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Chapter 13 International Economic Cooperation


Chapter 13 International Economic Cooperation Professor Michael R. Baysdell PS130 World Politics Saginaw Valley State University Is Trade Good or Bad? – PowerPoint PPT presentation

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Title: Chapter 13 International Economic Cooperation

Chapter 13 International Economic Cooperation
  • Professor Michael R. Baysdell
  • PS130 World Politics
  • Saginaw Valley State University

Origins of Economic Cooperation
  • Liberal idea of creating a global economy was
    slow to take hold
  • Began to take shape in 1930s and 1940s
  • End of WWII and creation of global and regional
    intergovernmental organizations
  • World Bank, IMF, GATT, and the WTO

Criteria for Economic Development
  • Economic diversification
  • Limited economic reliance on primary products
  • International market and investment access
  • A stable currency
  • Strong physical and technological infrastructure
  • Domestic order
  • Effective government that controls corruption

Development in the South Requirements
  • Loans
  • Private investmentFDI and FPI
  • Trade (major weakness for most LDCs too
    dependent on primary products like oil)
  • Foreign aid
  • Internal reforms to combat protectionism and
  • May also benefit from ex-pat remittances

Economic Cooperation Development The
  • United Nations (general cooperation)
  • GATT and WTO (trade cooperation)
  • IMF (monetary cooperation)
  • The World Bank Group (development cooperation)
  • OECD and the Group of 8 (EDC institutions)

The UN and Economic Cooperation
  • Global umbrella organization for numerous
    agencies and programs
  • UN General Assembly, UN Economic and Social
    Council, UN Development Program
  • Economic focus for United Nations global
    economic regulation and economic development of
    the South and debt relief and economic aid for
    poorest countries

The UN Global Economic Regulation
  • Regulation of transnational or multinational
    corporations (TNCs/MNCs)
  • Creation of global labor standards
  • International Labor Organization (ILO)
  • Focus on child labor and the creation of the UN
    Childrens Fund (UNICEF)

The United Nations and Economic Development of
the South
  • United Nations provides forum for world leaders
    from the North and South
  • Numerous programs that promote development
  • UN Development Program (UNDP)
  • UN Conference on Trade and Development (UNCTAD)
  • Group of 77 (G-77)

Trade Cooperation
  • Generalized Agreement on Tariffs and Trade (GATT,
  • World Trade Organization (WTO) 1995
  • Has power to enforce GATT
  • Uruguay Round Tariff reductions agreed upon
    1/3rd over 10 years
  • Doha Round Negotiations collapsed over
    North/South tensions

Structure and Role of the WTO
  • Power to enforce provisions of GATT
  • Assess trade penalties
  • Countries can withdraw
  • Three-judge panel hears trade violation
  • Sanctions
  • Each country has one vote
  • Imposed by 2/3 vote

The Future of GATT and the WTO
  • Tension between sovereignty and global governance
  • What if a country rejects WTO rules?
  • Criticism of the WTO as an agent of globalization
  • Revising the GATT The Stalled DOHA Round
  • Controversial issues include agricultural
    subsidies, consumer and workers rights,
    environmental standards, and developing nations
    opening their markets up to industrial goods and
    services to the rest of the world

Monetary Cooperation
  • Early monetary regulation
  • Bretton Woods system operated on the basis of
    fixed convertibility into gold
  • Unexpected fluctuations of exchange rates

The Role of the IMF
  • Helps maintain exchange-rate stability
  • Special Drawing Rights
  • Efforts in the 1990s
  • Stabilize economies of LDCs
  • Aid CIT reorientation to market economy
  • Asian financial crisis
  • Russian financial crisis

Controversy about the IMF
  • Voting based on member contribution
  • Conditionality of Lending Operations
  • Interferes with sovereignty
  • Destabilizes countries
  • Maintains dependency of LDCs
  • Capitalism and social justice
  • Imposes tight budget restrictions that limit a
    recipient nation's ability to manage domestic
    health, education, and welfare
  • Weak anti-corruption protections for loans

The Defense of the IMF
  • Since EDCs provide the funds, they ought to have
    a say in how they are invested
  • Reforms are necessary to correct the problems
  • Some evidence that IMF is easing its requirements
  • Case of Argentina

Development Cooperation The World Bank Group
  • International Bank for Reconstruction and
    Development (similar to commercial bank)
  • International Development Association (focuses on
    loans to poorest countries)
  • International Finance Cooperation (loans to LDCs
    and guarantees private investment promoting
    private-sector development)
  • Multilateral Investment Guarantee Agency
    (promotes flow of private development capital to
    LDCs through guarantees)

Controversy about the World Bank
  • Dominated by North, particularly U.S. Europe
  • Too little funding
  • No understanding of the needs of South and
    narrow, monetary-based definition of poverty
  • Terms of loans violate sovereignty, damage
  • Not enough attention to human and environmental
    impacts of projects
  • Promotes market economies, economic
    globalization, foreign direct investment, and
    other aspects of capitalism
  • Corrupt use of World Bank funds by recipient
  • Tension over Wolfowitz appointment
  • World Bank is seen as

Economic Cooperation and Development EDC
  • Organization of Economic Cooperation and
    Development (OECD)
  • The Group of 8 (G-8)
  • Canada, France, Germany, UK, Italy, Japan, United
  • Annual summit meetings
  • Role of public diplomacy
  • G-8 includes Russia sometimes
  • G-20 at ministerial level for some meetings

Regional Economic Cooperation and Development
  • Bilateral and multilateral economic cooperation
    is more advanced at the regional level
  • Regional trade organizations (RTOs)
  • Moving from economic cooperation to economic

Economic Integration Surrender Some Sovereignty
  • Levels
  • Free trade area
  • Customs union
  • Economic union
  • Monetary union

The Western Hemisphere
  • Economic integration not yet to the level of
    Europe, but the process is under way
  • FTAA
  • Mercosur

The North American Free Trade Agreement
(NAFTA)Canada, Mexico, and the United States
  • The evolution of NAFTA
  • Took effect in 1994
  • Established schedules for reducing all tariff and
    nontariff barriers to trade by 2009
  • The impact of NAFTA
  • Economic and nationalistic problems

The Dominican Republic-Central American Free
Trade Agreement (DR-CAFTA)
  • DR-CAFTA seeks to liberalize U.S. and Central
    American markets creating a free-trade zone
    similar to NAFTA's
  • Signatories include U.S, Guatemala, El Salvador,
    Nicaragua, Honduras, Dominican Republic, and
    Costa Rica
  • All nations have ratified DR-CAFTA
  • Provisions eliminate tariffs on basic grains such
    as rice, beans, and corns both immediately and
    gradually depending on country and product
    specific agreements

Concerns about DR-CAFTA
  • Small farmers will not be able to compete with
    subsidized agricultural imports from U.S.
  • Inability of Central American farmers to compete
    with U.S. agricultural imports will increase
    poverty and retard development in this
    predominately rural and agriculture based region
  • Spur "race to the bottom" in labor and
    environmental standards in Central American
  • Promotes de-stabilizing deregulation and
    privatization of key public services

Other Trade Agreements/Unions
  • Mercosur-South American common market
  • Brazil, Paraguay, Uruguay, Argentina
  • Bolivia, Chile, and Peru are associate members
  • Small amount of trade but huge symbolic step
  • ASEAN-Association of Southeast Asian Nations
  • Brunei, Cambodia, Indonesia, Laos, Malaysia,
    Myanmar, the Philippines, Singapore, Thailand,
  • Important counterweight to China

FTAA The Free Trade Area of the Americas
  • NAFTA DR-CAFTA Mercosur FTAA someday??
  • Missed 2005 Target date for agreement. Why?
  • Concerns about tidal wave of U.S. imports
  • Concerns about American investors buying local
    businesses and property
  • Concerns in U.S. about job loss and outsourcing

  • European Union Most extensive regional effort
    toward full economic integration
  • Movement toward significant political cooperation
    as well
  • Importance of the euro in stimulating further
    political and economic integration by member
  • Expanding membership (currently, 27 member

Asia, the Pacific, and Elsewhere
  • Association of Southeast Asian Nations (ASEAN)
  • Asia-Pacific Economic Cooperation (APEC)
  • Slow progress in economic integration

The Future of Regionalism
  • Integration versus revival of regionalism
  • Current trend of proliferation of regional
  • Controversial role of preferential trade
    agreements (PTAs) and their many forms
  • Pessimistic view that the rise of RTOs is
    actually undermining the globalization of free
    economic interchange represented by the WTO

Cooperation and Development Debating the Future
  • Economic interdependence intertwines personal,
    national, and global prosperity
  • Domestic economies, employment, inflation, and
    overall growth are all heavily dependent on
    foreign markets, imports of resources, currency
    exchange rates, and capital and human flows
  • But how much global economic interdependence
    should or will there be?
  • What are the advantages and disadvantages?

The Case for Economic Internationalism
  • Economic Advantages
  • Leads to general prosperity
  • Allows for benefits from specialization (vs. cost
    of protectionism)
  • Promotes competition
  • Provides development capital
  • Noneconomic Advantages
  • Increases world cooperation
  • Decreases violence
  • Promotes democracy

The Case for Economic Nationalism
  • Economic Advantages
  • Protects the domestic economy
  • Encourages diversification
  • Compensates for existing distortions
  • Puts domestic needs first
  • Noneconomic Advantages
  • Protects national sovereignty
  • Protects national security
  • Can be used as a policy tool
  • Protects society and the environment

The Globalization Debate in Perspective
  • Costs and benefits have been unequally
  • Negative consequences of globalization
  • Damage to the environment, creation of
    sweatshops, utilization of child labor
  • Advances of globalization go far beyond the
    growth of economic interdependence
  • Modern communications and travel are bringing
    people together
  • Different theoretical perspectives approach the
    debate differently

Is Trade Good or Bad?
  • Depends on who you ask
  • UAW Worker Trade bad
  • Economist Trade maximizes economic efficiency
  • Defense Secretary Jeopardizes national security
    if you ship high-powered computers or B-2s.
  • Average consumer Trade is wonderful, lowers
    prices and improves quality
  • Without international trade, many products would
    not be available on the world market
  • Elixir of Sulfanilimide and Thalidomide incidents

Myths about Trade
  • 1 International Trade is Different.
  • 2 International Trade is about competition
    between nations
  • 3 Exports are the goal of international trade
  • 4 High productivity is the key to competition.
  • 5 International Trade destroys jobs.
  • 6 We need a new partnership between business
    and government.
  • Whens the last time the US SERIOUSLY competed
    with another country? Nations dont competefirms
  • Michael Dell and Bill Gates destroyed the auto
    industrywere too good at producing other
    stuffcomparative advantage
  • VW Beetle made in Mexico creates jobs in U.S.
    export industries. Japanese voluntary
    restrictions to avoid tariffs under Reagan hurt

Resource Distribution and Trade
  • Each country of the world possesses different
    types and quantities of land, labor, and capital
  • By specializing in the production of certain
    goods and services, nations can use their
    resources more efficiently.
  • Specialization and trade can benefit all nations.

David Ricardo Comparative Advantage
  • David Ricardo (1772-1823) was a Classical
    Economist who opposed Englands Corn Laws. The
    Corn Laws, in force between 1815 and 1846, were
    import tariffs ostensibly designed to "protect"
    British farmers and landowners against
    competition from cheap foreign grain imports.
    They were repealed by PM Robert Peel after the
    Irish potato famine.
  • A person or nation has an absolute advantage when
    it can produce a particular good at a lower cost
    than another person or nation. Korea has
    absolute advantage in producing cars.
  • Comparative advantage is the ability of one
    person or nation to produce a good at a lower
    opportunity cost than that of another person or
    nation. South Korea can make cars and t-shirts
    cheaper than the U.S., but it is more productive
    at cars.
  • The law of comparative advantage states that
    nations are better off when they produce goods
    and services for which they have a comparative
    advantage in supplying.

Key Assumptions of Ricardo
  • There are no transport costs.
  • Costs are constant and there are no economies of
  • There are only two economies producing two goods.
  • The theory assumes that traded goods are
    homogeneous (i.e. identical).
  • Factors of production are assumed to be perfectly
  • There are no tariffs or other trade barriers.
  • There is perfect knowledge, so that all buyers
    and sellers know where the cheapest goods can be
    found internationally.

Imports and Exports of the United States
  • The United States main trading partners are
    Canada, Mexico and Japan. See handouts for trade
    deficits/surpluses between the U.S. and other

Trade and Employment
  • As nations begin to specialize in certain goods,
    dramatic changes in the nations employment
    patterns also occur.
  • Workers who lose their jobs due to
    specialization face three options
  • Unemployment inability to adapt and find a new
  • Relocation moving to where current skills meet
    current jobs
  • Retraining gaining new human capital to meet the
    demands of specialized labor markets

Trade Barriers
  • A trade barrier is a means of preventing a
    foreign product or service from freely entering a
    nations territory.
  • Import Quotas--An import quota is a limit on the
    amount of a good that can be imported.
  • Voluntary Export Restraints--a self-imposed
    limitation on the number of products shipped to a
    certain country. Best example Japanese car
    companies and President Reagan
  • Tariffs--a tax on imported goods, such as a
    customs duty. EX Bush 30 import steel tax.
    Tariffs can be protective or revenue tariffs.
  • Other Barriers to Trade--include high government
    licensing fees and costly product standards.

Arguments AGAINST Protectionism
  • Increased Prices for Foreign Goods
  • Tariffs and other trade barriers increase the
    cost of imported products, making domestic
    products more competitive. EX American cars were
    forced to improve by Japanese competition
  • Although manufacturers of many products may
    benefit from trade barriers, consumers can lose
  • Trade Wars
  • When one country restricts imports, its trading
    partner may impose its own retaliatory

Arguments FOR Protectionism
  • Protectionism is the use of trade barriers to
    protect a nations industries from foreign
  • Balance of Payments Argumentkeep them favorable
  • Protecting Jobs
  • Protectionism shelters workers in industries that
    would be hurt by specialization and trade.
  • Protecting Infant Industries
  • Protectionist policies protect new industries in
    the early stages of development.
  • Safeguarding National Security
  • Certain industries may require protection from
    foreign competition because their products are
    essential to the defense of the United States.
  • Not as needed as you might thinksome people are
    always betting on war.

The United States Trade Deficit
  • DO NOT confuse with National Debt or budget
  • The Trade Deficit
  • The United States has run a trade deficit since
    the early 1970s.
  • Why the Trade Deficit?
  • Imports of foreign oil as well as Americans
    enjoyment of imported goods account in part for
    the large American trade deficit.
  • Reducing the Trade Deficit
  • Quotas and other trade barriers can be used to
    raise prices of foreign-made goods and urge
    consumers to buy domestic goods.
  • But should we try to reduce it??????

Chapter Objectives
  • After completing this chapter, you should be able
  • 1. Discuss how the theories of economic
    nationalism, internationalism, and structuralism
    affect efforts for global cooperation.
  •  2. Examine what is required for the development
    of the South, taking note of loans, private
    investment, trade, foreign aid, and internal
  •  3. Discuss the role of the UN in economic
    cooperation and development.
  •  4. Examine the role of the WTO in trade
    cooperation and development.
  •  5. Understand how the IMF supports development
    and monetary cooperation, noting the controversy
    about the IMF.
  •  6. Discuss the role of the World Bank Group in
    development cooperation and examine the
    controversy about the World Bank
  •  7. Discuss the role of institutions in economic
    cooperation and development.
  •  8. Evaluate the role of regional trade
  •  9. Debate the case for and against economic
  •  10. Debate the case for and against economic
  •  11. Discuss the pros and cons of globalization.