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Globalisation and trade Globalisation and trade Class 2 Lecture notes Development of world trade and trade policy Jože P. Damijan University of Ljubljana.

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Presentation on theme: "Globalisation and trade Globalisation and trade Class 2 Lecture notes Development of world trade and trade policy Jože P. Damijan University of Ljubljana."— Presentation transcript:

1 Globalisation and trade Globalisation and trade Class 2 Lecture notes Development of world trade and trade policy Jože P. Damijan University of Ljubljana

2 Jože P. Damijan2 Stages in the development of world trade and trade policy Stages in the development of world trade and trade policy Mercantilism (16th to 18th century); Mercantilism (16th to 18th century); Liberalism (later part of the 18th century until early 19th century); Liberalism (later part of the 18th century until early 19th century); Protectionism (mid 19th century until the great depression); Protectionism (mid 19th century until the great depression); Interventionism (approximately 1933 to 1947); Interventionism (approximately 1933 to 1947); Liberalism, neoprotectionism, and globalism (after 1947). Liberalism, neoprotectionism, and globalism (after 1947).

3 Jože P. Damijan3 Development of world trade and trade policy Conditions for world trade: Necessary condition Necessary condition knowledge of the world; knowledge of the world; transport infrastructure. transport infrastructure. Sufficient condition production surpluses Sufficient condition production surpluses WORLD trade (systematic) starts after the discovery of America (driven by primary products, materials,..) WORLD trade (systematic) starts after the discovery of America (driven by primary products, materials,..)

4 Jože P. Damijan4 Growth in volume of world trade and GDP (annual average rates, in %) World trade much more dynamic than world output (up to 4.5 times), except during the short interventionism period ( ) World trade much more dynamic than world output (up to 4.5 times), except during the short interventionism period ( )

5 Jože P. Damijan5 Growth in volume of world trade and GDP (1500=100, logarithmic scale)

6 Jože P. Damijan6 Population of major countries in the world economy, (million)

7 Jože P. Damijan7 Share in world GDP of major countries, (in %)

8 Jože P. Damijan8 Per capita GDP of major countries, (relative to W Europe)

9 Jože P. Damijan9 Mercantilism Spans the time period from the discovery of America (1492) until the French revolution (1789) Spans the time period from the discovery of America (1492) until the French revolution (1789) Characteristics (economic nationalism) Characteristics (economic nationalism) Strong state; Strong state; Trade routes integrate the world, growing trade, capital accumulation, trade superpowers (Spain, UK, Portugal, Holland), gold parity; Trade routes integrate the world, growing trade, capital accumulation, trade superpowers (Spain, UK, Portugal, Holland), gold parity; Sporadic trade, no systematic trade promotion. Sporadic trade, no systematic trade promotion. Trade policy Trade policy Growth of national wealth Growth of national wealth Trade surplus as means of achieving national wealth Trade surplus as means of achieving national wealth Deflation effect of the net outflow of gold (specie flow) Deflation effect of the net outflow of gold (specie flow) Summary many nations stil view trade as competition Summary many nations stil view trade as competition

10 Jože P. Damijan10 European gains from the Americas 1. A new supply of precious metals (about 1,700 tons of gold and 73,000 tons of silver). One third of it destined to finance European imports from Asia; 2. Imports of exotic products – sugar, tobacco, cotton, coffee, cocoa (from Southern colonies); 3. Imports of fish, furs, ships, timber and other materials for shipbuilding (from Northern colonies); 4. Export markets for European manufacturers; 5. Profits from the slave trade; 6. Opportunities for European migration; 7. Windfall ecological gains from the transfer of indigenous American plants (maize, potatoes)

11 Jože P. Damijan11

12 Jože P. Damijan12 Specie-flow mechanism (Golden automatism) Served as definitive refutation for mercantilistic principles Served as definitive refutation for mercantilistic principles Natural distribution of specie ( coined money: money in the form of coins) will be established by purely automatic forces Natural distribution of specie ( coined money: money in the form of coins) will be established by purely automatic forces additional gold raises prices relative to other countries, resulting in an import surplus financed by specie outflow same reaction in gold receiving country additional gold raises prices relative to other countries, resulting in an import surplus financed by specie outflow same reaction in gold receiving country Gold P Ex,Im Gold Gold P Ex,Im Gold Similarly: Similarly: Gold P Ex,Im Gold Gold P Ex,Im Gold Hence: Internal equilibrium is being determined by the dynamics of the external equilibrium through the golden automatism (specie-flow) Hence: Internal equilibrium is being determined by the dynamics of the external equilibrium through the golden automatism (specie-flow)

13 Jože P. Damijan13 World output of gold,

14 Jože P. Damijan14 Gold and silver shipments from the Americas to Europe, (metric tons)

15 Jože P. Damijan15 Liberalism Period between 1789 and 1890; Period between 1789 and 1890; Characteristics Characteristics End of the feudal era; liberation (personal freedom), End of the feudal era; liberation (personal freedom), Political and economic integration (nation states); Political and economic integration (nation states); Removal of trade and factor movement restrictions; Removal of trade and factor movement restrictions; James Watts steam engine revolutionized the manufacturing and transportation (ships, railway); James Watts steam engine revolutionized the manufacturing and transportation (ships, railway); All together preconditions for the beginning of the industrial era. All together preconditions for the beginning of the industrial era. British supremacy UK as an engine for world economic growth. British trade deficit transferred buying power to other parts of the world. Crisis in Britain lead to a fall in world prices causing a new growth cycle to start. British supremacy UK as an engine for world economic growth. British trade deficit transferred buying power to other parts of the world. Crisis in Britain lead to a fall in world prices causing a new growth cycle to start.

16 Jože P. Damijan16 Evolution of world trade Evolution of world trade Developed in the 19 th century (1815 Napoleonic wars-1914 WWI). Best illustarted on British foreign trade data. Between 1700 and 1790 exports tripled (3,6 to 10 million £), while doubling to 20 million in the next ten years alone. Growth continued throughout the 19 th century. Developed in the 19 th century (1815 Napoleonic wars-1914 WWI). Best illustarted on British foreign trade data. Between 1700 and 1790 exports tripled (3,6 to 10 million £), while doubling to 20 million in the next ten years alone. Growth continued throughout the 19 th century. UK generated world trade through its deficit UK generated world trade through its deficit

17 Jože P. Damijan17 The conditions for a functional connection between the British and world economies: The conditions for a functional connection between the British and world economies: Britain as a large production centre with a substantial trade deficit; Britain as a large production centre with a substantial trade deficit; Complementary production structures of Britain and the rest of the world; Complementary production structures of Britain and the rest of the world; Automatic adjustment of employment to the trade cycle Automatic adjustment of employment to the trade cycle A shift of British demand from European countries to their colonies through imports of goods and exports of capital ( data in % ) A shift of British demand from European countries to their colonies through imports of goods and exports of capital ( data in % )

18 Jože P. Damijan18 Trade policy Trade policy Liberalization of trade tariffs (new tariff code in UK) Liberalization of trade tariffs (new tariff code in UK) New forms of gold parity New forms of gold parity Absolute (Smith, 1776) and comparative advantages (Ricardo, 1819) Absolute (Smith, 1776) and comparative advantages (Ricardo, 1819) Short period of trade liberalization Short period of trade liberalization In Britain it lasts from 1841 until WWI In Britain it lasts from 1841 until WWI Rest of Europe: Germany and France from 1860 (Cobden- Chevalier agreement) until 1879 when Germany and later France ( ) introduce protectionist measures). These measures were later also introduced by the Austro-Hungarian empire, Italy, Russia and, after 1865, the U.S. Rest of Europe: Germany and France from 1860 (Cobden- Chevalier agreement) until 1879 when Germany and later France ( ) introduce protectionist measures). These measures were later also introduced by the Austro-Hungarian empire, Italy, Russia and, after 1865, the U.S. Summary: liberalism remains alive mainly in theory, less in practice Summary: liberalism remains alive mainly in theory, less in practice

19 Jože P. Damijan19 Protectionism From 1890 until (the great depression) From 1890 until (the great depression) Characteristics: formed in response to liberalism Characteristics: formed in response to liberalism temporary deviation from free trade temporary deviation from free trade formed as a response to the supremacy of UK: German economic nationalism (List), mercantilistic (Hamilton) to industrial (Carey) protectionism formed as a response to the supremacy of UK: German economic nationalism (List), mercantilistic (Hamilton) to industrial (Carey) protectionism Reasons for the spread: large barriers, large disparities between rich and poor Reasons for the spread: large barriers, large disparities between rich and poor Trade policy Trade policy Implementation of tariff codes in the majority of countries Implementation of tariff codes in the majority of countries Summary: protectionism enabled the economic development of the majority of the current OECD members Summary: protectionism enabled the economic development of the majority of the current OECD members

20 Jože P. Damijan20 Western and Asian Merchandise exports, (million 1990 constant dollars)

21 Jože P. Damijan21 Unweighted World Average Own Tariff, 35 Countries, %

22 Jože P. Damijan22 Unweighted Average of Regional Tariffs Before World War II

23 Jože P. Damijan23 Interventionism Between 1933 until 1947 Between 1933 until 1947 Characteristics Characteristics Formed as a response to the great depression Formed as a response to the great depression Internal price policy, Price regulationInternal price policy, Price regulation Active role of the state seeking internal incentives for starting a business cycle Active role of the state seeking internal incentives for starting a business cycle Goal: external equilibrium no longer a priority, seeking full employment Goal: external equilibrium no longer a priority, seeking full employment Consequences Consequences Decrease in world trade (self-sufficient economies) Decrease in world trade (self-sufficient economies) Import replacement strategy Import replacement strategy Trade policy Trade policy Large number of trade policy instruments implemented, state monopolies in trade Large number of trade policy instruments implemented, state monopolies in trade Summary: inefficient Summary: inefficient

24 Jože P. Damijan24

25 Jože P. Damijan25 Liberalization, neoprotectionism, and globalisation After 1947 After 1947 Characteristics: Characteristics: Deregulation (internal), trade policy liberalization, globalization of production; Deregulation (internal), trade policy liberalization, globalization of production; Formed in response to interventionism Formed in response to interventionism Forms of world trade liberalization Forms of world trade liberalization Multilateral liberalization (GATT, WTO)Multilateral liberalization (GATT, WTO) Regional trade liberalization in the form of economic integrationsRegional trade liberalization in the form of economic integrations Increase in trade of goods and services Increase in trade of goods and services Convergence in development levels Convergence in development levels Increased mobility of production factors, increased role of multinational firms (globalization of production and consumption habits) Increased mobility of production factors, increased role of multinational firms (globalization of production and consumption habits)

26 Jože P. Damijan26 Average tariff reductions during individual GATT Rounds GATT RoundAvg. Tariff reduction (%) Remaining tariffs as % of 1930 level Before GATT ( ) First Round (1947) Second Round (1949) Third Round ( ) Fourth Round ( ) Dillion Round ( ) Kennedy Round ( ) Tokyo Round ( ) Uruguay Round ( )

27 Jože P. Damijan27 Trade policy: Trade policy: Neoliberalism (developed countries liberalize trade in industrial products, less developed agriculture) Neoliberalism (developed countries liberalize trade in industrial products, less developed agriculture) Limits to the use of trade policy instruments (by GATT and WTO) Limits to the use of trade policy instruments (by GATT and WTO) Neoprotectionism (use of non-tariff barriers to trade) Neoprotectionism (use of non-tariff barriers to trade) Globalisation Globalisation Interaction of world trade liberalization and internationalization of productionInteraction of world trade liberalization and internationalization of production Primary manifestation: international reallocation of production, capital agglomeration (concentration) to unify production and services more efficient research and development activities and lower costs.Primary manifestation: international reallocation of production, capital agglomeration (concentration) to unify production and services more efficient research and development activities and lower costs. Dangers: Dangers: Growing difference between developed and developing countries can lead to further polarization Growing difference between developed and developing countries can lead to further polarization Mergers could cause an oligopolization of industries, decrease in R&D activity and increase the sensitivity to external shocks Mergers could cause an oligopolization of industries, decrease in R&D activity and increase the sensitivity to external shocks

28 Jože P. Damijan28 Historical Golobal Data sets


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