Regional Trading Blocs and Economic Integration

Regional Trading Blocs and Economic Integration

 

 

From Asia’s Rise in the New World Trade Order

Asia Rising

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From What is Regional Trade Blocs or Free Trade Agreements?

As trade integration across countries is intensifying, we hear more and more about Free Trade Agreements (FTAs) and Regional Trade Blocs (RTBs). As their name suggests these RTBs/FTAs are arrangements aimed for faster trade liberalisation at regional levels.

Countries are convinced that trade is an engine of growth and they are searching for arrangements that promote trade.

The WTO that contains 162 countries is the most popular one; a truly multilateral forum for trade liberalisation. But the history of WTO led trade liberalisation shows that the organisation is facing difficulty in bringing further trade liberalisation because of conflicting interest among large number of countries.

This has led to interest in trade liberalisation within a limited number of countries that may be regionally close together. These regional trade promoting arrangements advocate more tariff cuts and removal of other restrictions within the group while maintaining restrictions against the rest of the world.

Though many regional trade agreements like the EU, NAFTA and ASEAN were established before or around the time of WTO’s formation, there is mushrooming of RTBs in recent years. Recently formed Trans Pacific Partnership (TPP) shows this increasing affinity towards RTBs. Many RTBs like the TPP would like to make advanced level trade liberalisation and hence they are not satisfied with the slow pace of trade liberalisation within the WTO.

What are Regional Trade Blocs (RTBs)?

Regional Trade Blocs or Regional Trade Agreements (or Free Trade Agreements) are a type of regional intergovernmental arrangement, where the participating countries agree to reduce or eliminate barriers to trade like tariffs and non-tariff barriers.  The RTBs are thus historically known for promoting trade within a region by reducing or eliminating tariff among the member countries.

Over the last few decades, international trade liberalisations are taking place in a serious manner through the formation of RTBs. They are getting wide attention because of many important international developments. First, now the world is trying hard to escape from the ongoing great recession phase. Second is the failure of the WTO to take further liberalisation measures on the trade liberalisation front.

The EU, NAFTA, ASEAN, SAFTA etc are all examples for regional integration. The triad of North America, Western Europe, and Asia Pacific have the most successful trade blocs. Recently signed Trans Pacific Partnership is a powerful RTB. Similarly, another one called RCEP is in negotiation round. India has signed an FTA with the ASEAN in 2009. Simultaneously, the country has signed many bilateral FTAs.

Different types of RTBs

All regional trade blocs don’t have the same degree of trade liberalisation. They may differ in terms of the extent of tariff cutting, coverage of goods and services, treatment of cross border investment among them, agreement on movement of labour etc.

The simple form of regional trade bloc is the Free Trade Area. The Free Trade Area is a type of trade bloc, a designated group of countries that have agreed to eliminate tariffs, quotas and preferences on most (if not all)goods and services traded between them.

From the lowest to the highest, regional trade integration may vary from just tariff reduction arrangement to adoption of a single currency. The most common type of regional trade bloc is the free trade agreement where the members abolish tariffs within the region. Following are the main types of regional economic integrations.

Classification of RTBs

Preferential trading union: Here, two or more countries form a trading club or a union and reduce tariffs on imports of each other ie, when they exchange tariff preferences and concessions.

Free trade union or association: Member countries abolish all tariffs within the union, but maintain their individual tariffs against the rest of the world.

Customs union: countries abolish all tariffs within and adopt a common external tariff against the rest of the world.

Common market: in addition to the customs union, unrestricted movement of all factors of production including labour between the member countries. In the case of European Common Market, once a visa is obtained one can get employed in France or Germany or in any other member country with limited restrictions.

Economic union: The Economic Union is the highest form of economic co-operation. In addition to the common market, there is common currency, common fiscal and monetary policies and exchange rate policies etc. European Union is the example for an Economic Union. Under the European Monetary Union, there is only one currency- the Euro.

At present, out of the total regional trade arrangements FTAs are the most common, accounting for nearly 90 per cent.

 

From Regionalism in a globalizing world: an Asia-Pacific perspective

RTA7

From Asia’s Rise in the New World Trade Order

RTA4

 

From The world’s free trade areas – and all you need to know about them

International trade is a driving force behind economic growth, and two so-called “mega-regional” trade deals are dominating public debate on the issue: the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP).

But there are around 420 regional trade agreements already in force around the world, according to the World Trade Organization. Although not all are free trade agreements (FTAs), they still shape global trade as we know it.

 Global exports and trade agreements

Image: The Economist

 

What exactly are free trade areas?

The OECD defines a free trade area as a group of “countries within which tariffs and non-tariff trade barriers between the members are generally abolished but with no common trade policy toward non-members”.

The free movement of goods and services, both in the sense of geography and price, is the foundation of these trading agreements. However, tariffs are not necessarily completely abolished for all products.

 

Which are the world’s major free trade areas?

 

The North American Free Trade Agreement (NAFTA)

 

Free trade between the three member nations, Canada, the US and Mexico, has been in place since January 1994. Although tariffs weren’t fully abolished until 2008, by 2014 total trilateral merchandise trade exceeded US$1.12 trillion.

According to the US government, trade with Canada and Mexico supports more than 140,000 small and medium-size businesses and over 3 million jobs in the US. Gains in Canada are reportedly even higher, with 4.7 million new jobs added since 1993. The country is also the largest exporter of goods to the US.

 US Trade with NAFTA Partner 1993-2012

Image: Congressional Research Service

 

However, the Council on Foreign Relations suggests that the impact on Mexico is harder to assess. Per capita income has not risen as fast as expected; nor has it slowed Mexican emigration to the US. However, farm exports to the US have tripled since 1994, and the cost of goods in Mexico has declined. The cost of basic household goods has halved since NAFTA came into force, according to estimates by GEA, a Mexican economic consulting firm.

 

Association of Southeast Asian Nations Free Trade Area (AFTA)

 

The AFTA was signed in January 1992 in Singapore. The original members were Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand. Four countries have subsequently joined: Vietnam, Laos, Myanmar and Cambodia.

The bloc has largely removed all export and import duties on items traded between the nations. It has also entered into agreements with a number of other nations, including China, eliminating tariffs on around 90% of imported goods.

 The ASEAN AFTA

Image: ASEAN Briefing

 

The AFTA nations had a combined GDP of US$2.3 trillion in 2012, and they’re home to 600 million people. The agreement has therefore helped to dramatically reduce the cost of trade for a huge number of businesses and people.

 

Southern Common Market (MERCOSUR)

 

Although MERCOSUR was envisaged as a Latin American single market, enabling the free movement of people, goods, capitals and services, this vision is yet to become reality. Internal disputes have slowed progress towards removing tariffs and the free movement of people and goods.

But MERCOSUR is still one of the world’s leading economic blocs, and has a major influence on South American trade and the global economy.

 

Common Market of Eastern and Southern Africa (COMESA)

 

Formed in December 1994, the organization aims to develop natural and human resources to benefit the region’s population. Its primary focus, according to the United Nations, is to establish a large economic and unit to overcome barriers to trade.

With 19 member states, and an annual export bill in excess of $80 billion, the organization is a significant market place, both within Africa and globally.

 COMESA Member States

Image: United Nations

 

COMESA utlimately aims to remove all barriers to intra-regional trade, starting with preferential tariffs and working towards a tariff-free common market and economic union.

 

What about the European Union?

 

The EU is a single market, which is similar to a free trade area in that it has no tariffs, quotas or taxes on trade; but a single market allows the free movement of goods, services, capital and people.

The EU strives to remove non-tariff barriers to trade by applying the same rules and regulations to all of its member states. The region-wide regulations on everything from working hours to packaging are an attempt to create a level playing field. This is not necessarily the case in a free trade area.

 The European Union

Image: BBC

 

The creation of the single market was a slow process. In 1957, the Treaty of Rome established the European Economic Community (EEC) or Common Market. However, it was not until 1986 that the Single European Act was signed. This treaty formed the basis of the single market as we know it, as it aimed to establish the free-flow of trade across EU borders. By 1993 this process was largely complete, although work on a single market for services is still ongoing.

Today, the EU is the world’s largest economy, and the biggest exporter and importer. The EU itself has free trade agreements with other nations, including South Korea, Mexico and South Africa.

 The State of EU Trade

Image: European Union

 

What about the TPP and TTIP?

 

Once fully ratified, the Trans-Pacific Partnership is set to become the world’s largest trade agreement. The TPP already covers 40% of global GDP, and trade between member nations is already significant.

However, by removing tariffs and other barriers to trade, the agreement hopes to further develop economic ties and boost economic growth.

 The Trans-Pacific Trade Deal

Image: Reuters

 

The Transatlantic Trade and Investment Partnership is a deal currently being negotiated between the EU and the US. If reached, it would itself become the world’s largest trade agreement – covering 45% of global GDP.

Like the TPP, it aims to cut tariffs and regulatory barriers to trade. Among these is the removal of customs duties, according to the EU’s negotiation factsheet.

The Center for Economic Policy Research has estimated that the deal would be worth $134 billion a year for the EU and $107 billion for the US – although opponents have disputed these figures.

 Transatlantic Negotiations

Image: Brookings

As the World Economic Forum’s E15 Initiative has highlighted, effective global trade is central to economic growth and development. Trade agreements are an integral part of making this a reality.

From Regional Trade Agreements and the Multi-polar Global Order:
Implications for South Korea’s Economy

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From Regional Trade Agreements and the Multi-polar Global Order:
Implications for South Korea’s Economy

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From Regional Trade Agreements: Promoting conflict or building peace?

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Key Terms:

  • Rising Powers
  • Global Economic Governance
  • Mega-Regionals
  • World Trade Organization (WTO)
  • Transatlantic Trade and Investment Partnership (TTIP)
  • Transpacific Trade and Investment Partnership (TPP)
  • MFN (Most Favored Nation)
  • PTA (Preferred Trading Agreement)
  • FTA (Free Trade Agreement)
  • RTA (Regional Trade Agreement)
  • MTS (Multi Lateral Trade System)
  • BTA (Bilateral Trade Agreement)
  • Belt and Road Initiative
  • Regional Comprehensive Economic Partnership (RCEP)
  • ASEAN
  • AEC
  • APEC
  • BRICS
  • EU
  • SAARC
  • MERCOSUR
  • Free Trade Area of the Asia-Pacific (FTAAP)
  • NAFTA
  • ASEAN+3
  • ASEAN+6
  • Custom Unions
  • Common Markets
  • Economic Unions
  • GATT
  • WTO
  • SADC
  • COMESA
  • ECOWAS
  • ECCAS/CEEAC
  • SACU
  • AFTA
  • SAPTA/SAFTA

Key Sources of Research:

 

 

What is Regional Trade Blocs or Free Trade Agreements?

http://www.indianeconomy.net/splclassroom/107/what-is-regional-trade-blocs-or-free-trade-agreements/

 

 

 

The world’s free trade areas – and all you need to know about them

2016

WEF

https://www.weforum.org/agenda/2016/05/world-free-trade-areas-everything-you-need-to-know/

 

Regional trade agreements: Blessing or burden?

Caroline Freund, Emanuel Ornelas

02 June 2010

http://voxeu.org/article/regional-trade-agreements-blessing-or-burden

 

 

 

Regional Trade Agreements: Promoting conflict or building peace?

Oli Brown
Faisal Haq Shaheen
Shaheen Rafi Khan
Moeed Yusuf

October 2005

Click to access security_rta_conflict.pdf

 

 

 

Regional trade agreements

WTO

https://www.wto.org/english/tratop_e/region_e/region_e.htm

 

A COMPLETE GUIDE TO THE REGIONAL TRADE AGREEMENTS OF THE ASIA-PACIFIC

WRITTEN BY TIM MARTYN
MARCH 2001

Click to access martyn.pdf

 

 

 

Globalization and the Growth in Free Trade Agreements

SHUJIRO URATA

2002

Click to access Globalization_and_FTA.pdf

 

 

 

Regional trade agreements: blessing or burden?

 

Click to access cp313.pdf

 

 

 

Mexico’s Free Trade Agreements

M. Angeles Villarreal
Specialist in International Trade and Finance

April 25, 2017

Click to access R40784.pdf

 

 

Regional Trade Agreements in a Multilateral Trade Regime: An Overview

Parthapratim Pal

Click to access survey_paper_RTA.pdf

 

 

 

REGIONAL TRADE INTEGRATIONS: A Comparative Study of African RTAs

Sannassee R., Boopendra S and Tandrayen Verena

Click to access 15.pdf

 

 

 

Trade Blocks and the Gravity Model: A Study of Economic Integration among Asian
Developing Countries

E. M. Ekanayake

Amit Mukherjee

Bala Veeramacheneni

Click to access 9180KU76078V3656.pdf

 

 

Free Trade Agreements, the World Trade Organization and Open Trade

Michael SUTTON

Click to access 04sutton.pdf

 

 

 

REGIONAL TRADE BLOCS THE WAY TO THE FUTURE?

ALEJANDRO FOXLEY

Click to access regional_trade_blocs.pdf

 

 

 

Regional Trade Agreements and the WTO

Ildikó Virág-Neumann

2009

Click to access 32_Neumann-Virag.pdf

 

 

 

PREFERENTIAL TRADE AGREEMENTS AND THE WTO: IMPETUS OR IMPEDIMENT?

Committee on International Trade

Principal Drafters:
Helena Sullivan, Chair
Stuart Shroff
Mark Du
Albert Bloomsbury

THE ASSOCIATION OF THE BAR OF THE CITY OF NEW YORK
42 WEST 44TH STREET, NEW YORK, NY 10036

Click to access 20071935-PreferentialTradeAgreementsandtheWTO.pdf

 

 

 

Regional Trade Agreements and the Multi-polar Global Order:
Implications for South Korea’s Economy

Dr. Mi Park

Click to access 84.full.pdf

 

 

 

Rising Powers in the Global Trading System – China and Mega-Regional Trade Negotiations

Clara Brandi

2016

Click to access vol1.1.Clara-Brandi.pdf

 

Asia’s Rise in the New World Trade Order

The Effects of Mega-Regional Trade Agreements on Asian Countries

Part 2 of the GED Study Series:

Effects of Mega-Regional Trade Agreements

Click to access NW_Asia_s_Rise_in_the_New_World_Trade_Order.pdf

 

 

 

 

Regional Trade Agreements: Development Challenges and Policy Options

By Antoni Estevadeordal, Kati Suominen, Christian Volpe Martinicus,
December 2013

 

http://e15initiative.org/publications/regional-trade-agreements-development-challenges-and-policy-options/

http://e15initiative.org/themes/regional-trade-agreements/

 

 

 

Regional Trade Agreements

https://ustr.gov/trade-agreements/wto-multilateral-affairs/wto-issues/regional-trade-agreements

 

 

 

What are mega-regional trade agreements?

WEF

https://www.weforum.org/agenda/2014/07/trade-what-are-megaregionals/

 

Regional trade agreements, integration and development

2017

 

Click to access ser_rp2017d1_en.pdf

 

Mega-Regional Trade Agreements and the Future of the WTO

Chad Brown
PIIE

http://onlinelibrary.wiley.com/doi/10.1111/1758-5899.12391/epdf

https://piie.com/commentary/speeches-papers/mega-regional-trade-agreements-and-future-wto

 

 

CHINA’S NEW REGIONAL TRADE AGREEMENTS

Agata Antkiewicz

John Whalley

December 2004

 

Click to access w10992.pdf

 

 

CHINA’S REGIONAL AND BILATERAL TRADE AGREEMENTS

Chunding Li Jing

Wang John Whalley

January 2014

 

Click to access pt.pdf

 

 

Currency Unions and Regional Trade Agreements: EMU and EU Effects on Trade

Reuven Glick

Federal Reserve Bank of San Francisco

October 2016

Click to access wp2016-27.pdf

 

Regionalism in a globalizing world: an Asia-Pacific perspective

Dilip Das

2001

http://wrap.warwick.ac.uk/2038/

 

Slowdown in Global Investment (FDI) Flows

Slowdown in Global Investment (FDI) Flows

 

 

From Determinants of Foreign Direct Investment (FDI)

Foreign direct investment (FDI) is a major component of globalization, together with international trade. Its operation is made possible by movements of factors across countries, in particular, capital. By definition, FDI involves long-term cross-country commitments. According to International Monetary Fund (IMF), FDI entails the establishment of a “lasting interest” by a resident entity of one economy in an enterprise located in another economy (International Monetary Fund, 1993). Lasting interest implies a long-term relationship between the foreign investor and the overseas enterprise where the said investor holds significant influence over management. The IMF defines a direct investment enterprise as one in which a foreign investor holds at least 10% of the ordinary shares or voting power (International Monetary Fund, 1993). The Organization for Economic Cooperation and Development (OECD, 1996, p. 10) classifies enterprises of direct foreign investors into three groups: subsidiaries, in which a nonresident investor holds more than 50% of the ownership; associates, in which a nonresident investor’s shares range between 10 and 50%; and branches, which are unincorporated enterprises owned by a nonresident investor, wholly or jointly. Obviously, such definitions and the resultant measurements leave ambiguities and imprecisions. However, they do help maintain relative consistency in cross-country comparisons.

From 1995 to 2015, the world saw a dramatic increase in FDI. The FDI inflows in 2015 were 8.6 times those in 1995, an increase from about 0.2 trillion USD in 1995 to about 1.8 trillion USD in 2015. While FDI inflows to developed countries increased 8.6-fold, those to developing countries and transitional economies increased 23 times. In 1995, FDI inflows to developing and transitional economies were 17% of the world total, and in 2015 they accounted for 45%. FDI flows to OECD countries peaked in 2007, at about 1.3 trillion USD. Between 2013 and 2014, for the first time, developing countries received more FDI than developed countries (UNCTAD, 2016), though the developed world recaptured the position as the largest FDI recipient in 2015 (see Figure 1).

There is an ever-growing body of literature on FDI. As Markusen (2008) demonstrated, three strands of relevant literature exist:

  • the international business approach that is oriented toward the rationale of individual firms,
  • the macroeconomic approach that focuses on aggregate flows of FDI without making a distinction between direct and portfolio investments,
  • and the international trade theory approach, which increasingly moves closer to the international business approach, combining firm-level FDI analysis with aggregate analysis of capital flows.

 

 

From UNCTAD World Investment Report 2017

FDI2

 

 

Key Sources of Research:

 

2017 AT Kearney FDI Confidence Index

http://www.iberglobal.com/files/2017/fdi_index_atkearney.pdf

 

UNCTAD World Investment Report 2017

http://unctad.org/en/PublicationsLibrary/wir2017_en.pdf

 

 

Recent Developments in Trade and Investment

Pierre Sauvé
Trade and Competitiveness Global Practice
World Bank Group
MIKTA Workshop on Trade and Investment
Session 2
Geneva, 20 March 2017

https://www.wto.org/english/forums_e/business_e/pierre_sauve_world_bank.pdf

 

 

OECD FDI Data

https://data.oecd.org/fdi/fdi-flows.htm

 

 

UNCTAD FDI Data

http://unctad.org/en/Pages/DIAE/FDI%20Statistics/Interactive-database.aspx

 

 

GLOBAL FDI FLOWS SLIP IN 2016, MODEST RECOVERY EXPECTED IN 2017

http://unctad.org/en/PublicationsLibrary/webdiaeia2017d1_en.pdf

 

 

Cross border mergers make India favoured FDI route: UNCTAD

June 2017

 

http://www.deccanchronicle.com/business/economy/080617/cross-border-mergers-make-india-favoured-fdi-route-unctad.html

 

 

Cross-border M&As push global FDI flows to $1.76 trillion

June 2016

http://economictimes.indiatimes.com/news/international/business/cross-border-mas-push-global-fdi-flows-to-1-76-trillion/articleshow/52860326.cms

 

 

OECD Bilateral FDI Data

http://stats.oecd.org/index.aspx?DataSetCode=FDI_FLOW_PARTNER

 

 

UNCTAD Bilateral FDI Data

http://unctad.org/en/Pages/DIAE/FDI%20Statistics/FDI-Statistics-Bilateral.aspx

 

 

World Bank FDI Database

https://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD

 

 

FDI Markets

https://www.fdimarkets.com

 

 

FDI Reports

http://www.fdireports.com/home/index.cfm?CFID=16605395&CFTOKEN=534deb8f9bfff240-CA8D9CBD-9042-6C79-7D3F0DD68E9B6616&jsessionid=2030aa76f30310567d2372163935674e554c

 

 

Determinants of Foreign Direct Investment (FDI)

Yi Feng

Online Publication Date: Jun 2017

http://politics.oxfordre.com/view/10.1093/acrefore/9780190228637.001.0001/acrefore-9780190228637-e-559?print=pdf

Trading Down: NAFTA, TPP, TATIP and Economic Globalization

Trading Down: NAFTA, TPP, TATIP and Economic Globalization

Top Institutions and Economists Now Say Globalization Increases Inequality

World Bank, IMF, BIS, NBER, McKinsey Now Admit that Globalization Increases Inequality

We’ve all heard that globalization lifts all boats and increases our prosperity …

But mainstream economists and organizations are now starting to say that globalization increases inequality.

The National Bureau of Economic Research – the largest economics research organization in the United States, with many Nobel economists and Chairmen of the Council of Economic Advisers as members –  published,  a report in May finding:

Recent globalization trends have increased U.S. inequality by disproportionately raising top incomes.

***

Rising import competition has adversely affected manufacturing employment, led firms to upgrade their production and caused labor earnings to fall.

NBER explains that globalization allows executives to gain the system to their advantage:

This paper examines the role of globalization in the rapid increase in top incomes. Using a comprehensive data set of thousands of executives at U.S. firms from 1993-2013, we find that exports, along with technology and firm size, have contributed to rising executive compensation. Isolating changes in exports that are unrelated to the executive’s talent and actions, we show that globalization has affected executive pay not only through market channels but also through non-market channels. Furthermore, exogenous export shocks raise executive compensation mostly through bonus payments in poor-governance settings, in line with the hypothesis that globalization has enhanced the executive’s rent capture opportunities. Overall, these results indicate that globalization has played a more central role in the rapid growth of executive compensation and U.S. inequality than previously thought, and that rent capture is an important part of this story.

A World Bank document says globalization “may have led to rising wage inequality”. It  notes:

Recent evidence for the US suggests that adjustment costs for those employed in sectors exposed to import competition from China are much higher than previously thought.

***

Trade may have contributed to rising inequality in high income economies ….

The World Bank also cites Nobel prize-winning economist Eric Maskin’s view that globalization increases inequality because it increases the mismatch between the skills of different workers.

A report by the International Monetary Fund notes:

High trade and financial flows between countries, partly enabled by technological advances, are commonly cited as driving income inequality …. In advanced economies, the ability of firms to adopt laborsaving technologies and offshoring has been cited as an important driver of the decline in manufacturing and rising skill premium (Feenstra and Hanson 1996, 1999, 2003) ….

***

Increased financial flows, particularly foreign direct investment (FDI) and portfolio flows have been shown to increase income inequality in both advanced and emerging market economies (Freeman 2010). One potential explanation is the concentration of foreign assets and liabilities in relatively higher skill- and technology-intensive sectors, which pushes up the demand for and wages of higher skilled workers. In addition, FDI could induce skill-specific technological change, be associated with skill-specific wage bargaining, and result in more training for skilled than unskilled workers (Willem te Velde 2003). Moreover, low-skill, outward FDI from advanced economies may in effect be relatively high-skilled, inward FDI in developing economies (Figini and Görg 2011), thus exacerbating the demand for high-skilled workers in recipient countries. Financial deregulation and globalization have also been cited as factors underlying the increase in financial wealth, relative skill intensity, and wages in the finance industry, one of the fastest growing sectors in advanced economies (Phillipon and Reshef 2012; Furceri and Loungani 2013).

The Bank of International Settlements – the “Central Banks’ Central Bank” – also notes  that globalization isn’t all peaches and cream.  The Financial Times explains :

A trio of recent papers by top officials from the Bank for International Settlements goes further, however, arguing that financial globalisation itself makes booms and busts far more frequent and destabilising than they otherwise would be.

McKinsey & Company notes:

Even as globalization has narrowed inequality among countries, it has aggravated income inequality within them.

The Economist points out:

Most economists have been blindsided by the backlash [against globalization]. A few saw it coming. It is worth studying their reasoning ….

***

Branko Milanovic of the City University of New York believes such costs perpetuate a cycle of globalisation. He argues that periods of global integration and technological progress generate rising inequality ….

Supporters of economic integration underestimated the risks … that big slices of society would feel left behind ….

The New York Times reported:

Were the experts wrong about the benefits of trade for the American economy?

***

Voters’ anger and frustration, driven in part by relentless globalization and technological change [has made Trump and Sanders popular, and] is already having a big impact on America’s future, shaking a once-solid consensus that freer trade is, necessarily, a good thing.

“The economic populism of the presidential campaign has forced the recognition that expanded trade is a double-edged sword,” wrote Jared Bernstein, former economic adviser to Vice President Joseph R. Biden Jr.

What seems most striking is that the angry working class — dismissed so often as myopic, unable to understand the economic trade-offs presented by trade — appears to have understood what the experts are only belatedly finding to be true: The benefits from trade to the American economy may not always justify its costs.

In a recent study, three economists — David Autor at the Massachusetts Institute of Technology, David Dorn at the University of Zurich and Gordon Hanson at the University of California, San Diego — raised a profound challenge to all of us brought up to believe that economies quickly recover from trade shocks. In theory, a developed industrial country like the United States adjusts to import competition by moving workers into more advanced industries that can successfully compete in global markets.

They examined the experience of American workers after China erupted onto world markets some two decades ago. The presumed adjustment, they concluded, never happened. Or at least hasn’t happened yet. Wages remain low and unemployment high in the most affected local job markets. Nationally, there is no sign of offsetting job gains elsewhere in the economy. What’s more, they found that sagging wages in local labor markets exposed to Chinese competition reduced earnings by $213 per adult per year.

In another study they wrote with Daron Acemoglu and Brendan Price from M.I.T., they estimated that rising Chinese imports from 1999 to 2011 cost up to 2.4 million American jobs.

“These results should cause us to rethink the short- and medium-run gains from trade,” they argued. “Having failed to anticipate how significant the dislocations from trade might be, it is incumbent on the literature to more convincingly estimate the gains from trade, such that the case for free trade is not based on the sway of theory alone, but on a foundation of evidence that illuminates who gains, who loses, by how much, and under what conditions.”

***

The case for globalization based on the fact that it helps expand the economic pie by 3 percent becomes much weaker when it also changes the distribution of the slices by 50 percent, Mr. Autor argued.

And Steve Keen – economics professor and Head of the School of Economics, History and Politics at Kingston University in London – notes:

Plenty of people will try to convince you that globalization and free trade could benefit everyone, if only the gains were more fairly shared. The only problem with the party, they’ll say, is that the neighbours weren’t invited. We’ll share the benefits more equally now, we promise. Let’s keep the party going. Globalization and Free Trade are good.

This belief is shared by almost all politicians in both parties, and it’s an article of faith for the economics profession.

***

It’s a fallacy based on a fantasy, and it has been ever since David Ricardo dreamed up the idea of “Comparative Advantage and the Gains from Trade” two centuries ago.

***

[Globalization’s] little shell and pea trick is therefore like most conventional economic theory: it’s neat, plausible, and wrong. It’s the product of armchair thinking by people who never put foot in the factories that their economic theories turned into rust buckets.

So the gains from trade for everyone and for every country that could supposedly be shared more fairly simply aren’t there in the first place. Specialization is a con job—but one that the Washington elite fell for (to its benefit, of course). Rather than making a country better off, specialization makes it worse off, with scrapped machinery that’s no longer useful for anything, and with less ways to invent new industries from which growth actually comes.-

Excellent real-world research by Harvard University’s “Atlas of Economic Complexity” has found diversity, not specialization, is the “magic ingredient” that actually generates growth. Successful countries have a diversified set of industries, and they grow more rapidly than more specialized economies because they can invent new industries by melding existing ones.

***

Of course, specialization, and the trade it necessitates, generates plenty of financial services and insurance fees, and plenty of international junkets to negotiate trade deals. The wealthy elite that hangs out in the Washington party benefits, but the country as a whole loses, especially its working class.

Some Big Companies Losing Interest In Globalization

Ironically, the Washington Post noted in 2015 that the giant multinational corporations themselves are losing interest in globalization … and many are starting to bring the factories back home:

Yet despite all this activity and enthusiasm, hardly any of the promised returns from globalization have materialized, and what was until recently a taboo topic inside multinationals — to wit, should we reconsider, even rein in, our global growth strategy? — has become an urgent, if still hushed, discussion.

***

Given the failures of globalization, virtually every major company is struggling to find the most productive international business model.

***

Reshoring — or relocating manufacturing operations back to Western factories from emerging nations — is one option. As labor costs escalate in places such as China, Thailand, Brazil and South Africa, companies are finding that making products in, say, the United States that are destined for North American markets is much more cost-efficient. The gains are even more significant when productivity of emerging countries is taken into account.

***

Moreover, new disruptive manufacturing technologies — such as 3-D printing, which allows on-site production of components and parts at assembly plants — make the idea of locating factories where the assembled products will be sold more practicable.

***

GE, Whirlpool, Stanley Black & Decker, Peerless and many others have reopened shuttered factories or built new ones in the United States.

 Key Sources of Research

 

Trading Down: Unemployment, Inequality and Other Risks of the Trans-Pacific Partnership Agreement

 

Jeronim Capaldo and Alex Izurieta

with Jomo Kwame Sundaram

January 2016

 

Click to access 16-01Capaldo-IzurietaTPP.pdf

 

 

The Trans-Atlantic Trade and Investment Partnership: European Disintegration, Unemployment and Instability

Jeronim Capaldo

October 2014

 

Click to access 14-03CapaldoTTIP.pdf

 

 

 Revisiting the Link between Trade, Growth and Inequality:
Lessons for Latin America and the Caribbean

by Kimberly Beaton, Aliona Cebotari, and Andras Komaromi

 

 

ECONOMIC GLOBALIZATION AND INCOME INEQUALITY IN THE UNITED STATES

 

Click to access inequality.pdf

 

 

Data Fail: The Divergence between Rosy International Trade Commission Projections and U.S. Trade Agreements’ Actual Outcomes

Tradewatch.com

May 2016

Click to access usitc-tpp-prebuttal.pdf

 

Globalization, Outsourcing, and Wage Inequality

Robert C. Feenstra, Gordon H. Hanson

NBER Working Paper No. 5424
Issued in January 1996

http://www.nber.org/papers/w5424

Economic Inequality in the United States

Janet Yellen

2006

http://www.frbsf.org/our-district/press/presidents-speeches/yellen-speeches/2006/november/economic-inequality-in-the-united-states/

http://www.frbsf.org/economic-research/publications/economic-letter/2006/december/economic-inequality-in-the-united-states/

 

 

What’s caused the rise in income inequality in the US?

WEF

2015

https://www.weforum.org/agenda/2015/05/whats-caused-the-rise-in-income-inequality-in-the-us/

 

Worsening American Income: Inequality: Is world trade to blame?

Gary Burtless

https://www.brookings.edu/articles/worsening-american-income-inequality-is-world-trade-to-blame/

 

 

Income inequality in the United States: What do we know and what does it mean? Issues by the Numbers, July 2017

Dr. Daniel Bachman

July 12, 2017

https://dupress.deloitte.com/dup-us-en/economy/issues-by-the-numbers/july-2017/rising-income-inequality-gap-united-states.html

 

 

Top Institutions and Economists Now Say Globalization Increases Inequality

August 20, 2017

Washington Post Blog

http://www.washingtonsblog.com/2017/08/globalization-increases-inequality-destabilizes-economies-political-systems.html

Business Investments and Low Interest Rates

Business Investments and Low Interest Rates

 

Longstanding IS-LM macroeconomic framework says that low interest rates should result in higher investment (as the cost of capital for investments declines).  However, in practice it is not true.  Business Investment also depends on many other factors such as profitability and projections for economic growth, market growth,  and Industry/sector growth (in which a company operates).  Low Interest rates also indicate low economic growth environment.  In a low growth environment, having poor projections of future cash flows from new investments, companies can not justify domestic Investments if financial hurdle rates are not met.

Corporations also may have attractive options for investment outside the country.  Free Trade agreements allow for business investments to move overseas for getting access to growing markets or for cost cutting reasons such as labor costs.

Instead of Investing in new capacity, companies are paying dividends, and buying back shares to boost share prices and doing acquisitions. Companies are using their own cash retained from earnings to pay dividends, buyback shares, and in some cases doing acquisitions. Debt-financed acquisitions are done through raising capital from capital markets.

Companies do not need to grow by new fixed investments when they can grow by acquiring other companies. Organic growth is the process of business expansion by increased output, customer base expansion, or new product development, as opposed to mergers and acquisitions, which is inorganic growth. Organic growth typically excludes the impact of foreign exchange.

There has been spectacular M&A activity in 2014, 2015 and is continuing in 2016.

In low economic growth and low interest rate environment, it may make more sense to grow by inorganic growth.  The justification for M&A is usually the combination of reduced costs of doing business and increased revenue from greater market share.   After completion of acquisition, acquiring company management may decide to rationalize business units – closing inefficient plants, laying off employees, combining overlapping internal corporate services departments.  These decisions depend on the type of M&A strategy.

Economists need to pay attention to these trends as well.  At present, there is no discussion of M&A activity in Economic Policy discourse among Economists and Policy makers.

 

Wall street data charts showing trends in Business Investments

na-cm077_resear_16u_20161026161806na-ck534_bizinv_16u_20160615183306

 

From  Jeff Cox / CNBC.com November 17 2016

Fed Chair Janet Yellen and her colleagues for quite some time have been bemoaning the low levels of business investment.

Pressed Thursday to explain why this has been the case, the central bank chief told Congress she wasn’t sure, but she denied it had anything to do with the Fed’s cheap-money policies of the past eight years.

“It’s not clear in my mind why it is that investment spending has been as weak as it is,” she told the Joint Economic Committee. “Initially, we had an economy with a lot of excess capacity. Firms were clearly operating without enough sales to justify a need to invest in additional capacity, and more recently with the economy moving toward full employment, we would expect to see investment spending pick up, and it’s not obvious exactly why it hasn’t picked up.”

Sen. Bill Cassidy, R-La., suggested that the fault may lie in what the Fed has done. Specifically, he pointed to the central bank’s quantitative easing measures that saw the Fed’s balance sheet surge to $4.5 trillion largely on three rounds of bond buying.

Faced with the uncertainty of returns from capital expenditures and the near-certainty of returns on assets like stocks and bonds during what Cassidy called “easy money” QE programs, businesses opted for the latter, he said.

“I wouldn’t agree that the Fed’s monetary policy has hampered business investment or been a negative factor,” Yellen responded. “I’m not aware of any evidence that suggests that it is.”

She explained that productivity has been on the decline since companies started reversing bare-bones employment levels during the financial crisis. However, that has not been met with business investment, in part because companies don’t believe it “will produce returns that justify those investments,” Yellen said.

 

From Moody.com

Moody’s: US non-financial corporates’ cash pile increases to $1.68 trillion, tech holding the lead

Global Credit Research – 20 May 2016

New York, May 20, 2016 — US non-financial companies rated by Moody’s held $1.68 trillion in cash at the end of 2015, up 1.8% from $1.65 trillion the year prior, Moody’s Investors Services says in a new report. The top 50 holders of cash account for $1.14 trillion of the total cash pile, and entry to the top 50 list now requires $6.12 billion in cash.

“The top four cash-heavy US industries remain technology, healthcare/pharmaceuticals, consumer products, and energy,” says Richard Lane, a Moody’s Senior Vice President. These four industries currently hold a record $1.3 trillion, or 77% of total corporate cash and have accounted for more than 72% of the total every year since 2007.

The top five cash holders are Apple, Microsoft, Google, Cisco Systems and Oracle, Moody’s says in “US Non-Financial Companies: Cash Pile Grows 1.8% to $1.68 Trillion; Tech Extends Lead Over Other Sectors.”

Apple held $215.7 billion in total cash for the period. The company has held the top spot as cash king since 2009.

“While the concentration of cash among the top-rated cash holders continues to grow, so too has the portion held by the technology sector, which accounted for a record 46% of total cash in 2015, up from 41% in 2014,” Lane says.

Moody’s expects the technology sector cash concentration will grind higher over the next year because of the sector’s strong cash flow generation and despite stronger returns of capital to shareholders. The technology sector generated 63% of the total rated non-financial free cash flow in 2015, up from 37% in 2007.

For the top 50, capital spending fell by 3% to $885 billion, and net share buybacks fell 7% to $269 billion. Dividends increased by 4% to a record high of $404 billion, while acquisition spending increased 43%, to a record $401 billion.

For the first time since 2012, cash coverage of aggregate debt maturities over the next five years fell below 100% to 93% at the end of 2015.

In 2016, Moody’s expects aggregate spending on capital investments, dividends, acquisitions and share buybacks to again approximate $1.9 trillion.

 

From Wall Street Journal

mi-cp973_divide_16u_20160603184210

 

From DealLogic

mw-dn118_ma_acq_20150602090958_mg

 

From M&A experts weigh in on deals for 2017

manda3manda2017

 

From  US M&A market on a high

us-ma-2015

From IMAA

usmabestusmabest2

 

Key ideas/issues for M & A:

Why grow through M & A activities ?

  • Limited organic growth options
  • Need to address the transformation in the marketplace/existing business models
  • Availability of credit on favorable terms
  • Large Cash reserves/commitments
  • Shifting consumer demands
  • Improving Equity markets
  • Opportunities in emerging markets

What are concerns?

  • Slow growth environment
  • Lack of suitable targets
  • Record stock prices
  • Geopolitical risks
  • Others
  • Constrained Consumer Demand
  • Regulatory Considerations
  • Rising Interest Rates

 

 

Key terms:

  • Return on Investment (ROI)
  • Return on Invested Capital ( ROIC)
  • Internal Rate of Return (IRR)
  • Weighted Average Cost of Capital (WACC)
  • Economic Value added (EVA)
  • Return on Assets (ROA)
  • Return on Equity (ROE)
  • Net Present Value (NPV)
  • Compound Annual Growth Rate (CAGR)
  • Capital Expenditures ( CAPEX)
  • Corporate Savings Glut
  • Business Fixed Investments
  • Share Buybacks
  • DIvidends
  • Acquisitions
  • NAFTA
  • TPP
  • TTIP
  • International Investment Position (IIP)
  • Free Trade
  • Direct Investment Position (FDI)
  • Trade Flows
  • Current Account
  • Capital Account
  • Organic Growth
  • Inorganic Growth

 

 

Key Sources of Research:

 

Business Investment in the United States: Facts, Explanations, Puzzles, and Policies

Remarks by Jason Furman Chairman, Council of Economic Advisers

September 30, 2015

 

Click to access 20150930_business_investment_in_the_united_states.pdf

Click to access 2015.09.30-Jason-Furman_Business-Investment-in-US-Facts-Explanations-Puzzles-Policies.pdf

 

 

Firms’ Investment Decisions and Interest Rates

Kevin Lane and Tom Rosewall

Click to access bu-0615-1.pdf

 

 

Investing when interest rates are low

By Timothy M. Koller, Jiri Maly, and Robert N. Palter

http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/investing-when-interest-rates-are-low

 

 

Are low-interest rates contributing to low business investment?

By Nick Bunker

http://equitablegrowth.org/equitablog/are-low-interest-rates-contributing-to-low-business-investment/

 

 

Why isn’t Investment More Sensitive to Interest Rates: Evidence from Surveys

Steve A. Sharpe and Gustavo A. Suarez

2014

Click to access 201402r.pdf

 

 

Why Aren’t Low Rates Working? Blame Dividends

Since the Federal Reserve took rates to near zero, companies have boosted buybacks 194%

http://www.wsj.com/articles/why-arent-low-rates-working-blame-dividends-1465119005

 

 

Low Interest Rates Are Hurting Growth

http://www.forbes.com/sites/realspin/2016/10/04/low-interest-rates-are-hurting-growth/#5e9ccf813a2b

 

 

Secular Stagnation and Returns on Capital

Paul Gomme,  B. Ravikumar, Peter Rupert,

Click to access ES_19_2015-08-18.pdf

 

 

The Return to Capital and the Business Cycle

Gomme, Paul, B. Ravikumar, and Peter C. Rupert, 2006.

Federal Reserve Bank of Cleveland, Working Paper no. 06-03.

https://www.clevelandfed.org/en/newsroom-and-events/publications/working-papers/working-papers-archives/2006-working-papers/wp-0603-the-return-to-capital-and-the-business-cycle.aspx

 

 

Long-term investment, the cost of capital and the dividend and buyback puzzle

Adrian Blundell-Wignall and Caroline Roulet

Click to access Long-term-investment_CapitalCost-dividend-buyback.pdf

 

 

The “Search for Yield” and Business Investment

By Jason M. Thomas

Click to access productivity_slowdown_may2016_final.pdf

 

 

Infrastructure versus other investments in the global economy and stagnation hypotheses: What do company data tell us?

Adrian Blundell-Wignall and Caroline Roulet*

Click to access Infrastructure-versus-other-investments-Global-economy-Stagnation-hypotheses.pdf

 

 

(Why) Is investment weak?

Ryan Banerjee Jonathan Kearns Marco Lombardi

Click to access r_qt1503g.pdf

 

 

The Fed Has Hurt Business Investment

by Michael Spence, Kevin Warsh

http://www.hoover.org/research/fed-has-hurt-business-investment

 

 

FRED data series on Savings and Investments

https://fred.stlouisfed.org/categories/112

 

 

Weak Business Investment, Lower Neutral Rate Impacting Each Other

http://www.theepochtimes.com/n3/2160321-weak-business-investment-lower-neutral-rate-impacting-each-other/

 

 

The Corporate Saving Glut in the Aftermath of the Global Financial Crisis

Joseph W. Gruber and Steven B. Kamin

Click to access ifdp1150.pdf

 

 

Rising Intangible Capital, Shrinking Debt Capacity, and the US Corporate Savings Glut

Antonio Falato Dalida Kadyrzhanova Jae W. Sim

November 2012. This version: June 2013

Click to access 5599_KADYRZHANOVA_Cover%20-%20Rising%20Intangible%20Capital,%20Shrinking%20Debt%20Capacity%20and%20the%20US%20Corporate%20Savings%20Glut.pdf

 

 

Corporate Profits and Business Fixed Investment: Why are Firms So Cautious about Investment?

Naoya Kato and Takuji Kawamoto

April 2016

Click to access rev16e02.pdf

 

 

The Evolution of Corporate Cash

John R. Graham
Mark T. Leary

Draft: February 2015

Click to access graham.pdf

 

 

Adverse Effects of Ultra-Loose Monetary Policies on Investment, Growth and Income Distribution

Andreas Hoffmann & Gunther Schnabl

Click to access Savings%20and%20Investment%20During%20the%20Great%20Depression%20and%20the%20Recent%20Global%20Crisis.pdf

 

 

NAFTA at 20

AFL-CIO

Click to access March2014_NAFTA20_nb.pdf

 

 

The North American Free Trade Agreement (NAFTA)

 

M. Angeles Villarreal

Ian F. Fergusson

April 16, 2015

Click to access R42965.pdf

 

 

 

NAFTA Revisited

PIIE

Click to access NAFTA_Revisited_Text.pdf

 

Direct Investment Positions for 2015 Country and Industry Detail

 

By Derrick T. Jenniges and James J. Fetzer

July 2016

 

Click to access 0716_direct_investment_positions.pdf

 

 

Activities of U.S. Multinational Enterprises in the United States and Abroad

Preliminary Results From the 2014 Benchmark Survey

 

Click to access 1216_activities_of_us_multinational_enterprises.pdf

 

 

2015: A Merger Bonanza
Nearly $5 trillion worth of deals were announced last year. Why do so many big companies want team up?

http://www.theatlantic.com/business/archive/2016/01/2015-mergers-acquisitions/423096/

 

 

M&A experts weigh in on deals for 2017

https://info.kpmg.us/ma-survey-2017.html?gclid=Cj0KEQiAkO7CBRDeqJ_ahuiPrtEBEiQAbYupJaJUqUI61s1m-kFVDnT112-3ocH1SdVfcCxiBiNX614aAuvj8P8HAQ

 

 

 

The Federal Reserve’s Impact on the US M&A Market: An Empirical Examination

Sebastian v. Boetticher

Spring 2015

 

Click to access Boetticher.pdf

 

 

M&A Statistics

IMAA offers extensive and up-to-date information, data, research on M&A and Mergers & Acquisitions statistics

https://imaa-institute.org/mergers-and-acquisitions-statistics/

 

 

Hearing: The Economic Outlook

Janet Yellen on November 16 2016 speaking at Joint Economic Committee

Listen/view at 1:33:00 her comments on Business Investments