International Integration I

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International Integration I

• Trade and the Economy

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When Having an Intelligent Discussion on Free
Trade.

• .dont listen to Lou Dobbs!

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Comparative Advantage v. Competitive Advantage

• Competitive Advantage
• Might refer to absolute advantage (country
  being best at producing everything), but usually
  refers to firm/nations market share.
• Therefore, not economically useful because
  economists dont view world trade as a
  competitive, zero-sum game.

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Comparative Advantage v. Competitive Advantage

• Comparative Advantage
• Opportunity cost is what a country sacrifices to
  produce a good.
• A country has a comparative advantage when it can
  produce a good at an opportunity cost that is
  lower than another country.

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Comparative Advantage v. Competitive Advantage

• Rules of Comparative Advantage and Trade
• Every country has a comparative advantage!
• A country can lose a competitive advantage in a
  particular industry, but not comparative
  advantage.
• Countries should specialize according to their
  comparative advantage.
• Even if a country has an absolute advantage, it
  can benefit by directing more of its resources
  towards the good with the lower opportunity cost.
• All countries initially gain from trade.
• Countries will only continue to gain from trade
  if they innovate (Samuelson)!

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Are we really talking about trade when talking
about outsourcing?

• Trade v. Offshore Outsourcing
• Trade
• Exchange of goods and services across borders
• Offshore Outsourcing
• The purchase of services at arms length with the
  buyer and seller staying in their respective
  countries.
• Contrary to what some may say, outsourcing does
  NOT change the rules!
• It is simply another form of specialization in a
  tradable good
• Technology served the role of oceans or tariffs

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Indicators of trade and Outsourcing

• Export and Imports
• Foreign Direct Investment

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The United States major import source countries
http//www.census.gov/foreign-trade/statistics/hig
hlights/top/index.html
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FDI in Perspective

• The vast majority of this investment is in the
  industrialized world. 90 of FDI outflow is from
  OECD countries. 70 of FDI inflow is to OECD
  countries. The remaining 30 goes primarily to
  10 countries in Latin America and East Asia.
• Despite a large degree of attention being given
  to the decision of US MNCs investing in India and
  China, from 1993 to 2003 American firms invested
  ten times as much in the Netherlands as in China.
  In 2003, US MNCs invested two-and-a-half times as
  much in Ireland (4.7 billion) as in China. Also
  in 2003, Europe accounted for 65 of FDI into
  America, and US MNCs sent 87 billion in FDI to
  Europe (a rise of 30.5 from 2002).

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Outsourcing and Job Loss

• Case 1 Manufacturing

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State of Manufacturing

• Employment is less than in 2000, but production
  is higher than in 2000.
• What does this suggest?
• Higher Productivity from Technology!
• That is why, worldwide, manufacturing employment
  has declined 11 since 1995.
• 11 decline in US.
• Jobs going to China?
• 15 decline in manufacturing employment in China.

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Moving Up the Manufacturing Food Chain Japan

• How Japanese Industry beat back low-cost
  competition Financial Times. May 4, 2005

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Outsourcing and Job Loss

• Case 2 Offshore Outsourcing of White Collar Jobs

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What is known?

• Very little
• McKinsey Global Institute (think tank of McKinsey
  consulting) has most up-to-date study on trends
• In 2003 there were 1.5m service jobs outsourced
  abroad from developed countries
• By 2008 4.1m service jobs outsourced each year.
• However,
• so far in 2005, an average of 4.6m Americans
  start work with a new employer every month.
• 15 million jobs lost each year in the US economy
  for all reasons.
• At any one time there are at least 130 million
  people employed in the US.
• Furthermore, in the 1990s, the US economy created
  an average of 200,000 new jobs every month.

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Outsourcing and Job loss

• In short, trade and outsourcing do not impact the
  overall capacity of the economy to create jobs.
• Labor Supply, Capital Stock, Technology, and,
  perhaps most importantly, Knowledge determine
  ability of economy to create jobs.

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But what about wages?

• Some reason for concern
• Kletzer (2002) workers who lose their jobs to
  import competition find new jobs that, on
  average, pay 13 less than the jobs they have
  lost.
• However, these are the same results for
  manufacturing workers who lost jobs for
  productivity reasons.
• Additionally, Kletzer finds that, 35 of
  displaced workers report earning as much or more
  in new job, while 25 said they experienced a 30
  decline from old wage. This latter group is
  comprised mostly of workers over 45 years of age.
  
• Hence, workers under 45 years of age are more
  likely not to experience a decline in wages (core
  issue for economists).
• Consider that the average American manufacturing
  worker is paid approximately 16 per hour. If
  this wage is reduced 13 percent, the worker now
  receives 13.92 an hour. Is this new wage
  unreasonable?
• Many highly paid college graduates are paid
  little more than 16 on an hour when their
  salaries are calculated on an hourly basis. A
  corporate marketer paid 60,000 per year, working
  60 hours per week (with no time and a half
  overtime), and working 50 weeks out of the year
  is earning 20 per hour.
• True, this is not factoring in an end of year
  bonus (a large share of which is eliminated by
  taxes), but its also not counting additional
  work hours spent traveling for business

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But what about wages?

• Also, some of the wage reduction is made up in
  price reduction
• Wal-Mart, by contracting directly with a handful
  of denim manufacturers in Southeast Asia, has
  been able to drive down the retail price of the
  George brand of jeans (sold in Britain and
  Germany) from 26.67 to 7.85 (Is Wal-Mart Too
  Powerful? Business Week. Oct. 6, 2003).
• Outsourcing of hardware production (such as when
  Dell has CPUs constructed in Asia) accounted for
  10 to 30 percent of the price decline in computer
  hardware between 1995 and 2002.

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So then why do people become worried?

• Lump of Labor Fallacy
• Charles Duell (1899)

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Protectionism is not the answer

• but trade and outsourcing displacement
  adjustment is!

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Should you outsource?

• Benefits
• Lower Costs Average Wage Comparisons

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Table 1 Wage Comparison of US vs. India
Source Data from Samuelson, R. J. (2004,
January 14). The specter of outsourcing Final
edition. The Washington Post, p. A19
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Should you outsource?

• Benefits
• Ability of remaining personnel to
  specialize/focus on core tasks and spend more
  time growing business.
• Eliminate Obsolete Job more quickly (many
  outsourced jobs are close to extensive automation
  ex call center).

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Should you outsource?

• Costs
• Protection of I.P. (shouldnt outsource core
  business functions)
• If only keep senior level positions in the
  states, what will you do when those senior level
  people retire?
• Hard to maintain quality control with far-flung
  team
• Awkward communication schedules
• Consumer backlash
• This is without accounting for poor quality
  infrastructure and the raising of wages in
  outsourced location (as is happening in India).

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Primary Reasons Companies go Multinational