Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
Introduction: Globalization in the Data Gregory Corcos Eco572: International Economics
September 10, 2014
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
International Economics
Analysis of cross-border economic relationships Trade relationships (Lectures 1-5) and monetary/financial relationships (Lectures 6-9) Two sides of the same coin: any trade flow generates a monetary payment, shocks to the financial system have an impact on international trade What is specific to international economics that needs to be studied outside the macro class? Welfare gains from international trade and factor mobility Dynamics of the balance of payments Determination of exchange rates International coordination of economic policies
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
Course Outline
1. The theory of comparative advantage 2. The neo-classical model of international trade 3. International trade under imperfect competition 4. Trade policies 5. Multinational firms and foreign direct investment 6. Intertemporal choice and the balance of payments 7. The foreign-exchange market 8. The equilibrium exchange rate 9. Foreign exchange crises
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
Organization
A ”normal” week = 1.5 hour lecture + 2 hour tutorial. Problem sets will be handed out one week in advance and will be solved in class by students. Final exam 3 hour written exam, closed book 2 parts (trade/international macroeconomics) with equal weights problem sets with possibly one short essay question past exams available at http://www.isabellemejean.com/ internationaleconomics.html.
Historical Perspective
Trade globalization
Financial globalization
This Lecture
Globalization: Historical perspective - Trade globalization - Financial globalization
Questions raised by globalization
Questions raised by globalization
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
What Does Globalization Mean?
Integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, and the spread of technology ⇒ Cross-border exchange of goods, services, assets, labor
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
Globalization in Historical Perspective
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
Measures of Trade and Financial Globalization
Trade globalization: Growth in international flows of goods and services as measured by Trade Openness: (X+M)/GDP, Restrictions to free trade (tariffs and regulations)
Financial globalization: Extent of cross-border financial transactions as measured by Financial Openness: (Domestic assets held by foreigners + Foreign assets held by domestic agents)/GDP, Inflows/GDP, Outflows/GDP, Restrictions to international capital movements (taxes and regulations)
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
Two episodes of globalization
1870-1914, “Golden Age” of Trade Fall in transportation costs (railway, steamboat, telegraph) Europe’s colonial expansion → trade in raw material, agriculture Industrialization in the North, dis-industrialization in the South Long-run capital flows (railway) Gold Standard Share of British wealth invested overseas = 17% in 1870 and 33% in 1913 (larger than any country today)
⇒ Stopped by WWI, Protectionist Pressures during the Great Depression (eg Smoot-Hawley tariffs in the US and retaliation from many countries) and until the end of WWII
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
Two episodes of globalization (2)
1960-?, Second “Golden Age” of Trade? Fall in transportation and communication costs (shipping container, telecom, internet) General Agreement on Tariffs and Trade (now WTO), IMF North-North intra-industry trade (manufactured goods) Industrialization in the South (high growth rates + multinationals + intra-firm trade) Since 1980, financial liberalization, especially in emerging markets → Increase in capital flows (three times faster than trade growth since 1990) Regional trade Since 1973, floating exchange rates
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
World trade over time
Table: World exports as a share of GDP (%)
Source: Krugman (1995). Exports of merchandise. (a) OECD countries only 30
25
20
15
10
5
0 1967
1971
1975
1979
1983
1987
1991
1995
1999
2003
2007
2011
Source: CEPII-Chelem. Exports of goods and services
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
World trade over time: Non-smooth process Exports of goods (% GDP)
Source: Baldwin & Martin (1999), CEPII-CHELEM database.
Globalization is not entirely new: 1870-1914, 1960-? Globalization is not irreversible: Aftermath of Great Depression
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
World trade over time: Heterogeneous across countries Exports of goods (% GDP)
Source: Baldwin & Martin (1999), CEPII-CHELEM database.
Evolution more recent in the South
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
0
0
Trade Value (billions USD) 2 4
Trade Value (1990=100) 500 1000 1500 2000
6
2500
World trade over time: Heterogeneous across countries
1970
1980
1990 North−North South−South
2000
2010
1990
1995
North−South South−North
2000 North−North South−South
2005
2010
North−South South−North
Source: UN ComTrade
High income countries dominate world trade But strong growth of low/middle income countries trade since the beginning of the 90s
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
Trade barriers over time Trade Barriers over Time
Source: Feenstra & Taylor
Trade barriers = all the factors that influence the amount of goods and services shipped across international borders (transport costs, tariffs, frictions, etc)
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
Transport costs Transport costs (% production costs)
Source: Bairoch (1989) cited in Baldwin & Martin (1999). Figures for an hypothetical 800 km shipment Role of technological innovation and infrastructure investments
Historical Perspective
Trade globalization
Financial globalization
Transport costs (2) Transportation and communication costs
Source: World Bank (1995)
Questions raised by globalization
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
Transport costs (3) Role of container shipping in the second wave of the globalization: Loading time (per man hour) Time in port Charge (tons per boat)
1950 0.627 3 weeks 10,000
1970 4.234 18 hours 40,000
Source: SF Chronicle Cited in Feenstra & Taylor
Role of communication costs in the second wave of the globalization: 1986 1991 Telephone capacity (Thousands of voice paths) Transatlantic 100 504 Transpacific 41 141.2 Internet hosts Thousands 5.1 617 Source: Cairncross (1997) Cited in Baldwin and Martin (1999)
1996 2,021.6 1,098.6 12,881
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
Tariffs over time
Average tariff on manufactured goods (%) 1913 1931 1950 1980 1999 2004 France 20 30 18 8.3 4.1 2.5 Germany 13 21 26 8.3 4.1 2.5 USA 44 48 14 7 .4.5 2.2 Sources: Mayer and Martin (2008), Boumellassa et al. (2009)
Strong increase in the interwar period: Smoot-Hawley tariffs in the US during the Great Depression (60% tariffs on some import categories) → Cause other countries to retaliate Reduction after WWII: International agreements (General Agreement on Tariffs and Trade, now World Trade Organization)
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
Trade barriers: Unachieved liberalization Average protection in % 40% 35%
2001
30%
2004
25% 20% 15% 10% 5%
ld
ad
W or
ig er
pt
ia
di a
Ch
N
In
Eg y
in a Ch
al ay s
M
az il Br
ex ic o
Ja pa n
M
N
ew
U SA z ea Eu la ro nd pe an U ni on
0%
Source : MacMaps-HS6-v2 database, Boumelassa, Laborde and Mitaritonna (2009)
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
Trade barriers: Heterogeneity across countries/goods World protection in 2004 in % Goods Agricultural goods of which: Primary and semi-processed Final Industrial goods of which: Primary and semi-processed Final Extraction and energy products of which: Primary and semi-processed Final All products of which: Primary and semi-processed Final
World 18.9
HICs 18.0
MICs 20.8
LDCs 14.1
12.8 22.8 4.4
12.1 21.7 2.7
14.2 25.4 8.9
9.5 16.8 11.7
2.8 5.0 1.9
1.2 2.9 0.6
6.2 9.9 5.6
10.9 11.9 12.7
1.4 3.3 5.1
0.3 1.4 3.3
4.6 7.6 9.6
14.4 11.2 12.2
3.3 6.0
1.8 3.9
6.8 11.0
11.4 12.4
Source : MacMaps-HS6-v2 database, Boumelassa, Laborde and Mitaritonna (2009)
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
Trade costs today Trade costs continue to be large today, see Anderson & van Wincoop (2004) The ad-valorem tax equivalent of all trade costs for the representative rich country is estimated to reach 170% Total = 55% tax equivalent for local distribution costs + 74% tax equivalent for international trade costs International trade costs = 21% tax equivalent for transportation + 44% for border-related trade barriers Transport cost = 12% directly measured freight costs + 9% tax equivalent of the time value of goods in transit Border-related trade barriers = 8% policy barriers (tariffs and NTB) + 7% language barrier + 6% information cost + 3% security barrier (insecurity associated with contractual enforcement problems and corruption)
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
Geography of Globalization: Regionalization Intra-bloc trade (% total)
Source: CEPII-Chelem
Trade within Europe accounts for about 25% of world trade
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
The emergence of China Imports and Exports (% of world trade) 45,00
40,00
35,00
30,00
X USA 25,00
M USA X EMU M EMU
20,00
X CHN X CHN M CHN 15,00
10,00
5,00
0,00 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: ComTrade
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
0
2
4
6
8
10
International Financial Integration
1970
1980
1990 over GDP
2000
2010
over Trade
International Financial Integration in Advanced countries. Source: Lane P. & Milesi-Ferretti G.M. (2006), Financial integration measured as the ratio of foreign assets + foreign liabilities over GDP (green) or Trade (red)
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
International Financial Integration (2)
1
Ext. Assets and Liabilities over GDP 1.5 2 2.5
3
International Financial Integration by regions
1995
2000 Advanced countries Latin America
2005
2010
Emerging Asia
Source: Lane P. & Milesi-Ferretti G.M. (2006)
Financial integration heterogeneous across countries
Historical Perspective
Trade globalization
2. Financial Financial globalization
openn
Questions raised by globalization
De jure financial opennessdefinition De jure financial openness since 1970
• Current-acco national curren freely for the p and services, p transfers, and f in a majority o
• Financial-ac investments, po investments, an without restrict Source: Chinn & Ito (2008). The index is the first principal component of 4 categories of restric-synonymous w Source: Chinn and Ito (2008), based on the IMF Annual Report on tions: (i) existence of multiple exchange rates; (ii) restrictions on current account transactions; concern some f Exchange Arrangements and Exchange Restrictions, 1970-2007. (iii) restrictions on financial account transactions; (iv) requirement of the surrender of export Note: the index is the first principal component of 4 categories of transactions, pa proceeds. restrictions: (i) existence of multiple exchange rates; (ii) restrictions others (e. FDI on current account transactions; (iii) restrictions on financial account industries). transactions; (iv) requirement of the surrender of export proceeds. Measurement issues, seeofLecture 6 economies and 128 emerging Non-weighted average 24 advanced and developing economies economies.
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
Volatility of capital flows Flows are more volatile than stocks: in the 2008 crisis, collapse of international flows
Financial Globalisation
Flows are more volatile than stocks Collapse of international flows during the 2008 crisis
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
Volatility of capital flows (2)
selling of foreign g assets
Capital flows are much more volatile than trade
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
Growth in FDI Figure: FDI Net Inflows, by destinations 2.5E+12
2E+12
1.5E+12
World High Income
1E+12
Asia Low income
5E+11
0 1970
1975
1980
1985
1990
1995
2000
2005
2010
-5E+11
Source: World Bank, Data are in current US$. Net inflow = Investment - Disinvestment
FDI is a recent phenomenon FDI is extremely concentrated, in large part among developed countries
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
Questions raised by globalization
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
At the macro level Gains from trade in goods and services Global gains? Distribution across countries and production factors? Compensation of losers?
Trade policies Multilateral versus regional and bilateral (“noodle bowl”) agreements Tariffs versus non-tariff barriers (Agriculture and services)
Gains from financial integration Gains from risk-sharing or more instability? Conditions under which capital inflows benefit the host country? Some flows have a stronger effect on TFP (FDI), some institutional background is needed. Transmission of (positive and negative) shocks across countries? Needs for global governance?
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
At the micro level
How does globalization affect firms’ strategy? Which firms engage in internationalization? Export versus FDI? Participation to international supply chains? Implications for policy instruments: export subsidies, tax coordination...
Organization of financial institutions To what extent are portfolio diversified? Regulation (eg capital requirements in Basel agreements)
Historical Perspective
Trade globalization
Financial globalization
Questions raised by globalization
Conclusions
Globalization represents the increase in cross-border trade of goods and services and movement of production factors. Two episodes: 1870-1914 and 1960-. Globalization is neither new nor irreversible. Capital flows are much more volatile than trade. Globalization raises macro issues related to the distribution of gains from trade and the transmission of shocks, and micro issues related to firms’ strategies and the organization of financial institutions.
