💰Capitalism Unit 7 – Globalization and international trade

Key Concepts and Definitions

• Globalization involves increasing interconnectedness of economies through cross-border flows of goods, services, capital, people, and ideas
• International trade consists of the exchange of goods and services across national borders
• Comparative advantage occurs when a country can produce a good or service at a lower opportunity cost than another country
• Absolute advantage refers to a country's ability to produce more of a good or service with the same amount of resources as another country
• Trade liberalization involves reducing barriers to international trade such as tariffs, quotas, and subsidies
• Foreign direct investment (FDI) occurs when a company invests in production or business operations in another country
• Global value chains involve the dispersion of production processes across multiple countries to optimize efficiency and cost

Historical Context of Globalization

• Early forms of globalization existed in ancient times through trade networks like the Silk Roads connecting Asia, Europe, and Africa
• European exploration and colonization in the 15th-19th centuries expanded global trade and economic integration
  • Columbian Exchange introduced new crops (potatoes, tomatoes) and diseases between the Old World and New World
  • Triangular Trade connected Europe, Africa, and the Americas through flows of manufactured goods, enslaved people, and raw materials
• Industrial Revolution in the late 18th and 19th centuries drove increased international trade in manufactured goods and raw materials
• 20th century saw expansion of global trade after World War II through institutions like the General Agreement on Tariffs and Trade (GATT)
• Late 20th and early 21st centuries marked by rapid growth in global trade, financial integration, and the rise of multinational corporations
  • Advances in transportation (containerization) and communication technologies (internet) facilitated global economic integration
  • Emergence of global supply chains dispersed production processes across multiple countries

Drivers of International Trade

• Differences in resource endowments across countries create opportunities for mutually beneficial trade
• Comparative advantage drives specialization and trade as countries focus production on goods and services they can produce relatively efficiently
• Economies of scale enable countries and firms to lower costs by producing larger quantities for global markets
• Technological advancements in transportation and communication have reduced trade costs and barriers
  • Containerization lowered shipping costs and facilitated intermodal transportation
  • Internet enabled instant global communication and digital trade in services
• Trade liberalization through multilateral, regional, and bilateral agreements has reduced policy barriers to trade
• Growth of global production networks and value chains has increased trade in intermediate goods and services
• Consumer preferences for variety and demand for foreign products drive import demand

Economic Theories of Trade

• Ricardian model explains trade based on differences in labor productivity across countries
  • Countries specialize and export goods they can produce relatively efficiently and import other goods
• Heckscher-Ohlin model posits that countries export goods that intensively use their abundant factors of production and import goods that intensively use their scarce factors
  • Countries with abundant capital focus on capital-intensive exports while those with abundant labor focus on labor-intensive exports
• New trade theory incorporates the role of economies of scale, product differentiation, and imperfect competition
  • Explains intra-industry trade in similar products between countries with similar factor endowments
• Gravity model predicts bilateral trade flows based on the economic sizes and distance between two countries
  • Trade is proportional to the product of the countries' GDPs and inversely related to the distance between them

Global Trade Institutions and Agreements

• World Trade Organization (WTO) is the primary global institution governing international trade
  • Provides a forum for negotiating trade agreements and resolving disputes
  • Promotes trade liberalization and non-discrimination through principles of most-favored-nation treatment and national treatment
• General Agreement on Tariffs and Trade (GATT) was the predecessor to the WTO and established the multilateral trading system after World War II
• Regional trade agreements (RTAs) are reciprocal trade agreements between two or more countries
  • Examples include the European Union (EU), North American Free Trade Agreement (NAFTA), and the Association of Southeast Asian Nations (ASEAN)
• Preferential trade arrangements provide unilateral trade preferences to developing countries
  • Generalized System of Preferences (GSP) grants duty-free treatment to many developing country exports
• Bilateral investment treaties (BITs) govern investment flows between two countries and provide protections for foreign investors

Impact on Developed vs. Developing Nations

• Developed countries have generally benefited from globalization through increased export markets, lower consumer prices, and access to a wider variety of goods and services
  • However, some workers in import-competing industries have faced job losses and wage pressures
• Developing countries have had mixed experiences with globalization
  • Some have achieved rapid export-led growth and poverty reduction (East Asian Tigers)
  • Others have struggled to compete in global markets and have experienced deindustrialization and widening inequality
• Global value chains have enabled some developing countries to participate in manufacturing for export without developing complete industries
  • However, many are trapped in low-value-added activities with limited technology transfer and upgrading
• FDI has been a major source of capital and technology for some developing countries but can also lead to dependency and profit repatriation
• Trade liberalization has reduced policy space for developing countries to protect infant industries and pursue strategic industrial policies

Challenges and Criticisms of Globalization

• Globalization has contributed to rising inequality within and between countries
  • Skilled workers and owners of capital have generally benefited while lower-skilled workers have faced job losses and wage stagnation
• Environmental degradation and climate change are exacerbated by the increased scale of global economic activity and transportation of goods
• Cultural homogenization and loss of local traditions can result from the spread of global consumer culture
• Global financial crises can be transmitted rapidly across borders through interconnected financial markets
  • Examples include the Asian Financial Crisis (1997) and the Global Financial Crisis (2008)
• Trade liberalization can undermine national sovereignty and limit the ability of governments to pursue domestic policy objectives
• Multinational corporations have gained significant power relative to nation-states and can influence policies to their advantage

Future Trends and Outlook

• Slowing growth in global trade since the Global Financial Crisis and rise of protectionist sentiments in some countries
  • US-China trade war and Brexit reflect backlash against globalization
• Increasing regionalization of trade through mega-regional agreements like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP)
• Growing importance of trade in services, particularly digital services enabled by the internet and new technologies
• Shift towards more inclusive and sustainable trade policies that address social and environmental concerns
  • Examples include labor and environmental provisions in trade agreements and fair trade certification schemes
• Potential for new technologies like blockchain and 3D printing to disrupt traditional trade patterns and supply chains
• Continued growth of South-South trade as emerging economies become larger players in the global economy
• Uncertain impact of the COVID-19 pandemic on the future of globalization and international trade
  • Could accelerate existing trends towards regionalization, digitalization, and reshoring of production