7.6 HGAP KBAR

For half a millenium, many have tried to answer “why do countries trade with each other”

They have narrowed it down to three economic priorities: comparitive, complementarity and competitive advantage.

David Ricardo- proposed comparative advantage- countries trade with each other because they can specialize and produce one specific product much better than other products in their economy. This creates a system where countries can export out the comparative advantaged products while importing the products they cannot create so easily.

Recently, many trading firms prioritize the complementarity of the trade partners. Essentially, its a measure of how well one country’s import profile matches another’s export profile. This provides the basis for successful trade.

Finally, some scholars recognize the importance of TNC (transnational corporations) in global trade. Peter Dickens defines TNCS as firms with the power to coordinate operations in more than one country, even if they don’t own those operations themselves. Thus, competitive advantages, a TNC’s ability to outperform other similar TNCS in the industry is created. It can maintain that edge through upgrades and innovation. example- Toyota

Neoliberalism is defined as a combination of economic liberalization, deregulation, and privatization policies that promote free market capitalism and reduce the role of government in economic affairs.

The UN created the IMF and the World Bank

International Monetary Fund- seeks to foster global monetary cooperation, achieve financial stability, facilitate international trade, and promote sustainable economic growth. One of its important functions is to provide loans to countries that are so deeply in debt that they cannot get loans from private banks.

World Bank- provides funding and expertise to newly industrialized countries.

In order to promote free trade, the UN created the World Trade Organization, which serves as a global forum for negotiating trade agreements and resolving disputes among member countries.

These three organizations are quite important in the realm of globalization.

There are also regional trade initiatives.

Free trade agreements- treaty between two or more countries that reduces tariffs and promotes foreign investment.

EU- European Union- no tarrifs and trade barriers allowed!

Custom Unions- Unions that adopt a no- tarrif policy among each other but pursue a common policy regarding tarrifs with other non-members. These increases protectionism to protect regional imports from other non-members.

Mercosur- South American free trade agreement that involves Argentina, Brazil, Paraguay, and Uruguay

EU- EUCI (european union customs union)- all eu member states + monaco and few others.

OPEC- international trade agreement to control the output and price of oil

Founded by Iran, Iraq, Kuwait, Saudi, and Venezuela

Controls about 44% of the world’s oil production

Controls oil prices and oil global supply.

Free-trade agreements and customs unions create new spatial connections among countries by altering the flow of goods and services across international borders. Connections are enhanced among countries within trade bloc boundaries and reduced with countries that do not belong to the trade bloc.

Even though TNCS are powerful, nation-states still are global trade central players.

Tarrifs can sometimes lead to tarrif wars.

slower economic growth in both countries

Trade embargo- official ban on a specific product or trade with specific good. OPEC”s oil embargo in 1973 against USA and European countries- example

can heighten political tensions

affected economic development for countries all around the world ( spike in global oil prices)

Governments at all scales also have the ability to promote international trade and stimulate economic growth. For example, most U.S. states have foreign trade delegations, often to encourage the export of a locally or regionally produced good. State and local governments invest in seaports and airports to encourage trade and boost regional economic growth.

Global financial crises often come from deeply interconnected financial markets (aka NY Stock Exchange)

The world has faced numerous financial crises, but today we are going to cover two important ones: the Latin American Oil Crisis of the 1980s and the Global Recession of 2008.

The Latin American Oil Crisis was caused by the oil embargos of OPEC, which had caused oil prices to shoot up by 400%. All this extra cash, known as surplus petrodollars was moved into international financial banks.
All the surplus of money made it even easier for Latin American countries to borrow credit at a cheaper rate, in order to aid in their industrialization processes. Unfortunately, they racked up thousands of dollars of debt, to a point where the loans was far greater than the actual like GDP of the countries. Many government bankrupticies called panic globally, and the IMF was forced to intervene to end the crisis.

The Latin American debt crisis led to a change in the region’s development strategy. Prior to the debt crisis, Latin American countries had been pursuing a strategy of import substitution industrialization. Import substitution industrialization (ISI) is an economic development policy intended to replace imported goods with domestically produced goods as a way to spur industrialization and reduce dependence on other countries. Latin America’s borrowing in the 1970s and 1980s was part of governments’ efforts to maintain ISI policies.

But it all changed. You see, the Latin American debt crisis led to a change in the region’s development strategy. Prior to the debt crisis, Latin American countries had been pursuing a strategy of import substitution industrialization. Import substitution industrialization (ISI) is an economic development policy intended to replace imported goods with domestically produced goods as a way to spur industrialization and reduce dependence on other countries. Latin America’s borrowing in the 1970s and 1980s was part of governments’ efforts to maintain ISI policies.

The crisis forced Latin American governments to turn to the IMF because private banks had cut off credit. This allowed the IMF to dictate the terms of debt refinancing. In the case of Latin America’s debt crisis, the IMF demanded that countries abandon ISI as a development strategy. In place of ISI, the IMF imposed neoliberal development policies that encouraged free-market strategies. It forced Latin American governments to open up to foreign investment and reduce their expenditures on social and economic development programs. Industrialization projects were abandoned, and government funding for education, public health, and social services declined.

Finally, the most famous crisis of all time: The global financial crisis of 2008.

This crisis was largely triggered by the collapse of the housing market in the United States and the subsequent failure of major financial institutions, leading to a worldwide economic downturn that affected markets and economies globally. In the 1990s, banks began to offer mortgages to more people, even people who couldn’t pay them back. A flurry of buyers drove up home prices, and people began to default on their mortgage loans.

Major investment banks holding these now near-worthless financial products began to fail in 2008. A global financial crisis ensued as the world’s biggest banks and investment institutions teetered on bankruptcy. To stabilize the world economy, governments intervened with trillions of dollars to prop up the failing banks, illustrating the importance of government initiatives.

The main consequence of the 2007–2008 financial crisis was the worst global economic downturn in 80 years. It caused massive unemployment and corporate and personal bankruptcies around the globe. Many individuals worldwide lost their jobs, their life savings, and their homes.

A small number of cities, mostly in developed countries, now control most international financial transactions. These cities include New York, London, Chicago, Zurich, Tokyo, and San Francisco. However, Asia is emerging as an important player in the financial sector, and Shanghai, Hong Kong, and Singapore are among the top nine cities that together control about three-quarters of the world’s financial transactions.