BAES 6 - Lecture 6 - Trade and Finance Lecture Notes PDF

Trade and finance  Agenda 1. Trade and finance as pillars of globalization 2. Historical evolution 3. Global governance Trade Finance 2  1. Trade and Finance as Separate but Interconnected Spheres Trade: Involves the exchange of goods and services Fin...

Trade and finance  Agenda 1. Trade and finance as pillars of globalization 2. Historical evolution 3. Global governance Trade Finance 2  1. Trade and Finance as Separate but Interconnected Spheres Trade: Involves the exchange of goods and services Finance: Centers on monetary flows, capital mobility, and investments. Unlike trade, finance lacks a clear physical infrastructure and relies on digital networks and financial hubs 3  Interconnections Disturbances in finance (e.g., currency crises) can disrupt trade by limiting credit or altering exchange rates. Similarly, trade imbalances can lead to financial instability through unsustainable debt accumulation. In short, crises in one sphere often have "knock-on problems" in the other Regulatory gaps between these domains: While the WTO governs trade, finance is dominated by institutions like the IMF and World Bank, creating fragmented and sometimes contradictory systems of global governance 4  Trade and finance as the two pillars of economic globalization 5  Intensity vs. Extensity in Globalization Intensity: Refers to the degree to which global economic flows (trade or finance) cross borders. For example, increasing trade volumes signal heightened intensity. Extensity: Refers to the geographical spread of these flows—how many regions and countries are integrated into the global economy. Extensity measures highlight whether globalization is truly global or limited to specific "hotspots." 6  While intensity often increases with globalization, extensity is more uneven. For instance, your readings argue that regions bypassed by global trade and finance remain marginalized, reinforcing economic asymmetries In the reading, this distinction uses this distinction to critique the narrative of globalization as universally beneficial. It demonstrates that while trade and finance volumes have grown dramatically since the 1970s, this growth has concentrated in certain regions and sectors, bypassing others entirely.  History 7  2. Historical evolution Bretton Woods Conference Established the post-WWII economic governance system, prioritizing stable global trade and financial systems through institutions like the IMF and World Bank Introduced capital controls to ensure financial stability, a system that facilitated global trade by minimizing volatility in exchange rates and financial flows. The reading (and not just it!) describes Bretton Woods as a high-water mark of global regulatory coherence, creating a system where finance served trade rather than dominating it 8 9  Transition to Financial Liberalization in the 1970s The U.S. dismantled the Bretton Woods system under Nixon, leading to floating exchange rates and the liberalization of capital markets. This allowed finance to become globally mobile, resulting in growing inequalities and financial crises The breakdown of the Bretton Woods system led to floating exchange rates and the liberalization of capital markets, allowing finance to operate globally with minimal constraints. This liberalization fueled massive financial flows and speculative activities, concentrating wealth in financial hubs like New York and London while increasing instability in less developed economies. Yr reading (and not only it!) discusses how this transformation allowed finance to dominate the global economy, with trade increasingly subordinated to financial interests 10  3. Governance of Global Trade and Finance What do we mean by governance? 11  a. Trade The General Agreement on Tariffs and Trade (GATT) Established: 1947 as a provisional framework for reducing tariffs and other trade barriers. Initially signed by 23 nations, it became the de facto institution for global trade governance. 12  Challenges of GATT: Provisional Nature: GATT was never a formal organization but a series of agreements managed through ad hoc negotiations. Rise of Non-Tariff Barriers: While GATT was successful in reducing tariffs, non-tariff barriers like quotas and subsidies became increasingly prominent. Growing Membership: The inclusion of more countries, especially after decolonization, made negotiations more complex and cumbersome, as seen during the Uruguay Round. 13  The Uruguay Round (1986–1994) The Uruguay Round was a turning point in global trade governance and laid the groundwork for the WTO. This round was the most ambitious in GATT’s history, addressing several new issues: Inclusion of Services: Negotiations extended to trade in services, leading to the General Agreement on Trade in Services (GATS). Intellectual Property Rights: Intellectual property became a trade issue, culminating in the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Agriculture: For the first time, agricultural trade was explicitly addressed, though significant asymmetries remained. Dispute Settlement: The round strengthened mechanisms for resolving trade disputes, introducing a more structured and enforceable system. Institutional Reform: The need for a permanent body to oversee these expanded trade rules became evident. The Uruguay Round concluded in 1994 with the Marrakesh Agreement, which officially established the WTO. 14  The WTO replaced GATT and became the primary institution for global trade governance. It inherited and expanded upon GATT’s framework with the following innovations: Legal Entity: Unlike GATT, the WTO was established as a formal international organization with a legal personality, granting it greater authority and institutional stability. Enhanced Dispute Settlement: The WTO introduced a more binding and enforceable dispute settlement mechanism through the Dispute Settlement Body (DSB). This addressed one of GATT’s key weaknesses—its reliance on voluntary compliance. 15  Key Principles of the WTO The World Trade Organization (WTO) is built on several foundational principles that aim to create a predictable, transparent, and fair global trading system. These include: Most Favored Nation (MFN) Principle National treatment 16  Most Favored Nation (MFN) Principle The MFN principle ensures that any trade advantage granted by one member to another must be extended to all members. This principle, codified in GATT Article I, aims to eliminate discriminatory trade practices and promote multilateralism. In other words, the MFN principle requires that any trade advantage, such as lower tariffs or favorable import conditions, granted by one WTO member to another must be extended to all other WTO members. Example: Imagine Country A negotiates a trade deal with Country B to reduce tariffs on steel imports from 10% to 5%. If both countries are WTO members, Country A is obligated to apply the same 5% tariff to steel imports from all other WTO members, such as Country C or Country D, even if they were not part of the original negotiation. Purpose: The MFN principle ensures fairness by preventing countries from favoring specific trading partners while excluding others. 17  Note of caution: yr chapter notes how regional trade blocs and preferential agreements have undermined this principle, creating asymmetries in the global trade system 18  National treatment This principle requires WTO members to treat imported goods no less favorably than domestically produced goods once they have entered the market. It prevents countries from using domestic policies to indirectly protect their own industries. In other words, National treatment requires that once goods, services, or intellectual property from a foreign country enter a domestic market, they must be treated the same as domestically produced goods. Example: Suppose Country X imports cars from Country Y. Under national treatment, Country X cannot impose additional taxes, stricter safety standards, or other regulatory barriers on imported cars that are not applied to domestically produced cars. Purpose: National treatment ensures that imported goods are not disadvantaged after entering a market, promoting non-discrimination and fair competition. 19  Institutional structure The WTO operates through a multilateral framework involving several key bodies: Ministerial Conference: The top decision-making body meets every two years to make major decisions and set the organization’s agenda. It is composed of representatives from all member states. General Council: Composed of ambassadors or senior officials from member countries, it oversees the day-to- day functioning of the WTO. It also operates as the Dispute Settlement Body (DSB) and the Trade Policy Review Body (TPRB). 20  Committees and Councils: Various specialized bodies manage specific agreements, such as those on agriculture, intellectual property (TRIPS), and trade in services (GATS). These committees ensure technical and operational coherence. WTO Secretariat: Located in Geneva, the Secretariat provides administrative and technical support but does not have decision-making powers. It plays a crucial role in compiling trade data and assisting members in negotiations. 21  Major negotiating rounds Geneva Round (1947): The first GATT round established foundational rules and achieved tariff reductions among 23 nations. Kennedy Round (1964-1967): Focused on further tariff reductions and introduced an Anti-Dumping Agreement to prevent predatory pricing in international trade. Tokyo Round (1973-1979): Broadened the scope of negotiations to include non-tariff barriers, resulting in agreements on subsidies and technical barriers to trade. Uruguay Round (1986-1994): The most ambitious round, it led to the creation of the WTO in 1995. It expanded trade rules to include services (GATS), intellectual property (TRIPS), and agriculture. This round highlighted tensions between developed and developing nations, particularly regarding agricultural subsidies. Doha Development Round (2001-Present): Launched with a focus on addressing the needs of developing countries, the Doha Round remains stalled due to disagreements over agricultural subsidies, market access, and non- agricultural goods liberalization. The chapter notes that these impasses reflect deep- seated asymmetries in trade governance 22  Criticisms Asymmetries in Trade Governance: WTO rules often favor industrialized nations, leaving developing countries with limited bargaining power. Sectors like agriculture and textiles, crucial for developing economies, remain highly protected in advanced economies, reflecting systemic inequities Example: Agricultural subsidies in advanced economies (e.g., the EU and U.S.) protect domestic farmers but disadvantage developing countries that depend on agricultural exports 23  Neglect of Social and Environmental Dimensions: Critics argue that global trade governance prioritizes economic growth over labor rights, environmental protection, and equitable development. Ineffectiveness in Current Global Challenges: The WTO has struggled to address modern challenges like climate change, digital trade, and global inequality. Its focus on liberalization is seen as outdated in an era of populist nationalism and rising protectionism. Example: The rise of bilateral and regional trade agreements, which undermine its multilateral framework 24  But also benefits 1. Reduction of trade barriers and Promotion of Multilateralism and Rules- Based Trade: Since its predecessor GATT, global governance of trade has significantly lowered tariffs and other trade barriers, increasing global trade volumes. The WTO has provided a structured, rules-based system for trade, reducing uncertainty and promoting stability in international markets. 2. Support for Developing Countries: Programs like the Aid for Trade Initiative and provisions for special and differential treatment aim to help developing nations integrate into the global trading system. 25  3. Economic Growth and Poverty Reduction: By facilitating trade liberalization, global trade governance has contributed to economic growth and reduced poverty in many parts of the world. Example: Trade openness in Asia, particularly in countries like China and Vietnam, has driven rapid economic development and lifted millions out of poverty. 26  b. The governance of finance Role of the IMF and World Bank: The International Monetary Fund (IMF) and World Bank were created at Bretton Woods to helo manage crises and promote economic stability and growth 27  Financial Stability and Crisis Management: IMF: The IMF provides financial assistance to countries facing balance-of-payments crises, offering short-term loans to stabilize economies. Its role is critical in preventing currency crises and mitigating the risk of contagion. World Bank: The World Bank plays a key role in long-term economic development, offering loans and grants for infrastructure projects, poverty reduction, education, health, and environmental sustainability. This helps developing countries build the infrastructure necessary for economic growth. 28  Promotion of Global Economic Stability: IMF: The IMF’s role in surveillance and policy advice aims to ensure global economic stability. By monitoring the global economy, providing policy recommendations, and offering a forum for countries to discuss economic challenges, it seeks to prevent global financial instability. World Bank: The World Bank supports global efforts to reduce poverty and boost shared prosperity, aligning its projects with the sustainable development goals (SDGs). 29  Capacity Building and Technical Assistance: Both the IMF and World Bank provide technical assistance to member countries, helping them build the institutional and regulatory frameworks necessary for economic development. This includes training government officials, improving fiscal management, and enhancing financial sector regulation. 30  Global Coordination: 1. International financial governance, led by institutions like the IMF and World Bank, fosters coordination between nations on financial and economic policies. This can help ensure that global economic policies are aligned, reducing the risks of conflicts that could destabilize the global financial system. 31  Among the functions the two institutions perform, lending is certainly one of the most distinctive functions Countries borrow from the institutions based on quota Lending is conditioanl 32  Conditionality Why is lending conditional? 33  Criticisms of financial governance Conditionality and Austerity Measures: IMF: The IMF has been heavily criticized for imposing austerity measures as conditions for its loans. Critics argue that these policies, which often include spending cuts, tax increases, and privatization of state assets, can exacerbate economic hardship, especially in developing countries. Austerity has been blamed for deepening recessions, increasing inequality, and social unrest in countries that received IMF assistance. World Bank: The World Bank’s approach to development has also been criticized for promoting policies that favor market-oriented reforms, such as deregulation and privatization, which critics claim can harm social welfare, deepen inequality, and undermine local economies. 34  Power Imbalance and Lack of Accountability: Both the IMF and World Bank are often seen as institutions where power is disproportionately concentrated in the hands of developed countries, particularly the United States, which holds significant voting power in both institutions. This power imbalance can lead to policies that prioritize the interests of wealthy nations over those of developing countries, limiting the influence of poorer countries in decision-making processes. Examples - choice of the top officials  35  The IMF Managing Director The World Bank President How are they selected? 36  A gentlemen agreement The informal convention that the Managing Director of the IMF is always a European citizen and the President of the World Bank is always a U.S. citizen dates back to the founding of the Bretton Woods institutions in 1944. This practice is rooted in the geopolitical dynamics of the post-World War II era and reflects the power balance between the United States and Europe at the time. 37  Environmental and Social Concerns: World Bank: The World Bank has been criticized for financing projects that cause environmental damage, such as large-scale infrastructure projects (e.g., dams) that displace communities, destroy ecosystems, and contribute to climate change. Although the World Bank has taken steps to improve its environmental and social safeguards, these concerns remain significant. 38  Sovereignty Concerns: 1. The policies promoted by the IMF and World Bank are sometimes seen as a violation of national sovereignty, as countries are pressured to implement foreign-imposed economic policies. This can lead to tensions between countries and international institutions, as well as public backlash from citizens who view these interventions as foreign interference in domestic affairs. 39  In short The IMF and World Bank have played pivotal roles in shaping the global economic order, promoting stability and development. However, their principles, tasks, and structures have sparked debates over their fairness, effectiveness, and alignment with the interests of all member states, particularly developing nations. Reforming these institutions to address modern challenges and ensure greater inclusivity remains a pressing issue in global governance. 40  To wrap-up Trade and finance as key areas of investigation in IR Governance of trade Governance of finance Benefits and criticisms 41 www.unibo.it