THE GLOBAL

CITIZEN Issue 4: Trade

[ The Economics of Globalization Series ]

THE GLOBAL CITIZENStudent Reader: Trade

Copyright © 2014 by UNA-Education A Program of the United Nations Association of the United States of America

Written and edited byDaniel PierKristin Cox Mehling Rebecca Zerzan Tara Friedman, PwC Amy Auguston, United Nations AssociationTroy Wolfe, United Nations Association

United Nations simulations written byRebecca Corcoran, United Nations Association of Greater Boston

DesignRachel da Silva

Special Thanks toDaniel Laender, United Nations FoundationEileen Buckley, PwC

Special Thanks to PwC

The United Nations Association of the United States of America801 Second AvenueNew York, NY 10017Phone: (212) 697-3315Fax: (212) 697-3316

www.unausa.org

Letter from the Publisher

Trade: The Global Exchange

IN THIS ISSUE

1

3

5

9

15

How the World Connects

The Making of an iPhone

Finance Snapshots

Case Studies from Around the World

Featured Article

The Long Road from Seattle to Bali

Facts and Figures

Starving for Jobs: The Story of Offshoring

The G loba l C i t i zen

LETTER FROM THE PUBLISHER

Trade:The Global ExchangeUse with Lesson 4.02 in the UNA-Education Economics of Globalization Curriculum

Dear Readers,

Have you recently bought snacks at a store, swapped desserts with a friend at lunch, or purchased clothing online? These are all forms of trade, the voluntary exchange of goods or services between two parties. People have traded since the early days of humankind. Before currency existed, people bartered by trading one good or service for an-other. Today trade is more complex – commerce takes place between people on opposite sides of the globe. Individ-uals, small businesses, governments, and multinational corporations are all parties to this system of exchange.

But Stone Age bartering and modern transnational commerce have one important thing in common: a trade rela-tionship exists because both traders--buyer and seller in most cases nowadays--believe it will benefit them. In other words, trade takes place because people have access to different resources. This diversity makes trade advanta-geous by allowing for exchange. People have different skills and resources, so they specialize in what they are good at producing and trade in order to fulfill their other needs. Perhaps you are good at mowing lawns but not at making clothes. You can mow your neighbors’ lawns and head to the store to buy clothing with the money your neighbors pay you.

Countries, like people, are diverse and possess different resources; this is the foundation of international trade. To-day’s global trade has a remarkable impact on societies around the world. Just as historical trade of gold and spices led explorers to travel to new lands, today’s system of international trade brings many of us into contact with people and cultures from around the globe.

These transactions have a variety of effects, some of which present significant challenges. The existence of a global economy begs many important questions: Who makes the rules that govern international trade? Who ensures the qual-ity and safety of goods traded globally? Who safeguards the rights of workers employed by firms from other countries? Who will make certain that the manufacturing and shipping of globally traded products won’t hurt the environment?

These questions are only the beginning. Being interconnected through a global economy means that a change in one country ’s markets can have a ripple effect on other industries and countries halfway around the world. Countries must work together to address the challenges of global trade so that, ultimately, we may all share together in the benefits and successes of the global economy. We hope you enjoy this fourth issue of The Global Citizen.

Sincerely,

The UNA-Education Team

1

The Econom ics o f G loba l i z a t i on | Trade 2

The G loba l C i t i zen

HOW THE WORLD CONNECTS

The Making of an iPhoneUse with Lesson 4.03 in the UNA-Education Economics of Globalization Curriculum

Where is the popular iPhone made? The iPhone is sold by Apple, Inc., an American technology company, but it is not manufactured in the US. In fact, it is not manufactured by Apple at all. Apple out-sources the entire manufacturing process of the iPhone. So where is it made? The answer is not that simple.

1

3

Some technology industry experts doubted that comput-er giant Apple would be competitive in the mobile phone business. The skeptics missed the mark: in 2014, seven years after introducing the iPhone, the company sold its 500 millionth unit somewhere in one of the 100-plus countries where Apple markets its products.

Researchers from the Personal Computing Industry Center (PCIC) at the University of California at Irvine were curious about the complex trade relationships that characterize today’s global marketplace. So what did they do? They took apart an iPhone. What they found was a complicated but fascinating story about international commerce.

An iPhone has hundreds of separate parts. Researchers tried to determine where each component of the iPhone was man-ufactured, how much it sold for, and who benefited. For each part, they calculated the “value added,” which is the difference between the cost of the inputs and the value of the outputs. 1 For example, let’s say a company buys silicon and makes it into computer chips. The value added by the company is the differ-ence between what they paid for the silicon and other compo-nents and the amount they get for selling the computer chip. The more value added, the more profit the company makes.

Who gets the biggest chunk of the profits?Apple comes out on top, even though it does not manufacture the iPhone. Through design, marketing, advertising, and media campaigns, Apple has achieved high demand for its device. The company charged retail customers an average of $549 for the iPhone 4 (though in the US that cost was often reduced in exchange for a contract with a mobile carrier) when the study was conducted in 2010. Apple earned an average of $321 in profit, just over 58 percent. “The primary benefits go to the U.S. economy,” the re-searchers note, “as Apple continues to keep most of its product design, software development, product management, marketing and other high-wage functions in the U.S. . . Apple . . . in turn rewards its (pre-dominantly American) employees and stockholders.”

1

3 3

The Econom ics o f G loba l i z a t i on | Trade

2

3Together, at least five countries or regions — the US, Japan, South Korea, Taiwan, and the European Union —cap-tured just over 9 percent of the iPhone’s retail value in profits through the manufacturing of components. However, most of the manufac-turing for the iPhone components took place outside the suppliers’ home countries, in places such as China, Taiwan, the Philippines, Singapore, Malaysia, Mexico, and Costa Rica. For example, US-based companies OmniVision and Quallcomm both manufacture compo-nents in Taiwan. 3 Manufacturing takes place where workforces are large and wages are relatively low. By building plants or outsourcing to factories in these countries, companies save money on the manufac-turing process.

4

At last, the iPhone is ready for its final assembly.The company hired for this job, Foxconn, is based in Taiwan, but it assembles most of the iPhones in China. When consumers see “Made in China” printed on their iPhones and other electronic de-vices, many assume that Chinese firms and workers garner much of the profits generated by these products. The UC Irvine researchers note, “That is not true of any name-brand products from U.S. firms that we’ve studied,” including the iPhone. “The main financial ben-efit to China takes the form of wages paid for the assembly of the product or for manufacturing of some of the inputs,” a number they estimate to be only $10 or less per iPhone sold, just 2 percent of the phone’s retail value.

4

Firms that design and market final products tend to make higher profits than those who do the manufac-turing. The more expertise needed to create a component, the more value is added. Moreover, profits tend to go to the countries where firms are based, rather than the countries where products are manufactured. This is a pattern that has been evident in the global economy for a long time, and it is likely to continue.

Ultimately, Apple, a US company, buys components that are manufactured in China, Singapore, and the Philippines from companies based in South Korea, the United States, Taiwan, Japan, and Europe. This means the finished iPhone has parts that have traveled the globe even before the final product is shipped to one of its 100-plus retail markets on six continents. “Today, no single country is the source of all innovation,” explained the researchers in an earlier study. It is becoming more and more clear that firms “need to work with international partners to bring new products to market.”

Samsung, a South Korean company, provided the memory chips and earned gross profits of about 7 percent of the sales price for the iPhone.When a legal battle broke out in 2011, with each company accusing the other of patent infringements—illegally copying each other’s ideas--Apple began seeking other suppliers for the chips. It struggled to arrive at a satis-factory agreement, so Apple and Samsung remained partners in manufacturing but bitter adversaries in the courtroom into 2014.2

1 Kraemer, Kenneth L., Greg Linden, and Jason Dedrick. Capturing Value in Global Net works: Apple’s iPad and iPhone. Personal Computing Industry Center (PCIC), An Alfred P. Sloan Foundation Center, University of California at Irvine, July 2011. 2 The Wall Street Journal 3 Finances Online

24

4

3

The G loba l C i t i zen5

TRADE SNAPSHOTS

that have access to the coast, like Kenya and Sudan, have heavy population concentrations far from the ocean. Moreover, modern eco-nomic growth — and participation in the global economy— requires trade. This is very difficult for many African countries because their popu-lations are located in places meant to limit trade with outsiders.

Lack of economic growth and high population density is a formula for severe poverty. Where an inaccessible geography was desirable two hun-dred years ago, it is now an impediment to trade with wealthy foreign nations and therefore a barrier to the economic growth that could speed the achievement of prosperity.

The devastation suffered by Africa during the slave trade was far and wide. Between 1400 and 1900, as many as 18 million Africans were kidnapped, carried away and forced to labor in foreign lands. Centuries of oppression took their toll not only on the enslaved, but on African political institutions, as well. Without security or a stable workforce, African governing bodies collapsed, organized industries—such as trade and agriculture—were impossible to sustain, and communities fell into ruin. But what legacy has this horrific trade left for modern-day Africa? Recent studies indicate that the slave trade has had lasting effects on the political and economic composition of Africa and continues to impact Africans today.

During the slave trade, the most successful com-munities in Africa were those in geographically inaccessible areas, where Africans could hide from and escape slave traders, thereby main-taining their labor forces. Because slave traders invaded the coastlines, African populations con-centrated in regions that were landlocked, and often in areas over rough terrain. Because these populations were far from the coast, they could not rely on fishing or overseas trading. Instead, they relied on agriculture, even though agricul-ture on rough terrain requires more labor and produces fewer crops than does agriculture in more suitable areas. Agricultural industries tend to promote high population growth because growing crops generally requires many laborers.

Today, Africa has the highest proportion of land-locked population in the world. Even countries

Africa Still Suffers from Legacy of Slave Trade

AFRICA

Case Studies from Around the WorldUse with Lesson 4.04 in the UNA-Education Economics of Globalization Curriculum

5

SHACKLES USED TO BIND SLAVES- UN PHOTO

fertilizer use, while the use of corn for fuel, not food, increased food prices.

Perhaps good intentions have gone awry. What does all this mean for biofuels and environmen-talism? Global trading patterns mean that seem-ingly harmless actions in one place can have major consequences elsewhere. In 2013, some US Senators proposed to end the corn ethanol mandate.6 The debate continued, as did the search for renewable, economically viable fuels that are truly environmentally friendly.

6

Biofuel is the fuel of the future, many people say. Petroleum-based fuels such as gasoline release carbon dioxide (CO2) into the atmo-sphere, contributing to global climate change. And people are worried that the world’s petro-leum resources are being depleted. Biofuels—processed from corn, sugar cane, or other plant matter — seem like a good solution to both of these problems. They burn more cleanly than petroleum-derived fuels, and they are a renew-able resource. If we run out, we can just grow more! The United States jumped on the biofuel bandwagon: 2005 and 2007 laws mandated that biofuels including corn ethanol be mixed into gasoline.4

It turns out this policy may not benefit the environment the way its supporters had hoped. The US’s attempt to develop a more eco-friend-ly fuel is unintentionally contributing to the destruction of the Amazon rainforest in South America. How could environmental measures in North America hurt the environment in South America? Because of the popularity of ethanol, US farmers began to convert their soybean farms into corn farms in order to earn more money. With less soy on the market, the price of soy rose around the world. Brazil responded by increasing its soy production to meet the demand. China, the world’s biggest consumer of soy, now imports most of its soy from Brazil, one of the world’s biggest soy producers.

Brazil’s government takes measures to make sure major producers stay out of the fragile Amazon rainforest. However, as major soy pro-ducers took up more land, small-time Brazilian farmers and cattle ranchers were displaced from their farms. These farmers ventured into the rainforest and cleared new land for them-selves, contributing to deforestation. There are local risks, too; critics say heavy US corn pro-duction led to pollution caused by increased

North American Ethanol Hurts South American Rain Forest

THE AMERICAS

AMAZON RAIN FOREST - UN PHOTO

4 The Associated Press5 The Heartland Institute6 Reuters

In the 1990s, Cambodia was one of the world’s least developed nations and was eager to make and sell textiles--products made of cloth--to promote economic growth. Multinational cor-porations opened factories or hired Cambodian factories to produce clothing and other goods. This provided jobs for Cambodians and in many cases improved their incomes. Wages and other production costs were low in Cambodia, ben-efiting companies who made clothes there to sell in more developed countries. Consumers in those other countries could buy the clothes at low prices.

There were challenges, however. Some com-panies closed factories in developed countries and relocated them to Cambodia, causing job losses in those countries. Conditions in many Cambodian factories were poor, with employees not always being paid their wages and being forced to work overtime. There were also health and safety problems such as inadequate toilet facilities and poor ventilation, and some limits on workers’ ability to join labor unions. Cambo-dian workers began strikes and protests.

Leaders from the Cambodian and United States governments, businesses, and labor unions forged a unique agreement aimed to help Cambodia improve its labor conditions while still enjoying growth in its textile industry. Cambodia was given a quota, or limit — as most develop-ing countries had at the time--on its textile ex-ports to the US. But the agreement allowed the quota to increase year by year if Cambodia’s factories improved their conditions, giving Cambodia’s government and factory owners an incentive to ensure this happened. In order to earn an export license from the Cam-bodian government, factories were required to pass inspections of their working conditions by the International Labor Organization (ILO), giving factory owners an incentive to improve conditions.

But would it work? ILO reports showed that while conditions were still not perfect after two rounds of inspections, they did improve a lot,7 and wages were high compared to most other available jobs. Would the changes cause mul-tinational corporations to take their factories elsewhere, slowing or stopping the growth of Cambodia’s textile industry? After the first six years of the agreement, Cambodia’s textile and apparel exports were five times higher and em-ployment levels had almost tripled, suggesting that the agreement did not harm the industry’s economic growth.

While the United States-Cambodia Textile Agreement wasn’t perfect, most experts con-sider it a success story. Imitating the model elsewhere has proven challenging, though. The textile quota system ended, so government, business, and labor leaders must find other ways to create economic incentives for respon-sible behavior. The Cambodia case illustrates that, when done effectively, this can advance social goals while facilitating economic growth.8

Advancing Workers’ Rights and Economic Growth

7 Carnegie Endowment for International Peace8 Harpur, Paul. “Better Work: Problems with Exporting the Better Factories Cambodia Project to Jordan, Lesotho, and Vietnam”. Employee Relations Law Journal Vol. 36, No. 4, Spring 2011. 80-99.

7

CAMBODIA - UN PHOTO

ASIA AND THE MIDDLE EAST

of imitation versions, has not stopped. The huge supply makes AK-47s far cheaper than newer guns. Because areas of conflict have porous bor-ders, unregulated trade, and a ravenous demand for weapons, enforcing Russia’s belated patent laws is proving difficult, if not impossible.

The lasting impact of the AK-47 has made it a historic icon to some. Because it was distributed to rebels overthrowing colonial rulers in Afri-ca, many Africans viewed the weapon as a tool to fight oppression. In fact, the AK-47 appears on the flag of Mozambique. But the weapon’s legacy is anything but glorious. Its contribution to six decades of warfare and deaths, including approximately 250,000 deaths per year as of 2007,10 has earned it an ominous nickname: “the world’s favorite killing machine.”

Mikhail Kalashnikov of the Soviet Union’s Army spent most of World War II trying to perfect an assault rifle to repel the Nazi army. The war ended before Kalashnikov’s gun, the AK-47, was perfected, but the AK-47 was — and still is —widely celebrated anyway. It was one of the first automatic assault rifles ever invented. It reached a range of 1,000 meters and fired 600 rounds per minute. “The Kalashnikov rifle is a symbol of the creative genius of our people,” President Vladimir Putin said in 2007, on the gun’s 60th anniversary.9

To this day, AK-47s remain the weapon of choice in battlefields around the world. According to a 2007 book about the weapon, about 15 percent of all firearms worldwide, roughly 75-100 million guns, are AK-47s. It is popular today for the same reason it was in 1947: It is resistant to extreme weather like tropical humidity, desert sand-storms and Arctic cold, and it is easy to operate — so easy, in fact, that child soldiers throughout the world tote AK-47s into battle.

But by today’s standards, the AK-47 is also an outdated technology. It is less accurate and has a smaller range than newer assault rifles, and it is less safe for users. Why does this 60-year-old piece of technology still rule the global weapons market? Partly because the Soviet Union never patented the gun. During the Cold War, the Sovi-et government distributed AK-47s to groups that were friendly to the Soviet Union. Allowing mili-tary industries to manufacture the weapon was another way for the Soviet Union to strengthen international alliances and to encourage rebels to topple enemy governments.

Today, soldiers around the world know how to use AK-47s. Switching to a more modern weapon would be burdensome because troops would have to be retrained. And even though the Rus-sian government finally applied to patent the gun in 1998, tens of millions of AK-47s had already been produced, and manufacturing, including

A Deadly Legacy: The World’s Favorite Assault RifleEUROPE

89 USA Today10 The Globalist

The G loba l C i t i zen

UNIT 1

THE LONG ROAD FROM SEATTLE TO BALIUse with Lesson 4.05 in the UNA-Education Economics of Globalization Curriculum

Trade relationships exist because both buyer and seller believe the exchange will benefit them. Since World War II, most of the world has embraced the benefits of international trade, and trade has boomed. That does not mean, though, that trade rela-tionships have developed smoothly and evenly. With its protests, disagreements, and disrupted negotiations, the history of the World Trade Organization (WTO) illustrates that the stakes of economic globalization are high and consensus is hard to achieve. After twelve tu-multuous years, the WTO reached its first global trade agreement, fueling hope that, though obstacles remain, the nations of the world can chart a path toward free trade that benefits everyone.

The WTO is the international organization whose pri-mary purpose is, in its own words, “to help trade flow as freely as possible — so long as there are no unde-sirable side effects — because this is important for economic development and well-being.” 11 Made up of 160 member states, the WTO negotiates and oversees the rules for international trade, settles trade disputes, and helps poor countries participate in trade. At its heart are the WTO agreements. Countries’ govern-ments sign the agreements, and their parliaments or congresses ratify them, which means to approve and confirm them. Through these agreements, each coun-try promises to treat all of its WTO trading partners the same, while working toward reducing barriers to free trade even further. Each member of the WTO holds

UNIT 1FEATURED ARTICLE

UNITED NATIONS SECRETARY-GENERAL ADDRESSES WTO MEETING, 2011

- UN PHOTO9

11 World Trade Organization

The Econom ics o f G loba l i z a t i on | Trade 10

what is called most-favored nation status with all other WTO members. Most-favored nations get to trade under the least-restrictive trade rules that have been negotiated so far. Most-favored nation trade has also been called normal trade relations.

Countries join the WTO so that their companies have greater freedom to sell products and services in other countries. In return, members of the WTO must agree to lower their own trade barriers and allow foreign companies access to their markets. The WTO also resolves trade disputes that sometimes occur between countries, usually when one country feels that its companies cannot compete fairly because of another country’s laws. A WTO panel of trade officials meets to decide whether the law in question is acceptable within the WTO agreements. If a law is found unacceptable, the country that is harmed by the law may place trade sanctions on the offending country, which means that tariffs and other trade barriers can be placed on the products of that country.

For example, in 2005 and again in 2009 after an appeal, the WTO ruled that subsidies to United States cotton farmers violated WTO rules. Brazil would be allowed to place sanctions on the United States unless the subsidies stopped. Instead, the two sides agreed that the US would keep the subsidies but pay the Brazilian Cotton Institute $147 million a year. The US stopped payments in 2013, and Brazil considered sanctions, but rather decided to ask the WTO to rule on an amended US farm law.12

Many of the world’s richest nations have been mem-bers of the WTO since it was founded in 1995. The United States, Germany and Japan, for example, all play important leadership roles in the WTO. However, even countries with emerging economies — from large ones including Brazil and China to small, devel-oping countries such as Tonga, Laos, and Yemen--have become members of the WTO. The leadership of the WTO argues — and many economists agree—that increasing international trade is an important way to combat poverty in the world’s poorest nations. In an open market — one in which supply and demand set prices with little or no interference from the govern-ment--these countries should be able to develop more efficient and specialized industries that reach much larger numbers of customers. Multinational corpora-tions should also find developing countries attractive places in which to invest, as costs of production are low. The result can be economic growth and higher

employment, factors important to development.

The WTO usually meets every two years, holding what is called a ministerial conference, since it is attended by each member state’s trade minister. The first ministe-rial conference of the WTO, held in Singapore in 1996, was plagued by disagreements among developed and developing nations. This was a sign of things to come. The second ministerial conference was held in Gene-va, Switzerland. The third ministerial conference, to be held in Seattle, in the United States, was meant to start

COTTON PICKERS - UN PHOTO

12 The Globalist

The G loba l C i t i zen

a fresh round of negotiations. But the Seattle Round ended in failure, drawing worldwide attention in the process.

The Failed Seattle Round On November 30, 1999, WTO delegates from over 130 nations gathered in Seattle for the launch of a new round of trade negotiations. But the Seattle negotiations would come to an end without an agree-ment. During the Seattle meeting, tens of thousands of demonstrators from around the world took to the streets. Many of them were students. Most demon-strated peacefully by marching, waving signs, singing, and blocking streets. A few chose more dramatic and violent means to express their dissatisfaction; they broke windows and lit trash cans on fire.

The so-called Battle in Seattle earned media attention as the first large-scale anti-globalization protest in the United States, but the main focus of the protest was a concern about the WTO itself. Many protest-ers welcomed the phenomenon of globalization—growing connections among countries—but feared that the WTO was taking the wrong path toward a globalized world.

The organization’s free trade policies, they said, fa-vored the interests of rich nations and multinational corporations over the interests of developing nations, the environment, and labor rights. Globalization can mean good things, said Jerry Mander of the Interna-tional Forum on Globalization, but the type of econom-ic globalization favored by the WTO “emphasizes the interests of corporations over everything else. It places the values of profit and growth above all other values.”

Protesters complained that not all countries had an equal say in making decisions about trade rules in the WTO. They accused rich nations of holding their own informal meetings to make important decisions togeth-er, without representation from the rest of the WTO members. “There is no democracy in the process,” said Jason Mark, co-author of the book Insurrection: Citizen Challenges to Corporate Power.

The WTO responded that many of the protest-ers’ complaints were based on misinformation or misperceptions.13 However, there was contention

inside the negotiations as well. Charlene Barshefsky, the United States Trade Representative, noted that “divergences of opinion remained that would not be overcome rapidly,” on topics including agriculture, trade rules, and labor standards.14

By the end of the three-day conference, Seattle had seen much unrest, with incidents of vandalism and fighting between police and protesters, but no con-sensus declaration on how free trade negotiations would proceed.

The Doha RoundThe fourth ministerial meeting of the WTO was held in Doha, Qatar, in November 2001. This meeting marked the formation of the Doha Development Agenda (DDA), which was intended to advance development in poor re-gions, increase development aid, and improve relations between the developed and developing worlds. But the main goal of this round of negotiations was to open markets for free trade, especially in the agricultural and manufacturing sectors.

There was plenty of optimism at the start of the negotia-tions, but countries soon faced challenges. In 2003, WTO member countries gathered in Cancún, Mexico. Devel-oping countries wanted to discuss the agricultural sub-sidies paid by Europe and the US to their own farmers. These subsidies allow farmers from wealthy countries to sell their agricultural products at very low prices. Farm-ers in developing countries do not get these subsidies, so they cannot compete in international markets.

When excess agricultural products from the US and Europe are sold very cheaply in the developing world, this is often called dumping. It drives down the price of agricultural products in the developing countries, mak-ing it very difficult for farmers to make a living. This is a serious problem because so many people in developing countries rely on farming for their livelihoods. But the US and Europe insisted on their right to subsidize their farmers. These subsidies often go to large agricultural businesses, which the US and the EU say are important parts of their economies. According to the World Bank, half of European Union subsidies went to just 1 percent of producers. In the US, 70 percent of subsidies went to 10 percent of producers.15

During the Cancún meeting, the “North,” which is made

11

13 World Trade Organization14 World Trade Organization15 The Guardian

The Econom ics o f G loba l i z a t i on | Trade

up of rich countries, tried to end debate on agricultural subsidies and move on to other issues. The “South,” or the developing countries, simply refused. Represen-tatives from some countries even walked out of the meeting. Outside of the meeting venue, things were not any better. There was a large protest of WTO pol-icies. A Korean farmer and activist named Lee Kyung Hai committed suicide in protest of the World Trade Organization by stabbing himself. Cancún marked a very low point in trade negotiations.16

But optimism eventually returned. In 2004, China’s trade negotiator, Wu Yi, expressed his confidence in the future success of the talks. “Positive results of the Doha Development Agenda (DDA) will help renew and strengthen confidence in the (WTO) system, and are beneficial to all members,” Wu Yi said. “The results ... will have critical impact on China.” But he also cau-tioned that compromise would be necessary. “As a developing and relatively lower-income country, China (can) not afford to effectively subsidize its weak agri-cultural production,” he said. “Meanwhile, China’s ag-riculture is suffering from heavily subsidized compe-tition from developed countries. This unfair situation (has) got to be corrected in the DDA negotiations.” 17

Negotiations improved substantially the following year in Geneva, Switzerland, when countries agreed to a framework for opening trade. Brazil, the EU, Japan, and the US also agreed to reduce or end certain subsidies. A year later in Paris, the agricultural issues were again very controversial, but negotiations con-tinued to make progress.

At the sixth Ministerial Conference of the WTO, held in Hong Kong, negotiations progressed substantially. But the Hong Kong meeting was still very controver-sial. There was a large protest outside the meeting venue, and clashes between protesters and police caused 116 injuries. But inside, the negotiations were seen as a success. The attendees agreed to continue to move toward the goal of a global trade agreement. Industrialized countries agreed to open their markets to goods from some of the world’s poorest countries, finally fulfilling a plea issued by former UN Secretary- General Kofi Annan before the start of the Cancún meeting. Was a global trade agreement really achiev-able? “I now believe it is possible,” said Pascal Lamy, Director- General of the WTO, following the Hong Kong meeting. “I did not a month ago.” 18

Once again, though, a global agreement proved elusive. In 2006, WTO delegates again gathered in

12

WTO MEETING - UN PHOTO

16 The Guardian17 Embassy of China18 The New York TImes

The G loba l C i t i zen

Geneva. The issues of agricultural subsidies and agri-cultural market access for poor countries were again issues of contention. Countries blamed each other for the failure of negotiations to progress. Indian Trade Minister Kamal Nath pointed to the US, saying “Every-body put something on the table except one country.” EU trade commissioner Peter Mandelson also faulted the US, while US Trade Representative Susan Schwab blamed the EU and others for not reducing tariffs on agricultural products, saying, “As we went through the layers of loopholes . . . we discovered that a couple of our trading partners were more interested in loop-holes than market access.” 19

The Doha Round collapsed for a time in a sea of blame and resentment, though many nations con-tinued to negotiate their own trade agreements not subject to the consensus of the entire WTO. Many observers argued that with the talks stalled and other agreements proliferating, the Doha Round was be-coming irrelevant. Numerous trade ministers contin-ued to express interest in reviving the talks, however, and after two more ministerial meetings, the ninth ministerial conference was planned for Bali, Indone-sia, in 2013.

A breakthrough in BaliNegotiators focused on the parts of the Doha Devel-opment Agenda on which members were closest to consensus, particularly trade facilitation, or making trade smoother and more efficient by measures such as speeding up customs procedures. As the WTO neared an unprecedented accord, differences flared

up again, with Cuba demanding that the agreement address the United States’ long-standing trade embar-go--a law prohibiting trade—against it, and India fight-ing to permanently keep its food subsidy program for the poor.20 After round-the-clock negotiating sessions yielded compromises on both issues, the WTO finally announced its first global trade agreement on Decem-ber 7, 2013. “For the first time in our history, the WTO has truly delivered,” exclaimed Roberto Azevêdo, the WTO Director-General. “We have put the ‘world’ back into the World Trade Organization.” 21

The ‘Bali package’ commits WTO members to improve trade facilitation—often called “cutting red tape”, pledg-es help for poor nations trying to make that happen, and allows poor countries to sell their goods more easily in rich countries by eliminating tariffs and quotas. Though the agreement only completes a small part of the Doha Development Agenda, it is expected to have a big impact on world trade. It was estimated that the improvements will boost the global economy by $400 billion to $1 trillion and support up to 20 million jobs, with the greatest benefits going to poor countries, by reducing the cost of trade, creating a stable business environment, and attracting investment.

Even as the trade ministers celebrated the historic agreement, trade experts warned that the remain-ing, and most contentious, issues were not solved. These include farm subsidies, tariffs on manufactured goods, and barriers to trade in services (the pur-chase of people’s time and expertise—for account-ing or customer support, for example—as opposed to goods). Observers acknowledge that after twelve years of negotiations, coming to agreement on those issues will not be easy.

Reaching an agreement of any kind, said Azevêdo, shows that the organization is still relevant and committed to concluding the DDA. He welcomed the fact that mem-bers asked the WTO leadership to create a “clearly defined work program” for tackling the outstanding disagreements. “The decisions we have taken here,” he added, “are an important stepping stone towards the completion of the Doha round.” 22

Given the history of the WTO and the Doha round so far, though, most observers doubt that the stepping stones will lay out a smooth path toward a comprehensive, global trade agreement.

19 Financial Times20 The Economist13

SEA PORT IN NOVOROSSIYSK, RUSSIA - UN PHOTO

21 World Trade Organization22 World Trade Organization

The Econom ics o f G loba l i z a t i on | Trade | Trade | Trade | Trade | Trade | Trade | Trade | Trade | Trade | Trade | TradeThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i on 14

WTO Supporters Say…The WTO is undemocratic. Its leaders are not elected, and decisions are made by a small group of powerful countries with influence from corporations. It doesn’t allow regular people to participate in the formation of trade rules that profoundly affect their lives. Member states don’t vote, so small countries are left out of the decision-making process.

The WTO is democratic. Individuals can participate; not directly, but through their governments. The WTO makes rules by con-sensus, which means that all of the member states have to agree. Of course, it would be wrong to say that every country has the same power, but even so, no decision is made with-out every member country agreeing to it.

WTO Critics Say…

The WTO is not transparent, because many decisions are made by the powerful coun-tries alone and in secret.

This decision-making process helps nation-al governments to operate independent of lobbyists, or groups that argue for special interests.

The WTO rules benefit rich countries, corpo-rations and individuals, but leave everyone else behind.

The WTO rules help to make free trade possi-ble. With trade, jobs are often created, which can benefit people from all walks of life. The Doha Development Agenda seeks specifically to help poor countries develop; all members have agreed to give market access to the least developed countries.

The WTO undermines countries’ sovereignty, or their ability to make their own laws. The WTO can rule that a country’s laws break trade agreements and are therefore barriers to trade, even if those laws are meant to pro-tect workers, consumers or the environment.

The WTO simply enforces the agreements that member states themselves have already agreed to, and those agreements call for an end to barriers to trade. The WTO cannot overturn any country’s laws; it enforces the agreements by letting harmed countries enact trade sanctions against countries that break agreements until the law is changed to conform to WTO agree-ments.

The WTO has ruled that member countries cannot ban a product being sold by another country based on the method used to pro-duce it. Even if a method involves environ-mental destruction or uses sweatshop labor, countries must allow the product to be trad-ed freely.

If member states were allowed to ban prod-ucts from countries that have different social, environmental or health policies, then coun-tries might abuse these bans to protect their own economies from international competi-tion.

The WTO destroys jobs. Sometimes new trade arrangements cause some jobs to be eliminated. But when this hap-pens, jobs are often created elsewhere, often in developing countries that need them the most; developed countries often gain higher-paying jobs. Free trade leads to economic growth and net job gains.

Starving for Jobs: The Story of OffshoringUse with Lesson 4.06 of the UNA-Education Economics of Globalization Curriculum

FACTS AND FIGURES

A Toronto woman waits patiently for a radiolo-gist to finish examining her x-rays. A computer programmer writes code for a London soft-ware company. A customer service agent helps a Florida man buy car insurance.

But the radiologist is in Brisbane, Australia, the computer programmer is in Shanghai, China, and the customer service agent is in Makati, Philippines.

With new technologies, doctors, engineers, telephone operators, and accountants can of-fer their services from the farthest reaches of the world—and often for less money.

This is “offshoring,” the movement of jobs from one country to another. Two recent waves of offshoring caused economic upheaval and polit-ical turmoil as shifting labor markets created, at least temporarily, winners—workers in devel-oping countries and firms that became more ef-ficient—and losers—workers in developedcoun-tries who lost their jobs. The trend has slowed and, to a limited extent, even reversed, leaving econo-mists, workers, and young people contemplating the question: What are the jobs of the future and where will they be located?

Businesses profit most when revenues are high and costs are low. Acting in their self-interest, firms seek to reduce the cost of producing goods or providing services. Thus, when the cost of operations and labor are dramatically cheaper in certain countries--as they are in India and China compared to those in the US, EU, and Japan--corporations will gravitate to them. For example, the cost of operations and

““We have been slow to rise to the challenge [posed by offshoring]… We have to dig into ourselves. We in America have all the basic economic and educational tools to do that… Every individual is going to have to run a little faster if he or she wants to advance his or her standard of living. When I was growing up, my parents used to say to me, ‘Tom, finish your dinner—people in China are starving.’ . . . I am now telling my own daughters, ‘Girls, finish your homework—people in China and India are starving for your jobs.’”

– Thomas Friedman The New York TImes

15

wages are lower in Romania than in Germany. By hir-ing Romanian accountants, German banks can save a great deal of money.

Hold on, critics say. Sure, German banks save money, and Romanian accountants get nice, fat paychecks. But what happens to all of those German accountants who used to work for the banks, before their jobs were handed to the Romanians?

This is the heart the offshoring debate. What happens to American computer programmers when a software company moves its operations—and programming jobs—to China? What happens to British tax prepar-ers when their jobs are shipped to India? This debate often becomes political; both the 2012 re-election campaign of U.S. President Barack Obama and the campaign of his challenger, Mitt Romney, accused the

The Econom ics o f G loba l i z a t i on | Trade | Trade | Trade | Trade | Trade | Trade | Trade | Trade | Trade | Trade | TradeThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i onThe Econom ics o f G loba l i z a t i on 16

Many economists argue that developed economies benefit overall from offshoring,

but the same is not always true for the individuals and families whose jobs are moved. AOL Jobs interviewed one such

worker, Stephen Gentry, in 2012. Here is an excerpt:

Meet Stephen Gentry. His story begins 10 years ago, when then a Boeing engineer for 15 years, Gentry was called into the office during Christmas vacation and told that he was being laid off. His job was going to be outsourced.

And it got worse: He was informed that he had to train his Indian replacement.

He says that he will never forget when the team’s replacements from Infosys in Bangalore, India, showed up at Boeing’s Seattle office for three months of training. Boeing managers told Gentry and his team of 10 co-workers that their pensions and severance packages hung in the balance of proper completion of the three-month training.

The three months went by largely without incident, he says.

“It was humiliating, but what can you do?” he said in an interview with AOL Jobs. “I was trying to leave a bridge with the company.”

He was expecting there would be “more opportunities very soon.”

But the nine years that followed were tough. He bounced from one contract job to another, holding only one staff position -- with a contractor of the Securities and Exchange Commission -- for a year.

Since Gentry had completed his 15th year at Boeing and was age 50 when he was laid off, he was entitled to retirement benefits, which helped during all those years of bouncing from one contract to another. Still, “it’s been a real struggle” since losing the Boeing job, he says.

Gentry, who recently landed a staff job at Intel, isn’t bitter, however. He still considers Boeing a good employer overall.

And in spite of his own personal frustrations on the job market, Gentry says that he understands why employers outsource and the fact that many economists believe outsourcing actually adds jobs to the U.S. economy, overall.

“I debate this with myself,” he says. “If companies are always looking for the cheapest deal, we’re going to have a world where if you’re not the top 1 or 2 or 3 percent, you will only have crumbs.”

Source: Dan Fastenberg, AOL Jobs

Who benefits most from offshoring? Is the loss of jobs in developed country

economies unacceptable? In a 2003 report, the McKinsey Global Institute made

the following analysis of US companies offshoring jobs to India:

The most obvious benefits of offshoring accrue to businesses and English-speaking destination countries. Lower wages in foreign countries translate into significant savings and, often, improved quality. A software developer in the US, for example, costs $60 an hour whereas one in India only costs $6 an hour. This and other benefits could translate to a net impact of a 50 percent increase in profits for American businesses.

Destination countries see increased investment and job creation through offshoring. India, for example, gains in net benefit at least 33 cents for every dollar of spend offshored to its country.

Impact on the United States

While Forrester, a technology research and trend analysis firm, predicts the loss of some 3.4 million jobs to offshoring in the US by 2015, MGI's analysis shows that the United States has much more to gain.

Offshoring will allow the US to capture economic value through multiple channels:

• Reduced costs—Savings from reduced costs means more savings, which can be passed to consumers or to investors to reinvest.

•New revenues—Offshoring creates demand in destination countries for US products, especially for high tech items.

• Repatriated earnings—Several providers serving the US market are incorporated in America, which means they repatriate their earnings back into the US.

• Redeployed labor—US workers who lose their jobs to offshoring will take up other jobs, which will in turn generate additional value for the economy.

Of the $1.45 – $1.47 of value MGI estimates is created globally from every dollar spend a domestic company chooses to divert abroad, the US captures $1.12 – $1.14 while the receiving country captures on average 33 cents. In other words, the US captures 78 percent of the total value.

Source: McKinsey Global Institute

The G loba l C i t i zen23 Amiti, Mary, and Shang-Jin Wei

other candidate of contributing to offshoring, and the issue became a major campaign theme.

A similar debate raged in the 1980s and 90s when large numbers of manufacturing jobs moved out of the United States and other developed countries. China, with huge numbers of low-wage workers and reliable infrastructure, gained the most jobs.

“What will happen to American factory workers?” people asked. Though many lives were disrupted, some factory workers were able to find jobs in high-er-paying industries. In fact, many economists argue that offshoring causes little or no net—or total--job loss, and it in fact is a net benefit to the US econo-my. 23

Also, corporations cut costs by moving production to developing countries, and they passed their savings on to consumers. The prices of manufactured goods went down, and American and European consumers were able to save money for other purchases, con-tributing to the overall economy.

The second wave of offshoring came in the 1990s and 2000s as advances in technology made it possible to send large amounts of data around the world nearly instantaneously. This wave was based on services offshoring—the offshoring of jobs like call-center operations, accounting, x-ray reading, telemarketing, and computer programming.

Many of these services jobs are “high skill” and be-long to “knowledge” industries. Not only could cheap manual labor be found outside the United States, Britain, Germany, and other wealthy nations; now, doctors, engineers, and architects could be hired elsewhere, too.

But many economists sought to assuage the public’s fears. “If the Indians get one job, the United States does not necessarily lose one,” assured Robert Atkin-son of the Progressive Policy Institute.

Additionally, many people saw offshoring as a reminder that wealthy countries must continue to innovate, create and produce. The researchers and

17

Figure 1 The cost gap that lures offshoring: The hourly costs of manufacturing employees compared to US employees. China’s and the Philippines’ wages rose from 2000 to 2009 but remained far below those earned by US and EU workers.

The Econom ics o f G loba l i z a t i on | Trade

Figure 2 The sheer scale of China’s manufacturing workforce: in 2009, China had nearly 100 million manufacturing employees, with all other countries listed well below 20 million.

engineers in developing countries should not be viewed as a lurking army of job thieves, they say, but rather as healthy competition, inspiring Americans to work harder and make their skills even more valu-able.

The problem, others argue, is not the loss of service jobs, but the kinds of jobs that replace them. “The real threat to offshoring is that it could…squeeze the middle class,” says Atkinson. 24 Employment in the United States is growing, but mostly in high-wage and low-wage jobs—not middle-wage jobs. The US Bureau of Labor Statistics estimates that the middle class will only continue to shrink. Some experts fear this could increase class divide and have a negative impact on society as a whole.

For all the consternation over offshoring, there is some evidence that the direst predictions may have been premature. Though the Wall Street Journal found that US multinationals outsourced 2.4 mil-lion jobs overseas from 2000-2010, the trend has slowed, and a small percentage of the jobs that were offshored are now being “reshored”, or brought back to developed countries. General Electric, one of the pioneers of offshoring, in 2012 moved manufactur-ing of washing machines, refrigerators, and heaters from China to Kentucky. Of 108 American manufac-turing firms with multinational operations surveyed in 2012, 14 percent had firm plans to bring some manufacturing back to America and a third were considering it. 25

Firms that reshore note that the costs of doing busi-ness overseas, including wages and transportation expenses, are rising fast, while developed country wages are rising much more slowly, making the cost more comparable. Add in the benefits of faster deliv-ery times, being more responsive to customers, and encouraging innovation by having design, research, and manufacturing close together, and the cost-ben-efit analysis is beginning to tilt toward producing goods in developed countries.

It is unlikely that the number of jobs in certain sec-tors, such as textile manufacturing, will ever return to pre-1990 levels. New technologies such as ever more efficient robots and 3-D printing make produc-tion less labor intensive, so even if the initial trend of reshoring intensifies, a smaller number of jobs will rematerialize. However, engineers need to design

Figure 3. Services exports have increased rapidly, with 2011 seeing nearly three timesthe export value as there was in 2000. Source: World Bank

1824 Atkinson, Robert D. 25 Simchi-Levi, David, et. al.

Figure 4 . In 2003, of seven investment areas, firms were most likely to invest their manufacturing dollars offshore. By 2005, they had shifted their offshore invest-ments toward information technology and call centers.

Source: Issues in Science and Technology, A.T. Kearney

Source: U.S. Bureau of Labor Statistics International Labor Comparisons

Source: World Bank Database

The G loba l C i t i zen

the robots, technicians need to repair them, and other producers need to supply the factories, so if the trend continues, it will create new work.

All of this might leave the unemployed and young people scratching their heads when trying to choose a profession: What kinds of jobs will be available, when, and where? How do I prepare myself for them? A team of business leaders and educators has identified the skills and knowledge that they believe will leave future workers “better prepared to thrive in today’s global economy”. Besides the traditional core academic subjects, these include 21st-century themes (global awareness, financial and economic literacy, civic literacy), learning and innovation skills (creativity, critical thinking, problem solving, col-laboration), media skills (information literacy, tech-nology literacy), and life and career skills (flexibility, cross-cultural skills, productivity).26

The team listed these skills recognizing that workers, just like businesses, now compete with others not just around the corner, but around the world.

Figure 5. This projection shows how much the China-US wage gap could close by 2025. Rising wages, increasing transport costs, and other factors have some US firms moving production from China to other countries or reshoring.

Figure 6. A graphic representation of skills identified by the Partnership for 21st Century Skills as essential in today’s global job market. Source: Partnership for 21st Century Skills

19

26 Partnership for 21st Century Skills

THE GLOBAL

CITIZENThrough 33 suggested lessons, student readers, and primary source readings, The Economics of Globalization helps teachers and students engage in the human story of globalization. Each unit of interactive lessons cul-minates in a Model UN mini-simulation. Mini-simulations take the best of Model UN and may be implement-ed in one or two class periods.

In Model UN, participants role-play as ambassadors from UN member states, researching their country’s position on a host of global issues. Student “delegates” write position papers, negotiate with others, address committees through speeches and caucusing, and navigate the UN’s rules of procedure.

With innovative curricular materials, up-to-date online and print resources, and mini-simulations for all, UNA-USA brings the Model UN experience to the Economics of Globalization curriculum and seeks to support teachers in meeting national, state, and local standards for global citizenship and college and career readiness.

The United Nations Association of the United States of America (UNA-USA) is a membership organiza-tion dedicated to inform, inspire, and mobilize the American people to support the ideals and vital work of the United Nations. For 70 years UNA-USA has worked to accomplish its mission through its national network of Chapters, youth engagement, advocacy efforts, education programs, and public events. UNA-USA is a program of the United Nations Foundation. UNA-USA and its sister organization the Better World Campaign represent the single largest network of advocates and supporters of the United Nations in the world. Learn more about UNA-USA’s programs and initiatives at www.unausa.org.

Copyright © 2014 by UNA-Education,A Program of the United Nations Association of the United States of America

801 Second AvenueNew York, NY 10017

Phone: (212) 697-3315Fax: (212) 697-3316

www.unausa.org