GO131: International Relations Professor Walter Hatch Colby College Global Trade and Finance.
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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
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