TRADE, TRADE AGREEMENTS, & IMMIGRATION Simple Trade Model Logic behind trading blocs Trade Organizations & U.S. Trade Agreements Trade Agreements and Labor Labor Standards Immigration
WHY NATIONS TRADE? • Differences in factor endowments • Countries differ in endowments in natural resources, infrastructure, capital availability, human capital accumulation • Benefits from economies of scale • By specializing, countries can produce on a large scale
Simple trade model • Assumptions: • 2 good world: e.g., food and clothes • 2 types of inputs – capital and labor • Regions differ in their endowments of each • Both capital and labor are of fixed quantity and immobile • Constant returns to scale • Consumers in both countries have same taste • Can combine capital and labor to produce some mix of food and clothes: result is a production possibilities function.
Comparative Advantage • Regions (countries) differ in the quantity/quality of inputs • Costs of producing one good expressed in opportunity costs or foregone production: - I.e., The cost of producing one unit of A means foregoing the production of x units of B • Country X is said to have a comparative advantage in producing Good A if the foregone output of Good B is lower than the foregone output of Good B in Country Y. • Note: No $$ Discussed
Trade as Mutually Beneficial • Notion is that countries differ in the relative costs of production. • Free trade does not lead to all production being shifted to the lowest cost location
Predictions of Simple Model (Heckscher-Ohlin hypothesis) • Countries will export goods in which they have a comparative advantage and import those in which they do not. • Free trade leads to specialization of production according to comparative advantage • Maximized Consumer Welfare (lower product prices)
Implementing Free Trade Introduction to Trading Blocs
Trading Blocs • Definition: Preferential trading agreements • Members of bloc favored over non-members • Expected Advantages to trading blocs • Creation of new markets for producers • Lower priced goods/services for consumer • Promote political stability & economic prosperity • Much of world divided into regional trading blocs
4 TYPES OF TRADING BLOCS • Trade Preference Association: Members lower govt. barriers on goods from other members only (e.g., Preferred nation designation). • Free Trade Area: Members eliminate barriers against other members but maintain individual barriers against goods from non-members (e.g., NAFTA).
4 TYPES OF TRADING BLOCS, CONT. • Customs Union: Members eliminate govt. barriers against members imports and establish common tariffs against non-members (e.g, EC, Mercosur). • Common Market: Barriers to all transactions removed b/n members, incl. transfers of labor, capital, & services. Common barriers against non-members (e.g., EU).
THEORETICAL PROS & CONS OF TRADING BLOCS: Advantage • Trade Creation: Members import goods they previously did not import • Efficiency enhancing: Specializing production according to comparative advantage • Lower product prices for consumers in bloc • Efficiency enhancing • Economies of Scale • Larger markets allow producers to enjoy economies of scale -> lower production costs • Efficiency enhancing
THEORETICAL PROS & CONS OF TRADING BLOCS: Disadvantage • Trade Diversion: • Members now import goods from other members that were previously imported from outside of bloc • Assumed that switch is from more efficiently produced to less efficiently produced goods • Not efficiency enhancing
Features of Trading Blocs • One or more small countries linked to larger country (or bloc itself) • Small countries often trying to make internal reform • Ultimate goal of deeper integration • Degree of liberalization relatively modest • Smaller countries usually making greater concessions
EMPIRICAL RESULTS ON TRADE CREATION • Trade creation more likely to occur the: • Higher pre-bloc tariffs & trade barriers • More member countries • More competitive the countries prior to forming bloc • Closer the countries geographically
WHY PUSH FOR BLOCKS IF BENEFITS MIXED • Product of political process where beneficiaries represented • Way to reduce political conflicts • Way for developing countries to reduce dependence on developed countries • Ideological commitment
U.S. Trade Agreements • Free Trade Agreement (FTA) • United States/Canada (1/1989) • North American Free Trade Agreement (NAFTA) (1/1994) • United States/Canada/Mexico • Fast Track • FTAA, CAFTA
Fast Track Authority • Executive branch delegated authority to negotiate terms of trade, enter into agreements and change write legislation to reform federal laws as needed • Congress can suggest goals but can only vote on entire agreement • Recent Use • Used to negotiate NAFTA • Requested and Denied, March 1999 • Requested and Approved 2002: expected bilateral pact with Singapore and inclusion of Chile in NAFTA • Slow down in momentum for western hemispheric free trade agreements despite US 2005 deadline
Barriers reduced or eliminated by FTA and NAFTA • Fiscal Barriers: Eliminates or reduces taxes on partner goods and subsidies to native goods • Quantitative Barriers: Quotas on Imports of partner goods eliminated • Transaction costs associated with Trade: Checking goods at border, paperwork, etc. • Some Non-tariff Trade Barriers
FTA Promote bilateral trade Improve climate for bilateral investment Resolve specific trade difficulties NAFTA Expand goods mkt. Expand invest. opp Stabilize Mexico for US investment Reduce illegal immigration Develop both sides of border Reasons for agreements
WORKPLACE ISSUES IN TRADING AGREEMENTS: AN AFTERTHOUGHT • Canada: Expect slight increase in US employment from more competitive firms & goods substitution • Mexico: US employment increase from “trickle-down”: Increased demand in Mexico for US goods => increase in US employment.
LABOR STANDARDS IN FREE TRADE AGREEMENTS • Link b/n fair labor standards & trade policy • Notion of “social dumping” - League of Nations in 1927 • Policies to “harmonize” and eliminate competition based on failure to respect international standards - ILO in 1950s • Worker rights not part of Uruguay talks and tangential to NAFTA
WORK UNDER NAFTA • North American Agreement on Labor Cooperation (NAALC): • Labor side agreement • Point: to protect national sovereignty & right to issue labor standards • Agreement to protect: right to bargain, minimum labor standards, safety & health • Disputes resolved by multi-step arbitration process
Economic Framework:THEORY OF ECONOMIC LOCATION • Basic premise of location theory: • Firm locates at minimum cost location • Considers production function, spatial variation in factor prices and capital availability, proximity to inputs & markets, transportation costs
Labor as a Locational Attribute • Cost • Compensation and Labor Standards • Will affect “demand” for a location • Heterogeneity • Skill heterogeneity: will encourage specialization • Labor Standards • Social contract between nation & its workforce
THEORY OF ECONOMIC LOCATION, CONT. • Labor Mobility with NAFTA: • Severely restricted • Some professional services mobile • Implication of Labor Immobility • Labor as a locational attribute thus part of each country’s comparative advantage
Conceptual Bases for Labor Standards • 2 Bases for defining labor standards • Rights-based • Labor standards as codification of human rights –Reflect world-wide norms for treatment of labor • Economic Regulation • Modifying economic behavior; limits choices of producers &/or consumers • Usually penalties for non-compliance • Set in context of comparing importing and exporting countries
Rationale for Labor Standards • Use of police power of state to abridge individual liberties if there is a public benefit • Poor conditions of employment associated with weak bargaining power of employees -- a social ill that could be addressed by state intervention
DEFINITION OF LABOR STANDARDS • A governmentally established procedure, term or condition of employment, or employer requirement that has as its purpose the protection of employees from treatment at the workplace that society considers unfair or unjust. • They are mandatory - governmentally imposed and enforced
3 Basic Models of Labor Standards • Within-Country • Legislation or Collective Bargaining • Cross-National • Legislative, Trade sanctions, Multilateral agreement • Voluntary Standards • Codes of corporate conduct
WHY ARE LABOR STANDARDS-RELATED ISSUES IMPORTANT? • ECONOMIC PERSPECTIVE • PRODUCERS: Cost concerns • EMPLOYEES: Compensation & Welfare • POLICY PERSPECTIVES • STRATEGIC QUESTIONS: International competitiveness • SOVEREIGNTY QUESTIONS: Ability to make laws consistent with national welfare and values
Empirical Research on Labor Standards Global Organizations Canada – United States Comparison Block & Roberts United States – European Union Comparison Block, Roberts, & Berg
Global Trade Organizations: WTO • World Trade Organization (WTO) • Established 1995; ~142 countries • Objectives: • facilitate liberalization of trade; • eliminate most favored trade status arrangements; • encourage competition; • help with development of developing countries. • Advocate of multi-lateral agreements
Global Trade Organizations: ILO • International Labour Organization (ILO) • Established by Treaty of Versailles in 1919; 175 member countries. • Purpose: promotion of social justice and internationally recognized human and labor rights • Mechanism: Conventions ratified by member countries
Fundamental ILO Conventions • Freedom of Association (# 87, 98) • Abolition of Forced Labor (#29, 105) • Equality (#111, 100) • Elimination of Child Labor (#138, 182)
U.S. – Canada Comparison:Key Questions • ARE THERE DIFFERENCES IN CANADIAN AND U.S. LABOR STANDARDS? • IF SO, WHAT IS THE MAGNITUDE OF THOSE DIFFERENCES?
Difference in Statutory Basis between U.S. & Canada • U.S • For most standards, Federal govt. is mandatory floor • Some standards set at state unjust dismissal • Canada • Provincial sovereignty on most standards • Exceptions: Employment (unemployment) insurance & standards governing sectors that operate inter-provincially
STANDARDS THAT REQUIRE EMPLOYER PAYMENTS TO EMPLOYEES OR TO GOVERNMENT MINIMUM WAGE OVERTIME/HOURS OF WORK PAID-TIME OFF UNEMPLOYMENT INSURANCE WORKERS’ COMPENSATION STANDARDS THAT CONSTRAIN EMPLOYER ACTIONS COLLECTIVE BARGAINING EQUAL EMPLOYMENT /EMPLOYMENT EQUITY UNJUST DISMISSAL OCCUPATIONAL SAFETY AND HEALTH LABOR STANDARDS ANALYZED
SUBSTANTIALLY HIGHER IN CANADA PAID-TIME OFF COLLECTIVE BARGAINING UNJUST DISMISSAL SLIGHTLY HIGHER IN CANADA WORKERS’ COMPENSATION EQUAL EMPLOYMENT / EQUITY OCCUPATIONAL SAFETY AND HEALTH SIX LABOR STANDARDS HIGHER IN CANADA THAN IN U.S.
TWO STANDARDS COMPARABLE IN CANADA AND U.S. • MINIMUM WAGE • UNEMPLOYMENT INSURANCE
ONE STANDARD HIGHER IN U.S. THAN IN CANADA • MAXIMUM HOURS FOR OVERTIME
U.S. versus EU: Prevailing views • Trade-off between worker protection and unconstrained (and therefore efficient) market forces • In relative terms: • U.S. seen as placing higher value on market • EU seen as placing higher value on worker protection
Differences in political structure • U.S. – sovereign country • Federally-set standards binding lower bound in all states • Enforced (usually) by federal agencies • EU – political union of member countries • European directives issued centrally • Member countries each pass legislation and structure enforcement.
Wage rates (min. wage) Working time Paid time off Unemployment insurance Collective bargaining Anti-Discrimination Unjust dismissal Occupational safety & health Large scale layoffs Employee involvement Parental/family leave Transfers of ownership Standards analyzed: Those promulgated at federal or council level
EU higher: Collective Bargaining Unjust dismissal Occupational Safety & Health Employee involvement Transfer of Ownership Paid time off U.S. higher: Minimum wage Unemployment insurance About the same: Discrimination Large scale layoffs Parental leave Results
Understanding Offshoring • Why now: • India and China have long had wage advantage • May be improving in education, though still developing countries • Driver: lower transportation and communication costs • Off-shoring concentrated in IT, phone & on-line services
LABOR IMMIGRATION Brief history of U.S. Law Who migrates and why Effect of Immigration on U.S.
Recent History of Immigration Law • Immigration Acts of 1921 and 1924 • 1924 - U.S. Border Patrol established • Immigration & Nationality Act of 1952 • Set basic U.S. immigration law framework • Defined categories of non-U.S. born individuals • 1965 Amendments • Abolished quotas & changed priorities • Immigration Reform and Control Act of 1986 • Major reform of immigration law • Created amnesty program & employer sanctions • Marriage penalty (separate law)
Current Law • Immigration Act of 1990 • Major reform: set cap on number of immigrants (675K) • 1993 – Lottery for green cards • permanent resident visa • Priorities: • Family reunification, special skills, refugees