GO131:International Relations

Professor Walter HatchColby College

Global Trade and Finance

No Trade

Autarky (“self-reliance”)Protectionism

TariffsNon-tariff barriers

Trade$10 trillion/year in merchandise exports $2.5 trillion/year in service exports

Why Trade?

SpecializationEfficiencyLower Prices

Absolute gains

Comparative Advantage

TVs Beer AutarkyRatio

Country A 1 hourper unit

3 hoursper six pack

1 B: 3 TVs1 TV: 1/3 B

Country B 2 hoursper unit

4 hoursper six pack

1 B: 2 TVs1 TV: ½ B

Heckscher-OhlinA country will tend to export the commodity that more intensively uses its relatively abundant factor of production, and will import the commodity that more intensively uses its relatively scarce factor of productionWhy?

Difference in relative price of commoditiesGains from specialization

Liberal Economists:Be Happy

Three Unhappy Scenarios

Friction in allocating resourcesDeclining terms of trade

To overcome? industrial policy

Asymmetrical interdependence

Trade RelationsUnilateralism

Super 301

BilateralismPlurilateralism

EUNAFTA

Multilateralism

Governing Global TradeGATT (1947)WTO (1995)

149 membersLimited enforcement powersGreat success: reducing tariffsmost-favored nation concept

Critics

Seattle 1999

Challenges: The Doha Round

Director-General Pascal Lamy

Finance

Types of Finance

Portfolio investmentForeign Direct Investment

$900 billion in 2005

Currency Exchange$1.9 trillion every day

Exchange Rates

ConvertibleFrom fixed to floatingCurrency value is relativeStates have own reserves

Bretton WoodsMeetings in 1944 under U.S. and U.K leadershipCreated IMF and World Bankfixed exchange rate system

non-dollar currencies pegged to the dollar, which was (supposedly) backed by gold stockpilesU.S. began running larger and larger BOP deficits. Central banks in Europe and elsewhere found they had greater and greater dollar reserves relative to the gold in Fort Knox. They began to doubt the ability of the U.S. to redeem its dollar liabilities in gold.

1971: U.S. abandoned dollar standard; within two years, major currencies were floating

Today’s IMF

184 membersLender of last resortMacroeconomic policy police

Asian fiscal crisis (1997-8)

Critics of IMF

Third World Debt

Who Runs the IMF?

Rodrigo de Rato y Figaredo?

U.S.? 17.4 percent voting power