The evolution of global trade regime

The evolution of global trade regime

Compiled by

Dr. Mutahir

Lacture-1319-12-2014

Economy – from the Greek word “household” – assets and activities for production and exchange

Economics – how to organize production and exchange most efficiently (minimal cost, maximum gain)

Political economy (Adam Smith) – “branch of science of a statesman or legislator” concerned with:

– “providing a plentiful revenue or subsistence for the people”

– “supplying the state or commonwealth with a revenue sufficient for the public service”

Capitalism is historically rooted in international trade Division of labour on the international scale Movement of goods, money, people between countries

creates a global network of economic ties A global capitalist economy gradually emerges as a result of

integration of national economies into a single world system Key role of states in its creation and development First leader – Holland (17th-18th centuries), then - Great

Britain (18th - 19th centuries) Challenged by others (France, Germany), displaced by the

United States in the 20th century

Globalization

19th century globalization led to World War I

The Great War triggered off the global crisis of capitalism

• The 1917 Russian revolution

• The Great Depression

• The rise of fascism

• World War II

Challenge to political leaders: restructuring the global system

United Nations Monetary and Financial Conference 730 delegates from 44 countries 2 global institutions created:

International Monetary Fund – to coordinate monetary policies of states and render financial assistance to governments

International Bank for Reconstruction and Development (now called the World Bank) – to help rebuild national economies on a capitalist basis

proposed 3rd global institution: International Trade Organization –set up as World Trade Organization in 1995

1940s-1970s:

Government regulation of markets, welfare state, a relatively liberal regime of international economic relations

Global capitalism was saved by government policies which regulated the market economy and redistributed wealth

The rise of global capitalTransnational (or multinational) corporationsThe first in history was established in 1600 – British East India

CompanyThere are 63,000 transnational corporations worldwide, with

690,000 foreign affiliates51 of the world's top 100 economies are corporationsThree quarters of all transnational corporations are based in North

America, Western Europe and JapanNinety-nine of the 100 largest transnational corporations are from

the industrialized countriesRoyal Dutch Shell's revenues are greater than Venezuela's Gross

Domestic Product. Using this measurement, Wal-Mart is bigger than Indonesia. General Motors is roughly the same size as Ireland, New Zealand and Hungary combined

---------------------------------------------http://www.corpwatch.org/issues/PID.isp?articleid=378

Success and growth of the global capitalist economy led to concentration of enormous power in the hands of multinational corporations

Global capital was resistance at the limitations imposed on it by states

From late 1970s:

A shift in state policies toward deregulation of business activities and reduction of taxes on wealth

“Triumph of freedom”

“The Washington Consensus”, or Neoliberal Orthodoxy – dominant Western economic ideology since the early 1980s

– Liberalization – maximum possible freedom of market interactions

– Stabilization – balanced state budgets, limits on government spending

– Privatization – selling off public enterprises to private owners

In sum: changing the balance of power between global capital and the state

Globalization seen as progress Import-export of goods Investment of capital in another country to produce goods

there Creation of international production networks – the world as

a factory Removal of obstacles to trade and financial flows Migration of workers to seek employment anywhere Capital is free to go anywhere to seek a higher rate of profit Global division of labor reaches unprecedented scale:

everybody depends on everybody else

Globalization seen as disaster Concentration of capital on a global scale accelerates Capital acquires global control over production, exchange,

government policies, people’s lives Downward pressure on wages Global demand for goods and services declines Solution: borrow money against future income Pyramid of debt grows to stimulate the global economy At a certain point, the pyramid collapses – inevitably

The global economy: a snapshot Global population – over 6.87 bln. people http://www.poodwaddle.com/clocks/worldclock/ Global labor force - 3,262 bln. (2010 est.) Global GDP - $79 trln. (measured by Purchasing Power Parity, 2011, est.) Composition:

• agriculture: 5.9%• industry: 31.3%• services: 62.8% (2011 est.)

Global GDP per capita (PPP) - $11,800 Household income:

• lowest 10%: 2.7%• highest 10%: 27.7% (2007 est.)

Taxes and other revenues:• 29% of GDP (2011 est.)

Public debt• 60% of GDP (2011 est.)

Source: https://www.cia.gov/library/publications/the-world-factbook/geos/xx.html

Data

2.8 bln. people (40% of the world’s population) live on less than $2 a day

The richest 1% of the world’s people receive as much income as the poorest 57% (UN Human Development Report 2002, Overview, p.2)

World’s 3 richest people have assets greater than 48 poorest countries combined

Millionaires (US$): 10 mln. people (0.01% of the world’s population)

Billionaires (US$): 1,210 people, total wealth - $4.5 trln. (up from $900 bln. 2

years ago, 38% of the world’s GDP) 40% - Americans, own 37% of global billionaire wealth http://www.forbes.com/wealth/billionaires

Shocks

The world’s population can be divided into 3 classes

Upper class: 11% (real income higher than the average income)

Middle class: 11% (real income between the average income and the poverty line, adjusted for purchasing power)

The poor: 78% (real income below the poverty line)

Branko Milanovic, True World Income Distribution, 1988 and 1993: First Calculations Based on Household Surveys Alone. Economic Journal , Jan.2002

Role of the state – the key issue The state is the key intermediary between transnational

forces and citizens How does it use its power? The state can totally yield to the logic of global capital Or it can try to influence its behavior (tame it) though sticks

and carrots Impossible to do on a national scale Need for concerted international actions Creation of a global political regime (norms, laws,

regulations) to shape corporate behavior

State

Who is defining the terms of this regime? Whose interests are shaping it? What kinds of interests are they? Profit maximization as the driving force of the global economy To what degree is this compatible with other human interests? Struggle for determination of policies Protectionism – predicated on the notion that each country is a

body competing w. other bodies But – globalization, interdependence, integration present

obstacles to protectionism The global economy needs effective and democratic global

governance

TNC/MNC

GATT rules still form basis of WTO’s operations.

WTO:

Secretariat (of 500 people) based in Geneva. Main functions to supply technical support to WTO’s various councils, committees and ministerial conferences.

Ministerial Council meets every two years. Sets general aims of WTO.

Council membership made up of 159 countries, representing 95%+ of world trade

GATT, WTO

Growth of PTAs about more than the regulation of trade. Growing fact of international economic and political life– Longstanding European policy, but central role of USA in recent years.

Increasing activity in Asia They are not going to go away.

– Need to manage, mitigate and multilateralise them; not simply disavow them.

Need to minimise the friction between RTAs and WTO led non-discriminatory trade relations.

Multilateralism and the Challenge of Preferentialism

Many RTAs are of recent vintage, asymmetrical, bilateral, non-contiguous in nature and mixed motive (economic, political, strategic) in origin.

Concerns about RTAs– Can lead to trade distortion and market segmentation– Regionalism can engender unfairness towards small players– Preference margins or previous PTAs, in contrast to MFN liberalisation are

diminished by new ones– Specific rules of origin for a PTA are wasteful and incur costs and reduce

trading opportunities and benefits from an FTA– RTAs make multilateral negotiations more difficult:

Distinguishing Features of Recent RTAs

Need to clarify and improve disciplines and procedures in relation to WTO provisions on RTAs. WTO needs to do more than simply enforce treaty based rules

Need for concerted response to preferentialism at the regional level and a demonstration of commitment to multilateral system by the major players. For example:– The major industrialised countries should refrain from establishing PTAs

among themselves.– Similarly, large developing countries with increasing shares of world trade

should do likewise WTO should strengthen and make permanent the recently

established Transparency Mechanism for reviewing RTAs.

So what to do about RTAs?

• Tokyo Round (1973-1979)• Infamous “Side Agreements”

– Developing countries want exceptions: MFN treatment without signing all codes

– GATT becomes “plurilateral”

• Brazil, India, & Egypt threaten to block consensus

Status of DC & LDC in WTO

The situation, however, changed with the Uruguay Round (1986-1994).

The Cold War had ended, and the bargaining position of the DC had increased considerably.

After creating WTO, US & EC withdrew from GATT 1947

–Effect: Developing countries to sign onto the WTO to get access to the US & EC

Formally, the WTO makes all decisions by consensus (unanimous decision). (Article IX)

What is the implication of this?

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The “Green Room” -- Director General’s Private

Conference Room

WTO Policy

Well, actually, not as it is, This is what really happens

a “nucleus” agrees on policy and generalizes it to the other members

• Quad Countries: US, EU, Japan, & Canada– Set agenda– Dominate Green Room Caucus

• Unequal resources for handling disputes• Strong countries intimidate weak countries• Developed countries threaten to abandon

and remake regime

Power-Based Bargaining

International Monetary System

International Monetary System

• Defined: The way in which a country manages its currency and thus the arrangement by the price of that country’s currency is determined on foreign exchange markets.

• Arrangements ranging from:– Floating Rate– Managed Rate (“Dirty Float”)– Pegged Rate

• Arrangement is determining by governments.• Starting with the gold standard regime of the latter part of

the 19th century to today’s somewhat “mixed system” we can identify there 3 distinct periods:– Gold Standard: 1816 – 1914 – Bretton Woods: 1945 – 1973 (Pegged)– Mixed System: 1973 – the present

International Monitory System

“Mixed” International Monetary System consisting of:– Floating exchange rate regimes:

• Market forces determine the relative value of a currency.

– Managed (dirty float) rate regimes:• Governments managing their currency’s value with

regard to a reference currency.• Market moves these currencies, but governments are

managing the process and intervening when necessary.– Pegged exchange rate regimes:

• Government fixes (links) the value of its currency relative to a reference currency.

• Fewer of these regimes than in the past.

International Monetary System

• The gold standard regime required that domestic currencies (national money) be defined in terms of a specific weight of gold.

• For example:– The British pound was fixed

at .23546% of an ounce of pure gold (in 1816).

– The U.S. dollar was fixed at 0.048379% of an ounce of pure gold (in 1879).

– Thus, the dollar pound “parity” (i.e., the exchange rate) was set at $4.867

– .23546/.048379 = 4.867The Gold Standard also required that

each country adjust its domestic money supply in direct relation to the amount of gold it held.– Increase in gold would increase

the domestic money and a reduction in its gold supply would reduce the money supply.

Gold Standard

•How it worked:•Assume the United Kingdom ran a trade deficit with the United States.•As a result, gold would flow from the UK to the US (gold financed trade imbalances).•Each country’s domestic money supply was tied into the amount of gold it held, thus the U.S. money supply would rise.•The increase money supply would increase prices in the United States, which in turn would make U.S. goods less attractive to the UK.•The net result was that the trade surplus of the US would decrease and the trade deficit of the UK would decrease.

In July of 1944, as World War II is coming to an end, all 44 allied countries meet in Bretton Woods, New Hampshire for the purpose of establishing a new international monetary system.

At Bretton Woods, countries agree that fixed exchange rates were necessary for “restarting” world trade and global investment (both of which had fallen dramatically).

It is also obvious that the US dollar would become the cornerstone of any new international monetary system.

– Key points of the Bretton Woods were:

– Pegging the U.S. dollar to gold at $35 per ounce (with the USD the only currency convertible into gold).

– All other countries peg their currencies to the U.S. dollar.

• Their par values are set in relation to the U.S. dollar

• GBP = $2.80; JPY = 360 (1in 1949)

– Countries agreed to “support” their exchange rates within + or – 1% of these par values.

• This is done through the buying or selling of foreign exchange when market forces needed to be offset.

Bretton Woods: A Pegged Regime

On March, 19, 1973, when foreign exchange markets reopen, major countries announce that they are “floating” their currencies:

– On March 19, 1973, the list of countries floating their currencies includes Japan, Canada, and those in Western Europe.

The Bretton Woods fixed exchange rate system effectively ends on this date.

Approximately 3 months later, by June 1973, the dollar has “floated” down an average of 10% against the major currencies of the world.

The End of Bretton Woods

Exchange Rate Regimes Today

Currently, current exchange rate regimes fall along a spectrum as represented by national government involvement in affecting (managing) their currency’s exchange rate.

Very Little (if any) Involvement

ActiveInvolvement

Forex Market is Determining

Exchange rate

Government is Managing or

PeggingExchange rate

Paper Final. MCQ-from lec-1 to 13, Subjective lec-7 to 13.

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