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Trade and Globalization

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Trade and Globalization Trends and Consequences * * * * * * * * * * * * * Colombia = resource per coffee. US = 5 resources per missile. Exchange rate = 10 coffee ... – PowerPoint PPT presentation

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Title: Trade and Globalization


1
Trade and Globalization
  • Trends and Consequences

2
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)

3
B. Origins of Per-Capita Growth
4
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

5
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

6
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7
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

8
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
  • Lloyds insured Germanys ships!

9
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

10
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

11
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

12
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

13
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)

14
f. Cascade Devaluation by Core States Spilled
Over to Non-Core
Years on Gold Standard 1923-39 ?
15
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

16
Collapse of the Gold Standard
17
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)

18
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19
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

20
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21
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

22
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

23
4. Evolution of the Trade System
  • a. GATT Rounds lower tariffs on manufactured
    goods ? trade expansion

24
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

25
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
    dont 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

26
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.

27
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)

28
b. From fixed to floating exchange rates The US
abandons gold in 1971
29
II. Hegemons and Regimes
  • Explanations for the modern global economy
    (Post-18th Century Per Capita Growth)

30
A. Hegemonic Stability Theory
  • Assumptions Primarily Economic Theory
  • Depressions ? Major Wars
  • International Economic Cooperation Prevents
    Depressions

31
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
    wont 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 wont be
    provided
  • is WILLING to pay those costs because the
    benefits to itself outweigh the costs

32
e. Law of Uneven Growth
33
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

34
v. Free Trade and US Hegemony Consistent?
AVERAGE AVERAGE US TARIFF WORLD YEAR RATE TARIFF
-------- --------- ---------- 1940 36 40 1946 2
5 -- 1950 13 25 1960 12 17 1970 10 13 1975
6 -- 1984 5 5
35
b. American decline coincides with failure of
Bretton Woods monetary system
36
B. Regime Theory
  • Goal Understand why economic system didnt
    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

37
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

38
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

39
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

40
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.

41
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

42
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43
2. Emulation
  • Institutions Dollarization, Euros, WTO/IMF
    standards
  • Learning Copy success stories (avoid socialism,
    sign on to neoliberalism or developmental state)

44
3. Opportunism
  • Beggar Thy Neighbor and the Great Depression
  • Free-Riding
  • Race to the Bottom
  • Trading Economics for Politics (Cold War)

45
C. Problems with Contagion
  • Why some regions rather than others?
  • Modeling, Opportunism or Diffusion?
  • Uncertain regional boundaries
  • Few specific predictions

46
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

47
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?

48
C. Assumption Expectation of Cooperation
  • 1. Promotes Absolute-Gains Concerns Over
    Relative-Gains Concerns
  • Why is this so important?

49
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?

50
Absolute Advantage
Given 100 resources, what can each country
produce?
  • Production possibilities without trade
  • Trade ? Specialization. Coffee lt 10 resources,
    Missiles lt 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!

51
b. Comparative Advantage
Given 100 resources, what can each country
produce?
  • US has absolute advantage in both goods!
  • US has comparative advantage in
  • 51 wheat, 21 cars ? wheat
  • UK has comparative advantage in
  • 12 rather than 15 ? cars
  • UK buys wheat at lt5 resources,
    US buys cars at lt10 resources
  • Example Wheat 2, Cars 8.
  • US sells 12 wheat (24 resources), buys 3 cars (24
    resources)

52
C. Evidence Regional Economic Organizations and
Cooperation
  • ASEAN Only minimal political conflict

53
2. European Union No war since WW II
54
3. US FTAs Trade Policy or Security Policy?
55
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

56
V. A final challenge to liberalism and
globalization commerce and coalitions
57
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

58
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

59
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)
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