M1T1 Globalization RTAs

FIN30013/FIN30015
International Trade and

Finance/International Finance
Dr Yii Kwang Jing

kyii@swinburne.edu.my
B341
Globalisation and International
Trade Agreements
Topic 1
Economic Interdependence
 High degree of economic interdependence

 No nation exists in economic isolation
 All aspects of a nation’s economy linked to economies of
trading partners
 Reflects historical evolution of the world’s economic and
political order
 Economic interdependence is complex, and its effects are
uneven
Key questions:
 Does Free Trade Apply to Cigarettes?
 Is International Trade an Opportunity or a Threat to Workers?
 Is current protectionism a form of backlash against
globalization?
The International Economy
● High degree of economic interdependence
• Steps toward international cooperation
• Mutually advantageous for trading nations
 Specialization, efficiencies of large scale production
 Wider variety of products at lower cost
• Protectionist pressures
 Some developing nations argue that liberalized trading system serves to keep
them in poverty
Unintended consequences: Economic Interdependence:

U.S. Fed Policy Incites Backlash
Domestic economic policies have spillover effects on other economies
• Quantitative easing by Fed, intended to stimulate U.S. economy during
Great Recession, criticized by U.S. trading partners as attempt to improve
American competitiveness through depreciation of dollar
Copyright ©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©derrek/Getty Images
Globalization of Economic Activity
 Globalization
 Greater interdependence between countries and their citizens
 Increased international flows of
 Goods and services
 People
 Investments in equipment, factories, stocks, bonds
 Non-economic elements
 Culture and the environment
 What forces are driving globalization?

 Technological change
 Multilateral trade negotiations
 Continuing liberalization of trade and investment
 Widespread liberalization of investment transactions
 Development of international financial markets
Waves of Globalization
 Some academics would argue that globalization was always present

due to the nomadic nature of humans.
 History of globalization tied to the evolution of trade
 In late 1700s and 1800s, mass production and improved transportation
made international trade easier, making most goods tradeable
 Rise of global manufacturing in 1990s characterized by geographical
fragmentation of productive processes and offshoring of industrial tasks
● First Wave of Globalization: 1870-1914

● Decreases in tariff barriers
● Technological developments
• Declining transportation costs
 Shift from sail to steamships; railways
• Driven by European and American businesses and individuals
● First Wave of Globalization: 1870-1914 (cont)
• Exports as share of world income nearly doubled to 8%
• Per capita incomes increased 1.3% per year
 Previous 50 years: 0.5% per year
• Nations that actively participated in globalization became richest countries in
world
• Brought to an end by World War I
● Great Depression of 1930s

• Governments practiced protectionism
 Raised tariffs on imports
Tried to shift demand into domestic markets to
 Promote sales for domestic companies
 Promote jobs for domestic workers
 Exports as share of national income fell from 8% to 5%, undoing 80 years of
technological progress in transportation
● Second Wave of Globalization: 1945–1980

• Horrors of retreat into nationalism renewed incentive for globalization
• Falling transportation costs fostered increased trade
• Trade liberalization not uniform
 Which countries participated? Mainly developed countries
 Which products were included? Manufactured goods
● Developed and developing countries

differentially affected during second wave of
globalization
• Developed countries largely freed of barriers
Greatly increased the exchange of manufactured goods
Raised incomes in developed countries
• Developing countries
Exports faced no barriers only for agricultural and
primary goods not produced in developed countries
Exports of manufactured goods faced sizable barriers
● Second Wave of Globalization: 1945–1980 (cont)
• New kind of trade
 Rich country specialization in manufacturing niches
 Gained productivity through agglomeration economies
 Firms clustered together
 Some clusters produced same product; others connected by
vertical linkages
• Agglomeration economies
 Benefits only those in clusters
● Second Wave of Globalization: 1945–1980 (cont)
• Most developing countries did not participate in growth of global trade in
manufacturing and services
 Continuing trade barriers in developed countries
 Unfavorable investment climates
 Antitrade policies of developing country governments
 Dependence on agricultural and natural-resource products
• Developing countries as group left behind
● Latest Wave of Globalization (1980 to present)
• Many developing countries have participated, led by
 China, India, and Brazil, which entered world markets for manufactured
goods
• Other developing countries
 Increasingly marginalized in the world economy, with decreasing incomes
and rising poverty
• Significant international capital movements
● Latest Wave of Globalization (1980 to present) (cont)

• Some developing countries have harnessed competitive advantage in labor-
intensive manufacturing
 Bangladesh, Malaysia, Turkey, Mexico, Hungary, Indonesia, Sri
Lanka, Thailand, and the Philippines
 Tariff cuts and lower barriers to foreign investment
 Technological progress in transportation and communications
• Protectionist policies in developed countries
● Latest Wave of Globalization (1980 to present) World more globalized
- international trade, capital flows
• Foreign outsourcing
 Different aspects of a product’s manufacture performed in more than one
country
 Manufacturing moved to wherever costs were lowest
Job losses for blue-collar workers
Cries for passage of laws to restrict outsourcing
• Digital platforms increasingly enable small companies and individual
entrepreneurs to participate in global economy
 Integrated factory floor increasingly replaced by network of individual suppliers
specializing in specific services or phases of production
 Boeing 787 Dreamliner is example of trade occurring between different
participants of a production chain
● Latest Wave of Globalization By 2000s, foreign outsourcing of white-

collar work
 Information Age
Digitization, Internet, and high-speed data
networks around world
 Sending upscale jobs offshore
Accounting, chip design, engineering, basic
research, and financial analysis
• Foreign outsourcing
 Reduce costs of a given service: 30 to 50%
Australia as an Open ECONOMY: ONE WAY OF
MEASURING GLOBALIZATION
Openness and trade patterns

Rough measure of the importance of
international trade in a nation’s economy
Nation’s exports and imports as a percentage
of its Gross Domestic Product (GDP)
Why is Globalization Important?
• Law of Comparative Advantage:
• Each nation gains by producing goods in which it has
relative advantage
• If a good or service can be obtained more
economically through trade, makes sense to trade for
it, not produce it
• International trade also gains from competitive process
• Competition essential to innovation, efficiency
• Global competition can result in high-cost domestic
producers exiting market
Why is Globalization Important?
● Open economies
• More competition, which lowers prices
• More firm turnover
 Improvements for industry
● Economic growth rates - closely related to

• Openness to trade
• Education
• Communications infrastructure
Globalization and Competition
● Globalization and free trade provide benefits to

many but impose burdens on others
● Schwinn bicycles the standard of the industry, surviving
the Great Depression with continuous innovation; bikes
durable, stylish, but heavy
• Competitors produced mountain bikes & racing bikes;
cheap imports entered market
• Schwinn moved production to non-union state;
obtained parts from foreign countries, but uneven
quality; Schwinn declared bankruptcy; firm purchased
• Schwinn bicycles today made in China
The globalisation debate
Globalisation, jobs and income
inequality
• Critics of globalisation worry that jobs are being
lost to low-wage nations.
• Supporters of globalisation argue that free
trade will result in countries specialising in the
production of those goods and services that they
can produce most efficiently, while importing
goods and services that they cannot produce as
efficiently.
continued
Globalisation, labour policies and the

environment
 Critics of globalisation argue that free trade
encourages firms from advanced nations to move
manufacturing facilities offshore to less developed
countries with lax environmental and labour
regulations.
 Supporters of free trade point out that tougher
environmental regulation and stricter labour
standards go hand in hand with economic
progress and that foreign investment often helps
a country to raise its standards.
continued
Income levels and environmental pollution
Globalisation and national sovereignty
 Critics of globalisation worry that economic power is
shifting away from national governments and towards
supranational organisations such as the WTO, the
European Union (EU) and the United Nations. (e.g. Brexit,
Catalonia, Trump and others).
 Critics of globalisation argue that the gap between rich
and poor has got wider and that the benefits of
globalisation have not been shared equally.
 Supporters of free trade suggest that the actions of
governments have brought limited economic improvement
in many countries.
Globalisation and the world’s poor
• Critics of globalisation argue that globalisation
has not improved the lot of the poor of the
world.
• International income inequality
• Global inequality
• Supporters would argue that globalisation has

improved the lot of world’s poor.
Globalisation and the world’s poor
• Critics of globalisation argue that globalisation
has not improved the lot of the poor of the
world.
• International income inequality
• Global inequality
• Supporters would argue that globalisation has

improved the lot of world’s poor.
Common Fallacies of International Trade
 “Trade is a zero-sum activity”
 False; both partners gain from trade
 “Imports reduce employment and burden the economy, while exports promote
growth and employment”
 False; source of fallacy is failure to consider link between imports and
exports
 Tariffs, quotas, and other import restrictions will save jobs and promote a higher
level of employment”
 False; fails to recognize that a reduction in imports does not occur in
isolation
 Free trade
 Increases competition, lowers prices
 Makes better products available to consumers
 Results in higher consumption
 The two extremes: Trump vs Friedman
 https://www.youtube.com/watch?v=7DhagKyvDck
Regional Integration
Source: Cavusgill, et al., 2015, Ch. 9.
1. Explain the reasons why countries pursue regional

integration and become economic blocs
2. Compare and contrast the different forms of regional
integration
3. Recognise the success factors for regional
integration
4. Analyse the drawbacks and ethical dilemmas of
regional integration
Regional Integration and Economic Blocs
• Regional economic integration: The growing economic

interdependence that results when two or more countries
within a geographic region form an alliance aimed at reducing
barriers to trade and investment.
• It is estimated that more than 50 per cent of world trade today is

under some form of preferential trade agreement signed by groups
of countries.
• The free trade that results from economic integration helps nations
attain higher living standards by encouraging specialisation, lower
prices, greater choices, increased productivity and more efficient
use of resources.
Regional Integration and Economic Blocs
• Regional economic integration bloc: A geographic area

consisting of two or more countries that have agreed to pursue
economic integration by reducing barriers to the cross-border
flow of products, services, capital and, in more advanced states,
labour.
• Best known examples of this trend are the European Union (EU),
the Association of Southeast Asian Nations (ASEAN) and the
North American Free Trade Agreement (NAFTA) area.
Types of Regional Integration
• Free trade area: A stage of regional integration in

which member countries agree to eliminate tariffs
and other barriers to trade in products and services
within the bloc.
• Customs union: A stage of regional integration in

which the member countries agree to adopt common
tariff and non-tariff barriers on imports from non-
member countries.
Types of Regional Integration (cont’d)
• Common market: A stage of regional integration in which
trade barriers are reduced or removed, common external
barriers are established, and products, services and factors
of production are allowed to move freely between the
member countries.
• Economic union: A stage of regional integration in which
member countries enjoy all the advantages of early stages,
but also strive to have common fiscal and monetary policies.
• Political union: A stage of regional integration in which
member countries enjoy all the advantages of an economic
union, but also have a central government and military that
represent all member states.
Leading Economic Blocs
• Europe has the longest experience with regional integration
and is home to several economic blocs.
• The EU has taken the following steps towards becoming a
full-fledged economic union:
• Market access. Tariffs and most non-tariff barriers have been
eliminated.
• Common market. Barriers to cross-border movement of
production factors have been removed.
• Trade rules. Cross-national customs procedures and
regulations have been eliminated, which has streamlined
transportation and logistics within Europe.
• Standards harmonisation. Technical standards, regulations
and enforcements have been harmonised.
Leading Economic Blocs (cont’d)
The European Union (EU) (cont’d)
Five institutions that govern the EU
Council of the European Union. The main decision-making body, it decides
on economic policy, budgets, foreign relations and admission of new member
countries.
European Commission. Represents the interests of the EU as a whole.
Proposes legislation. Responsible for implementing decisions of the Parliament
and the Council.
European Parliament. Has 766 total members; representatives meet in
session every month to devise EU legislation, supervise EU institutions and
decide on the EU budget.
European Court of Justice. Interprets and enforces EU laws and settles legal
disputes between member states.
European Court of Auditors. Ensures EU taxes are properly collected and
legally spent.
North American Free Trade Agreement (NAFTA)
• Its passage in 1994 was smoothed by the existence, since the
1960s, of the maquiladora program.
• Eliminated tariffs and most non-tariff barriers for products and
services traded in the bloc, and made it possible for member
country firms to bid for government contracts.
• Established trade rules and uniform customs procedures and
regulations, while prohibiting the use of standards and technical
regulations as trade barriers.
• Provides for dispute settlement in areas such as investment,
unfair pricing, labour issues and the environment.
NAFTA (cont’d)
•Trade between the members has more than tripled and now
exceeds US$1 trillion per year.
•Between 1994 and 2008, annual exports from…
 Canada to Mexico and the US more than doubled;
 Mexico to the US grew from $50 billion to $227 billion;
 the US to Mexico grew from $40 billion to $216 billion;
 the US to Canada grew to $300 billion.
•Also stimulated some restructuring of the North American labour

market.
El Mercado Comun del Sur (MERCOSUR)
• Has become the strongest economic bloc in South America.
• Launched in 1991, the four initial members were
Argentina, Brazil, Paraguay and Uruguay.
• Established the free movement of products and services, a
common external tariff and trade policy and coordinated
monetary and fiscal policies.
• May be integrated with NAFTA and DR-CAFTA as part of
a future Free Trade Area of the Americas.
• Caribbean Community and Common Market (CARICOM). Established in
1973 to lower trade barriers and institute a common external tariff
• Comunidad Andina de Naciones (CAN). Established in 1969; expected to
merge with MERCOSUR to form a new economic bloc encompassing all of
South America.
• Association of Southeast Asian Nations (ASEAN). Created in 1967 with
the goal of maintaining political stability; promotes regional economic and
social development.
• Asia Pacific Economic Cooperation (APEC). Aims for greater free trade
and economic integration of the Pacific Rim countries.
• South Asian Association for Regional Cooperation (SAARC).
Established in 1985, provides example of regional bloc unable to reach full
potential due to political tensions and armed conflict between member
states.
• The Middle East’s primary regional organisation is the
Gulf Cooperation Council.
• Established in 1981 to coordinate economic, social and
cultural affairs, the GCC consists of Bahrain, Kuwait,
Oman, Qatar, Saudi Arabia and the United Arab
Emirates.
• Initiatives include coordination of the oil industry,
abolition of certain tariffs and liberalisation of
investment, as well as harmonisation of banking,
financial and monetary policies.
• The GCC also wants to establish an Arab common
market and increase trade ties with Asia.
Global Trend: Integration in Asia
• Many countries in the Asian region defied the downturn
from the global financial crisis and experienced rapid
growth in the last few years.
• The economies of China, India, Indonesia, Vietnam and
Malaysia are expected to grow by more than 5 per cent
annually.
• The Australian Government in 2012 published a white
paper titled Australia in the Asian Century, which discusses
the importance for Australia to integrate and link its
economy more with the economies of South, Southeast and
East Asian nations.
• The Middle Eastern and North Africa region (MENA) is
also seen as an important route for future trade and
investment between Africa and Europe.
Trans Pacific Parnership (TPP)
• Twelve countries that border the Pacific Ocean signed up to the
TPP in February 2016, representing roughly 40% of the world's
economic output.
• The pact aims to deepen economic ties between these nations,
slashing tariffs and fostering trade to boost growth.
• Members hope to foster a closer relationship on economic
policies and regulation.
• The agreement was designed so that it could eventually create
a new single market, something like that of the EU.
• But all 12 nations needed to ratify it, before it could come into
effect.
• The TPP began as an expansion of the Trans-Pacific Strategic
Economic Partnership Agreement.
Source: http://www.bbc.com/news/business-32498715
• In 1989 the Australian Government, under the leadership of
then Prime Minister Bob Hawke, decided to initiate the APEC
agreement.
• APEC is yet to achieve agreement on major issues, so the
Australian Government has undertaken a number of free trade
agreements (FTAs) to facilitate trade with other countries.
• The Australia–New Zealand Closer Economic Relations
Agreement was signed in 1966. It removed 80 per cent of
tariffs and quotas between the two nations, but was relatively
complex and bureaucratic.
• In 1983 the Closer Economic Relations Agreement (CER)
sought to accelerate free trade, leading to further economic
integration of the two nations.
Why Countries Pursue Regional Integration
• Expand market size

 Increases size of the marketplace for firms inside the
economic bloc. Belgium has a population of just 10 million;
the EU has a population of nearly 500 million.
 Buyers can access larger selection of goods.
• Achieve scale economies and enhanced productivity

 Bigger market facilitates economies of scale.
 Internationalisation inside the bloc helps firms learn to
compete outside the bloc.
 Competition and efficient resource usage inside the bloc
leads to lower prices for bloc consumers.
Why Countries Pursue Regional Integration
(con’t)
• Attract investment from outside the bloc

Compared to investing in stand-alone countries, foreign firms
prefer to invest in countries belonging to an economic bloc.
General Mills, Samsung and Tata have invested heavily in EU-
member countries.
• Acquire stronger defensive and political posture
Belonging to a bloc provides member countries with a stronger
defensive posture relative to other nations and world regions.
This was a key motive for formation of the European Union.
Success Factors for Regional Integration
• Economic similarity. The more similar the economies of

the member countries, the more likely the economic bloc
will succeed.
• Political similarity. Countries should have similar
political systems, share aspirations and be willing to
surrender national autonomy.
• Similarity of culture and language. Provides a basis for
mutual understanding and cooperation.
• Geographic proximity. Facilitates intra-bloc movement
of products, labour and other factors. Often, neighbouring
countries have similarities in culture and language.
Drawbacks and Ethical Dilemmas of
Regional Integration
• Trade creation. Trade is generated between countries

inside the economic bloc.
• Trade diversion. As within-bloc trade becomes more
attractive, member countries discontinue some trade
with non-member countries.
• Reduced global free trade. A country that reduces
trade barriers is moving toward free trade. On the
other hand, an economic bloc that imposes external
trade barriers is moving away from worldwide free
trade.
Drawbacks and Ethical Dilemmas of
Regional Integration (cont’d)
• Loss of national identity. Increased cross-border

contact makes members more similar to each other. In
response to NAFTA, Canada has restricted the ability of
US movie and TV producers to invest in the Canadian
film and broadcasting industries.
• Sacrifice of autonomy. In later stages, a central

authority is set up to manage the bloc’s affairs. Members
must sacrifice some autonomy to the central authority,
such as control over their own economy. E.g., Britain in
the EU.
Drawbacks and Ethical Dilemmas of Regional Integration
(cont’d)
• Transfer of power to advantaged firms.
Integration can concentrate economic power in the
hands of fewer, larger firms, often in the most
advantaged member countries.
• Failure of small or weak firms. As barriers fall,
protections are eliminated that previously shielded
smaller or weaker firms from foreign competition.
• Corporate restructuring and job loss.
Restructuring and increased competitive pressures
may lead to layoffs or reassigning employees to
distant locations, disrupting workers and entire
communities.
Management Implications of Regional Integration (cont’d)
• Regional products and marketing strategy. Firms cut

costs by standardising products and services. Following
integration of the EU, J. I. Case Inc. reduced its Magnum
line of tractors from 17 to only a few versions in Europe.
• Internationalisation by firms from outside the bloc.
Regional integration leads to the creation of large multi-
country markets, which are attractive to firms from outside
the bloc.
• Collaborative ventures. Regional integration creates
opportunities for cooperation between firms located inside
their own bloc.

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FIN30013/FIN30015

International Trade and

Dr Yii Kwang Jing

 High degree of economic interdependence

Unintended consequences: Economic Interdependence:

 What forces are driving globalization?

 Some academics would argue that globalization was always present

● First Wave of Globalization: 1870-1914

● Great Depression of 1930s

● Second Wave of Globalization: 1945–1980

● Developed and developing countries

● Latest Wave of Globalization (1980 to present) (cont)

● Latest Wave of Globalization By 2000s, foreign outsourcing of white-

Openness and trade patterns

● Economic growth rates - closely related to

● Globalization and free trade provide benefits to

Globalisation, labour policies and the

• Supporters would argue that globalisation has

• Supporters would argue that globalisation has

1. Explain the reasons why countries pursue regional

• Regional economic integration: The growing economic

• It is estimated that more than 50 per cent of world trade today is

• Regional economic integration bloc: A geographic area

• Free trade area: A stage of regional integration in

• Customs union: A stage of regional integration in

•Also stimulated some restructuring of the North American labour

• Expand market size

• Achieve scale economies and enhanced productivity

• Attract investment from outside the bloc

• Economic similarity. The more similar the economies of

• Trade creation. Trade is generated between countries

• Loss of national identity. Increased cross-border

• Sacrifice of autonomy. In later stages, a central

• Regional products and marketing strategy. Firms cut

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