Global Economics

Prof. Anand Verma

- By Alok Pathak

INDEX
Introduction----------------------------------------------------------------------------------------------------3

Geopolitical Instability---------------------------------------------------------------------------------------3

Factors affecting Geo instability---------------------------------------------------------------------------4

European union integration--------------------------------------------------------------------------------6

Fractious international relations--------------------------------------------------------------------------8

Protectionism measure in US-----------------------------------------------------------------------------10

References------------------------------------------------------------------------------------------------------

INTRODUCTION
Over the last two decades countries in the world became more interconnected and
interdependent because of the progressive increase in technology and development.
Geopolitical instability has become a global threat currently. It raises economic concerns,
trade issues, movement of people, development etc. There are trade wars between big
powers and some poor and underdevelopment countries who are not very stable politically
are suffering. Various factors which affect in positive and negative way to this global
instability.

GEOPOLITICAL INSTABILITY

Geopolitical Instability is caused by issues in national politics which in many nations has
confirmed exceptional disruptiveness and pushback with very touchy relationship
worldwide and increasing progressively. These volatilities will expectedly persevere, testing
all the key priorities of the co-operations.
Biggest risk which is expected in current world is the economic confrontations between the
major powers like US, china, Brexit issue etc.
There are many geopolitical risks expected this year

 Who will govern US. Being the superpower, any decision made affect the world in
some way.
 US – China trade war and tensions will disrupt the flow of talent, technology,
investment etc in future.
 Critical issues like poverty, climatic changes, trade made liberal by countries will
assert more pressure on the MNCs from political officials.
 Europe believe they should now become more aggressive and impactful in current
competing economic and political model.
 Constant climatic changes will put everybody on collision course with the decision
makers of corporate industry.
FACTORS AFFECTING GEOPOLITICAL INSTABILITY

International organizations are most important actors in this critical version of international
politics by making mediations, peace-making, resolving disputes, doing sanctions, managing
key areas in of world concern from health to monetary policies. There are two very
important features which make the difference between the international organisations and
others Power centralisation and autonomy of decision. These two are very effective on
politics beyond the simple effectiveness.
Factors help in Mitigation :
Free trade -Doing more imports and exports, making trade easy and free, removing of
barriers will increase in more co-operation between nations and increased globalisation. As
a result, it will help in reducing political instability and economic instability.
Expression of denationalisation policies can complement to national decision, by using
principle of international co-operation. WTO, IMF and other institutions can promote
nations to take more decisions related to international benefits and promoting more
globalisation which will lead to having less instability in politics and economy.
Sharing of technological advancements More sharing of technology and working together
of nations on technology will mitigate the chances of having instability.
Single union formation - Agreement between the states to form a single union. Like
European union all the nations came together and formed a single union to have single
currency and single trade terms, making internal trade free of all tariffs and increased the
stability of economy and politics.
Multilateral system – development of wide range of specialized institutions and rules to
promote co-operation between nations. This include promotion of best practices and
sharing of the information related to the best practices among other nations and helping
them in crisis.

Factors help in Amplification :

De-promoting globalisation decisions like implementing Brexit and going out of the EU, UK
is not promoting globalisation which may lead to have more instability in economy and
politics for both EU as well as UK. It also affects the other world who are doing trade with
them.
Rapid population growth and environmental degradation – makes difficult to maintain
political stability. Population growth and increasing degradation of environment lead to
assertion of more pressure on the political bodies and thus result in instability both
economy wise and political wise.
Nuclear control – increasing importance of nuclear control is affecting the political stability.
Currently the big countries like US, Russia, china etc all moving towards showing their
nuclear power and resulting in making relations bad. This control tends to provide more
political instability and reduces economy stability also.
EUROPEAN UNION INTEGRATION
Euro was created to eliminate the fluctuation risk and exchange cost. single currency
provides many benefits and advantages over the previous situation. Single market theory is
strengthened. Providing closer co-operation between all member states.

Key institutions of the European Union

European Commission – this is responsible for implementing policies agreed by the member states
of the EU. It is like a civil service.

The European Council of Ministers – this is the name for the group of ministers that form the
executive of the EU (the executive is in effect the group of key decision makers in a government).
The ministers come from different member states and they meet to discuss pan European issues.

European Parliament – this is the EU’s parliament which contains elected MEPs from the different
member states of the EU and the parliament sits in Strasbourg. It is relatively weak, but it may gain
more power and importance in time.

European Court of Justice – this is the highest court in the EU and its rulings/judgments bind the
courts of member states (i.e. the courts of member states in the EU have to abide by decisions made
by the ECJ and so it the highest court in the EU). It is based in Luxembourg.

European Central Bank – this sets the monetary policy (i.e. it sets interest rates and controls the
money supply) for the whole of the Eurozone. It is in Frankfurt.

It provides various advantages like:

 More options to the customers and less and stable prices than before.
 Provides more security with more opportunity in the market.
 Helps in improving economy and growth of a nation.
 Growth of more integrated financial institutions and markets.
 Makes the presence of EU stronger in the global scenario.
 Free trade area for all the member states.
 Trade creations occur and help nations grow and become stable.
 Price transparency increased. Forex got removed within EU made easy to trade.
 Opens the door for more opportunities in the global market.
COUNTERFACTUAL SCENARIO

There had been many criticisms in the formation of European union.

 They lead to more trade diversion than trade creation, trade diversion is not a good thing. If
the CETs will be large there will be increased number of diversions in trade than creation.
 Theory of comparative advantage can be easily seen to full and would eliminate the less
good producers completely and countries like Greece will suffer.
 Bilateral agreements can be a barrier in achieving multilateral trade. When trading blocs see
each other as rivals and do not practice free trade between them and do it only internally.
 Leads to more loss of nation sovereignty and nation’s ability to protect the industry and jobs
within.
 Bilateral trade reduce development of LDCs. Negotiations are not carried out on equal
terms. Rich nations are not fair towards poor nations because of more trading power.
 Lesser development of poor countries.
 Overcrowding due to free immigration.

Below is the increasing problems for EU-

FRACTIOUS INTERNATIONAL REALTIONS
Today geopolitics has become a very important for all businesses among nations and
borders are no more crucial. World economic forum in 2016 pointed out this risk and
concern of geopolitics with trade, economy, environment, disputes in middle east, south
China part etc. Geopolitical risks create harm to the core of a business. US-China trade war
is the biggest example for this, impacting relations and economy.

There will be a downward pressure on the global economy from the inequalities in financial
institutions and micro economic differences. Chances of economic stagnation will increase.
Leader now advance their national policies and people’s discontent becoming stronger with
those systems which has failed to increase economic advancement.
Economic confrontations and political polarization are most riskier things coming next.
Trade tension global trades which has been the core from all these years for growth, is
slowing down now. WTO released data to show the decline over the years lately. WTO has
called this declined due to high levels in trade restrictions. IMF says that if US and China will
uphold the tariffs and try to implement some new ones then growth will come down to less
than 1%.
Lower investment- Investments are always critical in boosting economy. Globally now it is
affected on a large scale by low returns. Due to current geopolitical tensions in US, Korea,
China, UK, EU protectionism regarding trade and populist agenda worked as obstacles for
FDIs and hot money.

Weak confidence- the business confidence data went down significantly, and this
confidence lead to more investments. Confidence index created by OECD(organisation for
economic co-operation and development) by using business sentiments and data to
determine future, which gives sign of becoming worse.
High debts- Private and public debts for nations are being on the higher side from the last
crisis. Due to lower returns in China and US private debts are accumulated. Economic
earning signs are flashing and indicating that tools available before won’t be working to
break the crisis again.
Monetary constraints IMF tells that cutting rates will boost economy but on the same hand
will take you to more debts. It gives chances of affecting stability. ECB, federal reserve, bank
of Japan all lowered their rates and had a cut down.
Stakeholder capitalism there is a strong need of consideration of social well being with the
economic gain. Social stability alongside political and economical stability makes the
sustainable model of stakeholder capitalism.

PROTECTIONISM MEASURES IN US

Protectionism is the act of restricting imports in order to boost own’s economy and protect
it from competition from foreign. US imposed 25% tariff on steel and 10% on aluminium.
This will encourage more local producers to produce and companies to buy local steel.
US thinking of boosting the steel industry inside US. This has adverse effect as well,
consumers will have to pay more prices than before.
USA has been practicing this protectionism measure from past. First time it got used in 2002
steel tariff. They put tariffs on imported steels. They removed it in 2003.
This all was done to stop more closure of steel companies in USA.
To protect jobs in steel industry in USA.
There was an election about to take place.
This was a step from president to go away from free trade. It would have worked in cutting
down more jobs in USA. It also harmed consumers.
There have been other examples of protectionism like dumping and response by India,
salmon from Norway dumped by EU, TV picture tubes dumped by China, banana war
between EU and Latin America.
Recent act of protectionism can be seen in the trade war between US and China. A trade
war is when more taxes, tariffs and quotas are applied on imports. It becomes a tit for tat
situation. It leads to economical instability and political tensions.
President of US recently placed 10% tax on $200 Bn worth of Chinese product and
announced to put 25% on more $325Bn to come. Mr president aims to buy US agricultural
products for poor countries. US claims that they have trade deficit which is largest in recent
years.

In return China which is world’s second largest economy have put tariffs on all the imports
from US like planes, pork, soybeans, agricultural products etc. they also indicated to take
counter measures for US’s increased tariffs.
Theory of comparative and absolute advantage some to the picture here. China has cheap
labour and less tax which attract all other nations to set up their factories there. This allows
china to set their monopoly in future and becoming an economic giant. China can also tax
Apple the tech giant in act of their protectionism. This global trade war is hurting consumers
all over the world, making harder for the companies to operate trade and sell.
CONCLUSION

Geopolitical instability will be the next big issue for the whole world. Big super powers need
to maintain the globalisation trend and stop the trade war to promote more growth.
Moving towards free trade will amplify this situation. Need to follow best practices and rules
set by financial institutions and the governments should be more responsible towards the
world as a one market.
 REFERENCES

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