Many outcomes of globalization are positive, giving people more goods and services from the same resources than if economies were isolated.
Some outcomes are tragic, however. And then there is the occasional farce. That was evident in a recent wire service story about the possibility of California imposing a strict requirement that porn film actors wear condoms in all circumstances. Representatives of the porn industry, a multibillion-dollar business centered in the San Fernando Valley area of Los Angeles, immediately warned that such a policy would drive production overseas and damage the U.S. economy.
This is not necessarily an idle threat. In an increasingly integrated global economy, changes in regulation, taxes or subsidies can motivate business owners to shift production from one country to another. This is particularly easy when the product involves intangible intellectual property such as films or software with virtually zero transportation costs. But it can also apply to traditional goods such as foods.
Examples go back far. Maritime shipping was an “export service” for the 13 colonies even before independence, as it had been for Britain itself. U.S.- and U.K.-owned vessels carried far more goods than these countries themselves imported or exported. This was true well into the 20th century.
Over time, however, U.S.- and U.K.-flagged shipping dropped in numbers and tonnage as more and more shipowners registered their vessels in countries such as Liberia or Panama that had lax regulation of safety and personnel. Critics scoffed at such “flags of convenience.” Shipping companies defend them as “flags of necessity,” arguing that if they have to abide by sundry laws such as those requiring ships flagged in a country to also be built in that country’s shipyards, mandatory minimum staffing, strict safety inspections and so forth, they would be unable to compete with ships flagged in nations without such regulation.
This sort of “regulatory arbitrage” also can take place within countries. Many major corporations are incorporated in the state of Delaware since its laws are particularly favorable, just as credit-card companies flocked to South Dakota after then-Gov. Bill Janklow made that state near-Nirvana for plastic issuers in the late 1970s.
Swiss banking secrecy and the favorable tax and regulatory treatment of the Cayman Islands, the Bahamas and Panama created much business for those countries.
Such footloose corporate activities are understandable, but they do decrease investment, employment and output in the nations that opt for tighter regulation or higher taxes.
Libertarians and other advocates of minimal government see this as a victory for individual autonomy and economic efficiency. But when there are external costs, global society can suffer. Unsafe ships carrying wool or iron ore don’t cause major problems if they run aground, but oil tankers do.
For the porn industry, such external costs could include actors not wearing condoms contracting or spreading AIDS.
U.S. and European financial institutions have established myriad shell companies in “fiscal paradises,” including some whose sole purpose was to hold exceedingly complex mortgage-backed securities. Goldman Sachs reportedly had more than 250 such “structured investment vehicles” based in the Cayman Islands alone.
But when the acute financial crisis hit in the fall of 2008, it was the U.S. Federal Reserve and the European Central Bank that had to step in to keep the system from crashing. The central banks of the Bahamas and the Cayman Islands were as ephemeral as that of Iceland when that nation’s high-flying consumer banks collapsed.
U.S. fruit and vegetable growers charge that if immigration laws are strictly enforced, they will be unable to hire needed workers. Critics who know some economics retort that if the growers increase wages or piece rates, they eventually will get workers. Growers counter that by asserting that if they pay more to workers, they will be unable to compete with growers in Mexico, Chile and other countries who can export freely to the United States.
Something nearly identical occurs at higher educational levels. High-tech employers moan that not enough H1-B visas are available for them to hire foreign engineers and scientists. Citizens in these categories complain that the H1-B program puts downward pressure on high-tech salaries. Employers complain that if they cannot hire foreign engineers, the workers will do the same research or design work in places like Bangalore or Beijing for competing companies.
If we wanted to keep broccoli grown in Mexico out of our country to allow U.S. growers to rely entirely on citizens or legal immigrants, we could. Physical goods have to cross physical borders.
It is exceedingly difficult, however, to keep out computer code or the design for a new microchip – or an adult video distributed over the Internet.
There are no easy answers to the sometimes harsh tradeoffs posed by this phenomenon. It has always been true that trade benefits societies generally, but that some producers or workers within any society may be hurt by increased trade. Technology has now broadened the range of occupations that are vulnerable to such international competition while making it more difficult to apply traditional trade restrictions like tariffs and quotas.
© 2011 Edward Lotterman
Chanarambie Consulting, Inc.