globalization & international trade

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lobalization” refers to the growing interdependence of countries resulting from the increasing integration of trade, finance, people, and ideas in one global marketplace. International trade and cross-border investment flows are the main elements of this integration. Globalization started after World War II but has accelerated considerably since the mid-1980s, driven by two main fac-tors. One involves technological advances that have lowered the costs of transportation, communication, and computation to the extent that it is often economically feasible for a firm to locate different phases of production in differ-ent countries. The other factor has to do with the increasing liberalization of trade and capital markets: more and more governments are refusing to pro-tect their economies from foreign com-petition or influence through import tariffs and nontariff barriers such as import quotas, export restraints, and legal prohibitions. A number of interna-tional institutions established in the wake of World War II—including the World Bank, International Monetary Fund (IMF), and General Agreement on Tariffs and Trade (GATT), suc-ceeded in 1995 by the World Trade Organization (WTO)—have played an important role in promoting free trade in place of protectionism.

Empirical evidence suggests that global-ization has significantly boosted eco-nomic growth in East Asian economies such as Hong Kong (China), the Republic of Korea, and Singapore. But not all developing countries are equally engaged in globalization or in a position to benefit from it. In fact, except for most countries in East Asia and some in Latin America, developing countries have been rather slow to integrate with the world economy. The share of Sub-Saharan Africa in world trade has declined continuously since the late 1960s, and the share of major oil exporters fell sharply with the drop in oil prices in the early 1980s. Moreover, for countries that are actively engaged in globalization, the benefits come with new risks and challenges. The balance of globalization's costs and benefits for dif-ferent groups of countries and the world economy is one of the hottest topics in development debates.

Costs and Benefits of Free Trade For participating countries the main benefits of unrestricted foreign trade

“G

66

12GLOBALIZATION AND INTERNATIONAL TRADE

Should all countries be equally open to foreign trade?

67

stem from the increased access of their

producers to larger, international mar-

kets. For a national economy that access

means an opportunity to benefit from

the international division of labor, on

the one hand, and the need to face

stronger competition in world markets,

on the other. Domestic producers pro-

duce more efficiently due to their inter-

national specialization and the pressure

that comes from foreign competition,

and consumers enjoy a wider variety of

domestic and imported goods at lower

prices.

In addition, an actively trading country

benefits from the new technologies that

“spill over” to it from its trading part-

ners, such as through the knowledge

embedded in imported production

equipment. These technological

spillovers are particularly important for

developing countries because they give

them a chance to catch up more quickly

with the developed countries in terms

of productivity.Former centrally

planned economies, which missed out

on many of the benefits of global trade

because of their politically imposed iso-

lation from market economies, today

aspire to tap into these benefits by rein-

tegrating with the global trading system.

But active participation in international

trade also entails risks, particularly those

associated with the strong competition

in international markets. For example, a

country runs the risk that some of its industries—those that are less competi-tive and adaptable—will be forced out of business. Meanwhile, reliance on foreign suppliers may be considered unaccept-able when it comes to industries with a significant role in national security. For example, many governments are deter-mined to ensure the so-called food secu-rity of their countries, in case food imports are cut off during a war.In addition, governments of developing countries often argue that recently estab-lished industries require temporary pro-tection until they become more competitive and less vulnerable to for-eign competition. Thus governments often prohibit or reduce selected imports by introducing quotas, or make imports more expensive and less competitive by imposing tariffs. Such protectionist poli-cies can be economically dangerous because they allow domestic producers to continue producing less efficiently and eventually lead to economic stagna-tion. Wherever possible, increasing the economic efficiency and international competitiveness of key industries should be considered as an alternative to protec-tionist policies.A country that attempts to produce almost everything it needs domestically deprives itself of the enormous economic benefits of international specialization.But narrow international specialization,which makes a country dependent on exports of one or a few goods, can also be

BEYOND ECONOMIC GROWTH

68risky because of the possibility of sudden

unfavorable changes in demand from

world markets. Such changes can signifi-

cantly worsen a country’s terms of trade.

Thus some diversification of production

and exports can be prudent even if it

entails a temporary decrease in trade.

Every country has to find the right place

in the international division of labor

based on its comparative advantages.

The costs and benefits of international

trade also depend on factors such as the

size of a country’s domestic market, its

natural resource endowment, and its

location. For instance, countries with

large domestic markets generally trade

less. At the same time, countries that are

well endowed with a few natural

resources, such as oil, tend to trade

more. Think of examples of countries

whose geographic location is particularly

favorable or unfavorable for their partici-

pation in global trade.

Despite the risks, many countries have

been choosing to globalize their

economies to a greater extent. One way

to measure the extent of this process is

by the ratio of a country’s trade (exports

plus imports) to its GDP or GNP. By

this measure, globalization has roughly

doubled on average since 1950. Over the

past 30 years exports have grown about

twice as fast as GNP (Figure 12.1). As a

result, by 1996 the ratio of world trade

to world GDP (in purchasing power

parity terms) had reached almost 30

percent—on average about 40 percent in

developed countries and about 15 per-

12GLOBALIZATION AND INTERNATIONAL TRADE

69

cent in developing countries (Map 12.1

and Data Table 3).

Geography and Composition of

Global Trade

Over the past 10 years patterns of inter-

national trade have been changing in

favor of trade between developed and

developing countries. Developed coun-

tries still trade mostly among themselves,

but the share of their exports going to

developing countries grew from 20 per-

cent in 1985 to 22 percent in 1995. At the same time, developing countries have increased trade among themselves.Still, developed countries remain their main trading partners, the best markets for their exports, and the main source of their imports.Most developing countries’ terms of trade deteriorated in the 1980s and 1990s because prices of primary goods —which used to make up the largest share of developing country exports—have fallen relative to prices of manufactured goods.For example,between 1980 and 1995 real prices

of

45% or more 35.0–44.9%20.0–34.9%15.0–19.9%Less than 15%No data Note: The ratio of trade to purchasing power parity –adjusted GDP is considered the best available tool for comparing integration with the world economy across countries. But the use of this tool is complicated by the different shares of the service sector in the economies of different countries. For example, developed countries appear to be less integrated because a larger share of their output consists of services, a large portion of which are by their nature nontradable.

Map 12.1Trade as a percentage of real GDP

, 1996

BEYOND ECONOMIC GROWTH

How is the role of developing countries in global trade changing?

70oil dropped almost fourfold, prices of

cocoa almost threefold, and prices of

coffee about twofold. There is still

debate about whether this relative

decline in commodity prices is perma-

nent or transitory, but developing coun-

tries that depend on these exports have

already suffered heavy economic losses

that have slowed their economic growth

and development.

In response to these changes in their

terms of trade, many developing coun-

tries are increasing the share of manu-

factured goods in their exports,

including exports to developed coun-

tries (Figure 12.2). The most dynamic

categories of their manufactured exports

are labor-intensive, low-knowledge

products (clothes, carpets, some manu-

ally assembled products) that allow

these countries to create more jobs and

make better use of their abundant labor

resources.

By contrast, developing countries’

imports from developed countries are

mostly capital- and knowledge-intensive

manufactured goods—primarily

machinery and transport equipment—in

which developed countries retain their

comparative advantage.1

12GLOBALIZATION AND INTERNATIONAL TRADE

What problems do transition countries face as they join in global trade?

71

Trade Issues in Transition

Countries

Countries in transition from planned to market economies have recognized the potential benefits of global integration,and most have significantly liberalized their trade regimes. As a result many Central and Eastern European countries saw the share of trade in GDP increase from 10 percent or less in 1990 to 20percent or more in 1995. In Russia and other countries of the former Soviet

Union the ratio of trade to GDP fell dur-ing this period, but this was a result of the collapse of trade within the former Soviet Union—trade with the rest of the world actually expanded. As market-determined patterns of trade replace government-determined patterns, a massive reorienta-tion of trade is under way favoring closer links with established market economies.T rade among transition countries is also recovering following a sharp, politically motivated decline at the start of the transition. A number of regional eco-nomic integration initiatives are

unfolding—the Baltic Free T rade Area (comprising Estonia, Latvia, and

Lithuania), Central Europe Free T rade Area (the Czech Republic, Hungary,Poland, the Slovak Republic, Slovenia,and countries of the Baltic Free T rade Area), and free trade initiatives within the Commonwealth of Independent States. One of these initiatives started in 1995 with negotiations about establish-ing a customs union for four members of the Commonwealth of Independent States—Russia, Belarus, Kazakhstan,and the Kyrgyz Republic. Russia and Belarus have since signed a treaty on forming an Interstate Commonwealth.Regional trade blocs can contribute to transition countries’ economic stabiliza-tion but they also carry risks of diverting trade from potentially more beneficial trade partnerships with other countries.T en transition countries in Central and Eastern Europe and the Baltics have applied for membership in the European Union, and nearly all transition countries have applied to join the World T rade Organization (WTO). Membership in the WTO would provide these countries with protection from substantial barriers—particularly quotas—which still impede their exporting of so-called sensi-tive goods to developed countries.Among these goods are agricultural prod-ucts, iron and steel, textiles, footwear, and others in which transition economies may have comparative advantages. Joining the WTO would not only confer rights on transition economies, it would also require them to meet certain obligations,such as maintaining low or moderate tar-iffs and abolishing nontariff barriers.A major challenge for transition economies is finding their place in the worldwide division of labor. In many cases that implies diversifying the struc-ture of exports, particularly to developed

BEYOND ECONOMIC GROWTH

72countries. Some former Soviet Union

countries are narrowly specialized in the

production and export of a small number

of commodities, such as cotton in

T urkmenistan and Uzbekistan and food

products in Moldova. For others, such as

Russia and Belarus, the biggest problems

are the quality and international compet-

itiveness of their manufactured goods.

Note

1.A popular debate in many developed coun-

tries asks whether the growing competitive pres-

sure of low-cost, labor-intensive imports from

developing countries pushes down the wages of

unskilled workers in developed countries (thus

increasing the wage gap between skilled and

unskilled workers, as in the United Kingdom

and United States) and pushes up unemploy-

ment, especially among low-skill workers (as in

Western Europe). But empirical studies suggest

that although trade with developing countries

affects the structure of industry and demand for

industrial labor in developed countries, the main

reasons for the wage and unemployment prob-

lems are internal and stem from labor-saving

technological progress and postindustrial eco-

nomic restructuring (see Chapters 7 and 9).