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

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 • Lloyd’s insured Germany’s 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)

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

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 don’t 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. 1,000% 900 800 700 600 500 400 300 200 100 0 –100 11th 12th 13th 14th 15th 16th 17th 18th 19th 20th 21st Century 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 won’t 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 won’t 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 25% -- 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 didn’t 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

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. Missiles 20 10 100 200 10 Coffee Absolute Advantage Given 100 resources, what can each country produce? • Production possibilities without trade • Trade  Specialization. Coffee < 10 resources, Missiles < 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!