GO131:International Relations

Professor Walter HatchColby College

Global Trade and Finance

No Trade

Autarky (“self-reliance”)

ProtectionismTariffs

Non-tariff barriers

Trade$10 trillion/year in merchandise exports

$2.5 trillion/year in service exports

Why Trade?

SpecializationEfficiency

Lower Prices

Absolute gains

Comparative Advantage

TVs Beer Autarky

Ratio

Country A 1 hour

per unit

3 hours

per six pack

1 B: 3 TVs1 TV: 1/3 B

Country B 2 hours

per unit

4 hours

per six pack

1 B: 2 TVs

1 TV: ½ B

Heckscher-Ohlin

A 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 production

Why?Difference in relative price of commodities

Gains from specialization

Liberal Economists:Be Happy

Three Unhappy Scenarios

Friction in allocating resources

Declining terms of tradeTo overcome? industrial policy

Asymmetrical interdependence

Trade Relations

UnilateralismSuper 301

Bilateralism

PlurilateralismEU

NAFTA

Multilateralism

Governing Global Trade

GATT (1947)

WTO (1995)149 members

Limited enforcement powers

Great success: reducing tariffs

most-favored nation concept

Critics

Seattle 1999

Challenges: The Doha Round

Director-General Pascal Lamy

Finance

Types of Finance

Portfolio investment

Foreign Direct Investment$900 billion in 2005

Currency Exchange$1.9 trillion every day

Exchange Rates

Convertible

From fixed to floating

Currency value is relative

States 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 members

Lender of last resort

Macroeconomic policy policeAsian 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