Chapter 11: International Trade in the Global Marketplace Copyright 2013 Cengage Learning

“Globalization has changed us into a company that searches the world, not just to sell or to source, but to find intellectual capital—the world’s best talents and greatest ideas.” Jack Welch, Former CEO of General Electric Copyright 2013 Cengage Learning

Struggles with Globalization Copyright 2013 Cengage Learning

“We must ensure that the global market is embedded in broadly shared values and practices that reflect global social needs, and that all the world’s people share the benefits of globalization.” Kofi Annan, Former Secretary-General of the United Nations Copyright 2013 Cengage Learning

Globalization and Trade  Trade integration  World trade generally grows faster than world GDP  Trade in services and telecommunications increasing  Developing economies may capture increasing share of world trade in services 5

The Growth of Global Trade Integration 1999 ‒ 2011 Copyright 2013 Cengage Learning

“The idea of economic competition among nations is flawed. Companies compete. But economically, countries depend on each other.” Robert Samuelson, Political economist Copyright 2013 Cengage Learning

Trade, Multinational Corporations, and the Globalization of Production  Multinational corporations (MNCs)  Today’s pattern is to dismantle the “hub” by dispersing production facilities worldwide.  Dispersion made possible by improvements in communication and transportation. 8

The Global Supply Chain Copyright 2013 Cengage Learning

Trade, Multinational Corporations, and the Globalization of Production  MNCs account for one-fourth of world’s production and two-thirds of global exports.  Intra-firm trade  MNCs are primary agents in globalization of productions  FDI 10

Globalization and Carbonation Copyright 2013 Cengage Learning

The Shifting Distribution of Foreign Direct Investments Copyright 2013 Cengage Learning

The Globalization of Labor  Goods cannot be produced without labor.  Integration of labor markets, predicated by the global nature of production as well as the increased size and mobility of the global labor force.  Wages and negotiating power of labor declines as labor becomes globalized. 13

Child Labor in a Global System Copyright 2013 Cengage Learning

The Globalization of Labor  Overall, globalization may bring positive, but perhaps unevenly distributed, developments.  Societies may benefit, but there are still winners and losers. 15

Copyright 2013 Cengage Learning Contending Trade Strategies  Liberalism versus mercantilism 16

Copyright 2013 Cengage Learning The Shadow of the Great Depression  Bretton Woods: IMF, IBRD  General Agreement of Tariffs and Trade (GATT) Reciprocity Nondiscrimination Transparency 17

Cascading Globalization: Communist China Chooses to Convert to Capitalism and Consumerism Copyright 2013 Cengage Learning

Copyright 2013 Cengage Learning. Main Differences Between Liberalism and Mercantilism  For mercantilism economic relations are conflictual  To mercantilism the states are the only important actors  To mercantilism the goal is to serve the national interest  To mercantilism politics determines economics  Mercantilism postulates that world transformations are products of shifts in distribution of states’ relative power  For liberalism economic relations are harmonious  To liberalism the major actors are households/business firms  To liberalism the goal of economic activity is to maximize global welfare  To liberalism economics should determine politics  Liberalism’s theory pictures global change in a dynamic ever-adjusting equilibrium 19

Copyright 2013 Cengage Learning Commercial Liberalism  Humans naturally want to cooperate  Trade can benefit all and promote peace  Problems of capitalism boom-and-bust can be solved  Open markets and free trade  Adam Smith, laissez-faire  Absolute advantage—a state should specialize only in producing that which it can at the lowest cost compared to potential trade partners 20

Copyright 2013 Cengage Learning Commercial Liberalism  David Ricardo and the principle of comparative advantage  Absolute gains of trade more important than relative gains  Invisible hand maximizes efficiency of the market  Gains from trade are not distributed equally 21

Key Differences Between Liberalism and Mercantilism Copyright 2013 Cengage Learning

Comparative Advantage and the Gains from Trade Copyright 2013 Cengage Learning

The Theory of Comparative Advantage  By specializing and trading, states and individuals can increase overall consumption and efficiency.  Powerfully contradicts the realist view that international affairs are a zero- sum game. 24

Copyright 2013 Cengage Learning Mercantilism  Largely an economic extension of Realism  Power politics determine economics  The state is involved in economics  Friedrich List  Relative gains are more important than both players’ absolute gains  Even trade can lead to zero-sum competition. 25

Copyright 2013 Cengage Learning Trade and Global Politics  Hegemonic stability theory  Collective good—public good, available to all  Collective action dilemma—who pays for the public good?  Hegemon absorbs costs and tolerates free riders  Trade ties tend to discourage military conflict 26

Copyright 2013 Cengage Learning Trade and Global Politics  Economic sanctions—deliberate economic actions against a target state and a form of coercive diplomacy  May not work against the target, but cost to citizens may be high 27

Sticks and Stones of Economic Statecraft Copyright 2013 Cengage Learning

Economic Freedom in the World Copyright 2013 Cengage Learning

The Fate of Free Trade  Global trade continues to grow and protectionism is low  Demands for protectionism still resonate, especially as economy stalls  Trade tricks  Uneasy coexistence of Mercantilism and Liberalism 30

Copyright 2013 Cengage Learning The Fate of Free Trade  Trade Tricks Tariffs Import and Export Quotas Orderly Market Arrangements (OMAs) Voluntary Export Restrictions (VERs) Nontariff Barriers (NTBs) Countervailing Duties Antidumping Duties 31

Copyright 2013 Cengage Learning Protectionism  Beggar-thy-neighbor policies  Import quotas  Export quotas  Voluntary export restrictions  Non-tariff barriers  Protection of infant industries  Strategic trade policy  Countervailing duties  Antidumping duties 32

Copyright 2013 Cengage Learning Uneasy Coexistence of Mercantilism and Liberalism  States simultaneously pursue liberalism and mercantilism.  Foreign aid may require purchase of donor’s goods.  Trade benefits may be linked to support in other issue areas.  Developed economies still maintain tariffs to protect valued sectors.  Rents and rent-seeking 33

Copyright 2013 Cengage Learning Triumph or Trouble for the Global Economy?  The Development of the WTO  Regional Trade Arrangements  World Trade and the Financial Crisis 34

Copyright 2013 Cengage Learning The Development of the WTO  Trade regime better developed than the monetary.  The GATT/WTO institutional core strengthens the regime.  Early GATT rounds (negotiating meetings) reduced tariffs and other obstacles to trade considerably. 35

Copyright 2013 Cengage Learning The Development of the WTO  The Uruguay Round of the 1980s led to the creation of the WTO in  Membership has grown from 23 at GATT’s inception to 153 today, with an additional 30 observers.  The Doha Round started in 2002 and addresses various issues like intellectual property rights. 36

The World Trade Organization Goes Global Copyright 2013 Cengage Learning

Is the WTO Killing Agriculture? Copyright 2013 Cengage Learning

Regional Trade Arrangements: Supplement or Substitute for the WTO?  Since early 1990s, rapid proliferation of RTAs and bilateral agreements, increasing tenfold.  In May 2011, 489 RTAs and 297 agreements (according to the WTO). 39

Trade Flows Within and Between Major Regions Copyright 2013 Cengage Learning

World Trade and the Financial Crisis  World trade fell 9 percent in 2008, the first decrease since 1982, and declined another 12.2 percent in  Trade levels rebounded in 2010 with a growth of 14.5 percent.  Impact of 2008 crisis led to oversupply of goods. 41

Copyright 2013 Cengage Learning World Trade and the Financial Crisis  The globalization of production magnified the oversupply of goods.  Tendency is for murky protectionism— hidden nontariff barriers.  Flexible exchange rate regimes enabled states to respond without having to resort to protectionism, which could lead to global economic collapse. 42

Copyright 2013 Cengage Learning World Trade and the Financial Crisis  The stagnation of the Doha Round indicates a juncture for globalized trade: Realists contend the WTO has limitations to its international organizational strength. Liberals contend the very continued existence of the WTO is a testament to its strength and legitimacy. 43

Copyright 2010 Cengage Learning The Growth of Global Trade Integration 44

Copyright 2010 Cengage Learning The Contribution of Foreign Direct Investments to Globalization, 1970 ‒

Copyright 2013 Cengage Learning Questions 1.Will a recovering U.S. economy affect other nations just as quickly as a troubled one? 2.Why do these countries work independently to improve their economic situations? What are the advantages and disadvantages? 3.What is “peasant power?” 46

Copyright 2010 Cengage Learning The Balance of Trade  Exports minus imports  Mathematical impossibility for two states to have a balance of trade with each other  Fair trade 47

Copyright 2010 Cengage Learning. Exchange Rates and the Balance of Trade 48 The Interaction of Exchange Rates and the Balance of Trade Equilibrium: Balanced Trade, stable Exchange Rate Increase Price (in Dollars) of Imports from Europe (Due to Increase in Euro Price) Decreased Demand for Imports from Europe (Due to Increased Price) Increase in US Imports (Trade Deficit) Increased Demand for Euros (To Pay for Increased Imports) Increased Price of Euros (Due to Increased Demand)

Copyright 2010 Cengage Learning. The Growth of World Trade and Wealth, 1950 ‒

Copyright 2013 Cengage Learning Questions for Critical Thinking 1.What are the positive and negative aspects of international trade? 2.Is it important to you to purchase free trade products? Why? 3.What are the incentives for states to use protectionism? 50

Copyright 2013 Cengage Learning Web Links  Trade Resources Trade Resources  World Bank World Bank  World Trade Organization World Trade Organization 51