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DESCRIPTIONTrade globalizationInternational 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."
- 1.Trade and Globalization Trends and Consequences Abouhana
2. I. A Brief History of the World Economic System A. Trade Before the World Trade System 1. Trade routes for all recorded history 2. Evolution about 1000 years ago: financial houses to underwrite trade expeditions, reliable permanent markets, etc (China and Italy) 3. About 500 years ago: Western Europe develops global reach (beginning of political-economic exploitation) Abouhana 3. B. Origins of Per-Capita Growth Abouhana 4. C. The World System to 1914 1. 16th-18th Centuries: a. Mercantilism (increase capital/bullion through trade surpluses) Trade at the point of a gun; exclusive deals b. Problems: Uncontrolled inflation, deflation, and Dutch disease, emphasis on relative gains instead of absolute gains Abouhana 5. 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 Abouhana 6. Abouhana 7. 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 Abouhana 8. 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 Lloyds insured Germanys ships! Abouhana 9. 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 Abouhana 10. 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 Abouhana 11. 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 Abouhana 12. 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 Abouhana 13. 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) Abouhana 14. f. Cascade: Devaluation by Core States Spilled Over to Non-Core Years on Gold Standard 1923-39 Abouhana 15. 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 Abouhana 16. Collapse of the Gold Standard Abouhana 17. 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) Abouhana 18. Abouhana 19. 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 Abouhana 20. Abouhana 21. E. The Rise and Fall of Bretton Woods 1. Goal: Avoid another Great Depression and World War III. 2. INSTITUTIONS: a. Rebuild industry and avoid another credit crunch: International Bank for Reconstruction and Development b. Avoid competitive devaluation: US pegs to gold, everyone else pegs to dollars. Stabilization to be provided by International Monetary Fund. c. Avoid trade wars through the MFN principle: General Agreement on Tariffs and Trade Abouhana 22. 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 Abouhana 23. 4. Evolution of the Trade System a. GATT Rounds lower tariffs on manufactured goods trade expansion Abouhana 24. 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 Abouhana 25. 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 dont 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 companyAbouhana 26. 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. Abouhana 27. 5. Evolution of the monetary system a. The decline of the dollar: i. Vietnam + Great Society Inflation. ii. Inflation + Economic Recovery Outside America = Dollar overvalued (too easy to acquire dollars speculative attack on the dollar) Abouhana 28. b. From fixed to floating exchange rates: The US abandons gold in 1971 Abouhana 29. II. Hegemons and Regimes Explanations for the modern global economy (Post-18th Century: Per Capita Growth) 0 100 100 200 300 400 500 600 700 800 900 1,000% 11th 12th 13th 14th 15th 16th Century 17th 18th 19th 20th 21stAbouhana 30. A. Hegemonic Stability Theory 1. Assumptions: Primarily Economic Theory a. Depressions Major Wars b. International Economic Cooperation Prevents Depressions Abouhana 31. Assumptions c. Public Goods Theory: i. World Economy as Public Good: Cannot exclude countries from existing in a prosperous world and stability is non-rivalrous ii. 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 wont make a difference! iii. Free Riding: Enjoying benefits of stable world economy without paying costs d. Hegemony: When a single state i. CAN pay the costs of world economic stability ii. MUST pay those costs or stability wont be provided iii. is WILLING to pay those costs because the benefits to itself outweigh the costsAbouhana 32. e. Law of Uneven Growth Abouhana 33. 2. Evidence a. Free Trade i. Napoleonic Wars: Challenge to British Hegemony (Continental System) Consistent ii. 1815-1840: Increased Protectionism: Corn Laws, etc Inconsistent iii. 1840s-1850s: Rise of free trade in Britain -- Consistent iv. 1860s-1880s: Rise of free trade in Europe, i.e. Cobden- Chevalier Treaty (1860) -- Consistent Abouhana 34. v. Free Trade and US Hegemony Consistent? AVERAGE AVERAGE US TARIFF WORLD YEAR RATE TARIFF -------- --------- ---------- 1940 36% 40% 1946 25% -- 1950 13% 25% 1960 12% 17% 1970 10% 13% 1975 6% -- 1984 5% 5% Abouhana 35. b. American decline coincides with failure of Bretton Woods monetary system Abouhana 36. B. Regime Theory 1. Goal: Understand why economic system didnt collapse in 1970s 2. 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 3. Emphasis on nonstate actors: regimes perpetuate themselves 4. Problem: Regime theory adds little to predictive power Abouhana 37. III. Contagion as a Cause of Regionalism and Globalization A. Processes of contagion in IR 1. Diffusion: Affinity, Agreements, or Spill-Over 2. Emulation: Modeling or Harmonization 3. Opportunism: Altered decision calculus Abouhana 38. B. Processes of Economic Contagion 1. Diffusion a. Affinity: Tourism, Remittances, Immigration b. Alliances and Agreements: Incentive to trade more with allies / MFN countries than enemies c. Spill-over: Alter economy of one state alter economies of neighbors Abouhana 39. 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