Basics of Trade and Economic Systems

• Trading has existed since ancient civilizations, often using the barter system.
• The barter system involves exchanging goods or services instead of currency, common within or between villages.
• Karl Marx termed the barter system “primitive communism”.
• A key challenge with bartering is finding equivalent values between traded items.
• Societies developed more sophisticated trade systems as they grew.
• Payment shifted to exchanging promises representing value (e.g., bank notes, credit cards).
• Currency acts as an intermediary if it is accepted by anyone and represents value.
• Trade exposes us to new cultures, lowers production costs, allows access to new technologies, and creates peace & security.
• Post-WW2, economic integration became a focus in the EU (a major trade bloc).
• Protectionist measures were seen as necessary to prevent price and wage decreases. Retaliation and trade wars lead to economic and political difficulties.
• Former colonies used protectionism to avoid dependence on outside powers.
• Latin America favored import substitution to foster local industries.

Globalization

• Globalization is defined as the increasingly complex global geography of production, distribution, and consumption.

Economic Systems

• Some organizations are publicly/government owned (e.g., communication, transport, energy).
• Most businesses operate privately in market economies.
• Command economies are more common in Communist governments (e.g., USSR).

Factors of Production

• Land, labour, capital, and entrepreneurship

Command Economies

• Government controls factors of production, sets prices based on perceived market needs.
• Prices are fixed, leading to market stability.
• Less product variety limits innovation.
• Private ownership is restricted, hindering expansion.
• Monopolies are common, reducing market responsiveness.
• Goods are allocated by the government.
• Almost no unemployment.
• Controlled salaries.
• Heavy government planning/interference.

Market Economies

• Government does not control factors of production.
• Prices fluctuate, potentially causing market instability.
• Greater product variety encourages innovation.
• Private ownership is allowed and encouraged.
• Competitiveness is encouraged, limiting monopolies.
• Goods are bought by those willing to pay the most.
• Unemployment exists.
• Salaries are not controlled.
• Government planning is limited.

Economic Ideologies

• Communist ideology is based on "equality and fairness".
• Capitalist ideology follows "everyone fends for themselves".
• Command economies feature few social security nets.
• Market economies feature social security nets.
• Globalization faces criticism due to job losses, cultural merging, and unequal income distribution.

Arguments Against Globalization

• Marine Le Pen: "Wild globalization has benefitted some, but it's been a catastrophe for most."
• Anna Lindh: Argues that globalization creates vulnerability.

Arguments For Globalization

• Tony Blair (2001): Globalization is pervasive in technology, communication, culture, and recreation, and we should combine it with justice.
• Isolation is the alternative to Globalization

Hyper-globalists

• Hyper-globalists strongly believe in the benefits of globalization and see national borders as less relevant.

Right-Leaning Hyper-globalists

• Free market capitalists, see globalization as a market force for growth, higher incomes, and improved product quality.
• They think we should gain from global communication networks, shared research and development, and should have closer economic integration.

Left-Leaning Hyper-globalists

• Believe its pace is too fast for governments and society to manage.
• Claim its rewards are enjoyed by a privileged few.
• Want a return to local markets and reject multinational power.
• Globalization involves increasing flows of goods, services, capital, people, and ideas across international boundaries.

Advantages of Globalization

• Economic Growth: Access to wider labor pools and new markets increases production and revenue.
• Access to New Markets: Companies expand their customer base internationally, increasing sales.
• Access to New Talent: Enables businesses to tap into diverse talent globally.
• Increased Collaboration: Fosters cross-border partnerships and innovation.

Disadvantages of Globalization

• Increased Competition: Domestic firms are challenged by international companies.
• Environmental Impact: Increased production and transportation contribute to pollution and climate change.
• Job Displacement: Companies relocate to countries with lower labor costs.
• Cultural Homogenization: Global brands erode local culture.

Restricting Trade

• Countries restrict trade because not everyone supports foreign competition with domestic goods.
• Policies to restrict trade are called protectionist policies like protecting fledging or infant industries.
• The World Trade Organization (WTO) increasingly accepts protecting new industries.
• Developing countries need time to compete with developed nations. Sunset industries at risk due to innovation/competition may need protection.
• Anti-dumping measures counteract foreign producers selling at unfair prices (below production costs) which is against WTO rules.
• Restricting trade can enforce health/safety requirements.
• For security and defense, some industries (e.g., food, military) are retained domestically.
• Independence: Latin American countries restricted trade to reduce colonial dependence.
• Preventing loss of culture: Foods with cultural significance get government protection like Parmigiano-Reggiano or Champagne.

Protectionism

• Protectionism shields a country's domestic industries from foreign competition by taxing imports.

Protectionist Policies

• Tariffs: Taxes on imported goods to encourage buying domestic products.
• Import Quotas: Limits on the quantity of imported goods to reduce foreign product supply.
• Subsidies: Government support to local businesses to help them compete with foreign products.
• Anti-Dumping Measures: Prevent international sellers from selling at extremely low prices.
• Trade Barriers: Restrictions or regulations that limit trade.

Should Protectionism Be Used?

• The WTO’s views regarding the use of protectionist measures has relaxed in recent decades.
• Less economically developed countries can benefit by using tariffs.
• Tariffs boost government revenue and protect infant industries.
• Developed countries benefit from trade agreements.

Tariffs

• Tariffs are taxes on imported goods.
• Meant to make foreign products more expensive, encouraging local consumption.
• It incentivizes foreign companies to set up industries/manufacturing plants in the country.

Benefits of Tariffs

• Promote domestic production.
• Create jobs.
• Enhance economic growth.
• Increase government tax revenue.

Disadvantages of Tariffs

• Potentially cause inflation.
• Increase consumer costs.

Competitive Advantage

• Competitive advantage distinguishes a company from its competitors (e.g., manufacturing, resources, supply chains, labor pool).

Drawbacks of Tariffs

• Tariffs on widely imported goods like clothes may increase costs without benefitting the local economy.
• Consumers pay more when there are no cheaper local alternatives.
• Government spending has grown, requiring more than tariffs alone can provide.

Targeted vs General Tariffs

• Targeted tariffs can boost government revenue.
• General tariffs (e.g., Trump's 10% tariffs) can cause inflation.

Why Protectionism Shouldn’t Be Used

• Protectionism can cause tensions between countries.
• The 2018 USA/China tariffs heightened global stock market instability.
• Protectionism can lead to a breakdown in trust, contributing to economic crises/war.

Trade Agreements

• Trade agreements can benefit participants but also create tension within trade blocs.

Trade Bloc

• A type of intergovernmental agreement, often part of a regional intergovernmental organization.

Preferential Trade Agreement

• Countries agree to reduce trade barriers for certain goods.

Free Trade Area (FTA)

• Countries promise to remove all barriers to goods and services between participating countries.

Examples of FTAs

• South Asian Free Trade Area (SAFTA).
• ASEAN- Association of Southeast Asian Nations.
• Central Europe Free Trade Agreement (CEFTA).
• Common Market for Eastern and Southern Africa (COMESA).

ASEAN

• Association of Southeast Asian Nations (ASEAN): Composed of 10 countries: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.
• Founded in 1954 and established in 1961 to gain peace, stability, and market integration.
• Created as a way to confront the spread of communism in Asia.
• Unity increased during the Vietnam War.
• Charter adopted in 2007 created a legal framework.
• Three cooperations were established in 2007: the ASEAN Economic Community, the ASEAN Political-Security Community, and the ASEAN Socio-Cultural Community.
• Prioritizes trade liberalization, sustainable development, and attracting foreign investment.
• Today tariffs between member countries are close to 0.
• It fosters cooperation/mutual understanding.
• The ASEAN bloc cannot fully address issues like the Myanmar civil war due to Chinese economic ties.
• Members of an FTA can trade freely with non-members.

Unions and Markets: Customs Union

• Customs Union: An agreement between FTA members to set the same trade policy with non-member countries.
• Easier for outside countries to negotiate trade agreements with the entire bloc.

Common Market

• Combines FTA and customs union characteristics with free movement of goods, people, and services across borders.
• Eliminates the need for passports and visas within the market.

Common Market Examples

• MERCOSUR (Argentina, Brazil, Paraguay, Uruguay, and Venezuela).
• The Gulf Cooperation Council (GCC).
• The European Union (EU).

Monetary Union

• Nations share the same currency.

Example: EU

• 17 EU countries use the Euro, established by the Maastricht Treaty (1992), and put into circulation in 2002.
• Monetary policy set by the European Central Bank (ECB) in Frankfurt, Germany.

Example: WAMZ

• West African Monetary Zone (WAMZ) planned to use "eco" currency but failed to meet convergence criteria.

WAMZ Convergence Criteria

• Low inflation rate (max 10%).
• Controlled annual government borrowing (max 4%).
• Low government debt.
• The central bank financing of debt must be limited to 10% or less of the government’s annual tax income.
• Enough money from exports for at least 3 months of import.
• Exchange rate stability.
• Stable currency value by not printing more money.

The U.S. Dollar

• The US dollar is the most widely circulated and held currency.
• There is a federal government for the entire country. Each of the 50 states that make up the USA has a separate state government from back when Great Britain ran its Empire.

Trade and Aid

• Research has been done since the end of WW2 and after countries escaped from their colonial past, to determine the best policies to help standards of living. Debates about how effective it is to send aid to developing countries is a major topic of discussion.

Arguments For Trade

• Free markets allocate resources effectively.
• Production creates its own demand.
• Trade/foreign markets increase production opportunities.

Arguments Against Trade

• Developing countries mainly export primary goods.
• It is difficult to generate large amounts of surplus through selling these goods.
• Over-reliance on too few industries.
• Unsustainable practices cause permanent damage.
• These countries eventually run out of the ability to rely on trading those goods because the land has been exploited of all its resources. Therefore, they also need to invest in manufacturing and other services besides farming and mining to be able to cope.

Arguments for Aid

• Transfers of money, goods, and services without expectation of return.
• Governments give Official Development Assistance (ODA).
• Target specific areas heavily affected.
• Effective during emergencies.
• Provides direct support to those in need.

Microfinance

• Industry providing financial services to those typically ineligible because of limited credit institutions.
• Provides access to credit, fueling business start-ups and economic growth.

Graheem

• Most famous microfinance institution

Summary of the Video on the European Economic and Monetary Union (EMU)

• The European Economic and Monetary Union (EMU) is a system that integrates the economies of several European Union (EU) member states and is also known as the Eurozone. It includes common monetary policies and a common currency (the Euro). 19 out of 27 EU member states use the Euro as their currency.
• The modern EMU has its origins in the 1951 Treaty of Paris. The 1992 Maastricht Treaty (signed in the Dutch city of Maastricht) formally established the EU and set the foundation for the Euro.

Eurozone Debt Crisis

• The Euro prevents member countries from printing their own currency to pay off debts. This caused problems during the European sovereign debt crisis, especially in Portugal, Ireland, Italy, Greece, and Spain (PIIGS countries).
• To avoid leaving the EMU, Greece accepted financial bailouts from the EU, which led to austerity measures but eventually brought financial stability.

EMU Overview

• The EMU involves coordination of economic and fiscal policies, a common monetary policy, and the Euro currency among 19 Eurozone nations.
• The Maastricht Treaty (1992) officially established the EMU and led to the creation of the Euro.

International Trade

• International trade drives the global economy and free and fair trade promotes competition, job creation, and innovation.

Unfair Trade Practices

• Foreign companies gain an unfair advantage in other markets, leading to market distortion and illegal trade activities.

U.S. Government’s Role

• The U.S. Government investigates unfair trade practices by foreign companies and governments.
• It can impose import duties (tariffs) to protect American jobs, ensure fair competition for domestic businesses, and encourage innovation and maintain a healthy market.