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Trade and Globalization
Trends and Consequences
I. A Brief History of the World
Economic System
A. Trade Before the World Trade System
1.
2.
3.
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)
B. Origins of Per-Capita Growth
C. The World System to 1914
1. 16th-18th Centuries:
a.
b.
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
2. 19th Century Trade
a. Emergence of modern banking
(stockholders instead of families)
b. Emergence of modern paper currency
(backed by silver/gold for public
confidence)
c. 1846: Britain pushes for “free trade” –
i.e. no tariffs. Unilaterally repeals
“Corn Laws”  1860 British-French
Treaty of Commerce
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
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!
D. The Interwar Years
1. Allied Debt to US, German Debt to Allies
2. Return to Gold Standard (Example of an
international regime)
a. Reason: early approach to the time inconsistency problem
b. US leads with easy domestic credit, allows UK to build up
trade surplus (gold reserves)  UK and others begin
adoption 1925
c. 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)
i. Implication: World economic growth increases demand
for core currencies  loss of competitiveness
ii. Implication: Non-core dependent on monetary policies
of core
3. Reparations and the Credit Crunch
a. The 1920s:
i. US invests/lends to Germany and Allies
ii. Germany pays Allies
iii. Allies repay US
b. The Crunch:
i.
Late 1920s: US stock market boom
reduces willingness to lend/invest in
Europe
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
4. Collapse of the Gold Standard
a. Decreased US demand exports recession
elsewhere
b. Strong incentive to devalue currency:
devaluation boosts exports, lowers imports
 stimulates domestic demand
c. Trade deficits undermine gold standard
(purchases made “in gold” so deficits drain
gold reserves)
d. Prewar stabilization mechanism (borrowing
from neighbors’ banks) unavailable due to
credit crunch
e. Devaluation and domestic politics
i.
Democratic governments more likely
to devalue (domestic costs vs.
international ones)
ii. Countries with large foreign
investments less likely to devalue
(would undermine own investments)
f. Cascade: Devaluation by Core States
Spilled Over to Non-Core
Years on
Gold
Standard
1923-39

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
Collapse of the Gold Standard
5. Collapse of the Trade System
a. “Beggar Thy Neighbor” – As
complement to or substitute for
devaluation, tariffs are used to shut
out imports (US: Smoot-Hawley 1930)
5. Collapse of the Trade System
a. “Beggar Thy Neighbor” – As
complement to or substitute for
devaluation, tariffs are used to shut
out imports (US: Smoot-Hawley 1930)
b. Other countries retaliate with tariffs
c. Trade spirals downward
E. The Rise and Fall of Bretton Woods
1. Goal: Avoid another Great Depression and
World War III.
2. INSTITUTIONS:
a.
b.
c.
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
3. Evolution of the financial system
a. Europe and Japan rebuilt: IBRD turns
to development of postcolonial states,
becomes known as “World Bank”
despite being only one agency in
Group
b. 1950s-1060s: World Bank Group
assumes role of mediating investment
and international lending disputes
4. Evolution of the Trade System
a. GATT
“Rounds”
lower tariffs
on
manufactured
goods 
trade
expansion
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
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
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.
5. Evolution of the monetary system
a. The decline of the dollar:
i.
ii.
Vietnam + Great Society  Inflation.
Inflation + Economic Recovery Outside
America = Dollar overvalued (too easy to
acquire dollars  speculative attack on
the dollar)
b. From fixed to floating exchange rates:
The US abandons gold in 1971
II. Hegemons and Regimes
Explanations for the modern global economy
(Post-18th Century: Per Capita Growth)
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
A. Hegemonic Stability Theory
1. Assumptions: Primarily Economic Theory
a.
b.
Depressions  Major Wars
International Economic Cooperation Prevents
Depressions
c.
Assumptions
Public Goods Theory:
i.
ii.
iii.
d.
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…
i.
ii.
iii.
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
e. “Law of Uneven Growth”
2. Evidence
a.
Free Trade
i.
ii.
iii.
iv.
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. CobdenChevalier Treaty (1860) -- Consistent
v. Free Trade and US Hegemony –
Consistent?
AVERAGE
US TARIFF
YEAR
RATE
---------------1940
36%
1946
25%
1950
13%
1960
12%
1970
10%
1975
6%
1984
5%
AVERAGE
WORLD
TARIFF
---------40%
-25%
17%
13%
-5%
b. American decline coincides with failure of
Bretton Woods monetary system
B. Regime Theory
1.
2.
3.
4.
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
III. Contagion as a Cause of
Regionalism and Globalization
A. Processes of contagion in IR
1.
2.
3.
Diffusion: Affinity, Agreements, or Spill-Over
Emulation: Modeling or Harmonization
Opportunism: Altered decision calculus
B. Processes of Economic Contagion
1. Diffusion
a.
b.
c.
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
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
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.
Devaluation to
Recession
• 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 singleday 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
2. Emulation
a. Institutions: Dollarization, Euros,
WTO/IMF standards
b. Learning: Copy success stories (avoid
socialism, sign on to neoliberalism or
developmental state)
3. Opportunism
“Beggar Thy Neighbor” and the Great
Depression
Free-Riding
“Race to the Bottom”
Trading Economics for Politics (Cold
War)
C. Problems with Contagion
1.
2.
3.
4.
Why some regions rather than others?
Modeling, Opportunism or Diffusion?
Uncertain regional boundaries
Few specific predictions
IV. Security Communities as a Cause
of Regionalism
A. Requirements
1.
2.
3.
4.
Expectation of Nonviolence: Trust,
Predictability, Knowledge
“We-feeling”
Shared long-term interests  Reciprocity
Security Communities  Institutions, not the
other way around
B. Emergence
1. Democratic Peace? No democracy vs.
democracy wars  expectation of
peaceful interaction
2. Interdependence? Creates common
interests  incentives for reciprocity
3. Regime stability? Creates
predictability
4. Interaction? Creates “we-feeling”?
C. Assumption: Expectation of
Cooperation
1. Promotes Absolute-Gains Concerns
Over Relative-Gains Concerns
Why is this so important?
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?
a.
Absolute
Advantage
Given 100 resources, what
can each country produce?
Missiles
Missiles
OR
Coffee
USA
Colombia
20
5
10
200
•Production possibilities without trade
20
•Trade  Specialization. Coffee < 10
resources, Missiles < 20 resources
•Example: Coffee = 2, Missiles = 10.
10
US trades 5 missiles (50 resources) for
25 coffee (50 resources)
10
100
200
Coffee
•Result: Both sides achieve levels of
consumption outside of the original
production possibilities!
b. Comparative
Advantage
USA Britain
Wheat
Cars
100
10
20
5
Given 100 resources, what
can each country produce? •US has absolute advantage in both goods!
•US has comparative advantage in…
Wheat
•5:1 wheat, 2:1 cars  wheat
100
•UK has comparative advantage in
•1:2 rather than 1:5  cars
•UK buys wheat at <5 resources,
US buys cars at <10 resources
50
•Example: Wheat = 2, Cars = 8.
5
Cars
US sells 12 wheat (24 resources), buys 3 cars
10 (24 resources)
C. Evidence: Regional Economic
Organizations and Cooperation
1. ASEAN:
Only
minimal
political
conflict
2. European Union: No war since WW II
3. US FTAs: Trade Policy or Security Policy?
Year
1985
Country
Israel
% US Exp
1
% US Imp
1
1989
1994
2001
Canada
Mexico (NAFTA)
Jordan
23
+ 14
trivial
18
+ 12
trivial
2003
2003
2004
Chile
Singapore
Morocco
<1
2
trivial
<1
1
trivial
2
2
trivial
varies
1
1
trivial
varies
2005 Australia
2006 Central America (DR-CAFTA)
2006 Bahrain
2007? South Korea, Colombia, Peru, Panama
E. Problems with Security Communities
1. Causality not established
2. Eurocentric: projects other regions will
follow path of Europe
3. 19th-Century European Peace: security
community was absent
4. Parsimony: The “Liberal Peace” thesis
(democracy/trade/IOs  peace)
explains war better, and peace 
trade
V. A final challenge to liberalism and
globalization: commerce and coalitions
A. Heckscher-Ohlin Theorem: Relative factor
abundance determines production.
1.
2.
3.
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
B. Extending the factors
1.
2.
3.
4.
Capital: Banks and investors
Labor: Workers
Land: Farmers
Free trade generally helps industries
using relatively abundant factors,
hurts industries using relatively scarce
factors
C. Predictions
1. Obvious: Relative strength of
organized interest groups representing
each factor determines trade policy
2. Less obvious: Trade policy selectively
weakens or strengthens factors,
altering domestic political balance!
3. Some evidence supports model, but
most propositions too vague to test
(real production uses all three factors)