Why are Toyota's Tundra trucks manufactured in San Antonio and Nike's shoes made in Vietnam? What is this situation's net "on-shoring/off-shoring" result? Should everyone in Ohio be happy with it? Would a law taxing the foreign-earned net income of US-based companies fix the problem?
A global balance sheet might show the US as the world's largest debtor (borrower) and China as the world's largest creditor (lender). How did this happen? Has this always been the case? Is it something to worry about? What should (could) be done about it?
The idea of an interconnected and inter-dependent global economy is nothing new. Arguably, the Vikings and Christopher Columbus were motivated by the economic gains that would come their way from discovering new worlds.
What has changed, especially during the past 25 years, are political and social attitudes about free-trade and the institutions necessary to conduct commerce on a global scale. We'll examine each of those factors in detail, but first, here are my lecture notes and PowerPoint slides dealing with "International Commerce:
Consider the following, all of which occurred over the past quarter-century and can be attributed to global changes in economic conditions, attitudes and institutions.
- The world's per-capita inflation-adjusted income rose by about 57% from $5,400 in 1980 to $8,500 in 2005. In general, growth was rapid in Asia, slow in Latin America and stagnant in Africa.
- Infant mortality declined substantially in all regions dropping from 64.5 to 37.5 per thousand births. Not coincidentally, life-expectancy increased strongly in all parts of the world except Africa and the transition states of the former Soviet Union.
- Education gained throughout the world increasing from an average of about 4.4 years of schooling in 1980 to almost 6 years in 1999.
- With the conspicuous exceptions of China and the Middle-East, more people than ever are governed by democratic governments; Latin America and Eastern Europe are the shining examples.
- Between 1980 and 2000, the share of the world's population living on less than $1 per day fell from 34.8% to 19%. The World Bank forecasts this trend will continue despite population growth and account for less than 10% of the world's population by 2015.
- In 1980, the world median inflation rate was 14.3%; by 2005, the median inflation rate was only 4.1%.
- The top average marginal population-weighted income-tax rate stood at 65% in 1980; it was 36.7% in 2005.
- The population-weighted world average tariff rate was 43% in 1980, but only 13% in 2004.
Source: Shleifer, A. (2008). The Age of Milton Friedman. Cambridge, MA.
This list of impressive feats wasn't accomplished without considerable hardships in many countries.
Economists use the term "dislocation" to refer to the process of major changes in an industry, for example, where plants are closed in one place and re-opened somewhere else and jobs are lost at the old location but gained in the plant's new location.
The dislocation's overall result may be positive, but the transition was costly for some parties.
In Section 2, consider the "methods" available for conducting international commerce, especially outsourcing and strategic alliances.
Section 3 introduces you to some of the barriers to international commerce. Consider how most of these barriers have been mitigated by political and institutional change. Understand how tariffs operate and the reason they are imposed. Know what comprises a country's Balance of Trade and the implications of a Trade Deficit versus a Trade Surplus.
Alsi, know how and why exchange rates operate in the way they do. Know the implications for exporters and importers of a "weak-dollar" versus a "strong-dollar." There's no need to become an expert in hedging foreign currencies.