Global Interactions: Trade and Fairness

Introduction

Global trade involves global responsibilities for a fair future.
The central question is whether trade can create a fairer world.

Key Questions

Factual:
- What is globalization?
- What are trade agreements?
- How do countries restrict trade?
- How is a currency's value determined?
- What trade agreements exist?
Conceptual:
- Why do we trade?
- How important is trade to a society's success?
- Why do countries restrict trade?
Debatable:
- Is globalization good or bad?
- What are the pros and cons of aid and trade?

Chapter Objectives

Understand how countries trade goods, services, and currencies.
Explore trade balances and agreements.
Audit personal shopping habits.

Approaches to Learning (ATL) Skills

Information literacy skills
Media literacy skills
Critical-thinking skills
Inquirers – fostering curiosity and independent learning.

Assessment Opportunities

Criterion A: Knowing and understanding
Criterion B: Investigating
Criterion C: Communicating
Criterion D: Thinking critically

Key Words

Exchange rate
Trade
Trade agreement

The History of Trade

Trade has existed for a long time; in traditional societies, it was often based on barter.
David Graeber argues that simple bartering is too simplistic and that early societies relied more on collective systems for survival.
Marx called this collective approach 'primitive communism'.
As societies grew, more sophisticated trade systems developed, using promises of value rather than actual objects.
Clay tablets were used as intermediaries, representing the value of goods, marking the emergence of early forms of money.
Modern forms of money include coins, notes, cheques, and cards.
Money is accepted based on the promise of exchange for something of value.

Globalization

Globalization has led to exposure to other cultures, lower production costs, and access to new technology.
Increased trade can promote peace and security, as seen in Europe after WWII.
However, strained trade relations, like those in inter-war Europe, can contribute to conflict.
Protectionist measures were used to prevent catastrophic decreases in prices and wages, but they worsened economic and political relations.
Post-colonial countries used protectionism to avoid dependence on outside powers, with Latin America favoring import substitution to develop their own industries.

Defining Globalization

Globalization lacks a precise definition and its causes and consequences are debated.
It involves an increasingly complex geography of production, distribution, and consumption on a global scale (Peter Dicken, 2007).
Businesses are increasingly defined by their size and global reach.
Organizations can be publicly or privately owned.
Negative views of globalization arise from concerns over job loss, cultural merging, and unequal distribution of income.

Perspectives on Globalization

Free Market View: Globalization fosters growth, raises incomes, improves product quality and choice, and lowers prices.
Left-Wing View: The pace of change is too fast, benefiting only a few, and there's a need to return to local markets and reject multinationals.
Sceptical Internationalists: Globalization is exaggerated, with causes rooted in history. Some argue the world was more integrated before World War I.
Hyper-Globalists: National borders are less relevant, with both positive and negative implications.

Why Do We Trade? The Theory of Comparative Advantage

Before the Industrial Revolution, mercantilist policies taxed trade to increase government gold and silver reserves.
Adam Smith and David Ricardo posited that countries gain more from trade than just tax revenue.
David Ricardo developed the theory of comparative advantage to explain trade between countries with different production capacities.
Opportunity Cost: The value of the next best alternative when making a decision.
The opportunity cost of good X in terms of good Y is calculated as: $(\frac{\text{Production volume of good Y}}{\text{Production volume of good X}})$
Countries benefit by specializing in producing goods with the lowest opportunity cost.

Comparative Advantage Example: Mexico and Panama

Mexico can produce 300 avocados or 100 blenders, while Panama can produce 100 avocados or 50 blenders.
Opportunity costs:
- Mexico:
  - Avocados: $\frac{100}{300} = 0.3$ blenders
  - Blenders: $\frac{300}{100} = 3$ avocados
- Panama:
  - Avocados: $\frac{50}{100} = 0.5$ blenders
  - Blenders: $\frac{100}{50} = 2$ avocados
Mexico has a lower opportunity cost for avocados (0.3 blenders < 0.5 blenders), while Panama has a lower opportunity cost for blenders (2 avocados < 3 avocados).

Supply and Demand in International Trade

Nations benefit from trade by engaging with other countries. (Chapter 8)
China: Leading producer of low-tech manufactured goods due to Special Economic Zones (SEZs) and government support.
Australia: Focuses on exporting agricultural and natural resources like tin and copper, while importing low-tech goods from countries like China.
Due to factors like a large, relatively low-wage labor force, China can produce low-tech goods at lower costs than Australia.
If Australia produced these goods, it would produce $Q1$ at $P1$ . But China can produce at $P_2$ , making it difficult for Australia to compete.
The supply curve of China is horizontal, meaning Australia can't impact the prices of low-tech imports.
At lower prices ( $P2$ ), the quantity demanded in Australia increases from $Q1$ to $Q_2$ .
Domestic producers struggle, causing the quantity supplied by Australian producers to fall from $Q1$ to $Q3$ .
The difference between $Q2$ and $Q3$ is covered by imports from China.

Ethical Implications

Exploitation of wage differences and legislative frameworks across the world.

Impact of Trade on Consumers

Trade benefits consumers by providing access to a variety of goods from different countries.
Trade lowers prices and increases consumer choice.
Before trade, domestic consumers pay $P_1$ , with a consumer surplus represented by a triangle.
When prices lower to $P2$ , with the increased quantity demanded of $Q2$ being satisfied by imports, consumer surplus increases by the added light blue shaded area.

Impact of Trade on Producers

Domestic producers face competition from abroad.
Before trade, producer surplus is the sum of coloured shapes; both the pink triangle and purple trapezoid.
Producer surplus falls to only the pink triangle with the price decrease and loss of sales.
To calculate changes in consumer and producer surpluses, you need to find the area of triangles and trapezoids:
- Area of a triangle = $\frac{1}{2} \cdot base \cdot height$
- Area of a trapezoid = $(\frac{a + b}{2}) \cdot height$
Revenue is calculated as Price x Quantity (see chapter 8).
Before trade, revenue is $P1 \cdot Q1$ . After trade, it's $P2 \cdot Q3$ .

The Success of a Society

Petra, home of the Nabataeans, thrived due to its location on the incense trade route.
Their knowledge of the difficult terrain gave them a unique advantage.
The resulting monopoly allowed them to accumulate wealth, build cities, and modernize, including advancements in rock carving and rainwater harvesting.
This led to significant population growth and the development of large cities.

Why Countries Restrict Trade

Despite gains from trade, domestic industries may seek protection from foreign competition through protectionist policies.

Reasons for Protectionism:

Fledgling/Infant Industries: Protection from competition while they grow and develop; increasingly accepted by the WTO for developing countries.
Sunset Industries: Protection for declining industries facing innovation or foreign competition; seen with car and steel industries in Europe and the USA.
Anti-Dumping: Preventing foreign producers from selling at unfairly low prices (below production costs), which is against WTO rules.
Protecting Jobs: Protecting workers from job losses due to industrial changes and foreign competition.
Health, Safety, and Environmental Regulations: Limiting goods that fail to meet health and safety requirements, indirectly protecting domestic industries.
Security: Retaining industries like food and defense domestically for strategic reasons.
Independence: Avoiding reliance on other countries for essential goods as attempted by some Latin American countries post-colonization.
Preventing Loss of Culture: Protecting culturally significant goods, like certain foods with international protections (e.g., Parmigiano-Reggiano and Champagne).

How Countries Restrict Trade

Tariffs are a common protectionist measure, imposing a tax on each unit of imported goods, raising the price.
Tariffs protect domestic producers by enabling them to increase supply.
Consumers are less able to afford the product as the total quantity demanded will fall.
Imports are reduced and The government earns revenue from the tariff which can be calculated as
Total Revenue = Tariff per unit x new volume of imports.

Should Protectionism Be Used?

The WTO has relaxed its stance on protectionist measures for less economically developed countries helping them to build domestic industries and governments can yield revenues for investment purposes.
More economically developed countries belong to trade agreements but these often leave out less economically developed countries.
Protectionism can be unfair and create international tensions (e.g., the USA and China trade relationship).
Strong protectionist barriers during the Great Depression worsened international relations.

Trade Agreements

Countries make agreements to support each other (historically for war or royal marriages).
Trade agreements can benefit participants but also create tension between blocs.

Types of Trade Agreements

Free Trade Area (FTA): Countries remove trade barriers between themselves (e.g., NAFTA, SAFTA, AANZFTA, CEFTA, COMESA).
- Members can still trade with non-member countries and erect different barriers.
Customs Union: FTA members set the same trade policy with non-member countries.
- Promotes free trade within the bloc but may not promote it with the outside world.
- Makes it easier for outside countries to negotiate with the entire bloc.
Common Market: Includes FTA and customs union characteristics, plus free movement of goods, people, and services.
- Reduces costs for businesses (e.g., MERCOSUR, GCC, EU).
Monetary Union: Participating nations share a currency (e.g., the Eurozone).
- Benefits include lower trade costs, better pricing information, price stability, and improved relations.

Monetary Union Benefits and Challenges:

Lower trade costs because currencies did not need to be exchanged
Better pricing information for consumers, because consumers now had access to a wider choice of goods and services all being sold in the same currency
Price stability in all countries
Better relations between all participating nations because of the requirements to work together to manage institutions like the European Central Bank.
Challenges include financial crises (e.g., the Greek debt crisis in 2012).
Another planned monetary union is the West African Monetary Zone (WAMZ) with the currency called the Eco.
Countries must meet convergence criteria: a low inflation rate, controlled government borrowing, controlled financing of government debt, and export revenues covering import expenditure
So far, Ghana is the only country to have met all the criteria.
Complete Economic Integration: Forming a single nation-state by merging political and economic systems (e.g., the United States of America).

Currency Value Determination

The foreign exchange market handles trillions of dollars in transactions daily, mainly in London.
Exchange rates (currency values) are determined by market forces (supply and demand).
Central banks control the physical notes, and currency is traded between holders and buyers.
Currency values change daily due to financial market speculations and news.
Currency Depreciation: When people sell a currency due to negative economic news, increasing its supply and decreasing its price.
Currency Appreciation: When demand for a currency increases, its price increases.

Evaluating Currency Changes

Currency movements impact trade, employment, inflation, and economic growth.
A depreciating currency can make exports cheaper and imports more expensive.
Impacts depend on the economy's structure, production, and trade.
Currency changes affect the cost of imported raw materials, potentially causing inflation.
Can impact economic growth positively or negatively.

Trade and Aid

Development theory aims to improve global living standards and involves debates on the effectiveness of aid.

Arguments for and Against Trade

Free markets allocate resources efficiently.
Trade opens opportunities for production, entrepreneurship, and income in developing countries.
Developing countries often export primary goods but may lack diversification and face risks from price shocks and environmental damage.
EU and USA protectionism makes it difficult for developing countries to compete.

Arguments For and Against Aid

Aid involves transferring money, goods, and services to help a country develop or meet basic needs.
Official Development Assistance (ODA) is sent by governments.
Non-Governmental Organizations (NGOs) give humanitarian aid in emergencies.

Arguments for Aid:

Provides necessary items directly to those in need.
Can target specific areas.
Effective when basic infrastructure is lacking.

Arguments for Microfinance

Microfinance provides financial services to those who usually wouldn't qualify for finance.
It gives greater access to credit fueling business start ups and economic growth.
The most famous example is the Grameen Bank
Microfinance helps to start businesses and escape the poverty cycle.

Meet an Economist: Esther Duflo (1972-Present)

Esther Duflo uses Randomized Control Trials (RCT) in the field of economics to try and quantify the effects of policies and initiatives.
One such study looks at the effects of microfinance and concluded that small business investment increased, but there were no significant changes to fields such as health, education or women's empowerment.

Reflection

Explored how trade can improve cooperation, competitiveness, and international relations.
Evaluated the extent to which trade can be positive
Investigated trade agreements and currencies

Questions

Factual:
- What do we mean by globalization?
- What are trade agreements?
- How do countries restrict trade?
- How is a currency’s value determined?
- What kind of trade agreements do countries form with each other?
Conceptual:
- Why do we trade?
- How important can trade be to the success of a society?
- Why do countries sometimes want to restrict trade?
Debatable:
- Is globalization good or bad?
- What are the pros and cons of aid and trade?