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
(No Transcript)
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
(No Transcript)
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
(No Transcript)
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
(No Transcript)
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)