Chapter 9: Cooperation between Nations

1. Chapter 9: Cooperation between Nations

2. Lesson Outline Globalization is driving cooperation between nations Levels of integration between nations Winners & losers from supranational cooperation • Under the WTO • Under regional cooperative arrangements • Under international commodity arrangements

3. Lesson Outline (cont'd) Behavior of firms & governments Applications of today’s material to understanding how nations are doing • “Getting along” matters • Implications of membership in trading blocs and cartels

4. Why do nations cooperate? • Nations cooperate to manage the flow of people, trade, and investment across national borders. They do so for many reasons, one of which is because their citizens see opportunities abroad and they lobby their government to help in opening up foreign markets and foreign investment opportunities. National governments also have reasonable grounds to fear retaliation if they refuse to work with their trading partners.

5. Why do nations cooperate? • Most importantly, national governments know they must work with other nations to resolve international trade and investment difficulties which inevitably arise. So, they do.

6. General principles & issues • Trade policies reflect a mixture of mercantilism and free trade thinking • Nations vary widely in their treatment of foreign trade and investment according to the industry in question. • Public choice analysis (ch. 8) tends to operate in industries which are under pressure from imports.

7. General principles & issues • Balanced against internal pressures to support troubled domestic industries is the desire, one might almost say the need, to maintain a good relationship with nations from which exports are coming.

8. General principles & issues • The final result is a “patchwork quilt” of industry-specific and broad-based agreements between trading partners, with numerous loopholes and exceptions. Strict adherence to the terms of trade agreements is rare because of domestic political pressures to protect local industries and the efforts of some individuals to profit by using political and other means of influence to take advantage of foreigners.

9. Levels of integration between nations • There are five types of regional economic integration between countries: • Free Trade Area (no internal barriers) • Customs Union (common external trade policy) • Common Market (free movement of factors) • Economic Union (coordinate economic policy) • Political Union (merge into one nation)

10. Levels of integration between nations • One principle considered important by some is that the level of integration must not be “too deep” across nations which are radically different in their per capita income because the disruption to the economies of the partners could make such arrangements unworkable.

11. Who wins & loses? • Under the principles of the WTO (see Figure 9.2, p.252), there is a clear focus on counter-acting internal national pressures to restrict imports and to restrict international investment flows, as well as to protect intellectual property. • There is a clear “free trade is good” mentality behind the WTO principles, although with recognition that developing nations may wish to guide and support particular industries as part of their economic development strategies.

12. Who wins & loses? • There is also a much stronger focus on enforcement powers for the WTO, compared to under the GATT. However, there are concerns that current enforcement mechanisms are skewed against developing nations.

13. Who wins & loses? • There is no clear picture concerning winners & losers under the WTO. • Overall the global economy probably does better with the WTO in operation, compared to the case where it didn’t exist. • Without a venue for multilateral negotiations the world may devolve into a series of regional trading blocs and bilateral agreements, leaving “outsiders” to any given agreement at a disadvantage.

14. Who wins & loses? • However, to the extent that the WTO promotes international trade and investment on “even” terms across nations, some nations are at risk of being left behind. • For example, a number of African nations are losing colonial trade preferences, but internal problems such as tribal conflict, low levels of education, poor infrastructure, small markets, and corruption are keeping away investment.

15. Who wins & loses? • The idea that free trade under the WTO helps increase global economic growth may be true. • But, the notion that “everybody wins” under free trade is unrealistic.

16. Who wins & loses? Under regional cooperative arrangements, insiders win and outsiders tend to lose. Under international commodity arrangements, insiders win and most outsiders lose. However, non-member nations which are net exporters in the commodity of interest tend to benefit when a cartel succeeds in pushing up prices.

17. Behavior of firms and governments • Governments engage in “horse-trading”, seeking to gain greater access in sectors of their choice (for their globally competitive industries) by offering more access and freedom in other sectors (where other nations stand to gain more through exports and through other means).

18. Behavior of firms and governments • There is a fair amount of “brinkmanship” by rich nations, especially the US and the EU. Governments of small developing nations can generally ill afford to engage in brinkmanship with developed nations, and as a rule they don’t do it.

19. Behavior of firms and governments • The response of firms to cooperative arrangements which reduce trade and investment barriers between nations depends on whether they win or lose by the terms of the agreement. • Firms in globally uncompetitive national industries lobby within their nation for protection, even as they may move value-adding activities abroad (if they have enough resources to do that).

20. Behavior of firms and governments • The response of globally competitive firms to protectionism has several components. First, they lobby their home government for support in opening up “closed” foreign markets. Second, they seek local political allies in host nations. Third, they allocate production and investment partly in response to political pressures, such as pressures for protectionism in their foreign markets.

21. Applications of today’s material tounderstanding how nations are doing “Getting along” matters • Trade wars are the economic equivalent of “mutually assured destruction” (MAD). They can start a “vicious cycle” of economic growth spiraling downwards. • Nations caught in a wide-ranging trade war with important trading partners will be unlikely to have bright economic prospects in the near to medium term.

22. Applications of today’s material tounderstanding how nations are doing • Implications of membership in trading blocs • tends to help their members’ economies growby setting in motion a virtuous cycle of investment and consumption in member nations • provides a stronger hand to members of the trading bloc in multilateral negotiations • May hurt global economic growth if trade and investment barriers to non-members become higher

23. Applications of today’s material tounderstanding how nations are doing • Implications of membership in cartels • tends to help cartel members, but a two-step process is needed to assess how much cartel membership will likely help (or hurt) a nation in the near to medium term. • For example, first determine how much Brazil may benefit by participating in a coffee cartel by assessing the importance of the coffee industry to the Brazilian economy.

24. Applications of today’s material tounderstanding how nations are doing • Implications of membership in cartels • Second, look at how well the coffee cartel seems positioned to affect the price for the commodity or product on which it focuses. • Conflict between cartel members may have a mildly, moderately, or severely negative effect on member economies, depending on how important the commodity is to the nation in question.