GO131:

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GO131 International Relations Professor Walter
Hatch Colby College Global Trade and Finance
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No Trade

• Autarky (self-reliance)
• Protectionism
• Tariffs
• Non-tariff barriers

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Trade

• 10 trillion/year in merchandise exports
• 2.5 trillion/year in service exports

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Why Trade?

• Specialization
• Efficiency
• Lower Prices
• Absolute gains

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Comparative Advantage
TVs Beer Autarky Ratio
Country A 1 hour per unit 3 hours per six pack 1 B 3 TVs 1 TV 1/3 B
Country B 2 hours per unit 4 hours per six pack 1 B 2 TVs 1 TV ½ B
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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

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Liberal EconomistsBe Happy
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Three Unhappy Scenarios

• Friction in allocating resources
• Declining terms of trade
• To overcome? industrial policy
• Asymmetrical interdependence

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Trade Relations

• Unilateralism
• Super 301
• Bilateralism
• Plurilateralism
• EU
• NAFTA
• Multilateralism

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Governing Global Trade

• GATT (1947)
• WTO (1995)
• 149 members
• Limited enforcement powers
• Great success reducing tariffs
• most-favored nation concept

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Critics
Seattle 1999
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Challenges The Doha Round
Director-General Pascal Lamy
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Finance
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Types of Finance

• Portfolio investment
• Foreign Direct Investment
• 900 billion in 2005
• Currency Exchange
• 1.9 trillion every day

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Exchange Rates

• Convertible
• From fixed to floating
• Currency value is relative
• States have own reserves

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Bretton Woods

• Meetings in 1944 under U.S. and U.K leadership
• Created IMF and World Bank
• fixed exchange rate system
• non-dollar currencies pegged to the dollar, which
  was (supposedly) backed by gold stockpiles
• U.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

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Todays IMF

• 184 members
• Lender of last resort
• Macroeconomic policy police
• Asian fiscal crisis (1997-8)

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Critics of IMF
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Third World Debt
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Who Runs the IMF?

• Rodrigo de Rato y Figaredo?
• U.S.?
• 17.4 percent voting power