Economic Exchange Intensification as a Race to the Bottom - Coursework Example

Economic Exchange Intensification as a “Race to the Bottom” Introduction Economic exchange is an important tool to enhance economic growth. However, contrary to the expectation, intensified economic exchange in America, as a result of free trade has negatively impacted on wage rates. Consequently, as free trade extends to non- American economies, converting the whole world to a global village, the impact on wages spreads out to other nation and with the current trend it will soon flatten wages across the globe at a low level. The deregulation in trade has resulted to relocation of production towards the cheap labor zones hence gaining a completive advantage. In an effort to compete fairly, production firms left in the developed countries try to reduce their production costs by reducing labor costs and deteriorating work environment conditions, hence resulting to a race to the bottom. Economics have tried to explain this phenomenon, proposing solutions to the controversy. To start with, economic growth differs from nation to nation and thus causing differences in development status. Accordingly, prices differ mostly due to production costs. United States as a nation portrays a clear image of this phenomenon, with the south being less developed as compared to the north. While cheap labor dominates the undeveloped regions, capital accumulation is higher in developed regions. With the aim of maximizing profits, capitalists from the north have shifted their investment to the south to capture the available cheap and trainable labor (Rosnick, 2013). This reduces the demand for northern labor, causing their wages to fall. Mainstream economists; consider investors as rational and thus the shift of investment nets ought to continue until wages in the northern region equal those of the southern region. It’s worth noting that with current rate of technology advancement, production requires few experts and many casual workers, which reduces the demand for high rank workers. Competition enhances quality and sustainability of supply, but this does not guarantee improved social welfare. Technology increases efficiencies in production and the higher the level of technology, the lesser the variable costs of production. Thus with variations in technological knowhow, competition becomes unfair and the developing nations are always on the losing ends (Jensen, 2011). This was the case in Mexico as a result of increased economic exchange after introduction of North American free trade area (NAFTA). Mexican farmers could not compete with American corn. As a result, productivity in Mexico reduced lowering the real GDP and thus the per capita income as well as unemployment rate (Weisbrot, Lefebvre, & Sammut, 2014). Similarly in Africa and Middle East, export goods from technologically advanced economies have killed local industries. In reality, the world experiences uneven distribution of capital and labor, which are the main inputs of production. Labor is relatively immobile making capital the only input that can flow to equalize production. Despite the argument that, labor abundant regions should capitalize in production of labor-intensive commodities and vice versa, completely free trade conditions are a requirement to ensure zero capital flows. However, this is not true in real world. Third world countries impose tariffs on capital intensive goods, creating an imbalance between labor-intensive goods and capital intensive goods. This causes factors such as raw materials to flow high investment zones, leading to high capital demand and excess labor in the developing countries. Consequently, if capital flow is not regulated, investors would definitely be attracted by the higher marginal product of capital in labor intensive regions. Intuitively, since labor is immobile. Capital amputation from low labor endowed regions creates high rate of unemployed in regions where production requires a high capital-labor ratio. Whilst multinational companies establishment in developing countries is supposed to trigger development. Research has shown negative results. At the MNCs onset, high rank employees are needed. However, following low educational standards, the developing countries lack this man power.at that moment, and thus the MNCs import employees from developed nations. Moreover, local production is waived off the market by the MNC, increasing unemployment. With time, the natives acquire skills through schooling, training and internship programmes and flood the high rank jobs market hence pushing wage rate downwards. China is one of the economies that neglected deregulation of the market, which is one of the reasons behind its tremendous economic rise. Notably, china‘s manufactured goods sale at very low prices. Contrary to Washington consensus, China’s government is given plays a large role in monitoring the market in addition to lowly pricing state produced goods. China’s move to reject Washington’s consensus as advised by the IMF might have been seen as foul thought given that wages in the country remained low during its growth time (Jenkins, 2008). However, recently china has recorded hiking wages both in formal and informal sector. Nike, an MNC with branches in china has been forced to relocate some of its production sites from china to Vietnam, to capture lower wages. Consequently, Japan has also dismissed loose market forces preferring regulatory approaches. The end of capitalist regime, welcomed the socialist era characterized by labor unions and labor protection. Their impact was meant to be felt greatly in the less developed zones where lower wages prevailed. The fact that, governments and workers saw this reducing income inequality that was real between the south and northern regions of America attracted great support (Rosnick, 2013). . Noteworthy, labor regulations such as minimum wages are determined based on local conditions. Therefore, despite work conditions being aligned by the southern labor unions, their standards still remained lower than in the north. Investors on the other hand, had no objection on the new requirements as capital shift was still bolstered. Therefore, an inequality now triumphed between investors and workers as opposed to the prior regional terms. What this means is that, the northern parts ought to cut down wage requirements towards the southern rate otherwise production in the north would be competitively disadvantaged. Moreover, free trade encouraged FDIs to lesser developed countries that have even lower minimum wage requirements, augmenting the above incident. Additionally, regions also differ in general productivity. As a matter of fact, trade is seen to increase prices in high productivity regions. Remarkably, investments and productivity are higher in tradable goods than in domestically consumed goods, possibly due to reduced barriers to commodity mobility (Dixon & Boswell, 2007). Given that labor is mobile across sectors, the increase in wages as a result of increased productivity in the tradable sector triggers up rise of wages in the non-tradable sector not backed up by investment. As a result, the non-tradable sector experiences inflation lowering general real wage rate. Free trade increases commodity flow from the developed countries to poor and developing countries hence improving social welfare in developing countries. However, the accompanying investment shift has negative impacts that outdo the advantage (Jensen, 2011). With time, manufacturing and processing firms are placed in the cheaper labor zone. Therefore, the developed countries export investment funds and cheaply valued inputs to the developing countries. This was a case with US verses Mexico and Canada upon implementation of the NAFTA. The implication is obvious that the developed nation exhibits a trade deficit. Consumption shifts from locally manufactured goods to imports. Contemporarily, local firms are forced to reduce their production costs. Free trade agreements as intensification programmes for economic exchange undermine the role of government. It’s worth noting that, different policy applications are successful in different regions and scenarios. Therefore, the universal rules made via free trade agreements combat the economy (Rosnick, 2013). For instance, NATFA gave investors power to sue the federal and state government of breach of the stated rules, regardless of the intentions of contract. Therefore, in a free zone area, such as the NAFTA region, investment decisions are left on the hands of the investors. Labor unions forces on the other hand are undermined by the strategic choice of location by the capitalists. Regulations such as minimum wage and other labor related laws have become an important consideration for capitalists’ investors as they prefer regions with less restriction. In response, regulating bodies lessen restrictions to allow investments in their areas. A combination of lack of labor union voice and government policy limitation increases income equality gap, where the returns to labor are continually victimized by soaring corporate profits. Moreover, as the free trade zones extend to even lesser developed economies, other socially related hazards such as threatened health, environmental degradation and lower food safety standards will also follow (Appelbaum et al 2013). To cater for these negative externalities of production, natives spend a proportion of their income. Thus, their real income is reduced. Therefore, any increase in domestic price for production in developing countries only affect the nominal wage but not real wage and thus reducing their currency value. Intuitively, exports to US will remain lowly priced hence stiffly competing with US’s locally produced goods. In a nutshell, despite economic exchange being a necessity, its intensification leads to “a race to the bottom’. The underlying material facts are that different economies at different development states cannot be connected by a set of similar rule and regulation. The repercussions are that investment flows to undeveloped zones characterized by cheap labor. in response the developed economies will lower wages, reduce the effectiveness of labor rights that will result in job condition deterioration. References Eileen Appelbaum, Rose Batt , & Ian Clark (2013). Implications of Financial Capitalism for Employment Relations Research: Evidence from Breach of Trust and Implicit Contracts in Private Equity Buyouts. Center for Economic and Oolicy [Policy] Research. Jensen, J. B. (2011). Global trade in services: Fear, facts, and offshoring. Washington, DC: Peterson Institute for International Economics. Peterson institute of international economics (2012, April). US Tire Tariffs: Saving Few Jobs at High Cost. Retrieved from http://www.piie.com/publications/pb/pb12-9.pdf Rosnick, D. (2013, September). Gains from Trade? The Net Effect of the Trans-Pacific Partnership Agreement on U.S. Wages. Retrieved April 3, 2014, from http://www.cepr.net/documents/publications/TPP-2013-09.pdf Weisbrot, , M., Lefebvre, S., & Sammut, J. (2014, February). Did NAFTA Help Mexico?; An Assessment After 20 Y ears. Retrieved April 3, 214, from http://www.cepr.net/documents/nafta-20-years-2014-02.pdf Jenkins, R. (2008). China?s Global Growth and Latin American Exports. Dixon, W. J., & Boswell, T. (2007). Differential Productivity, Negative Externalities, and Foreign Capital Dependency: Reply to Firebaugh. American Journal of Sociology, 102(2), 576. Read More