TRADE, TRADE AGREEMENTS, &
IMMIGRATION
1.
2.
3.
4.
5.
6.
Simple Trade Model
Logic behind trading blocs
Trade Organizations & U.S.
Trade Agreements
Trade Agreements and
Labor
Labor Standards
Immigration
LIR 809
WHY NATIONS TRADE?
ÖDifferences in factor endowments
Ö Countries differ in endowments in
natural resources, infrastructure,
capital availability, human capital
accumulation
Ö Benefits
from economies of scale
Ö By specializing, countries can produce
on a large scale
LIR 809
Simple trade model
Î Assumptions:
Î2 good world: e.g., food and clothes
Î2 types of inputs – capital and labor
ÎRegions differ in their endowments of each
ÎBoth capital and labor are of fixed quantity
and immobile
ÎConstant returns to scale
ÎConsumers in both countries have same taste
Î Can
combine capital and labor to produce
some mix of food and clothes: result is a
production possibilities function.
LIR 809
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Ehrenberg & Smith Production
Possibilities Diagram
Figure 4A.1
Hypothetical
Production
Possibilities
Curves, United
States
Copyright © 2003 by Pearson Education, Inc.
4-8
LIR 809
Comparative Advantage
Î Regions
(countries) differ in the
quantity/quality of inputs
Î 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
Î 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.
Î Note: No $$ Discussed
LIR 809
Trade as Mutually Beneficial
Î Notion
is that countries differ in
the relative costs of production.
Î Free
trade does not lead to all
production being shifted to the
lowest cost location
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Predictions of Simple Model
(Heckscher-Ohlin hypothesis)
1.
2.
3.
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)
LIR 809
Implementing Free Trade
Introduction to Trading Blocs
LIR 809
Trading Blocs
Î Definition:
agreements
Preferential trading
ÎMembers of bloc favored over non-members
Î Expected
Advantages to trading blocs
ÎCreation of new markets for producers
ÎLower priced goods/services for consumer
ÎPromote political stability & economic
prosperity
Î Much
of world divided into regional
trading blocs
LIR 809
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3
4 TYPES OF TRADING BLOCS
1.
2.
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).
LIR 809
4 TYPES OF TRADING BLOCS,
CONT.
3.
4.
Customs Union: Members eliminate govt.
barriers against members imports and
establish common tariffs against nonmembers (e.g, EC, Mercosur).
Common Market: Barriers to all
transactions removed b/n members,
incl. transfers of labor, capital, &
services. Common barriers against nonmembers (e.g., EU).
LIR 809
THEORETICAL PROS & CONS
OF TRADING BLOCS: Advantage
Î Trade
Creation: Members import goods
they previously did not import
ÎEfficiency enhancing: Specializing production
according to comparative advantage
ÎLower product prices for consumers in bloc
ÎEfficiency enhancing
Î Economies
of Scale
ÎLarger markets allow producers to enjoy
economies of scale -> lower production costs
ÎEfficiency enhancing
LIR 809
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4
THEORETICAL PROS & CONS OF
TRADING BLOCS: Disadvantage
Î Trade
Diversion:
ÎMembers now import goods from other
members that were previously imported
from outside of bloc
ÎAssumed that switch is from more
efficiently produced to less efficiently
produced goods
ÎNot efficiency enhancing
LIR 809
Features of Trading Blocs
Î One
or more small countries linked to
larger country (or bloc itself)
Î Small countries often trying to make
internal reform
Î Ultimate goal of deeper integration
Î Degree of liberalization relatively modest
Î Smaller countries usually making greater
concessions
LIR 809
EMPIRICAL RESULTS ON
TRADE CREATION
Î Trade
the:
creation more likely to occur
ÎHigher pre-bloc tariffs & trade
barriers
ÎMore member countries
ÎMore competitive the countries prior
to forming bloc
ÎCloser the countries geographically
LIR 809
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5
WHY PUSH FOR BLOCKS IF
BENEFITS MIXED
Î Product
of political process where
beneficiaries represented
Î Way to reduce political conflicts
Î Way for developing countries to
reduce dependence on developed
countries
Î Ideological commitment
LIR 809
U.S. Trade Agreements
Î Free
Trade Agreement (FTA)
ÎUnited States/Canada (1/1989)
Î North
American Free Trade Agreement
(NAFTA) (1/1994)
ÎUnited States/Canada/Mexico
Î Fast
Track
ÎCAFTA, FTAA
Î Australia
(2004); Israel (1985); Jordan
(2000); Morocco (2004); Singapore
(2003)
LIR 809
Fast Track Authority
(TPA – Trade Promotion Authority)
Î
Executive branch delegated authority to negotiate terms
of trade, enter into agreements and change write
legislation to reform federal laws as needed
ÎCongress can suggest goals but can only vote on entire
agreement (20 hrs. debate permitted)
ÎInitially created in 1974
Î
Recent Use
ÎUsed to negotiate NAFTA
ÎRequested and Denied, March 1999
ÎRequested and Approved 2002: used in bilateral pact with
Singapore and attempted inclusion of Chile in NAFTA, CAFTA
(2004)
Î
Slow down in momentum for western hemispheric free
trade agreements despite US 2005 deadline
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Barriers reduced or eliminated by
FTA and NAFTA
Î Fiscal
Barriers: Eliminates or reduces
taxes on partner goods and subsidies to
native goods
Î Quantitative Barriers: Quotas on
Imports of partner goods eliminated
Î Transaction costs associated with Trade:
Checking goods at border, paperwork,
etc.
Î Some Non-tariff Trade Barriers
LIR 809
Reasons for agreements
Î FTA
Î Promote bilateral
trade
ÎImprove climate
for bilateral
investment
ÎResolve specific
trade difficulties
Î NAFTA
ÎExpand goods mkt.
ÎExpand invest. opp
ÎStabilize Mexico
for US investment
ÎReduce illegal
immigration
ÎDevelop both sides
of border
LIR 809
WORKPLACE ISSUES IN TRADING
AGREEMENTS: AN AFTERTHOUGHT
Î Canada:
Expect slight increase in
US employment from more
competitive firms & goods
substitution
Î Mexico: US employment increase
from “trickle-down”: Increased
demand in Mexico for US goods =>
increase in US employment.
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LABOR STANDARDS IN FREE
TRADE AGREEMENTS
Î
Link b/n fair labor standards & trade policy
ÎNotion of “social dumping” - League of
Nations in 1927
ÎPolicies to “harmonize” and eliminate
competition based on failure to respect
international standards - ILO in 1950s
ÎGATT charged to integrate labor standards
but no mechanism
Î Sources
LIR 809
of international labor standards:
ÎILO Conventions
ÎInternational Covenant on Civil and Political
Rights (ICCPR) – NAFTA countries parties to
this.
Global Trade
Organizations: WTO
Î World
Trade Organization (WTO)
ÎEstablished 1995;
ÎReplaced GATT (General Agreement on Tariffs and
Trade)
Î 142 member countries
ÎObjectives:
Îfacilitate liberalization of trade;
Îeliminate most favored trade status arrangements;
Îencourage competition;
Îhelp with development of developing countries.
ÎAdvocate of multi-lateral agreements
LIR 809
Global Trade
Organizations: ILO
Î International
Î
Labour Organization (ILO)
ÎEstablished by Treaty of Versailles in 1919;
177 member countries.
ÎPurpose: promotion of social justice and
internationally recognized human and labor
rights
ÎMechanism: Conventions ratified by member
countries (Currently 185 conventions)
No enforcement authority
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Fundamental ILO
Conventions
Î Freedom
of Association (# 87, 98)
Î Abolition of Forced Labor (#29,
105)
Î Equality (#111, 100)
Î Elimination of Child Labor (#138,
182)
LIR 809
Ratification of 8 ILO
Fundamental Conventions
Î US:
Tied with Myanmar & Oman –
ratified 2
ÎSample countries with better ratification
records: Sudan (7), Iraq (7), Iran (5)
Î US:
Convention 105 (Forced labor) &
Convention 182 (Child labor)
Î World-wide average: 6.9
Î Raises question re: value of using ILO
ratifications as standard in free trade
agreements.
LIR 809
WORK UNDER NAFTA
Labor side agreement
Î North
American Agreement on Labor
Cooperation (NAALC):
Î Point: to protect national sovereignty &
right to issue labor standards
ÎAgreement to protect: right to bargain,
minimum labor standards, safety & health
ÎStrive to improve standards and maintain
transparent enforcement mechanisms
ÎDisputes resolved by multi-step arbitration
process starting with country-specific NAO
(National Administrative Office)
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WORK UNDER CAFTA
Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua,
Dominican Republic (signed 2004).
Î
Labor Features
Î Requires nations to enforce their own labor laws
Î Chief labor cooperation and standards capacity building: $20
million appropriated by US Congress (2005) to set up
program to improve labor rights in Central Am. & Dominican
Republic
Î Disputes resolved by Free Trade Commission (FTC) – Cabinet
level Commission
Î
Potential Weaknesses
Î No reference to existing international standards (ILO)
Î Absence of enforcement mechanisms
Î No assurance of continued funding for cooperation
Î High probability of structural weaknesses similar to NAALC
LIR 809
Work Under FTAA
Î
Î
Î
Î
Î
Î
Parties agree to abide by their ILO obligations;
Sovereignty with respect to establishing,
interpreting, and enforcing domestic labor
standards;
Inappropriate to weaken existing laws to gain
trade advantage;
Parties recognize advantage to cooperation with
respect to promoting ILO Fundamental
Conventions.
Bi-lateral consultation process in event of
disputes.
Concern about social services and protective
standards
LIR 809
Jobs, Labor Standards &
Free Trade
LIR 809
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Economic Framework:
THEORY OF ECONOMIC LOCATION
Î Basic
premise of location theory:
ÎFirm locates at minimum cost location
ÎConsiders production function, spatial
variation in factor prices and capital
availability, proximity to inputs &
markets, transportation costs
LIR 809
Labor as a Locational Attribute
Î Cost
ÎCompensation and Labor Standards
ÎWill affect “demand” for a location
Î Heterogeneity
ÎSkill heterogeneity: will encourage
specialization
ÎLabor Standards
ÎSocial contract between nation & its workforce
LIR 809
THEORY OF ECONOMIC
LOCATION, CONT.
Î Labor
Mobility with NAFTA:
ÎSeverely restricted
ÎSome professional services mobile
Î Implication
of Labor Immobility
ÎLabor as a locational attribute thus part of
each country’s comparative advantage
Î Labor
standards become trade advantage
LIR 809
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Conceptual Bases for Labor
Standards
Î2
Bases for defining labor standards
Î Rights-based
ÎLabor standards as codification of human rights –
Reflect world-wide norms for treatment of labor
Î Economic Regulation
ÎModifying economic behavior; limits choices of
producers &/or consumers
ÎUsually penalties for non-compliance
ÎSet in context of comparing importing and
exporting countries
LIR 809
Rationale for Labor
Standards
Î Use
of police power of state to
abridge individual liberties if there
is a public benefit
Î Poor conditions of employment
associated with weak bargaining
power of employees -- a social ill
that could be addressed by state
intervention
LIR 809
DEFINITION OF LABOR
STANDARDS
ÎA
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.
Î They are mandatory - governmentally
imposed and enforced
LIR 809
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3 Basic Models of Labor
Standards
Î Within-Country
ÎLegislation or Collective Bargaining
Î Cross-National
ÎLegislative, Trade sanctions,
Multilateral agreement
Î Voluntary
Standards
ÎCodes of corporate conduct
LIR 809
WHY ARE LABOR STANDARDSRELATED ISSUES IMPORTANT?
Î ECONOMIC
PERSPECTIVE
ÎPRODUCERS: Cost concerns
Î EMPLOYEES: Compensation & Welfare
Î POLICY
PERSPECTIVES
ÎSTRATEGIC QUESTIONS: International
competitiveness
ÎSOVEREIGNTY QUESTIONS: Ability to
make laws consistent with national welfare
and values
LIR 809
Empirical Research on Labor
Standards
Global Organizations
Canada – United States Comparison
Block & Roberts
United States – European Union
Comparison
Block, Roberts, & Berg
LIR 809
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U.S. – Canada Comparison:
Key Questions
Î ARE
THERE DIFFERENCES IN
CANADIAN AND U.S. LABOR
STANDARDS?
Î IF SO, WHAT IS THE
MAGNITUDE OF THOSE
DIFFERENCES?
LIR 809
Difference in Statutory Basis
between U.S. & Canada
Î U.S
ÎFor most standards, Federal govt. is
mandatory floor
ÎSome standards set at state unjust dismissal
Î Canada
ÎProvincial sovereignty on most standards
ÎExceptions: Employment (unemployment)
insurance & standards governing sectors that
operate inter-provincially
LIR 809
LABOR STANDARDS
ANALYZED
Î
STANDARDS THAT
REQUIRE EMPLOYER
PAYMENTS TO
EMPLOYEES OR TO
GOVERNMENT
ÎMINIMUM WAGE
ÎOVERTIME/HOURS
OF WORK
ÎPAID-TIME OFF
ÎUNEMPLOYMENT
INSURANCE
ÎWORKERS’
COMPENSATION
Î
STANDARDS THAT
CONSTRAIN
EMPLOYER ACTIONS
ÎCOLLECTIVE
BARGAINING
ÎEQUAL EMPLOYMENT
/EMPLOYMENT
EQUITY
ÎUNJUST DISMISSAL
ÎOCCUPATIONAL
SAFETY AND HEALTH
LIR 809
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SIX LABOR STANDARDS
HIGHER IN CANADA THAN IN
U.S.
Î SUBSTANTIALLY
HIGHER IN
CANADA
Î PAID-TIME OFF
ÎCOLLECTIVE
BARGAINING
ÎUNJUST
DISMISSAL
Î SLIGHTLY
HIGHER IN
CANADA
ÎWORKERS’
COMPENSATION
ÎEQUAL
EMPLOYMENT /
EQUITY
ÎOCCUPATIONAL
SAFETY AND
HEALTH
LIR 809
TWO STANDARDS COMPARABLE
IN CANADA AND U.S.
Î MINIMUM
WAGE
Î UNEMPLOYMENT INSURANCE
LIR 809
ONE STANDARD HIGHER IN
U.S. THAN IN CANADA
Î MAXIMUM
OVERTIME
HOURS FOR
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Effect of labor standards
on Economic Outcomes
Î Examine
US only with state as unit of
observation
Î Outcomes: GSP, Employment,
Manufacturing Employment, Export Share
Î Labor standards negatively affect GSP,
both types of Employment with elasticity
between .48 & .69
Î UI & Unjust Discharge – primary drivers
LIR 809
U.S. versus EU: Prevailing
views
Î Trade-off
between worker
protection and unconstrained (and
therefore efficient) market forces
Î In relative terms:
ÎU.S. seen as placing higher value on
market
ÎEU seen as placing higher value on
worker protection
LIR 809
Differences in political
structure
Î U.S.
– sovereign country
ÎFederally-set standards binding lower bound
in all states
ÎEnforced (usually) by federal agencies
Î EU
– political union of member countries
ÎEuropean directives issued centrally
ÎMember countries each pass legislation and
structure enforcement.
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Standards analyzed: Those promulgated at
federal or council level
Î
Î
Î
Î
Î
Î
Wage rates (min.
wage)
Working time
Paid time off
Unemployment
insurance
Collective bargaining
Anti-Discrimination
Î
Î
Î
Î
Î
Î
Unjust dismissal
Occupational safety &
health
Large scale layoffs
Employee involvement
Parental/family leave
Transfers of
ownership
LIR 809
Results
Î EU
higher:
ÎCollective
Bargaining
ÎUnjust dismissal
ÎOccupational
Safety & Health
ÎEmployee
involvement
ÎTransfer of
Ownership
ÎPaid time off
Î U.S.
higher:
ÎMinimum wage
ÎUnemployment
insurance
Î About
the same:
ÎDiscrimination
ÎLarge scale
layoffs
ÎParental leave
LIR 809
Understanding Offshoring
Î Why now:
ÎIndia and China have long had wage
advantage
ÎMay be improving in education, though
still developing countries
Î Driver:
lower transportation and
communication costs
ÎOff-shoring concentrated in IT,
phone & on-line services
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LABOR IMMIGRATION
1.
2.
3.
Brief history of U.S. Law
Who migrates and why
Effect of Immigration on
U.S.
LIR 809
Recent History of
Immigration Law
Î Immigration
Acts of 1921 and 1924
Î1924 - U.S. Border Patrol established
Immigration & Nationality Act of 1952
Î
ÎSet basic U.S. immigration law framework
ÎDefined categories of non-U.S. born individuals
Î1965 Amendments
ÎAbolished quotas & changed priorities
Î Immigration
Reform and Control Act of 1986
ÎMajor reform of immigration law
ÎCreated amnesty program & employer sanctions
ÎMarriage penalty (separate law)
LIR 809
Current Law
Î Immigration
Act of 1990
ÎMajor reform: set cap on number of
immigrants (675K)
Î 1993
– Lottery for green cards
Îpermanent resident visa
Î Priorities:
ÎFamily reunification, special skills, refugees
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Current Statistics
Î Downward
trend since 1991: 1.8 Million
to 660,000 in 1998
Î Large increase in employment based
immigration:
Î3.7% in 1990 to 11.7% in 1998
Î Largest
sending regions: North America,
followed by Asia
Î Largest receiving states: CA by far,
then NY, then FL
LIR 809
Neoclassical Framework
(Push-Pull)
Î Migration
as function of relative
attractiveness of 2 areas
ÎAttractiveness = f(wages)
Î Migration
as equilibrating process
Î Distance as market imperfection
ÎNon-zero transaction cost
LIR 809
Models of Immigration
Î Basic
Neoclassical Framework
ÎMigration as an equilibrating process
Î Roy
Model
Î Explains net flows from one country to
another
Î Migration
as a Human Capital Decision
Î Explains individual level decision making
LIR 809
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Roy Model Basics
Î Assumes
2 countries with different
income distributions
ÎCountry A: Wide dispersion, low mean
ÎCounty B: Narrow dispersion, high mean
Î Model
Predictions
ÎLow end of A will move to B, but high end of
A will not
ÎHigh end of B will move to A, while low end
of B will not
LIR 809
Roy Model: Income
Distributions
Country B
Country A
LIR 809
Migration as Individual
Human Capital Investment
Î Same
framework as with education:
Î PVB = Σ [(Bjt - Bot )/(1+r)t]
ÎWhere: Bjt are the benefits associated with
destination country
Î Bot are the benefits associated with sending
country
Î t is length of time expected to be in destination
country and r is discount rate
ÎMove if PVB/C => 1
Î C are the direct costs associated with
immigration borne by the individual
LIR 809
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Who migrates to U.S. and
why?
Î Older
or younger
Î More or less educated
Î Closer countries or further
LIR 809
Two types of employmentbased migrants
Î Target
earners
ÎMigration to high wage region for
specified period of time to make
“target” money to send home
Î Permanent
migrants
ÎChain migration
ÎFamily migration: Evidence of longer
investment time horizon
LIR 809
Is Immigration Good for
the US?
Two Perspectives
Î Immigrants as substitutes for US
workers
ÎIncrease unemployment
Î Immigrants
workers:
as complements to US
ÎTake jobs US workers do not want
ÎHelp sustain economic growth
LIR 809
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Immigration as hurting US
workers
SD
SF + D
W1
W2
D
E1
LIR 809
ED
E3
Simplistic versus likely version of
immigrants as hurting US workers
Î Single
market
ÎCommon argument that immigrants substitute
for US workers on one-for-one basis
ÎMore likely reality: addition of immigrants
depresses wages below what they would be.
If immigrants deported, would be an
insufficient supply of domestic workers at
new wage.
LIR 809
Immigration as helping US
workers
Î Migrants
as taking certain types of
jobs natives do not want
ÎDeliberate policy (H-1, H-2)
ÎInstitutionalized use
ÎEmployer practices
Î Economy as social structure
ÎNeed someone in bottom rungs
ÎIntergenerational moves up the ladder
ÎNatives and Immigrants as non-competing
groups
LIR 809
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Shifts in Population
Composition
P opulation E stim ates, U .S . C ensus B ureau
1-Jul-00
1-Jul-50
272,820
403,686
90.30%
86.70%
P opulation
% N ative
A sian - Pacific
Islander
% of total population
11,275
4.13%
H ispanic
32,478
% of total population
11.90%
S ource: w w w.census.gov/population
37,589
9.31%
98,228
24.33%
LIR 809
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