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Trade and Globalization. Trends and Consequences. I. A Brief History of the World Economic System. Trade Before the World Trade System Trade routes for all recorded history

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trade and globalization

Trade and Globalization

Trends and Consequences

i a brief history of the world economic system
I. A Brief History of the World Economic System
  • Trade Before the World Trade System
    • Trade routes for all recorded history
    • Evolution about 1000 years ago: financial houses to underwrite trade expeditions, reliable permanent markets, etc (China and Italy)
    • About 500 years ago: Western Europe develops global reach (beginning of political-economic exploitation)
c the world system to 1914
C. The World System to 1914
  • 16th-18th Centuries:
    • Mercantilism (increase capital/bullion through trade surpluses) – Trade at the point of a gun; exclusive deals
    • Problems: Uncontrolled inflation, deflation, and “Dutch disease,” emphasis on relative gains instead of absolute gains
2 19 th century trade
2. 19th Century Trade
  • Emergence of modern banking (stockholders instead of families)
  • Emergence of modern paper currency (backed by silver/gold for public confidence)
  • 1846: Britain pushes for “free trade” – i.e. no tariffs. Unilaterally repeals “Corn Laws”  1860 British-French Treaty of Commerce
d interdependence
d. Interdependence

"International finance has become so interdependent and so interwoven with trade and industry that ... political and military power can in reality do nothing.... These little recognized facts, mainly the outcome of purely modern conditions (rapidity of communication creating a greater complexity and delicacy of the credit system), have rendered the problems of modern international politics profoundly and essentially different from the ancient."

-- Norman Angell, 1910

interdependence
Interdependence?
  • Exports as % of GDP
    • 1913: 13%
    • 1992: 14%
  • FDI as % of GDP
    • 1914: 11%
    • 1993: 11%
  • British-German trade was high before WW I
    • Lloyd’s insured Germany’s ships!
d the interwar years
D. The Interwar Years
  • Allied Debt to US, German Debt to Allies
  • Return to Gold Standard (Example of an international regime)
    • Reason: early approach to the time inconsistency problem
    • US leads with easy domestic credit, allows UK to build up trade surplus (gold reserves)  UK and others begin adoption 1925
    • Key weakness of system: Gold adopted by core countries and others hold reserves of both gold and core currencies (designed to avoid gold price shock)
      • Implication: World economic growth increases demand for core currencies  loss of competitiveness
      • Implication: Non-core dependent on monetary policies of core
3 reparations and the credit crunch
3. Reparations and the Credit Crunch
  • The 1920s:
    • US invests/lends to Germany and Allies
    • Germany pays Allies
    • Allies repay US
  • The Crunch:
    • Late 1920s: US stock market boom reduces willingness to lend/invest in Europe
ii the stock market crash
ii. The Stock Market Crash
  • US stock market crash leads to business failures and bankruptcies  banks find themselves without enough reserves to cover outstanding deposits
  • US banks call in loans  international credit crunch
4 collapse of the gold standard
4. Collapse of the Gold Standard
  • Decreased US demand exports recession elsewhere
  • Strong incentive to devalue currency: devaluation boosts exports, lowers imports  stimulates domestic demand
  • Trade deficits undermine gold standard (purchases made “in gold” so deficits drain gold reserves)
  • Prewar stabilization mechanism (borrowing from neighbors’ banks) unavailable due to credit crunch
e devaluation and domestic politics
e. Devaluation and domestic politics
  • Democratic governments more likely to devalue (domestic costs vs. international ones)
  • Countries with large foreign investments less likely to devalue (would undermine own investments)
f cascade devaluation by core states spilled over to non core
f. Cascade: Devaluation by Core States Spilled Over to Non-Core

Years on Gold Standard 1923-39 

f cascade devaluation by core states spilled over to non core15
f. Cascade: Devaluation by Core States Spilled Over to Non-Core
  • Direct: Britain leaves system in 1931, immediately followed by all countries holding British pound as reserve currency
  • Indirect: Early-exit states able to moderate economic damage
5 collapse of the trade system
5. Collapse of the Trade System
  • “Beggar Thy Neighbor” – As complement to or substitute for devaluation, tariffs are used to shut out imports (US: Smoot-Hawley 1930)
5 collapse of the trade system19
5. Collapse of the Trade System
  • “Beggar Thy Neighbor” – As complement to or substitute for devaluation, tariffs are used to shut out imports (US: Smoot-Hawley 1930)
  • Other countries retaliate with tariffs
  • Trade spirals downward
e the rise and fall of bretton woods
E. The Rise and Fall of Bretton Woods
  • Goal: Avoid another Great Depression and World War III.
  • INSTITUTIONS:
    • Rebuild industry and avoid another credit crunch: International Bank for Reconstruction and Development
    • Avoid competitive devaluation: US pegs to gold, everyone else pegs to dollars. Stabilization to be provided by International Monetary Fund.
    • Avoid trade wars through the “MFN principle:”General Agreement on Tariffs and Trade
3 evolution of the financial system
3. Evolution of the financial system
  • Europe and Japan rebuilt: IBRD turns to development of postcolonial states, becomes known as “World Bank” despite being only one agency in Group
  • 1950s-1060s: World Bank Group assumes role of mediating investment and international lending disputes
4 evolution of the trade system
4. Evolution of the Trade System

a. GATT “Rounds” lower tariffs on manufactured goods  trade expansion

b the world trade organization
b. The World Trade Organization
  • Created in 1995 by “Uruguay Round” of GATT Talks
    • Function = Resolve trade disputes, especially over “non-tariff barriers” (NTBs)
    • Mechanism = Trade court with power to permit sanctions
  • Controversy: Many health, safety, environmental laws can be viewed as NTBs
sample wto cases
Sample WTO Cases
  • A government cannot ban a product based on the way it is produced
    • Child labor
    • European objections to U.S. hormone fed beef
    • U.S. laws requiring shrimp boats to use nets that don’t entangle sea turtles
    • Dolphin-safe tuna
  • U.S. Clean Air Act required stricter pollution standards for companies without reliable data (i.e. that already required to be collected by US regulations)
  • A government cannot ban a product based on the dealings of the company
c the doha round key issues
c. The Doha Round: Key Issues
  • Services: Developed countries want to export services (banking, health, law, etc). Developing countries (except India) resist.
  • Agriculture: Developing countries want end to subsidies. Developed countries resist.
  • Industry (NAMA): Developed countries want further reduction in developing-country tariffs. Developing countries resist.
5 evolution of the monetary system
5. Evolution of the monetary system
  • The decline of the dollar:
    • Vietnam + Great Society  Inflation.
    • Inflation + Economic Recovery Outside America = Dollar overvalued (too easy to acquire dollars  speculative attack on the dollar)
ii hegemons and regimes

1,000%

900

800

700

600

500

400

300

200

100

0

–100

11th

12th

13th

14th

15th

16th

17th

18th

19th

20th

21st

Century

II. Hegemons and Regimes
  • Explanations for the modern global economy (Post-18th Century: Per Capita Growth)
a hegemonic stability theory
A. Hegemonic Stability Theory
  • Assumptions: Primarily Economic Theory
    • Depressions  Major Wars
    • International Economic Cooperation Prevents Depressions
assumptions
Assumptions
  • Public Goods Theory:
    • World Economy as “Public Good:” Cannot exclude countries from existing in a prosperous world and stability is non-rivalrous
    • Problem: World economic stability costs money (currency stability, free trade/lost jobs, military intervention, international law, etc.) – but no one wants to pay since their contributions won’t make a difference!
    • Free Riding: Enjoying benefits of stable world economy without paying costs
  • Hegemony: When a single state…
    • CAN pay the costs of world economic stability
    • MUST pay those costs or stability won’t be provided
    • is WILLING to pay those costs because the benefits to itself outweigh the costs
2 evidence
2. Evidence
  • Free Trade
    • Napoleonic Wars: Challenge to British Hegemony (Continental System) – Consistent
    • 1815-1840: Increased Protectionism: Corn Laws, etc – Inconsistent
    • 1840s-1850s: Rise of free trade in Britain -- Consistent
    • 1860s-1880s: Rise of free trade in Europe, i.e. Cobden-Chevalier Treaty (1860) -- Consistent
v free trade and us hegemony consistent
v. Free Trade and US Hegemony – Consistent?

AVERAGE AVERAGE

US TARIFF WORLD

YEAR RATE TARIFF

-------- --------- ----------

1940 36% 40%

1946 25% --

1950 13% 25%

1960 12% 17%

1970 10% 13%

1975 6% --

1984 5% 5%

b regime theory
B. Regime Theory
  • Goal: Understand why economic system didn’t collapse in 1970s
  • Argument: Hegemons create regimes, which persist after hegemony –

“Principles, norms, rules, and decision-making procedures around which actor expectations converge in a given issue area”

  • Emphasis on nonstate actors: regimes perpetuate themselves
  • Problem: Regime theory adds little to predictive power
iii contagion as a cause of regionalism and globalization
III. Contagion as a Cause of Regionalism and Globalization
  • Processes of contagion in IR
    • Diffusion: Affinity, Agreements, or Spill-Over
    • Emulation: Modeling or Harmonization
    • Opportunism: Altered decision calculus
b processes of economic contagion
B. Processes of Economic Contagion
  • Diffusion
    • Affinity: Tourism, Remittances, Immigration
    • Alliances and Agreements: Incentive to trade more with allies / MFN countries than enemies
    • Spill-over: Alter economy of one state  alter economies of neighbors
in detail east asian crisis
In Detail: East Asian Crisis
  • May – July 1997: “Bahtulism” in Thailand
    • Thai businesses begin to default on debts; government promises to “buy” the bad loans but reneges; Thai banks begin to go under; fear of recession leads to beliefs that baht will be devalued
    • Attack on the baht: Foreign speculators exchange baht for dollars, betting they will get more baht for their dollars later.
    • June 19: “We will never devalue the baht.”  Repeated June 30.
    • July 2: Devaluation of the baht
july 1997 devaluation spreads
July 1997: Devaluation Spreads
  • Investor fears (similar problems in neighbors’ economies) and competitive pressure (need to devalue to save export industries)
    • 2nd: Attack on the Philippine peso  devaluation on 11th
    • 8th: Attack on Malaysian ringgit  devaluation on 14th
    • 11th: Attack on Indonesian rupiah  devaluation August 14th
    • 14th: Singaporean dollar devalued
  • 24th: Currency meltdown.
devaluation to recession
Devaluation toRecession
  • August-September 1997: Fears of recession  Actual slowdowns
  • October: Vietnam, Taiwan devalue  Hong Kong stock market crashes  global plunge in stock markets (Dow Jones posts biggest single-day loss, trading suspended)
  • November: South Korean won and Japanese yen depreciate vs. US dollars  new round of stock market crashes as investors pull out of South Korea and Japan
  • Crashes  Banks call in loans  Failing businesses, unemployment  recessions in East Asia
2 emulation
2. Emulation
  • Institutions: Dollarization, Euros, WTO/IMF standards
  • Learning: Copy success stories (avoid socialism, sign on to neoliberalism or developmental state)
3 opportunism
3. Opportunism
  • “Beggar Thy Neighbor” and the Great Depression
  • Free-Riding
  • “Race to the Bottom”
  • Trading Economics for Politics (Cold War)
c problems with contagion
C. Problems with Contagion
  • Why some regions rather than others?
  • Modeling, Opportunism or Diffusion?
  • Uncertain regional boundaries
  • Few specific predictions
iv security communities as a cause of regionalism
IV. Security Communities as a Cause of Regionalism
  • Requirements
    • Expectation of Nonviolence: Trust, Predictability, Knowledge
    • “We-feeling”
    • Shared long-term interests  Reciprocity
    • Security Communities  Institutions, not the other way around
b emergence
B. Emergence
  • Democratic Peace? No democracy vs. democracy wars  expectation of peaceful interaction
  • Interdependence? Creates common interests  incentives for reciprocity
  • Regime stability? Creates predictability
  • Interaction? Creates “we-feeling”?
c assumption expectation of cooperation
C. Assumption: Expectation of Cooperation

1. Promotes Absolute-Gains Concerns Over Relative-Gains Concerns

  • Why is this so important?
2 absolute gains concerns incentive to trade
2. Absolute gains concerns = incentive to trade

Question becomes: Is this profitable for me? Rather than:

Is this more profitable for me than it is for you?

absolute advantage

Missiles

20

10

100

200

10

Coffee

Absolute Advantage

Given 100 resources, what can each country produce?

  • Production possibilities without trade
  • Trade  Specialization. Coffee < 10 resources, Missiles < 20 resources
  • Example: Coffee = 2, Missiles = 10.
  • US trades 5 missiles (50 resources) for 25 coffee (50 resources)
  • Result: Both sides achieve levels of consumption outside of the original production possibilities!
b comparative advantage

Wheat

100

50

5

10

Cars

b. Comparative Advantage

Given 100 resources, what can each country produce?

  • US has absolute advantage in both goods!
  • US has comparative advantage in…
    • 5:1 wheat, 2:1 cars  wheat
  • UK has comparative advantage in
    • 1:2 rather than 1:5  cars
  • UK buys wheat at <5 resources, US buys cars at <10 resources
    • Example: Wheat = 2, Cars = 8.
  • US sells 12 wheat (24 resources), buys 3 cars (24 resources)
e problems with security communities
E. Problems with Security Communities
  • Causality not established
  • Eurocentric: projects other regions will follow path of Europe
  • 19th-Century European Peace: security community was absent
  • Parsimony: The “Liberal Peace” thesis (democracy/trade/IOs  peace) explains war better, and peace  trade
a heckscher ohlin theorem relative factor abundance determines production
A. Heckscher-Ohlin Theorem: Relative factor abundance determines production.
  • Prediction: Countries with abundant labor export labor-intensive goods, countries with abundant capital export capital-intensive goods
  • Expansion by Stolper-Samuelson theorem: Price rise in factor-intensive good increases price of factor
  • Implication: Tariff on capital-intensive goods raises price of capital relative to wages, Tariff on labor-intensive good raises wages relative to capital
b extending the factors
B. Extending the factors
  • Capital: Banks and investors
  • Labor: Workers
  • Land: Farmers
  • Free trade generally helps industries using relatively abundant factors, hurts industries using relatively scarce factors
c predictions
C. Predictions
  • Obvious: Relative strength of organized interest groups representing each factor determines trade policy
  • Less obvious: Trade policy selectively weakens or strengthens factors, altering domestic political balance!
  • Some evidence supports model, but most propositions too vague to test (real production uses all three factors)