TRADE, TRADE AGREEMENTS,

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TRADE, TRADE AGREEMENTS, IMMIGRATION

• Simple Trade Model
• Logic behind trading blocs
• Trade Organizations U.S. Trade Agreements
• Trade Agreements and Labor
• Labor Standards
• Immigration

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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

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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.

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Ehrenberg Smith Production Possibilities Diagram
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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

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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

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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)

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Implementing Free Trade

• Introduction to Trading Blocs

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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

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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).

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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).

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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 -gt lower production costs
• Efficiency enhancing

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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

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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

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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

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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

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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

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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

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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

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Reasons for agreements

• 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

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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 gt increase in US employment.

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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

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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

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Jobs, Labor Standards Free Trade
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Economic FrameworkTHEORY 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

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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

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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
  countrys comparative advantage

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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

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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

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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

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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

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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

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Empirical Research on Labor Standards

• Global Organizations
• Canada United States Comparison
• Block Roberts
• United States European Union Comparison
• Block, Roberts, Berg

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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

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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

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Fundamental ILO Conventions

• Freedom of Association ( 87, 98)
• Abolition of Forced Labor (29, 105)
• Equality (111, 100)
• Elimination of Child Labor (138, 182)

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U.S. Canada ComparisonKey Questions

• ARE THERE DIFFERENCES IN CANADIAN AND U.S. LABOR
  STANDARDS?
• IF SO, WHAT IS THE MAGNITUDE OF THOSE DIFFERENCES?

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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

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LABOR STANDARDS ANALYZED

• 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

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SIX LABOR STANDARDS HIGHER IN CANADA THAN IN U.S.

• SLIGHTLY HIGHER IN CANADA
• WORKERS COMPENSATION
• EQUAL EMPLOYMENT / EQUITY
• OCCUPATIONAL SAFETY AND HEALTH
  

• SUBSTANTIALLY HIGHER IN CANADA
• PAID-TIME OFF
• COLLECTIVE BARGAINING
• UNJUST DISMISSAL

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TWO STANDARDS COMPARABLE IN CANADA AND U.S.

• MINIMUM WAGE
• UNEMPLOYMENT INSURANCE

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ONE STANDARD HIGHER IN U.S. THAN IN CANADA

• MAXIMUM HOURS FOR OVERTIME

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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

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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.

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Standards analyzed Those promulgated at federal
or council level

• 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

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Results

• 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

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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

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LABOR IMMIGRATION

• Brief history of U.S. Law
• Who migrates and why
• Effect of Immigration on U.S.

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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)
•  

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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

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Current Statistics

• Downward trend since 1991 1.8 Million to 660,000
  in 1998
• Large increase in employment based immigration
• 3.7 in 1990 to 11.7 in 1998
• Largest sending regions North America, followed
  by Asia
• Largest receiving states CA by far, then NY,
  then FL

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Neoclassical Framework(Push-Pull)

• Migration as function of relative attractiveness
  of 2 areas
• Attractiveness f(wages)
• Migration as equilibrating process
• Distance as market imperfection
• Non-zero transaction cost

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Models of Immigration

• Basic Neoclassical Framework
• Migration as an equilibrating process
• Roy Model
• Explains net flows from one country to another
• Migration as a Human Capital Decision
• Explains individual level decision making

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Roy Model Basics

• Assumes 2 countries with different income
  distributions
• Country A Wide dispersion, low mean
• County B Narrow dispersion, high mean
• Model Predictions
• Low end of A will move to B, but high end of A
  will not
• High end of B will move to A, while low end of B
  will not

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Roy Model Income Distributions
Country B
Country A
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Migration as Individual Human Capital Investment

• Same framework as with education
• PVB S (Bjt - Bot )/(1r)t
• Where Bjt are the benefits associated with
  destination country
• Bot are the benefits associated with sending
  country
• t is length of time expected to be in
  destination country and r is discount rate
• Move if PVB/C gt 1
• C are the direct costs associated with
  immigration borne by the individual

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Who migrates to U.S. and why?

• Older or younger
• More or less educated
• Closer countries or further

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Two types of employment-based migrants

• Target earners
• Migration to high wage region for specified
  period of time to make target money to send
  home
• Permanent migrants
• Chain migration
• Family migration Evidence of longer investment
  time horizon

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Is Immigration Good for the US?

• Two Perspectives
• Immigrants as substitutes for US workers
• Increase unemployment
• Immigrants as complements to US workers
• Take jobs US workers do not want
• Help sustain economic growth

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Immigration as hurting US workers
SD
SF D
W1
W2
D
E1
ED
E3
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Simplistic versus likely version of immigrants as
hurting US workers

• Single market
• Common argument that immigrants substitute for US
  workers on one-for-one basis
• More 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.

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Immigration as helping US workers

• Migrants as taking certain types of jobs natives
  do not want
• Deliberate policy (H-1, H-2)
• Institutionalized use
• Employer practices
• Economy as social structure
• Need someone in bottom rungs
• Intergenerational moves up the ladder
• Natives and Immigrants as non-competing groups

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Shifts in Population Composition