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The global economy : from the spice road to Amazon.com
Francesca Hansen
Programme Hospes
March 21, 2014
Class outline
1. Trade : the backbone of the Global Economy.
Key facts and figures
Why do countries trade ?
Regulating Trade & Protectionism
Globalization, the (old) global marketplace
The global digital economy
What it's changing
Internet Freedom and E-Friction
Discussion
Trade and the Global Economy
Why trade ? Rests on the principle of : Gains from Trade.
That your country or my country benefits from exporting
or importing a product that the other country can do
better.
Why do countries trade ?
What leads countries to trade with one another ?
Ricardan model : Trade is mutually beneficial if both countries trade according to
their comparative advantage :
Country
Paper output (unit)
Wine Output (unit)
France
1
2
South Africa
6
4
While South Africa has more productivity for both categories, France has a
lower opportunity cost if it produces more wine, and less paper, and a
better relative advantage. Following the model, countries will fully
specialize in their comparative advantage sector.
Why do countries trade ?
Specialization according to comparative advantage can result in greater overall
output. If every country rearranges according to their comparative advantage, the
global result is an improved material output for everyone.
Of course : the comparative advantage is not only the factor that determines which
countries will specialize in what industries .
How can we guess who exports what ?
Hecksher-Ohlin theorem : The model essentially says that countries will export
products that use their abundant and cheap factor(s) of production and import
products that use the countries' scarce factor(s). A capital-intensive country (such as
Japan) will export capital-intensive products (like computers) and import laborintensive products (like clothes).
Why do countries trade ?
●
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The Hechher-Ohlin theorem explains why Japan exports computers
to Bangladesh, but not why economic partners like the U.S. And the
E.U. primarily do business with each other.
Paul Krugman produced an answer to this that won him the Nobel
Prize in Economics :
–
Countries gain from trade not only because a larger market
allows them to better exploit scale economies, but also because
consumers can access a larger variety of products.
–
Also : for centers of production, transport costs push the centers
of production near consumers. Makes large concentrations of
populations such as those along the East Coast corridor of the
United States.
What is 'globalization' ?
●
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Definition : Oxford Dictionaries : (n). The process by which
businesses or other organizations develop international influence or
start operating on an international scale:
In other worlds, the concept of an interconnected global
marketplace.
...An old global marketplace
The concept of a global economy began long before we had boats ;
By the beginning of the 14th century, the kings of Europe were completely dependent
on the spices of Southeast Asia. Without a direct route to asia, they went through a
number of dealers through the Middle East and Constantinople before being traded at
the Venetian markets. This, in turn, made Venice an extremely powerful city-state ;
But, by the late fifteenth century ; the Portuguese explorer Vasco de Gama were the
first to reach India by an all-water route.
By the 16th century, half of the revenues of Portugal came from Gold and Pepper trade
from India.
...Globalisation is not a 20th century invention ! But with every technological leap, we
have seen an upturn in trade. A combination of decreasing trade barriers, and the
spread of the internet are leading to increasing volumes of trade (more on this later)
Statistics : International Trade
Overall, the volume of international trade
is rapidly increasing :
This is fragile : during the economic crisis
of 2008 and 2009, the volume of trade
exported outside country borders fell 5%.
Is today's globalization 'fair' ?
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So using each country's comparative advantage makes for more
global output, but .. where do the benefits go ?
Global increase in an economy's wealth, but the losses could be felt
by a sensitive, small group of people. And globalization does not
benefit all countries equally.
Global Benefits for a country : better paychecks, lower prices and
better product choices
Drawbacks : When open to global competition, many companies or
industries may not be able to compete . Given the enormous
dividends from international trade, the Government can intervene
to help farmers adjust their production model, to help workers bear
the burden of economic adjustment.
How does a country find trade partners ?
Who does a country trade with and how do trade zones become established ?
France - Does most of its business with Germany, Belgium Italy and the UK. They are
both countries with similar sized economies and are all of course...geographically close.
There's a fun equation for this :
Tij = A x Yi x Yj/Dij – A is constant Tij is the trade between country i and j, D is the
geographical distance between the two countries. Diminishes with the distance
between the two countries.
Increases within common market with no tariff barriers to trade :
●
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€2 trillion of trade within Europe
Increase of trade with NAFTA : from $290 billion in 1993 to more than $1.1 trillion in
2012.
Effects of trade on economies
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There are many ways to look at the positive effects of trade : free
trade means increased export markets for companies (larger
companies and SMEs) more consumer purchasing power,
Statistics : Increase in the share of trade in the GDP by 1 percentage
point, raises income levels for citizens by 0.9% - 3%.
But many countries, for political reasons, may choose to regulate
trade :
Regulating Trade
Many ways that countries may choose to regulate trade :
A duty : For example, adding a duty (tax) on an imported project,
means that the domestic product goes up, customer purchasing
power decreases.
Non tariff barriers :
Import Restraints: 2005 – China-E.U. Textile 'wars' after clothing
imports to the E.U. Rose by 40% in first months of 2005
Volontary Export Restraints – When a deal is struck between two
countries to limit the exports from one to another. Ex : Japanese
cars in the U.S. In the 1980's
Regulating Trade
●
Export subsidies
The gains felt by the producers are disproportionately low compared
to the cost for the consumer and the subsidizer (the Government).
Inefficient, at best.
●
Protectionism
Limited imports by levying tariff barriers, protectionism, is based on
the false idea that any given country can produce everything they
need, at a cost that consumers can afford.
Effects of protectionism
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Less competition results in higher domestic prices : higher prices for
consumers which also lowers companies' capacity to export.
Protectionism has costs for a country's overall domestic production ;
each dollar of increased protection leads to a drop of 66 cents in
gross domestic product (GDP).
Example : Smoot-Hawley Act (United States, 1930)
Protectionism has a negative impact on the global economy ; has a
negative overall effect : An increase of $1 in tariff revenues can result
in a $2.16 fall in world exports and a $0.73 drop in world income.
So we want to boost global trade. How ?
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The « The World Trade Organization (WTO) is the only global
international organization dealing with the rules of trade between
nations. »
Founded in 1995, successor to GATT (General Agreement on Tariffs
and Trade), founded in 1948.
The WTO defines itself as, « an organization for trade opening. It is a
forum for governments to negotiate trade agreements. It is a place
for them to settle trade disputes. It operates a system of trade rules.
Essentially, the WTO is a place where member governments try to
sort out the trade problems they face with each other. »
WTO : Progress & Multilateral trade negotiations
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The Bali Package was signed by WTO members on December 6, 2013; first major
agreement in its history.
Negotiations are difficult to coordinate amongst the 159 nations of the WTO.
Issues : North v. South : Export subsidies (EU/US), fair trade in Agricultural sector
major issues.
Due to blockages, thus there are a number of bilateral and plurilateral negotiations
underway – such as the TTIP (Europe and the U.S.) and the TPP (Brunei, Chile, New
Zealand, Singapore and negotaitions are underway to expanded to Australia,
Brunei, Chile, Canada, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the
United States, and Vietnam.)
How will trade rules to apply for countries that are WTO signatories AND belong to
plurilateral trade zones ?
How can countries compete better in the global
economy?
As we have discussed :
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Stabilize and specialize their economies
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Decrease barriers to trade ●
...and ensure that they are competing in the new digital
economy (part 2 of our class!)
What is the internet economy ?
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Defined as : Business conducted through markets with an
infrastructure based on the internet.
By 2016, the Internet Economy will have expanded to 4.2 Trillion in
the G20 countries
If the internet economy were a national economy, it would rank as
the number five country in the world
34% of the world had access to the internet in 2012
–
500 million users in Europe
–
1 Billion in Asia.
Open internet – Open Trade
What it's changing : New Customers
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Consumer Online Services represent a US$242 billion market, of
which a substantial part relates to e-commerce.
First revolution is that it has changed the speed, variety, and price at
which we can get products. Customer expectations have shifted with
e-commerce. The Amazon standard !
..Now it is also changing concepts of how countries and companies
view manufacturing :
What it's changing : E-Commerce (Ex : textiles)
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E-Commerce has facilitated an explosion in consumer goods, f.ex.
Clothing and textile industry, which employs 75 million people, and
represents US 1.7 Trillion dollars. (source : Fashion United)
The old model of 'cheaply made in the East'/consumed in the West'
may be shifting.
–
With the rise of the internet, consumers can be more informed
and thus more selective about what products they purchase and
their origin.
–
Made in France / Etsy.com : higher price, higher quality
–
Eco-Index : rating of the environmental friendliness of apparel
–
Example : Timberland and international leather suppliers
What it's changing : New Economies
The rise of the internet is developping new ways of consumer
exchange and new economies :
–
Social Economy/Sharing Economy ;
Example : AirBnb
–
New Money
The Bitcoin experiment
–
Mobile infrastructure in the developing world
Data are helping developing countries 'leapfrog' internet infrastructure,
providing them with access to mobile banking (Rwandan example)
The digital revolution and governments
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As the internet and number of consumers connected to the internet
grows, governments struggle whether to and how to regulate it
Internet Freedom recognized as a 'right' by the U.N. H.R.C. In 2012:
'The Unique and transformative nature of the Internet not only to enable individuals
to exercise their freedom of opinion and expression, but also a range of other human
rights, and to promote the progress of society as a whole.' - U.N. Report on Internet
Freedom as a Human Right (2011)
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Government censorship a continual problem in many countries
(China, Iran, Pakistan, etc.)
Are ways around censorship walls (VPNs, peer-to-peer, etc.)
but are difficult to access ;
The key is to not only allow for an open internet, but to facilitate
universal access to faster internet...
The E-Friction Index
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E-friction is the resistance that impedes individuals, consumers,
businesses to have access to the internet :
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Infrastructure-related friction (basic access to internet)
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Industry-related (shortage of labor/capital)
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Individual friction (payment systems, data security, etc.)
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Information-related fiction (volume of content available in a local
language, etc.)
Global
ranking ofof
E-Friction
Global
ranking
E-Friction
Reducing
Governments
mustE-Friction
reduce E-Friction
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Countries that have high e-friction miss out on a significant tool for
growth, because the digital economy is growing at a higher rate
than the traditional economy
If a country has low E-Friction, SMEs will perform better in the
Digital Economy ; are 50% more likely to sell products outside of
their immediate region
The report discussing E-Friction presented at the World Economic
Forum (Davos) calls for more global governance, and a
harmonisation of standards for the internet
And calls on governments to reduce e-friction ; encouraging
developing countries to prioritize internet infrastructure to boost
growth
Example : Digital Rwanda
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Traditionally has an agrarian
economy Has been a policy push to invest in
the ICT sectors : the goal is to make
Rwanda a knowledge-based
economy by 2020 :
Public-Private Partnership : Rwanda signed
a $140 million (£87 million) deal with Korea
Telecom, which will see the company
deliver 4G LTE internet to 95 percent of
citizens within three years
5,000 km of fiberoptic cable being laid
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One laptop per child : 200,000
children in 400 schools receive
laptops
A new service called e-Soko
allows Farmers to connect via
their phones to check on the
price of their goods at the
market :
Any questions ?
Thank you !
Sources
Council for Foreign Relations : « Nafta's Economic Impact
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Washington Post, « The payoff from globalization » http://www.washingtonpost.com/wp-dyn/content/article/2005/06/06/AR2005060601508.html
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UNCTA, « Global Trade Trends » http://dgff.unctad.org/chapter1/1.1.html
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IMF, « Trade, regulations and growth » CONFERENCE ON TRADE AND GROWTH
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RESEARCH DEPARTMENT
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MONDAY,, JANUARY 9,, 2006
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OECD, International trade: « free fair and open? »
http://www.oecd-ilibrary.org/docserver/download/0109121e.pdf?expires=1394988517&id=id&accname=guest&checksum=E0152F89BFE156AFCADEE21B183BC6B8
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How Countries Compete How Countries
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Compete
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STRATEGY, STRUCTURE,
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AND GOVERNMENT IN
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THE GLOBAL ECONOMY
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Richard H. K. Vietor
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Harvard Business School Press
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Boston, Massachusetts
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NYTImes, « The Future of Internet Freedom «y ERIC E. SCHMIDT and JARED COHENMARCH 11, 2014
http://www.nytimes.com/2014/03/12/opinion/the-future-of-internet-freedom.html?_r=0
Rwanda's ambitious 4G rollout begins, education cited as major beneficiary http://www.wired.co.uk/news/archive/2013-10/29/rwanda-4g