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

1INTERNATIONAL

ECONOMICS, ECO 486• NAFTA• Int’l

Factor Mobility– DFI

– Migration

2Learning 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

5Aggregate 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

6Aggregate 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

7Industry 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

8Table ES-2: Industry trade

Number ofIndustries

Sig.Increase

Sig.Decrease

Not Sig.Affected

US Exports-- Mexico

10 0 78

US Imports-- Mexico

16 7 92

US Exports-- Canada

10 8 95

US Imports-- Canada

13 8 94

9Labor

• 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

10Productivity

• Lacked data for direct analysis• US productivity gains

– Where strong competition from imports

11Qualitative 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

13Scope 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

15Motives 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

16Motives 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

17Motives 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

18Does DFI Substitute for Trade?

• 1996 WTO report found no support for a negative relationship between a country’s DFI and its exports

19DFI 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

20Host 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

21Host 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

22Source 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

23Conclusion

• Unobstructed international capital flows enhance world welfare

24Combining Traditional Trade

Theories & MNCs• Traditional Trade Theories

– assume factors are immobile

• Commodity Composition of Trade– Can it still be explained?

25Combining 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

26Combining 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

27International 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?

29Immigration

• 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

30Immigration

31US Immigration

• Once mainly European

– Directly

– Indirectly

• Mexico

– > ¼ of legal immigrants

– + 200,000 to 300,000 others

32Immigration

33Immigration

• 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

34Immigration

• 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

35Factor Price Equalization

Quantity of labor (millions)

Wag

e ra

te (

dol

lars

per

hou

r)

0Quantity of labor (millions)

Wag

e ra

te (

dol

lars

per

hou

r)

5

10

15

20

25

75 100 125 150 175 0

5

10

15

20

25

25 50 75 100 125

8 8

1LDUS LDM

37…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

38Immigration

• 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.

39Immigration

• 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

42Multi-National Corporations

True or False?• Globalization made MNCs more

“footloose” than ever.

• Partly true

43Multi-National Corporations

True or False?• MNCs are, first and foremost, creatures of

their home countries.

• Not always

44Multi-National Corporations

True or False?• All MNCs are large corporations.

• False

45Multi-National Corporations

True or False?• Markets dominated by MNCs are

impenetrable to rival companies.

• False

46Multi-National Corporations

True or False?• Only some industries are going global.

• False

47Multi-National Corporations

True or False?• MNCs are bigger than their assets.

• True

48Multi-National Corporations

True or False?• MNCs are inherently exploitative.

• Yes and no…

49Multi-National Corporations

True or False?• Investments by MNCs are good,

investments by international money managers are bad.

• Not necessarily

50Multi-National Corporations

True or False?• MNCs are creations of wealthy countries.

• Not anymore

53WTO News Items

• “Millennium Round” Agenda?

• NTBs (e.g. apples)

• Activists concerned about– Environment

– Workers’ rights

– Human rights

• Comments

54WTO 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

55

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

56

Arizona Republic, Sunday editorial cartoon, December 1995

57