Global Real World Examples Flashcards
Protectionism - USA, China Trade War
Donald Trump has long been a critic of the trade practices of countries outside the USA and as of March 2018, he launched a full-blown trade war with China citing the large $375bn trade deficit the USA had with China and various improper practices that Trump believes China uses. It is worth noting that Trump threatened to use protectionism in the form of tariffs on Japanese car and electronics imports (not imposed due to positive trade talks) and has actually imposed tariffs on EU imports of steel and aluminum whilst making threats to also impose them on imports of EU cars.
Trump has justified his protectionist trade war with China by accusing them of illegal dumping in the US, currency manipulation to provide artificial competitiveness advantages, forcing American firms operating in China to hand over intellectual property to Chinese companies, forcing special regulations on American firms operating in China and imposing non-reciprocal tariffs on imports. Trump has also been concerned by the destruction of American industries and jobs as a result of Chinese dominance over trade, seeking to protect US workers from unemployment, to encourage more consumers to purchase from US firms, and to incentivize more firms to actively produce in the US as a result of this protectionism.
Trump’s protectionist weapon of choice has been tariffs first imposed in 2018 on $253bn worth of Chinese imports including washing machines, solar panels, handbags, textiles, rice, vacuum cleaners, furniture, metals, and many more. At that time, 6,031 imported items had been subject to tariffs starting at 10% but raised to 25% as of May 2019 with China refusing to change its trade practices. From September 2019, a second wave of tariffs were imposed on $110bn worth of additional Chinese imports
at 15% this time targeting consumer products like footwear, textiles, and tech goods.
China firmly disagrees with Trump’s protectionist arguments and has retaliated strongly with tariffs of 25% on $110bn worth of imports from the US. Imports into China from the US total approximately $130bn so retaliation has hit nearly all imports and has focused strategically on sensitive goods in Republican swing states such as soybeans, cars, Levi’s jeans, bourbon whiskey, and crude oil.
Trump’s aim was to hold productive talks with China to come to an agreement over trade between the two countries, which would end the trade war and create a fairer trading environment for the US. These talks are taking place and could end in an agreement as both countries are losing from the trade war.
The negative impacts on the US so far have been firms like Harley Davison moving some production away from the US to avoid tariffs, US firms like Ford, General Motors, Coca Cola and Tyson Ford lowering profit forecasts and raising prices of key consumer goods like bikes, cots, air conditioners, car tires, luggage, and fridges. Furthermore, growth in the US economy in 2019 slowed due to these trade tensions impacting business sentiment and it should also be noted that the trade deficit with China actually widened to $420bn at Dusa at the end of 2018.
China has suffered from similar costs but also with growth slowdowns and big stock market falls; Chinese growth was 6.2% in 2019, the slowest growth rate in 28 years. Slower growth has also negatively impacted the trade balance of other countries, inward Chinese FDI, and purchases of debt and other assets where Chinese money flows play a big part in maintaining global economic stability. It is clear from the Covid crisis that China is in a much stronger position than the US with better economic recovery and a huge current account surplus despite the ongoing trade war. With a change in the US president, the future of this trade war could intensify or even come to an end if positive trade talks result in benefits to both parties.
Other examples of protectionism; 2) Bilateral EU and Russia Sanctions 3) EU Anti Dumping Tariffs on Chinese Solar Panels and Steel 4) US Tariffs on Airbus given large EU Subsidies 5) Chinese Tariffs on Australian Wine
Current Account Deficit - UK
The UK has, in the last decade, run a very large current account deficit averaging 4% of GDP this time, made up of a large trade deficit. Despite running a trade-in services surplus, the trade-in goods deficit is far greater caused by strong domestic income growth, a weak domestic manufacturing base, and a lack of international competitiveness due to high relative unit labor costs (high relative minimum wages and low productivity) and poor investment. Once more, the UK’s primary provides lower returns than foreign investments in the UK.
income (investment income) balance has recently run into a deficit indicating that UK investments abroad are providing lower returns than foreign investments in the UK.
The current account deficit, more precisely, the trade deficit has been a drag on growth for the UK, taking 1.2% off economic growth in 2016. There is also pressure to run a financial account surplus with debt issued to finance the current account deficit. Some economists are concerned over Britain’s ability to attract FDI and foreign buyers of British debt to run consistent financial account surpluses given the uncertain Brexit climate, with some even going so far as to say a collapse of the pound could result.
However, some economists have dismissed concerns over the UK’s current account deficit citing that the main driver is high-income growth in the economy creating a large sucking ni of imports effect, a by-product of prosperity in the country. Once more they argue that Britain has no problem in attracting FDI and foreign lenders given the strength, size, and stability of the economy even in a post-Brexit environment, whilst policies to try and reduce the deficit could have nasty unwanted tradeoffs on macroeconomic performance. Nevertheless, the deficit remains uncomfortably large and has structural, supply-side issues at its root, which could cause problems for the economy in the long run if it persists. Well-targeted, effective supply-side policies are needed to reduce the deficit over time. The Covid crisis has reduced the 2020 current account deficit to the lowest level since 2011; with significantly lower import expenditure given global travel restrictions and reduced incomes at home, but the current account remains in deficit despite this, given the underlying structural causes.
Other examples of countries with potentially concerning current account deficits; 2) USA 3) Turkey
Current Account Surplus - China
Since the 1990s, China has run current account surpluses peaking at a huge 10% of GDP in 2007 exploiting their comparative advantage, specializing in manufacturing output, and benefitting from more liberal trade policies in this period. The current account surplus has been driven by a trade surplus, more specifically an enormous trade in goods surplus which has boosted economic growth, created jobs for millions, and has raised incomes and living standards for Chinese citizens.
However, the surplus has caused problems for China as well, most notably by creating an economy so dependent on goods exports without other significant avenues of growth. Output is produced for international sale with not enough domestic production, leaving domestic Chinese consumption timid, therefore whenever trade figures disappoint and
fail to promote rampant
growth figures, the Chinese government has to spend large sums of borrowed money fuelling ever-rising Chinese government debt.
Furthermore, some have criticized the nature in which China has recorded such large current account surpluses with accusations of authorities intervening to provide artificial export competitiveness advantages in the form of large domestic subsidies, interventions to weaken the currency, and excessive bureaucracy and red tape to limit the ability of foreign countries to compete with domestic Chinese producers. Once more, trade is a zero-sum game in that one country’s current surplus is another’s deficit, and those countries in deficit could retaliate to reduce their deficit, especially if they believe China’s trade practices are unfair, as has clearly been seen with the ongoing US, China trade war. China also must run equal financial account deficits, which means buying up the debt of countries that have current account deficits leaving them in a vulnerable position if those economies ever get into economic difficulty.
China has recovered strongly from the Coronavirus crisis of 2020 and is on track to run the largest current surplus in history with exports of Covid related equipment allowing export revenues to rise drastically and a reduction in import expenditure due to a slump in outbound tourism and lower global commodity prices. However, a stronger Yuan and the continued trade war with the US could reduce the extent of these benefits in coming years, hence the need for policies that reduce reliance on export-led growth. This diversification would provide China with long-term macroeconomic benefits.
Other examples of countries with large current account surpluses; 2) Germany 3) Singapore 4) Holland 5) Thailand 6) Taiwan 7) South Korea 8) Ireland
Weak Exchange Rate - UK
Immediately after the Brexit vote on June 24* 2016, the pound plummeted by 15% against major currencies. Investors foresaw
future weakness in the UK economy and thus moved their money out of the country with speculators exaggerating the fall. Once more in August 2016, the Bank of England decided to reduce interest rates from 0.5% to 0.25% as well as pumping £60bn of money into the economy via QE, which maintained the dramatic fall. At its trough, £1=$1.22 (15% fall) and £1=€1.09 (10% fall) indicate just how low the pound had reached and it has yet to recover significantly since the Covid economic crisis keeping the value low.
Any beneficial impact from the weakness of the pound
has been limited. British exports became cheaper in foreign currency terms but not as much as expected in sterling terms, prices rose due to more expensive imports increasing the costs of production for exporting firms. Export revenues rose but only slightly as the PED of
exports in the UK is low given the dominance of service
exports which are not
price sensitive and a weak manufacturing base that cannot take advantage of a
weak pound. Imports became more expensive in pound terms but expenditure on imports rose indicating that the demand for imports in the UK is price inelastic. This is due to the fact that many imports are necessities (food and drink, clothing, oil, raw materials, and semi-finished goods) but also that there are few substitutes for those imports domestically.
Immediately after the depreciation, there was a worsening of the UK’s current account deficit from 5.2% to 6.3% of GDP; a J curve effect as theory suggests with only minimal improvements thereafter when
the Marshall-Lerner Condition was satisfied. The current account deficit narrowed only to 3% of GDP throughout 2017 before increasing back to 4.6% of GDP in 2019. This proves that any positive impact on AD and then growth and unemployment has been offset by increases in costs of production for firms operating in Britain. The only meaningful macroeconomic impact experienced has been a rise in inflation with the inflation rate peaking at 3.1% in November 2017, 1.1% above the target blamed purely on the weakness of the pound by the Bank of England.
Key facts:
* 15% depreciation against major currencies
* 15% fall against the $ and 10% against the €
* The current account deficit widened from
5.2% in Q2 of 2016 to 6.3% of GDP in Q3 of 2016
* In 2017 the deficit narrowed to 3% of GDP
* Pre Covid, the deficit was large at 4.6% of GDP
* Between Q3 2015 and Q4 2017, goods export revenues increased by only 3.9% and services export revenues by only 8.6%
* The PED of exports is low given a weak manufacturing base and nonprice sensitive goods and services exports; pharmaceuticals, financial services, legal services, education services
* PED (imports) < 1
* Input prices such as raw materials and fuels rose by more than 10% after the depreciation
* CPI inflation peaked at 3.1% in Nov 2017
For these countries, currency depreciation has been so large that stagflation has resulted, the phenomenon of high inflation with negative economic growth; 2) Nigeria (Naira) 3) Turkey (Lira) 4) Venezuela (Bolivar) 5) Argentina (Peso)
Strong Exchange Rate
1) The Chinese Yuan has been the best-performing currency of 2020 strengthening considerably against all major currencies driven by impressive economic recovery, a huge current account surplus, and higher relative interest rates promoting hot money inflows. Though the strengthening of the Yuan would seem unwanted given the huge Chinese export industry, COVID-related medical equipment is currently one of China’s biggest exports where demand is price inelastic. Furthermore, import expenditure has slumped despite the stronger Yuan making imports cheaper, as global commodity prices have fallen and global travel restrictions have reduced outbound tourism from China. The strong Yuan has undoubtedly been welcome in China as it is a sign of greater confidence and economic strength, a trend that is likely to continue.
2) A weakening US dollar has seen money flow into emerging economies such as Mexico (Peso), Brazil (Real), Singapore (Dollar), and Malaysia (Ringgit), with higher relative interest rates and better macroeconomic performance through the Covid crisis resulting in stronger exchange rates. Strong current account surpluses in these countries driven mainly by a large fall in import expenditure have further helped to strengthen these currencies.
Fixed Exchange Rate
1) Denmark’s Krone has been fixed against the Euro since 1999 to promote economic stability with the manipulation of currency reserves used to maintain the peg but also the use of interest rate policy purely to ensure the currency remains stable. This differs from other economies where monetary policy is mainly used to control inflation and also to boost a sluggish economy.
2) The UAE Dirham is fixed to the US dollar in order to promote exchange rate stability to help oil exports. This argument also holds for other countries in the Gulf area such as Saudi Arabia, Qatar, Jordan, Oman, and Lebanon where a combination of currency reserve manipulation and interest rate policy is used to maintain the fixed rate. There have been calls to move to a floating exchange rate in Qatar and the UAE where some exchange rate flexibility could have desirable macroeconomic benefits
and would allow for freedom over monetary policy but these arguments were rejected in a commitment to the fixed exchange rate regime where stability and transparency for businesses were deemed more important.
Managed Exchange Rate
1) Bolivia maintained a fixed exchange rate regime to the US Dollar until 2011 when policy intentions changed towards reducing inflation and boosting purchasing power domestically. To help achieve this goal, Bolivia announced the move to a managed exchange rate to keep the value of the Boliviano strong, reducing import prices and thus lowering inflation rates. While this worked well for the first few years, more recently there have been calls for devaluation given the negative impact of currency strengthening on export competitiveness and the trade position where surpluses have been falling.
2) The Chinese Yuan is generally viewed as a fixed exchange rate regime yet authorities regularly intervene to manage the value of the exchange rate to suit the interests of the Chinese economy. Chinese Yuan devaluations have been common since 2015 with a view to boosting export competitiveness and raising economic growth. Most recently in 2019, Chinese authorities devalued the Yuan by slashing interest rates three times to boost exports in the middle of the trade war with the US.
3) The Turkish Lira has been in free fall throughout 2020 risking a full-blown currency crisis. To combat this, Turkish authorities have tried to manage the exchange rate upwards and stabilize it by selling huge levels of foreign currency reserves and raising interest rates with dire macroeconomic conflicts. The Swiss Franc is managed in another way to prevent it from significant overvaluation.
Other countries are known to adopt managed exchange rates; 4) Vietnam (Dong) 5) Singapore (Dollar) 6) Malaysia (Ringgit) 7) Argentina (Peso)
Globalization Winners
1i) Countries in East and South East Asia (more in the development section below) have all seen rapid increases in GDP/capita and HDI scores since the 1980s benefitting largely from the trade liberalization aspect of globalization. No country exemplifies this better than South Korea which developed comparative advantages in low value-added but labor-intensive sectors such as textiles and wig making but always with the vision to diversify and move into production of greater value-added sectors. The government had a strong role to play in promoting health and education whilst developing infrastructure, using the revenues received from these small industries. Diversification into the steel industry saw further economic progress before
the fruits of a strongly educated and healthy workforce allowed for movement into lucrative services and technology-based industries. Samsung for example is a Korean company, ranking as one of the largest technology companies in the world. South Korea was one of the world’s poorest countries with GDP/capita figures of only $153 in the 1960s to now approximately $30,000 and has regularly been placed in the top 20 HDI countries in the world. Opening up to trade and exploiting comparative advantages with key government intervention in developing education, healthcare, infrastructure, and diversification but also ensuring that urbanization did not come at the cost of rural poverty were all key parts of South Korea’s success.
i) Vietnam has been a major beneficiary of globalization. Once a heavily centralized economy after the Vietnam War, the economy was allowed to open up to the
powers of the market through a series of economic and
political reforms known as the Doi Moi reforms. Trade
was liberalized through a vast reduction in tariffs, FDI
was encouraged, domestic bureaucracy and red tape
was reduced and alongside these powerful market
reforms, the government invested heavily in human
capital and infrastructure. More recently Vietnam also joined the trading bloc ASEAN. Such acceptance of globalization has seen Vietnam specialize in and become the larger exporter of textiles and the second largest exporter of electronic goods in the South East Asia region with exports accounting for 99.2% of the country’s GDP. From being one of the world’s poorest countries in 1985 with a GDP/per capita of only $230, incomes now stand at roughly $2,400 nominally and $6,000 adjusted for PPP. Annual growth rates have always been between 5% and 6.8% since 2010, beaten in the world only by China with much of this growth inclusive with many opportunities for both men and women.
2) Countries in the Eurozone have benefitted from globalization and greater economic integration by boosting exports and running large trade surpluses that contribute strongly to economic growth and overall prosperity. Once more, these countries have been open to FDI and migration to add to growth but also fill skills shortages, and boost productivity domestically.
Globalisation Losers
1) Sub-Saharan African countries have seen the slowest rate of HDI growth since the 1980s, with the average in the region being 0.55 indicating only a basic medium level of development. Many of
these countries are primarily commodity-dependent without diversifying their economies and have thus suffered from the ‘resource curse’, falling into deep recessions whenever commodity prices fall or overseas demand weakens. Once more, overseas
protectionism in the agriculture sector has proven to be a major barrier to growth but perhaps the biggest contributor is unstable governments, corruption, and war, which has prevented the benefits of trade and FDI from spreading to the wider population. The role of government in managing globalization has been very poor which is why improving education, health, infrastructure, and poverty alleviation remain urgent goals. Once more, these countries have been poor at managing FDI with many foreign MNCs stripping resources, leaving lasting environmental damage, not paying taxes, and exploiting local workers.
2) South American nations have benefitted from globalization but the gains have been limited due to opening up their financial markets too early which has caused destabilizing capital flows to enter and exit the region quickly leaving some countries like Argentina in economic ruin. Liberalizing financial markets can fuel rampant economic growth, particularly fi the inward flow of finance is used for productive means; loans for capital investment, and industry diversification for example but if inward flows are mainly speculative; exchange rate, stock market, bond, and derivative investments causing bubbles, leveraged by large scale borrowing ti can trigger a banking crisis when bubbles burst and deep recessions that are very difficult to recover from, as currently experienced ni Argentina for example.
3) Those on lower incomes in developed countries such as the UK, other developed European nations, the USA, and Canada have lost due to globalization. The move to greater trade liberalization has led to the destruction of many industries in the developed world with jobs transferred to mainly East and South East Asia, especially in textiles, metal, and manufacturing industries. With that, large pockets of the population have been left structurally unemployed, adjusting to lives on low incomes and reliant on benefits. These groups of people have actually seen their incomes reduce as a result of globalization.
Market-Based Policies for Development
1) China prior to the 1970s followed a heavily socialist agenda with the communist government making centrally planned decisions regarding output, prices, and wages. The economy was fundamentally subsistence agriculture and GDP per capita levels were low as a result. From 1978 onwards, however, China embraced the free market and the global economy by liberalizing domestic markets, allowing for
urbanization, profits from selling through the market, and international sales through exports, driving millions out of poverty. China developed large comparative advantages in manufacturing owing largely to a low-cost, high-productivity workforce making huge progress with income growth, education, and health development. HDI scores have improved with government revenues spent on key development areas like infrastructure, health, education, and public transport.
Despite China’s huge success story, barriers to development in China remain;
i) Significant environmental concerns in the form of air pollution, resource degradation, and desertification
ii) Wide income inequalities particularly comparing urban and rural incomes
ili) Excessive state control of industry still remains, suppressing the profit motive, efficiency, and innovation of such enterprises
iv) Lack of willingness to accept wide-scale FDI
v) High-tech and service industries needed to continue high levels of growth and prosperity
vi) China remains highly reliant on exports and government spending for growth and development. The economy needs to become more balanced, particularly with rises in domestic consumption, in times of external shocks
2) India post-independence in the 1940s was a highly isolationist, state-controlled economy with very low annual growth rates averaging 1% for three decades. From the 1970s onwards, especially by the 1990s, the country had opened up its economy dramatically to FDI, privatization, and exchange rate liberalization. This move allowed India to benefit from extremely high annual growth rates peaking at close to 10%, diversification into high value-added manufacturing and services industries such as TI, and large-scale job creation. Incomes have risen, living standards improved and rapid progress has been made in HDI scores and other core measures of development, though further improvement is necessary.
Despite India’s huge success story, barriers to development in India remain;
i) Significant environmental concerns in the form of air pollution and resource degradation
i) Wide income inequalities particularly comparing urban and rural incomes
il) State corruption and excessive bureaucracy holding back FDI, domestic business efficiency, productivity, innovation, inclusive growth, and development spending
iv) Lack of inclusive growth with barriers to girls’ education and women entering the workforce
v) Limited tax revenues due to a cash-dominant economy holding back development spending and progressive redistributive policy
3) Mauritius is an incredible development story accepting a wide variety of market-based approaches for development from the 1970s to now with GDP per capita increasing from $200 in 1968 to $8,000 today and annual growth rates since the 1970s averaging 5.1%. Success has stemmed from trade liberalization (signing numerous bilateral trade agreements with other African nations), opening up to large-scale FDI, liberalizing exchange rate
markets, promoting infrastructure development, ensuring a competitive tax environment, and reducing government involvement, corruption, and bureaucracy
making Mauritius one of the easiest places to do business in the world. Mauritius does not have a wealth of primary commodities yet has found growth from the export of sugarcane in the 1970s to then diversifying into textiles, finance and business services, and tourism, deriving comparative advantages by creating a highly educated workforce and accepting migration. Market reforms and a strong, stable, trusted government have been the backbone of their success.
4) Botswana has benefitted largely from trade to promote growth and development. Botswana’s comparative advantage lies in the production and export of gem diamonds and tourism services with it being the largest producer of diamonds in the world. From this, growth and incomes have risen dramatically with absolute poverty rates shooting downwards. Growth has led to fiscal benefits for the government which has been prudent and reliable, using funds to push infrastructure, health, and education improvements. Concerns remain with very high income inequality, resource depletion, and the government seemingly becoming more authoritarian suppressing democracy but the foundation has been laid for key development outcomes to be promoted over the next few decades with the government committed to promoting diversification to maintain strong rates of growth.
5) Nigeria has accepted globalization in the form of trade and FDI, using its huge oil reserves to export its way to rapid
growth with annual growth rates at times close to 20%. During oil price booms Nigeria consistently experiences annual growth of between 5-10% but though the size of its economy is very large (the
largest economy in Africa), its development story is considered a failure given a wildly corrupt and
inefficient government with Nigeria suffering from the primary commodity ‘resource curse’. As. a result Nigeria has remained over-specialized in oil production and export suffering from huge recessions and stagflation, via currency collapse, when oil prices fall. Furthermore, key public spending on essential development areas such as health, education, infrastructure, and welfare has not taken place with tax revenues pocketed and bribery at the highest level of politics rife. This has led to Nigeria making slow progress in HDI scores, income inequality, and poverty alleviation stemming from a lack of diversification, ineffective government policy, and inefficient infrastructure that holds back productivity. Angola has experienced a very similar development story, again reliant on oil revenues for growth and development but with an inefficient and corrupt government at the heart of the significant development challenges it faces.
