Globalisation and trade

Class 2 Lecture notes

Development of world trade and trade policy

Jože P. DamijanUniversity of Ljubljana

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Stages in the development of world trade and trade policy

Mercantilism (16th to 18th century); Liberalism (later part of the 18th century until early 19th

century); Protectionism (mid 19th century until the great depression); Interventionism (approximately 1933 to 1947); Liberalism, neoprotectionism, and globalism (after 1947).

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Development of world trade and trade policy

Conditions for world trade: Necessary condition

knowledge of the world; transport infrastructure.

Sufficient condition production surpluses WORLD trade (systematic) starts after the discovery of

America (driven by primary products, materials,..)

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Growth in volume of world trade and GDP1500-2003 (annual average rates, in %)

World trade much more dynamic than world output (up to 4.5 times), except during the short interventionism period (1913-1950)

World trade World GDPRatio

trade/GDP1500-1820 0.96 0.32 3.001820-1870 4.18 0.94 4.451870-1913 3.40 2.12 1.601913-1950 0.90 1.82 0.491950-1973 7.88 4.90 1.611973-2003 5.38 3.17 1.70

Increase (times the initial period)1500-1820 21 31820-2003 1,253 59

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Growth in volume of world trade and GDP (1500=100, logarithmic scale)

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World trade World GDP Ratio trade/GDP

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Population of major countries in the world economy, 1500-2030 (million)

China Japan India W Eur. US World1500 103 45 110 57 2 4381820 381 31 209 133 10 1,0421913 437 52 304 261 98 1,7911950 547 84 359 305 152 2,5241973 882 109 580 359 212 3,9172003 1,288 127 1,050 395 290 6,2792030 1,458 121 1,421 400 364 8,175

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Share in world GDP of major countries, 1500-2030 (in %)

China Japan India W Eur. US1500 24.9 9.1 24.4 17.8 0.31820 32.9 3.0 16.0 23.0 1.81913 8.8 2.6 7.5 33.0 18.91950 4.6 3.0 4.2 26.2 27.31973 4.6 7.8 3.1 25.6 22.12003 15.1 6.6 5.5 19.2 20.62030 23.8 3.8 10.4 13.0 17.3

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Per capita GDP of major countries, 1500-2030 (relative to W Europe)

0.00

0.50

1.00

1.50

2.00

2.50

1500 1820 1913 1950 1973 2003 2030

China Japan India US

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Mercantilism Spans the time period from the discovery of America

(1492) until the French revolution (1789) Characteristics (economic nationalism)

Strong state; Trade routes integrate the world, growing trade, capital

accumulation, trade superpowers (Spain, UK, Portugal, Holland), gold parity;

Sporadic trade, no systematic trade promotion. Trade policy

Growth of national wealth Trade surplus as means of achieving national wealth Deflation effect of the net outflow of gold (specie flow)

Summarymany nations stil view trade as competition

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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)

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Specie-flow mechanism(Golden automatism)

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

additional gold raises prices relative to other countries, resulting in an import surplus financed by specie outflow same reaction in gold receiving country

GoldPEx,Im Gold

Similarly: Gold P Ex ,Im Gold

Hence: Internal equilibrium is being determined by the dynamics of the external equilibrium through the “golden automatism” (specie-flow)

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World output of gold, 1493-1925

World output of gold 1493-1925(million fine ounces)

0

50,000

100,000

150,000

200,000

250,000

1493-1600 1601-1700 1701-1800 1801-1850 1851-1900 1901-1925

period

Africa

Americas

Europe

Asia

Australasia

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Gold and silver shipments from the Americas to Europe, 1500-1800 (metric tons)

Gold Silver1500-1600 150 7,5001601-1700 158 26,1681701-1800 1,400 39,157Total (1500-1800) 1,708 72,825

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Liberalism Period between 1789 and 1890; Characteristics

End of the feudal era; liberation (personal freedom), Political and economic integration (nation states); Removal of trade and factor movement restrictions; James Watt’s steam engine revolutionized the

manufacturing and transportation (ships, railway); 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.

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Evolution of world trade Developed in the 19th 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 19th century.

UK generated world trade through its deficit

Year Exp Imp Bal Exp Imp Bal Exp Imp Bal Exp Imp Bal1820 238 158 80 105 65 40 - - - 70 75 -5

1830 339 225 114 87 94 -7 - - - 72 70 2

1840 567 328 239 134 144 -10 - - - 128 104 24

1850 347 -- -- 206 153 53 - - - 147 176 -29

1860 806 1024 -218 439 366 73 - - - 342 360 -18

1870 1190 1476 -286 541 553 -12 - - - 417 450 -33

1880 1394 2001 -607 689 971 -282 696 665 -34 849 680 169

1890 1597 2047 -450 724 856 -132 792 969 -177 893 810 83

UK France Germany USA

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The conditions for a functional connection between the British and world economies:

Britain as a large production centre with a substantial trade deficit;

Complementary production structures of Britain and the rest of the world;

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 %)

Country 1857-59 1911-13 1870 1913USA 19 19 20 20Western Europe 21 23 50 5Other European ofshoots 8 18 10 45Other countries 52 40 20 30Total 100 100 100 100

Imports of goods Exports of capital

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Trade policy Liberalization of trade tariffs (new tariff code in UK) 1815-1845 New forms of gold parity Absolute (Smith, 1776) and comparative advantages (Ricardo,

1819) Short period of trade liberalization

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 (1881-1882) 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

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Protectionism From 1890 until 1929-33 (the great depression) Characteristics: formed in response to liberalism

“temporary” deviation from free trade 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

Trade policy Implementation of tariff codes in the majority of countries

Summary: protectionism enabled the economic development of the majority of the current OECD members

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Western and Asian Merchandise exports, 1870-2003 (million 1990 constant dollars)

1870 1913 1929 1950 1973 2003Japan 51 1,684 4,343 3,538 95,105 402,861India 3,466 9,480 8,209 5,489 9,679 86,097China 1,398 4,197 6,262 6,339 11,679 453,734Indonesia 172 989 2,609 2,254 9,605 70,320S. Korea 6 171 1,292 112 7,894 299,578Philippines 55 180 678 697 2,608 27,892Taiwan 7 70 261 180 5,761 134,884Thailand 88 495 640 1,148 3,081 72,233

France 3,512 11,292 16,600 16,848 104,161 404,077Germany 6,761 38,200 35,068 13,179 194,171 785,035UK 12,237 39,348 31,990 39,348 94,670 321,021US 2,495 19,196 30,368 43,114 174,548 801,784

Total Asia 5,243 17,266 24,294 19,757 145,412 1,547,599Total 4 West. Count. 25,005 108,036 114,026 112,489 567,550 2,311,917Asia/4 West c. 0.21 0.16 0.21 0.18 0.26 0.67

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Unweighted World Average Own Tariff, 35 Countries, %

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Unweighted Average of Regional Tariffs Before World War II

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Interventionism Between 1933 until 1947 Characteristics

Formed as a response to the great depression• Internal price policy, Price regulation

Active role of the state seeking internal incentives for starting a business cycle

Goal: external equilibrium no longer a priority, seeking full employment

Consequences Decrease in world trade (self-sufficient economies) Import replacement strategy

Trade policy Large number of trade policy instruments implemented, state

monopolies in trade Summary: inefficient

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Liberalization, neoprotectionism, and globalisation

After 1947 Characteristics:

Deregulation (internal), trade policy liberalization, globalization of production;

Formed in response to interventionism Forms of world trade liberalization

• Multilateral liberalization (GATT, WTO)• Regional trade liberalization in the form of economic integrations

Increase in trade of goods and services Convergence in development levels Increased mobility of production factors, increased role of

multinational firms (globalization of production and consumption habits)

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Average tariff reductions during individual GATT Rounds 1947-1994

GATT Round Avg. Tariff reduction (%)

Remaining tariffs as % of

1930 level

Before GATT (1934-47) 32.2 67.8

First Round (1947) 21.1 53.5

Second Round (1949) 1.9 52.5

Third Round (1950-51) 3.0 50.9

Fourth Round (1955-56) 3.5 49.1

Dillion Round (1961-62) 2.4 47.9

Kennedy Round (1964-67) 36.0 30.7

Tokyo Round (1974-79) 29.6 21.6

Uruguay Round (1986-1994) 30.0 15.1

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Trade policy: Neoliberalism (developed countries liberalize trade in industrial

products, less developed agriculture) Limits to the use of trade policy instruments (by GATT and WTO) Neoprotectionism (use of non-tariff barriers to trade) Globalisation

• Interaction 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.

Dangers: 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

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Historical Golobal Data sets

http://graphs.gapminder.org/world/