Chapter 13 International Economic Cooperation

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

2. 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

3. 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

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

5. Economic Cooperation & Development: The Institutions • 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)

6. 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

7. 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 Children’s Fund (UNICEF)

8. 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)

9. Trade Cooperation • Generalized Agreement on Tariffs and Trade (GATT, 1948) • 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

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

11. 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 (2001-2007) • 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

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

13. 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

14. 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

15. 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

16. 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)

17. 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 economies • 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 nations • Tension over Wolfowitz appointment • World Bank is seen as

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

19. 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 integration

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

21. The Western Hemisphere • Economic integration not yet to the level of Europe, but the process is under way • NAFTA • FTAA • Mercosur • DR-CAFTA

22. 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

23. 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

24. 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 countries • Promotes de-stabilizing deregulation and privatization of key public services

25. 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, Vietnam • Important counterweight to China

26. 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

27. Europe • 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 states • Expanding membership (currently, 27 member nations)

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

29. The Future of Regionalism • Integration versus revival of regionalism • Current trend of proliferation of regional agreements • 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

30. 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?

31. 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

32. 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

33. The Globalization Debate in Perspective • Costs and benefits have been unequally distributed • 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

34. 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

35. 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.” • When’s the last time the US SERIOUSLY competed with another country? Nations don’t compete—firms do • Michael Dell and Bill Gates destroyed the auto industry—we’re too good at producing other stuff—comparative advantage • VW Beetle made in Mexico creates jobs in U.S. export industries. Japanese voluntary restrictions to avoid tariffs under Reagan hurt U.S.

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

37. David Ricardo & Comparative Advantage • David Ricardo (1772-1823) was a Classical Economist who opposed England’s Corn Laws. The Corn Laws, in force between 1815 and 1846, were import tariffs ostensibly designed to "protect" Britishfarmers 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 advantagestates that nations are better off when they produce goods and services for which they have a comparative advantage in supplying.

38. Key Assumptions of Ricardo • There are no transport costs. • Costs are constant and there are no economies of scale. • 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 mobile. • 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.

39. Major Imports and Exports of the United States • The United States is the world’s largest exporter. Chemicals Industrial machinery Electrical machinery Data-processing equipment Airplanes and parts Vehicles:parts Power-generating machinery Vehicles: cars and trucks Scientific instruments Telecommunications equipment Exports • The United States is also the world’s largest importer 10 20 30 40 50 60 70 80 Vehicles: cars and trucks Crude oil and petroleum preparations Electrical machinery Data-processing equipment Clothing Industrial machinery Telecommunications equipment Vehicles; parts Power-generating machinery Chemicals Imports 10 20 30 40 50 60 70 80 Dollars per year (in billions) Source: Statistical Abstract of the United States 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 countries

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

41. Trade Barriers A trade barrier is a means of preventing a foreign product or service from freely entering a nation’s 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.

42. 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 out. Trade Wars • When one country restricts imports, its trading partner may impose its own retaliatory restrictions.

43. Arguments FOR Protectionism • Protectionism is the use of trade barriers to protect a nation’s industries from foreign competition Balance of Payments Argument—keep 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 think—some people are always betting on war.

44. The United States Trade Deficit • DO NOT confuse with National Debt or budget deficit 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??????

45. Chapter Objectives • After completing this chapter, you should be able to: • 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 reforms. •  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 organizations. •  9. Debate the case for and against economic internationalism. •  10. Debate the case for and against economic nationalism. •  11. Discuss the pros and cons of globalization.