GO131: International Relations Professor Walter Hatch Colby College Global Trade and Finance

No Trade Autarky (“self-reliance”) Protectionism Tariffs Non-tariff barriers

Trade $10 trillion/year in merchandise exports $2.5 trillion/year in service exports

Why Trade? Specialization Efficiency Lower Prices Absolute gains

Comparative Advantage TVsBeerAutarky Ratio Country A1 hour per unit 3 hours per six pack 1 B: 3 TVs 1 TV: 1/3 B Country B2 hours per unit 4 hours per six pack 1 B: 2 TVs 1 TV: ½ B

Heckscher-Ohlin A country will tend to export the commodity that more intensively uses its relatively abundant factor of production, and will import the commodity that more intensively uses its relatively scarce factor of production Why? Difference in relative price of commodities Gains from specialization

Liberal Economists: Be Happy

Three Unhappy Scenarios Friction in allocating resources Declining terms of trade To overcome? industrial policy Asymmetrical interdependence

Trade Relations Unilateralism Super 301 Bilateralism Plurilateralism EU NAFTA Multilateralism

Governing Global Trade GATT (1947) WTO (1995) 149 members Limited enforcement powers Great success: reducing tariffs most-favored nation concept

Critics Seattle 1999

Challenges: The Doha Round Director-General Pascal Lamy

Finance

Types of Finance Portfolio investment Foreign Direct Investment $900 billion in 2005 Currency Exchange $1.9 trillion every day

Exchange Rates Convertible From fixed to floating Currency value is relative States have own reserves

Bretton Woods Meetings in 1944 under U.S. and U.K leadership Created IMF and World Bank fixed exchange rate system non-dollar currencies pegged to the dollar, which was (supposedly) backed by gold stockpiles U.S. began running larger and larger BOP deficits. Central banks in Europe and elsewhere found they had greater and greater dollar reserves relative to the gold in Fort Knox. They began to doubt the ability of the U.S. to redeem its dollar liabilities in gold. 1971: U.S. abandoned dollar standard; within two years, major currencies were floating

Today’s IMF 184 members Lender of last resort Macroeconomic policy police Asian fiscal crisis (1997-8)

Critics of IMF

Third World Debt

Who Runs the IMF? Rodrigo de Rato y Figaredo? U.S.? 17.4 percent voting power