International Production and Trade

Lecture Outline• International Production and Trade• Theoretical Perspectives toward International Trade

• Mercantilism• Liberalism• Marxism

• Historical Development of International Trade Structure

• GATT • Increasing Protectionism• The Uruguay Rounds and WTO• The Doha Development Round

• Policy Controversies over International Trade

International Production and Trade

• International production and trade structure is the set of relationships between states, international organizations (IOs), international businesses, and nongovernmental organizations (NGOs) who together influence and manage international rules and norms related to what is produced, where, by whom, how, for whom, and at what price.

International Production

• The recent shift of production from developed to developing nations – Outsourcing – Increasing foreign direct investment in developing

countries– This has a positive impact on the volume of

international trade

International Trade

• Comparative Advantage: The limitations of scarce resources mean that no nation can produce as much as it wants of all goods and services; opportunity cost must therefore be considered.

• Opportunity cost is the value of the best alternative when a choice is made.

• The theory of comparative advantage holds that a nation should produce those goods that have a lower opportunity cost than the same goods produced in other countries.

Rationale for Free Trade: Mercantilism, Liberalism, Marxism

International Trade Wealth and power

•Comparative advantage is a relative term. States can

change advantages through strategic trade policies

•States should protect society

Comparative Advantage International Trade

Global Inequalities International Trade Maintenance of Global

Inequalities

MERCANTILISTS

Sometimes Good Sometimes Bad

LIBERALS

Always Good

(NEO)MERCANTILISTSMARXISTS

Generally Bad

Post-WWII International Trade Structure

1. Bretton Woods System and GATT (1947-1979)– The GATT grew out of an agreement reached in Bretton Woods, New

Hampshire (1944) to create an international institution that would promote free trade.

– The failure of the International Trade Organization (ITO) – 1947 the General Agreement on Tariffs and Trade (GATT) was instituted

based on the principle of reciprocity and nondiscrimination, (the most favored nation)

– GATT negotiating “rounds” were successful in lowering trade barriers on manufactured goods, but not on some goods (especially agriculture)

Post-WWII International Trade Structure

2. Increasing Protectionism (1980-1993)Increasing trade deficits in the U.SThe rise of Europe and Japan Strategic trade policies grew in importance, especially in the 1980s and 1990s.

–The idea of strategic trade policy is that comparative advantage is not fixed, but is dynamic.–Effective state policies can create comparative advantage.

Post-WWII International Trade Structure

3. The Uruguay Round and the WTOIn 1986, GATT members began new negotiations to reduce tariffs– the Uruguay Round. The talks focused on several areas.

The problematic areas have beenServices and Intellectual PropertyAgriculture

Uruguay Round established the WTO to implement enforcement mechanisms for more effective the global trade rules

Post-WWII International Trade Structure

The WTO–The WTO took over the GATT’s role in 1995.

• GATT• GATS (the General Agreement on Trade in Services)• TRIPS (the Agreement on Trade Related Aspects of Intellectual Property Rights)

–WTO has enforcement power through its Dispute Settlement Panel•to interpret WTO agreements and •authorize sanctions on member-states that violate trade rules.

–The WTO became the new target for anti-globalization movements

Post-WWII International Trade Structure

4. The Doha Development Round• The Problems of between North and South• The WTO launched a new round of talks at Doha, Qatar

in 2001. The round has not been completed yet. • The agenda includes

–cutting tariffs on industrial goods and services, –phasing out subsidies to agricultural producers, –reducing barriers to cross-border investment, and –limiting the use of anti-dumping laws

http://www.youtube.com/watch?v=f7eDiXaIXm8

• DISCUSS: Why is agriculture the elephant in the room?

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The Growth of World Trade and Wealth, 1950–2010

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The Volume of Trade Flows Between Major Regions, 2005-2008

Controversies over Trade Policies

Why do governments intervene in international trade?

Political Arguments Economic Arguments

• protecting jobs• protecting industries related to security• foreign policy purposes• protecting the human rights

•Protecting infant industries•Strategic trade policy

Tools of Trade Policy

•Tariffs • Subsidies• Quotas (Export and Import)• Currency Devaluations • Nontariff barriers• Dumping and Antidumping policies

Critiques of WTO

• Impairing State Sovereignty • Serving the Interests of the Great Powers • Being Undemocratic in its Decisions• Ignoring Issues of Development, Human Rights and

Environment

CLASS DISCUSSION

Do you think the WTO should consider human rights when managing international trade relations? Is not it in the end an organization to manage trade relations?

Financial Globalization and International Trade

The classical liberal political economy of England and Scotland:

• In the long run, it is beneficial to all if markets are allowed to operate freely with each other.

Why is the market good?

• As the most efficient means of organizing human production and exchange (an ‘invisible hand’ guiding and coordinating economic activity).

Some of the advantages of international markets over national

markets: – trade across national borders, which in turn generates

wealth and brings about prosperity;

– opportunities for economic co-operation that brings about interdependence among states;

– International capital markets, allocate money more efficiently than local ones.

The argument in favor of free markets speaks:

– against protectionism, which, from a liberal perspective, is a consequence of states acting according to short-sighted and perverse conceptions of the ‘national interest’.

– against mercantilism (the dominant trade practice at in the early 1800s).

Two important limitations of markets:

• Built-in inequality of participants.

• Periods of irrational behavior and speculative excess (market inefficiencies particularly in financial markets).

The great depression: led to the economic collapse of 1929-1934:

There are important similarities with the currentcrisis:

• The banking crises so crippled credit markets that lending virtually stopped.

• Depositors would not keep money in banks fearing that banks would close. So a run on the banks developed at the first sign of difficulties.

The US federal government dramatically increased its role

during the New Deal: • It imposed significant controls on trade.

• There was a decreased reliance on markets and more on state regulation and state-induced consumption (large public projects, etc.)

• Regulated economy.

• Demand-side economics (associated with British economist John Maynard Keynes)

Markets are imperfect

• International economic order is imperfect.• All markets operate within a political framework.• To the extent to which international power structures are

supportive of global markets, global markets are likely to be sustained.

• But international power structures are fragile and prone to instability, which often undermines the stability of markets.

In order to have international trade you need to have stable monetary

relations:

• The Gold standard (the period of classical liberalism, the first attempt to expand international trade; roughly between 1860s and 1914) Created a system of fixed exchange rates (and helped both investment and trade).

The Bretton Woods System after WW2

• created the IMF, the World and the GATT (the set or rules, norms and values);

• system created the gold-dollar regime (fixed exchange rate system).

International Monetary Fund• Its primary role was to prevent the global economic crisis that

engulfed the world during and after the Great Depression of the 1930s: • 1. Monitor a new system for valuing national currencies, the dollar-

gold standard. • 2. Make short-term loans to countries experiencing balance-of-payments

problems; • 3. Compile an annual report on each member country's economy.

Originally, the IMF was:

• 1. based on a recognition that markets often did not work well – that they could result in massive unemployment and might fail to make needed funds available.

• 2. founded on the belief that there is a need for international pressure on countries to have more economic policies that promote expansion.

The triumph of the Keynesian (“demand-side economics)…

• over the laissez faire economics (both domestically and internationally).

IMF:

• 1. Monitor a new system for valuing national currencies, the dollar-gold standard.

• 2. Make short-term loans to countries experiencing balance-of-payments problems;

• 3. Compile an annual report on each member country's economy.

International monetary relations stabilized, international trade was liberalized:

• The liberalization of world trade was the most important achievement of the Bretton Woods system.

• After six months of negotiations, the original GATT members signed over a 100 agreements, affecting more than 45 thousand tariffs that covered about half of world trade.

• This was a shift in the direction of global liberalization of trade.

The Bretton Woods system delivered the goods:

economic growth, • low unemployment (Unemployment averaged just 3 percent

in the main OECD countries, compared to 5 percent during the gold standard and 8 percent in the interwar years).

• stable prices. • relatively free trade, • stable currency values, • and high levels of international investment (but mostly

across the Atlantic).

Postwar (1950-1973) economic growth was extraordinary

everywhere: • The advanced capitalist nations as a whole grew three

times as fast as in the interwar years and twice as fast as before World War One.

• In the glory years of classical liberalism before 1914 world trade volume doubled every 20 to 25 years.

• After 1950 world trade volume doubled every 10 years.

This was a political arrangement. • It was a compromise dictated by the needs of the day.• Back then the US was dominant and there was a common

threat around which to unite. (Even with those conditions, it took the US almost four full years from the end of World War II until Marshall Plan money really started making its way into Europe).

• It took a depression, the Second World War, and the beginning of the Cold War to motivate real rather than symbolic actions concerning the creation of a functioning international community, at least the western branch of such a community.

Some examples of the political arrangements involved:

• In monetary relations, European countries tightly controlled their currencies, strictly limiting the degree to which private citizens could convert national money into gold or dollars.

• The US removed most of its trade barriers but accepted European and Japanese protection.

• The US provided significant funds through the Marshal plan.

Post WW2 alternative models of economic development:

• 1. Import Substitution Industrialization (ISI): government involvement (like that in W. Europe and North America in the 19th century) relied on trade barriers to stimulate national industry -- in response to the first limitation of free markets, namely, inequality of participants)

• 2. More radical: state intervention but also redistribution of wealth and virtual elimination of private ownership -- largely addressing the second limitation of free markets, excesses in financial markets).

Two trends, undermined the Bretton Woods system:

• 1. the restoration of international finance in the course of the 1960s;

• 2. the increasing pressure on the American dollar.

The push for the New Economic International Order

• international economic regimes that would REGULATE rather than entirely ABOLISH national interventions;

• greater access to OECD markets.

• for aid similar to what the US had given to Europe;

• higher prices for exports.

The end of the Breton Woods system:

• The Breton Woods System eventually broke down because of a decline in the power and influence of the US.

• The end of the B-W system marked the end of the rules dear to the US and opened up the room for the reconstruction of the economic order.

• This decline led to the switch to a regime of floating exchange rates from 1971.

What happened to alternative models?

1. The typical ISI economy went through periodic balance of payments crises.The government restricted imports but there was an ongoing need for imported goods. Spending chronically outpaced government revenue, and these budgets deficits were usually covered by printing money.

2. The communist world also faced increased difficulties: Economic growth in the centrally planned economies slowed continually over the late 1960s and early 1970s.

The push for the New Economic International Order:

• The U.S. imagined postwar international economic institutions as progressively abolishing national restrictions.

• States that had been wealthy before the War (colonial powers) went along because the US gave the previously rich market states the opportunity to reconstruct their economies (through the Marshall Plan).

• Latin American and the independent and colonial areas in Asia and Africa accepted the system, because they had no choice (and were not politically organized at the time).

• Third World governments felt cheated out of the trade-induced growth that the rich nations enjoyed in the 1950s and the1960s.

Group 77 • It pressed for changes in the rules of the international economic system to

make it easier for poor countries to participate). • Third world countries such as Argentina, Brazil, India, and Lebanon argued for:

international economic regimes that would REGULATE rather than ABOLISH national interventions; greater access to OECD markets;for aid similar to what the US had given to Europe.

• This set of proposals (put forth over the 1970s) came to be known as the New International Economic Order (NIEO).

Things were getting complicated for the US…

• On top of this political pressure from the Third World countries…

• Individual oil producers and, later OPEC as a whole, jumped on the industrial West’s growing oil dependence.

• The problem was political.

Two important material changes:

• First: the rise of the high-tech companies (Hewlett Packard, Microsoft, ATT) increasingly interested in global markets.

• Second: there was growing popular concern about high unemployment, slow growth, and inflation, which left voters and others open to new policies.

The rise of “the supply-side” economics:

• All of these factors combined pushed a pendulum away from Keynesian economics and towards freer markets.

• Milton Friedman and his followers: Their approach came to be called "market fundamentalism," since it saw "freer" markets as the solution for every economic problem.

• You jump-start the economy by privatizing (UK), cutting taxes, and deregulating.

Reagan came into office in 1981 with several objectives:

• Domestic level: antiinflationary policy.

• International level: the push in the direction of regional trade agreements. The larger blocs: made exports cheaper to produce, allowed firms to grow, made it easier to attract foreign investment, and encouraged the consolidation of banks and corporations. Regional integration (the EU, NAFTA, Mercosur) in the 1990s became an important component part of the overall process of economic globalization.

The Reagan administration tried to:

• 1. undermine the Third World alliance;• 2. undermine the UN system;• 3. privilege institutions that encourage market

discipline on Third World development policies.

During the 1990s the issue was decided in

favor of supporters of global integration.

• From an economic point of view N. America and W. Europe defined the world’s course (1/10 of the population but half the world economy and 2/3 of world trade).

• There was hardly universal agreement on free trade, but official policy came to accept it as a matter of course.

The Washington consensus:

• the use of international financial institutions (the IMF and the World bank) to promote free markets and the supply side economics.

International financial institutions

• promoted economic liberalization in the developing world (things such as trade and capital markets) with a corresponding deregulation of all aspects of the economy.

IMF (and the WB) structural adjustment programs required

governments to: • 1. eliminate uncompetitive nationalized industries;

• 2. cut subsidies to consumers and eliminate services (essential food-stuffs, steep reductions in spending on health, education, and other social services).

• 3. lift restrictions on capital movement.

The direction of financial globalization will change in three

important ways:• First, Western finance is going to be regulated.

• Second, the balance between state and market is going to change in other economic areas.

• Third, the US is likely to lose its economic clout and intellectual authority.

International trade negotiations:

• The advanced industrial countries push the opening of the markets in the developing countries to their industrial products.

• At the same time, they continue to keep their markets closed to the products of the developing countries, such as textile and agriculture.

• While they preach that developing countries should not subsidize their industries, they continue to provide billions in subsidies to their own farmers.

Official trade negotiations:

• The last time official trade negotiations were successful was in 1994 the year when the World Trade Organization was created: 125 nations agreed to a significant drop in trade barriers.

• In 1999, the attempt to launch a new round of trade negotiations crashed in Seattle.

• In 2001, the trade ministers met again in Doha, Qatar, and decided to initiate a new round that, they agreed, would be concluded in four years.

Regionalism and Global Trade:

• The Asia-Pacific Economic Co-operation forum;• The Association of South-East Asian Nations• EU, • NAFTA• Mercosur

A surge in trade despite the failure of WTO negotiations for two

reasons: • Technological innovations—from the Internet to

cargo containers—lowered the costs of trading.

• Political environment more tolerant of openness.