Lecture 1: Introduction to World Trade: Absolute and Comparative Advantage
International trade
The trade of goods and services across borders. (There is always a political aspect to this)
• Trade that involves dealing with more than one sovereign government.
• Often more than one monetary regime and set of laws.
- Moving from one currency to another.
• This can lead to any number of ‘complications’ as deals are made.
- Trade regulation affects markets.
- But International trade can also be extremely profitable.
- And, arguably, it can help people in both countries.
- Though, of course, it might hinder some people in one or both countries.
International production
Producing goods and services across borders.
• Your smartphone might have been made in 40 different countries.
• Many manufactured goods now are produced from highly international networks.
• How does this get regulated? Who creates enough stability for this to remain profitable.
International financial systems
Foreign exchange (Forex)
• Every time you move into another currency area, you are subject to additional risk.
• Also, credit can be given or withdrawn, leaving a small economy in shambles.
• And FDI (Foreign Direct Investment) is covered here as well.
International development
How do capital flows impact economic development, especially in ‘developing’ countries:
this is more handled in GPE even though there are chapters in our book. (Reinert)
International trade
• Does this impact me?
• You might have heard of the notion of… globalization
• When did globalization start?
• 1990s onwards?
,• WTO: Global Trade gets teeth
• But globalization arguably started in the 1870s-1914
- First ‘golden age’ of international capital
- Aka heyday of the British empire
- Global economy united under the pound and the gold standard
• Before 1945 however politicians tend to act as though the global economy was a ‘zero
sum game’ (one wins, another loses).
• This meant, if I didn’t grab land and use it for resources and markets, then someone else
would.
• This economic model fuelled the political model of colonialism.
• This economic model was based on the old theory of mercantilism.
Mercantilism
• Metropole= centre of production
• Manufactured goods are as a rule far more profitable to produce – contain more value
added, than raw materials.
• So, mercantilists want production to be ‘at home’ for the most profits.
• How to get raw materials for production – e.g. cotton for textile mills?
• You could buy them on a competitive international market.
• Or, you could take colonies, and extract raw materials a monopsonistic prices.
• (Monopsony= only one buyer)
• You then produce goods at home, and sell at home.
• But also use the colonies (e.g. India), as a forced market, where you have a monopoly as
a seller.
• Meanwhile, other ‘powers’ are jockeying to gain the most colonies, and most raw
materials, and markets, so that they can gain the most value added.
• Most wealth = most military power = most economic power = etc.
• But during the 1930s, and 1940s, the Anglo-American economists began to push a new
idea.
Trade: The Non-Zero-Sum Game
• The idea was that, instead of competing amongst each other for colonies and captive
markets.
• Why not create a new international order based on Ricardo’s old idea, that trade, via
comparative advantage, would enrich everyone?
• International trade would create more wealth than would autarky, even with colonies.
• This would create incentives to work together, rather than compete.
• It would also create development.
• And it would cement the world into one big capitalist-democratic family.
,Trade as Non-Zero-Sum Game
• This was extremely radical: and (I think ironically) many still view it cynically—even
though it was the main cause of the end of colonialism (!)
• But, to have the major powers create a whole economic system based on accountability,
democracy, good government, trust, rule of law, and on human rights and dignity…
• This was the dream; and in many ways it has delivered and continues to lift people out of
poverty.
• Before Covid, by 2030, no extreme poverty.
• So people bought into it: it ‘won’ by selling not only a promise, but real prosperity for the
‘middle classes’ and those who aspired to be like them.
Bretton Woods System
• Goal: To Foster World Trade and Democracy
• United Nations
• IMF
• World Bank
• GATT/WTO
• OECD
• Global currency union under the USD (until 1971)=> reduces risk and increases
opportunity for investment.
• Increasing cooperation
• Free movement of capital, goods, and people across borders, with minimal restrictions or
tariffs.
Globalization: Rise and decline
• Thus, Globalization has been happening since before WWI (with the UK as hegemon).
• And, since WWII (with the US as hegemon).
• It was believed in 1989 that Russia would join the global order.
- Fukuyama’s End of History.
• And that since 1997, that China would also join this global order.
• And we would be one big democratic-capitalist economy.
• Since the 1980s, world leaders acted as though globalization was inevitable.
Globalization
What are anti-globalists’ economic concerns?
• Immigrants
- Depresses wages
• Threat of moving companies overseas
- Worsen working conditions
- Help union busting
- Reduce workers’ bargaining power
, • Foreign investment
- Increase housing prices in cities
- Increased debt levels
• In general:
- Reduce standards of living
- Increase instability/quality of life
Globalization and International Trade
• But international economists will say: anti-glovalist are wrong, and that in the long-term
international trade enriches everyone.
• It creates more wealth than autarky.
• Look at the lower price of goods.
• People now can buy shoes, shirts, appliances, phones, for far less than they could in the
1960s and 70s.
• In those times, many children still went to school without shoes, parents did not all have
refrigerators, etc.
• Quality of life has gone way up.
• Global Poverty is rapidly decreasing: it is at an all-time low.
• This is despite huge population increases.
• And it corresponds with the ‘golden age’ of globalization and Bretton Woods.
So who is right?
• Reality is complex.
• International trade indubitably creates more wealth than autarky.
• It raises living standards.
• But, raised living standards also depend upon a social safety net.
• Governments have to intervene in markets, to reduce exploitation of the poor, or else
capitalism will look like c19th.
• In other words, capitalism only works well if it has some government intervention, i.e.,
‘socialist’ elements (even in the US, the New Deal created a vast safety net compared
with pre-New Deal).
International Trade
• In your book, Reinert attempts to make the case in favour of international trade for the
most part.
• Most economists believe that in the aggregate, international trade is better than not.
• We will in the first half of GPE, focus on the case for trade, looking at it critically, but
assuming that this is better than autarky.
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