GIT: Readings

Question 1

Rodrik (2012)

What were the three important changes that allowed for the first wave of globalisation?

Answer 1

In 19th C. transaction costs began to decline, accelerating first wave of globalisation.

1. new technologies: steamships, railroads, canals, telegraph.
2. Free market ideas (Smith, Ricardo) began to spread: tariff and explicit prohibitions were relaxed
3. Adoption of gold standard: free movement of capital without fear of currency devaluation.

Question 2

Rodrik (2012)

What two key institutions facilitated economic liberalisation?

Answer 2

a convergence in free trade belief systems among world’s major central banks.
imperialism, provided a mechanism to spread trade-friendly policies.

Question 3

Rodrik (2012)

Why was it a limited victory for free trade?

Answer 3

1846 Britain abolished corn laws, aiding urban manufacturers at expense of landlords interests. France followed with Cobden-Chevalier treaty in 1860. US civil war was about North wanting protection for their manufacturing sector and South wanting free trade for cotton and tobacco. 1866 North won and protection was increased. As a result south did not diversify or industrialise.

Question 4

Keohane

Answer 4

pointed out that this protectionism also intensified slavery as an institution.

Question 5

Rodrik (2012)

Liberal trade policies favour manufacturing interests and middle classes but are not always favourable.

Answer 5

NA

Question 6

Rodrik (2012)

Gold standard and financial globalisation

Answer 6

Adopted in 19th C - fixed currencies to a value of gold, thus exchange rates between countries were also fixed. 1870s decrease in gold hit farmers hard as they faced increasing interest rates and falling prices until more gold was found in S.America 1886.

Question 7

Rodrik (2012)

What was the main problem of financial globalisation?

Answer 7

Getting countries to pay their debt. no international court to force this - the only thing at stake is defaulters reputation and further access to credit.
“the market for international finance cannot thrive unless there are credible mechanisms for enforcing repayment”
Imperial leverage often filled the role of debt collector.

Question 8

Rodrik (2012)

Demise of the gold standard

Answer 8

WW1 governments suspended gold convertibility and introduced exchange controls to prevent free exchange of currencies. 1920s Britain returned to gold standard. Never regained competitiveness as prices and wages remained high and export oriented industries bore the brunt.
NY Fed also raised its interest rates bringing gold standard under pressure in 1930s.

Question 9

Rodrik (2012)

Problems with gold standard

Answer 9

Presumed an individualistic, decentralised workforce with flexible wages, but in reality labour was now mainly organised in trade unions and able to demand constant wages, which resulted in domestic industries less able to maintain market share if they became uncompetitive and increased unemployment. “Labours ability to maintain wages meant that a sustained monetary contraction due to a gold outflow…would now result in sustained unemployment”

Question 10

Rodrik (2012)

Protectionism in the inter-war period

Answer 10

1930s US introduced highest tariffs and quotas on imports, creating large domino effect in world wide protectionism and resulting in a mass decrease in trade. Demands of domestic social groups including social welfare and economic nationalism, now outweighed the demands for free trade and an international economy.

Question 11

Baldwin and Martin (1999)

When were the first and second waves of globalisation?

Answer 11

1st - 1870 - 1914
2nd - 1960 - now
“both globalisation waves were driven by radical reductions in technical and policy barriers to international transactions”

Question 12

Baldwin and Martin (1999)
1. Industrialisation and income inequalities:
Industrial revolution:

Answer 12

18th and 19th C revolution in Great Britain emerged from key textiles inventions and advances in iron making, which improved costs of goods e.g. steam engines and rails and looms. Improved water and road transport decreased cost of obtaining raw materials and expanded trade.

Question 13

Baldwin and Martin (1999)

Third world deindustrialisation

Answer 13

third world industry dominated world production in 18th C. East used to be main exporter of spices, cotton textiles, silk and porcelain. European industrialisation led to manufactured goods being imported to India and China and them exporting raw materials.
“Northern industrialisation caused Southern deindustrialisation and this amplified income divergence”

Question 14

Baldwin and Martin (1999)

Divergence and convergence of incomes

Answer 14

“while globalisation first generates massive divergence of real incomes, it subsequently becomes the driving force behind industrialisation, development and income convergence” there are 4 stages to this.
1. pre globalisation transaction costs high - industry spread, little trade. 2. transport costs diminish, industry begins to agglomerate, trading goods becomes cheaper than trading ideas. One region (North) finds itself in a virtuous cycle, leading to higher incomes. 3. cost of communication ideas drops so poorer regions can access technology from richer regions, bringing them industrialisation and income growth. 4. richer region suffers from new competition and income evens out in both regions.

Question 15

Baldwin and Martin (1999)

2. Capital Markets and financial integration
   capital mobility

Answer 15

massive international lending not a new phenomenon. Early 20th C gold standard and other financial institutions in London allowed for large flows of capital which in turn allowed rapid growth of the economies of new settlements e.g. Australia and developed their primary resources.

Question 16

Baldwin and Martin (1999)

capital and financial market integration and financial crises

Answer 16

low correlation between domestic investment and saving reflects high degree of integration because the savings are placed wherever the highest return are. i.e. not necessarily domestically global capital market was even more integrated in the early 20th C than it is now.

Question 17

Baldwin and Martin (1999)

3. Trade, investment, migration and factor prices

trade:

Answer 17

todays rapid growth is not unprecedented, between the end of the Napoleonic war and WW1 European trade soared. in todays world trade system, developing nations are less important, and most of the trade takes place between wealthy countries with similar factor endowments and by industry trade in similar products.

Question 18

Rodrik (2012) case for free trade

Case for free trade

Answer 18

Henry Martyn. Felt imports from india were beneficial. Trade as technological progress - sawmill - 2 people can work instead of 30, could employ 30 but its 28 more than necessary therefore a waste of resources. Similar waste to employ UK workers when it can be done for less in India. Produce another commodity in exchange. Assumes unemployed will find work otherwise no longer obvious gains. if in favour of technological progress then you must be in favour of free trade.

Question 19

Rodrik (2012) case for free trade

Ricardo - Comparative advantage

Answer 19

both countries buy what is cheap abroad and expensive at home - economising use of labour. CA is differences across nations in comparative costs, not absolute costs.

Question 20

Rodrik (2012) case for free trade

problems free trade faces

Answer 20

Public skepticism is widespread - hard to dismiss, want to ‘protect’ jobs - restrict imports, strong sense of patriotism and communitarian attachments also dislike international trade.

Question 21

Rodrik (2012) case for free trade

Justifying free trade & issues that can occur

Answer 21

Makes sense to import goods as long as it takes less labour to produce the exports that would pay for those imports than it does to produce those goods ourselves.
social costs > private costs e.g. when production generates harmful effects on environment. opposite when production generates valuable knowledge and other technological spillovers. Sometimes certain technology and science progress stopped due to deeply held values.

Question 22

Rodrik (2012) case for free trade

Income distribution

Answer 22

Some hurt in the short run but long run all benefit - but nothing guarantees this. Stopper and Samuelson state some groups will suffer long term losses in income. How to decide if country as a whole is better off when some gin and some lose. Assume new technology = common rules, could be child labour.

Question 23

Hausmann (2013) Specialisation Myth

what is the specialisation myth?

Answer 23

Notion that cities, regions, countries should specialise - you can’t be good at everything. CA to exploit gains from trade.

Question 24

Hausmann (2013) Specialisation Myth

arguments against specialisation

Answer 24

People do specialise and so they should (share knowledge etc..) this leads to diversity at higher level. E.g. specialisation of doctors leaders to diversification of hospital services. A larger city = more diversity= faster growth therefore more diversity - larger internal market and more diversified in what they can sell to other cities and countries. The more bits of knowledge available, the more industries can be supported and the greater their complexity can be. Focusing on limited activities would reduce the variety of capabilities. Should try to create more ‘winners’ not fewer.

Question 25

Feyrer (2009)

since Smith and Ricardo economists believe…

Answer 25

…that trade increases incomes. Hard to know if trade increases incomes or vice versa. Geographical locations impact trade - close together = more trade research shows even as trade costs decrease this is still true - more to do with similar tastes, historical etc..

Question 26

Feyrer (2009)

Closure of the Suez canal

Answer 26

Appeared permanent and could have caused serious problems for some countries. For pairs with a distance increase over 50% closure caused average fall in trade of just over 20% with three to four years adjustment period. A 10% decrease in ocean distance results in a 5% increase in trade.

Question 27

Feyrer (2009)

What did the closure of Suez canal show?

Answer 27

responsiveness to changes in trade costs suggests that lowering trade barriers leaders to increases in trade volumes. Closure of canal movements in trade that are unconnected to income for most countries therefore causality tuns from trade to income. increased trade led to increased income. Results show that lower barriers leaders to higher trade and higher incomes.

Question 28

Mayda and Rodrik (2003)

how many respondents expressed anti trade views in opinion polls

Answer 28

60%

Question 29

Mayda and Rodrik (2003)

Stolper - Samuelson theorem

Answer 29

under the specific factors model, trade benefits employees of export oriented sectors and hurts employees of import competing sectors.

Question 30

Mayda and Rodrik (2003)

for and against trade

Answer 30

Those with higher human capital (education, occupation) oppose trade restrictions only in countries well endowed with human capital. In ISSP high education is associated with pro-trade views in advanced countries but with anti-trade views in weaker countries i.e. Philippines. Social status, relative incomes, values and attachments play more important role. e.g. those who consider themselves middle class favour trade more. those who favour restrictions tend to have high attachments to their neighbourhood and community. those with an interest in democracy are less likely to favour protectionism. countries with greater inequality will be associated with higher levels of trade protection across countries.

Question 31

Mayda and Rodrik (2003)

Factor endowments model

Answer 31

moving towards free trade, country well endowed with skilled labour will experience increase in relative price of skill - intensive goods and correspondingly specialise in the production of these goods. Key assumption is that factors of production can move costlessly across economic sectors. A skilled individual will be pro trade in a country with high levels of skilled labour, but anti trade in a country with high levels of low skilled labour. The richer the country, the more positive is the impact of a marginal increase of education on the probability of pro trade attitudes. Negative coefficient on education but positive on education/ GDP. Education and skills are very highly correlated with support for free trade in countries well endowed with human capital.

Question 32

Mayda and Rodrik (2003)

Specific factor model

Answer 32

central insight, work in CA sector - pro trade, Work in non CA sector - protectionist, work in non trading sector - indifferent or pro trade.

Question 33

Mayda and Rodrik (2003)

Role of values, identity and attachments

Answer 33

string negative relationship between national pride and pro trade views. significant in explaining cross country variation in trade attributes, as national pride varies greatly among countries. Pride in a country’s democracy is positively correlated with pro trade attitudes but pride in a country’s political influence is negatively associated with pro trade attributes.

Question 34

Krugman (2007)

What was the believed impact of trade in 1980s and 90s?

Answer 34

Concern about globalisations role in contributing to rising income inequality. Based on standard economic theory - since 1941 Stolper-Samuelson paper - growing trade can have large effects on income distribution, easily leave broad groups e.g. less skilled workers worse off.

Question 35

Krugman (2007)

What were Krugman’s views on the impact of trade (1995)

Answer 35

After looking at numbers decided effect of trade on inequality was probably modest

Question 36

Krugman (2007)

What does he think now

Answer 36

This was based on data that doesn’t account for today. China didn’t follow expected pattern of moving on to more skilled work. No longer safe to assert that the effect f trade on income distribution in wealthy countries are fairly minor.

Question 37

Noah (2015) (great stagnation)

What happened to trade after WW2?

Answer 37

Trade is slowing down. After WW2 globalisation and trade increased, during the financial crisis trade plummeted, rebounding a year later. Since then trade has stopped growing as a % of output as it had in the past. Could just be a series of unprecedented blows (Euro zone, China slump) IMP paper finds trends streak in trade-to-GDP relationships that began before financial crisis.

Question 38

Noah (2015) (great stagnation)

Why is trade responding more sluggishly than past recoveries?

Answer 38

Could be due to decrease in trade liberalisation or EU integration and incorporation of China into global trading system may have both run their course. Reached limits of outsourcing/ offshoring.

Question 39

Noah (2015) (great stagnation)

Should we be worried?

Answer 39

No - offshoring presents competition. More exposed to global competition. Experience greater job losses when globalisation expands. Therefore slowdown may bring relief American, Japanese and european workers need.
Worry - Globalisation big driver for productivity gains. Long run, reason standard of living increases e.g. specialisation, makes it cheaper. Openness - learn ideas.

Question 40

Noah (2015) Free trade

Free trade no longer a no brainer?

Answer 40

Strong consensus trade barriers reduce a country’s overall well being in long run. Free trade also big thing economists disagree with public on. Only a few economists willing to stick their neck out to promote free trade. Free flow of financing across borders, source of dangerous instability - goes hand in hand with free trade. Competition from China has destroyed jobs and decreased wages ignominy US industries especially manufacturing - instead of being reallocated to jobs in different sectors they often went on to benefits. Losers were overlooked originally as not having too big an impact.

Question 41

Daniel et al (2012) Commercial Imperialism

Political influence during the Cold war

Answer 41

Political power to promote trade and other national interests e.g. unequal treaties imposed by western powers on China and Japan in the 19th C. Interpretation that US government had greater influence over foreign leaders that were installed and supported by CIA. Effect of successful interventions on purchase of US products is increasing governments share of GDP. Goods shipped to intervened countries were products US firms were less competitive in producing.

Question 42

Daniel et al (2012) Commercial Imperialism

Data on interventions

Answer 42

CIA successfully intervened to install a new leader to maintain power of regime. Successful interventions increase steadily after 1947 until 1970s after which falls until 1989.

Question 43

Daniel et al (2012) Commercial Imperialism

Estimate of results:

Answer 43

Suggests in intervention years a country’s trade with the US is 28.3% greater than trade in non-intervention years. Unlike imports, exports not affected.

Question 44

Daniel et al (2012) Commercial Imperialism

Conclusions:

Answer 44

Covert CIA interventions increased influence of US over foreign governments. This was used to increase US exports to the intervened countries. Increasing greater in industries where US had comparative disadvantage. Rule out alternative explanations (decreased trade costs, changing political economy, increased US loans and grants) CIA interventions also affect pattern of trade. Influence and power play an important role in international trade.

Question 45

Fouka and Voth (2013)

Massacre memories

Answer 45

Confluence between past and present conflict can affect consumer behaviour (Nazi - Greece). Especially in areas where German armed forces committed massacres during WW2, German cars sales fell significantly more than the rest of Greece when restrictions where imposed. Boycotts are among most common.

Question 46

The Economist (2008)

What were Krugman’s original claims?

Answer 46

1995 - thought that trade only played a relatively minor role in wage inequality - this was somewhat surprising. In theory, although trade brings gains to the economy as whole, it can have substantial effects on distribution of income. When a country with relatively more high-skilled workers (America) trades with poorer countries that have relatively more low skilled workers, America’s low skilled will lose out. But effect appeared modest.

Question 47

The Economist (2008)

In recent years the issue has returned…

Answer 47

… opinion polls suggest Americans have become increasingly convinced that globalisation harms ordinary workers. Krugman became more skeptical, stating it is no longer safe to assert that trade’s impact on income distribution in wealthy countries is fairly minor.

Question 48

The Economist (2008)

What were the reasons Krugman gave for becoming more skeptical

Answer 48

two reasons:

1. More of America’s trade is with poor countries, such as China
2. Growing fragmentation of production means more tasks have become tradable increasing the universe of labour-intensive jobs in which Chinese workers compete with Americans.

Question 49

The Economist (2008)

Katz

Answer 49

Poor countries share of commerce in manufactured goods has doubled. In contrast to the 1980s, the average wage of America’s top-ten trading partners has fallen since 1990. Found trade widened wage inequality between skilled and unskilled workers by 6.9% in 2006 and 4.8% in 1995. Trade is still far from being main cause of wage inequality.

Question 50

Robert Lawrence

Answer 50

Actually argues that wages of the least skilled workers have improved relative to the middle and that there is little sign that wage inequality has behaved as traditional trade might suggest.

Question 51

Robert Lawrence: 2 suggestions

Answer 51

1. American no longer makes some of the low skilled, labour intensive goods that it imports. So no domestic workers to lost out to foreign competition.
2. Even when America does produce something imported from China, it may make it in a different way, with more machinery and only a few high skilled workers. If imports from China and other poor countries compete with more-skilled American workers, they may displace workers but will not widen wage inequality. But evidence to all these arguments is inconclusive.

Question 52

Juhasz (2015) Temporary protection:

Answer 52

Can temporary protection of infant industries ind developing countries foster their long term development? Advocates point towards US and Germany who industrialised behind highly protective tariffs int he 19th C. More recently East Asia and China. Sceptics point to long list of countries in Latin America and Africa where decades of similar policy interventions have failed to deliver on promised gains.

Question 53

Rodrik (2012)

Trade in a politicised world:

Answer 53

unqualified commitment to free trade was feasible only when societies were ruled by narrow technocracies with faith in a uniform type of capitalism.

Question 54

Rodrik (2012)

Bretton Woods Model:

Answer 54

1944, created IMF and World Bank. Deal became undone 1970s/80s. Term “Bretton woods” remains a wistful reminder of the possibilities of collective deliberation at the global level. Reality is that we lack the domestic and global strategies needed to manage globalisations disruptions. As a result, we run the risk that the social costs of trade will outweigh the narrow economic gains and spark and even worse globalisation backlash.