwide integration • Impact on management of MNCs

48. Trade in Isolation 20% 15% Prevailing Tariff Rates on Imports 10% 33% 40% 100%

49. Free Trade Area 20% • No tariffs among members • Tariffs with non-members unchanged 33% 100%

50. Trade and Investment in Isolation Imports 33% 40% Cheapest Producer