Global Trade

PSIR 102 – 9

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Globalization of Free Trade
 3rd century BC – various nomadic groups and Chinese merchants
established a trading route known as the Silk Road. - commercial and
cultural bridge between the two regions.
 Many governments adopted the mercantilist model of trade. It stressed
the role of government in trade and emphasized the importance of
balance of payment surpluses in trade with other countries.
 At the extreme is autarky, which promotes economic national self-
sufficiency.
 Removing impediments to the free flow of goods and services among
countries is the foundation of free trade or trade liberalization.
 It reduces prices, raises the standard of living for more people, makes a wider
variety of products available, and contributes to improvements in the quality
of goods and services.

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Globalization of Free Trade
 By removing barriers to the free movement of goods among
countries, as well as within them, countries would be
encouraged to specialize in producing certain goods. If
countries focused on what they do best and freely trade their
goods with each other, all of them would benefit.
 Adam Smith
 David Ricardo: comparative advantage
 The growth of transnational or multinational corporations
complicates global trading. The production of goods and
services is strongly influenced by costs, arbitrary specialization
and government and corporate policies. These developments
mark a shift from the conventional theory of comparative
advantage to what is known as competitive advantage.
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Globalization of Free Trade
 Despite the global acceptance of the concept of free trade,
governments continue to engage in protectionism. The idea of
assisting certain industries is known as strategic trade theory.
 By the end of 19th century, many countries engaged in trade
protectionism. WWI caused international economic instability. The
Great Depression in 1929 influenced many countries to pursue
autarky and protectionism.
 Smoot – Hawley Tariff Act in the USA in 1930 designed to protect
American industries and trade from foreign competition.
 In 1934, the USA moved away from protectionist policies by enacting the
Reciprocal Trade Agreement Act which authorized the president to
negotiate tariff reductions on a reciprocal basis.
 The decline in global trade between WWI and WWII influenced the
USA and Western Europe to embrace freer trade.
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Globalization of Free Trade
 At the Bretton Woods Conference in New Hampshire in 1944, the United
States and its allies created the International Monetary Fund to manage
exchange rates and payment imbalances among nations and the
International Bank of Reconstruction and Development (World Bank) to
supplement private capital for international investment with an emphasis
on the reconstruction of Europe.
 In 1947, General Agreement on Tariffs and Trade (GATT) was established
to promote free trade and to reduce tariffs and other trade barriers.
 Assumptions of GATT:
 Multilateral negotiations are preferable to bilateral negotiations on trade issues.
 Private economic actors are preferable to governments for conducting and
managing international trade.
 Free trade ultimately benefits the global society.
 Governments distort the operation of the free market and should minimize their
involvement.

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Globalization of Free Trade
 Between 1947 and 1992, various meetings o GATT (known as rounds) resulted in significant reductions in
tariffs and freer trade. However, GATT covered manufactured products but excluded trade in agriculture and
services.
 The Uruguay Round meetings of GATT held from 1986 to 1992 added services and agriculture to the global
trade framework and replaced GATT with the World Trade Organization (WTO) İN 1993.
 To a much greater extent than GATT, the WTO directly challenges fundamental aspects of national
sovereignty by diminishing both the national barriers to global trade and governments’ economic activities.
 Most-Favoured Nation Clause: Prohibits trade discrimination among WTO members.
 WTO extended GATT rules to cover agriculture, consumer services (restaurants, hotels, travel agencies
and so on), producer services (investment, banking, insurance, intellectual property rights, or the control
people have over their artistic, creative, scientific, industrial, and educational inventions, and data
processing), textiles, clothing, telecommunications, labour standards and the environment.
 WTO regulations also reduced or eliminated many import quotas and subsidies.
 The 142 member countries of the WTO met in Doha, Qatar, in 2001 to further reduce barriers to trade. The
Doha Agreement, which reflected the growing power of developing countries regarding trade issues, relaxed
patent protection for brand-name drugs by allowing poor countries to manufacture generic medicines.
 Resistance to certain aspects of trade globalization in the developing world led to the collapse of two
subsequent WTO meetings. At the heart of controversy was the extent to which domestic industries should
be protected from foreign competition.
 The global economic recession focused attention on currency problems.

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Globalization of Free Trade
 Exchange rate: how much one country’s money can be bought with a
specified amount of another country’s money.
 The relative values of currencies directly affect global trade and domestic
economies.
 Even tough most countries embrace trade liberalization, many
governments engage in protectionist practices that impede the global
free flow of goods and services.
 Neo-mercantilist policies- protectionism is essential to national security.
 Many developing countries argue their need to achieve economic development
justifies implementing protectionist policies.
 Many antiglobalization activists view free trade as a threat to both the
environment and respect for human rights.
 Trade embargos
 Natural resource cartels (limit supplies to increase prices or impose sanctions
on importers to influence political decisions)

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Globalization of Free Trade
 The trade deficit is the difference between the value of goods and services
that a country buys from overseas and the value of goods and services it
sells to other countries.
 Loss of manufacturing and service jobs
 Higher levels of unemployment – higher government expenditures on social
services and other benefits for the unemployed.
 Budget deficits – reliance on foreign capital
 Trade surplus occurs when the value of goods and services they export is
larger than the value of imported goods and services.
 Countries with a trade surplus produce more engineers and scientists,
attract more talent, and accumulate more financial resources to continue
high levels of productivity and innovation.
 A focus on imports and exports ignores how global companies operate.
Most global companies follow the rule of “make where you sell” – global
market considerations vs national ties.