Tornado Alley (PROG)

[fuagf]

Trump's black and white look at the world (particularly attractive to his some 32%
base) will only serve to keep that base ignorant of how the world economy works

Speeches

Globalization and Its Effects on the U.S. Economy

Presented by Edward G. Boehne, President
Federal Reserve Bank of Philadelphia

World Affairs Council of Greater Valley Forge
Paoli, Pa.
March 20, 1998

[...]

While many people fear globalization, the process is not fundamentally different from the relocation of manufacturing and the integration of financial markets that occurred within the U.S. in the 20th century. We know that manufacturing plants and jobs moved from the Northeast to the South and Southwest. At the same time, companies established nationwide distribution systems and nationwide brands. Now a company headquartered in Pennsylvania may have production facilities in 6 states, buy inputs produced in 12 states, and sell goods in all 50 states.

Similarly, all but the largest Pennsylvania companies used to rely on local banks for the bulk of their financing. Now they borrow not only from local banks but also from a variety of financial firms headquartered in other parts of the country.

And residents of Pennsylvania, who used to keep their savings on deposit at local banks, now entrust much of their wealth to portfolio managers in New York who buy stocks and bonds issued by companies in all 50 states. Similarly, portfolio managers in Valley Forge handle money for residents of states other than Pennsylvania.

Substitute 'countries' for 'states' and you have described globalization.

Globalization has benefits, but also costs. Let's focus first on the benefits. U.S. firms gain access to new markets — Coca Cola, Procter and Gamble, and Merck, for example, sell their products in virtually all countries. These activities generate profits for their American shareholders. U.S. companies also gain access to new sources of raw materials and intermediate inputs, and to lower-cost locations for assembly operations that use unskilled labor — think of liquefied natural gas from the Arabian Gulf, computer boards from Taiwan, and running shoes assembled in Malaysia.

Still focusing on benefits of globalization, we know that as consumers we have gained access to new products, including compact disks, digital cameras, and fresh raspberries and blackberries in January and February. And as savers, we have gained the ability to diversify more broadly. Academic literature shows that over the long-run internationally diversified equity portfolios have a better risk-return tradeoff than domestic-only equity portfolios. These benefits have led to a higher standard of living in the U.S. and abroad.

Firms also benefit from globalization. They gain the ability to diversify more broadly. A U.S. firm that operates in many countries will find that recessions and booms in the many markets in which it operates are likely to be out of sync. This helps to stabilize companies' profits. Firms also gain the ability to make use of financial markets worldwide.

In the last few years, we have seen that globalization can also provide a safety valve against overheating of the U.S. economy. One reason inflation has remained so low in the U.S. during this business cycle is that competition from foreign producers has made it difficult for firms producing in the U.S. to raise prices even when they face robust demand for their products. And firms that produce not only in the U.S. but also in other countries have been able to expand production abroad, and then ship to the U.S. as their U.S. production facilities run out of slack. That has helped avoid bottlenecks.

As with the relocation of manufacturing in the U.S., globalization generates some of its gains by allowing — or sometimes forcing — relocation of production. Not everyone benefits. Just as relocation of manufacturing from Pennsylvania to South Carolina generates losers as well as winners, so does globalization.

The U.S. as a whole gains from reductions in trade barriers and capital controls, but not everyone shares in those gains. In particular, globalization appears to have contributed to the decline in real wages of those with few skills and little education, though more of the decline appears to have resulted from computerization and the widespread adoption of new technologies generally.

It is important to note that the costs of globalization do not come from losing jobs overall. Total employment in the U.S. has grown dramatically as globalization has proceeded. And we need to remember that while some U.S. companies have moved jobs abroad, foreign firms have set up shop in the U.S. and hired American workers. The costs of globalization come from the fact that it is costly to shift resources from one use to another and to retrain workers as the mix of jobs changes. In the process of shifting resources, some production facilities are abandoned and some workers suffer unemployment. They do not share the gains, at least not immediately.

Globalization also increases the U.S. economy's exposure to foreign shocks. An economic slowdown in Europe or Asia, for example, has a bigger effect on the U.S. economy now than it did when exports and imports were smaller relative to GDP. And greater international financial linkages mean that the U.S. financial sector is more exposed to foreign financial shocks than used to be the case. Recent financial problems in Asia provide a good example.

Because globalization brings costs as well as benefits, policymakers face a challenge: to maximize the benefits while minimizing the costs.

The first task is to ensure a 'level playing field' for U.S. and foreign firms in trade, foreign direct investment, financial services, and other areas. This is an important task, but it should not be an excuse for protecting particular industries in the U.S. from foreign competition.

Another challenge is to ensure that workers displaced by the more intense competition that globalization allows are able to acquire new skills, to move into new industries, and sometimes even to move to new locations.

[...]

We also cannot become complacent about our trade policies and the threat of protectionism. The U.S. must follow the good policies that helped bring us prosperity — good monetary policy, good fiscal policy, and good trade policy. If the problems in Asia lead to a resurgence of protectionist legislation in our nation, the result will be significant harm to world trade. If so, we would lose a key contributor to our nation's prosperity.

https://www.philadelphiafed.org/publications/speeches/boehne/1998/03-20-98_world-affairs-council

Also, what percentage of the deficit with China actually leads to profits for American companies?

U.S. Trade Deficit by Country, with Current Statistics and Issues

The Largest U.S. Deficit Is With China

By Kimberly Amadeo
Updated February 21, 2018

The United States has the world's largest trade deficit. It's been that way since 1975. The deficit in goods and services was $566 billion in 2017. Imports were $2.895 trillion and exports were only $2.329 trillion.

[...]

More than 65 percent of the U.S. trade deficit in goods was with China. The $375 billion deficit with China was created by $505 billion in imports. The main Chinese imports are consumer electronics, clothing, and machinery. America only exported $130 billion in goods to China.

Note that many of the imports are sold by American companies that ship raw materials to be assembled for a lower cost in China. They are counted as imports even though they create income and profit for these U.S. companies.

Nevertheless, this practice does outsource jobs .. https://www.thebalance.com/how-outsourcing-jobs-affects-the-u-s-economy-3306279 .
https://www.thebalance.com/trade-deficit-by-county-3306264