Unit 10: Global Interdependence Flashcards
Trade
The exchange of goods and services for money. It results from the uneven distribution of resources over the worlds surface
Pre 1500’s trade
Trade began with barter systems and expanded through ancient roots like the Silk Road connecting the exchange of goods
1500’s - 1800’s trade
European empires dominated global trade exploiting colonies for resources and labour. The transatlantic slave trade and triangular trade system shaped economies
1800’s - 1900’s trade
Advances in technology and transportation boosted global trade. Nations shifted to free trade policies while imperial powers continued to control economies
1900’s - present trade
The WTO and trade agreements facilitates international trade. Global supply chains and the rise of MNCs have interconnected economies
Trade in goods and services
Trade in goods involves the exchange of physical, tangible products
Trade in services involves the exchange of intangible activities or enterprise
Trends in trade
There has been a shift from trade dominated by physical goods to services especially in developed economies. Emerging markets have transformed global trade becoming major exporter challenging traditional economic powers. Increased global interconnectivity driven by free trade, technological advancements and MNCs have expended trade networks and diversified markets
Factors affecting global trade
Resource endowment
Comparative advantage
Locational advantage
Investment
Historical factors
Terms of trade
Changes in the global market
Trade agreements
Resource endowment
The natural resources, labor, and capital a country possesses, influencing its trade patterns and economic activities.
Comparative advantage
The ability of a country to produce goods or services at a lower opportunity cost than others, leading to specialization and trade benefits.
Locational advantage
The strategic geographical position of a country, impacting trade efficiency, access to markets, and transportation costs.
Investment
The flow of capital into infrastructure, industries, and technology that enhances production capacity and competitiveness in global trade.
Historical factors
Past events, such as colonialism, trade routes, and economic policies, that shape current trade relationships and dependencies.
Terms of trade
The ratio between a country’s export prices and import prices, affecting trade balance and economic stability.
Changes in global markets
Shifts in demand, supply, consumer preferences, and economic conditions that influence trade flows and competitiveness.
Trade agreements
Formal pacts between countries that reduce trade barriers, such as tariffs and quotas, to facilitate economic cooperation and exchange.
OPEC
An intergovernmental organisation comprising 12 oil producing nations. Founded in 1960 after a US law imposed quotas on Venezuelan and Persian Gulf oil in favour of Canadian and Mexican oil. OPEC countries account for a large proportion of world crude oil reserves
Criticised for the political nature of its decisions. Oil-rich Arab countries have wanted to put pressure on the USA and other Western countries with regard to the Israel-Palestine issue
OPECs objective
To coordinate and unify the petroleum policies of member countries and ensure the stabilisation of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fir return on capital to those investing in the petroleum industry
Endowment of LICs, MICs and HICs
In HICs the wealth has been built to a large extent on the export of raw materials in demand on the world market. MICs and LICs rich in raw materials have been trying to follow the same path. In both cases, wealth from raw materials has been used for economic diversification to produce a more broadly based economy
Results of comparative advantage
Different countries specialise in producing those goods and services for which they are best endowed. Each country will trade a proportion of these goods and services with other nations to obtain goods and services that it needs but for which it is not favourable endowed. Applies to raw materials, manufacturing and services
Some countries now have a global reputation for particular products
Location of market demand and strategic locations
It is advantageous for an exporting countries to be close to the markets for its products as this reduces transport costs along with other advantages gained from spatial proximity. Some countries and cities are strategically located along important trade routes giving them significant advantages in international trade
Investment in LICs and MICs
Some MICs have increased trade by attracting FDI. These low income globalisers have increased their trade to GDP ratios. Many countries have become less rather than more globalised as trade has fallen in relation to national income. In the poorest LICs businesses operate in investment climates that undermine their incentive to invest and grow. Economic, social and political instability deters investment by making future benefits uncertain or undermining the value of assets. Crime and corruption are a risk to investment and increase the cost of business where this is a problem
Colonial ties and trade dependency
Historical relationships are often based on colonial ties and are important for global trade. These ties are weaker than they once were but remain significant. Colonial expansion led to a trading relationship dictated by European countries for their benefit. The colonies played a subordinate role that brought them limited benefits at the expense of distortion of economies. This trade dependency is why poorer tropical countries have a limited share of world trade
Primary-product dependency
If countries rely on the export of commodities that are low in price and need to import items that are high in price they need to export large quantities to afford low volumes of imports. Many poor nations rely on primary products to obtain foreign currency through export. The world market price of primary products is low compared with manufactured products and services. Prices of primary productions are subject to variation making economic and social planning difficult
Terms of trade for LICs and HICs
The manufacturing and service exports rise in price at a predictable rate resulting in a more regular income and less uncertainty. Terms of trade for many LICs are worse now than 20 years ago and many are struggling to get out of poverty. Many LICs also have very high trade deficits
Consequences of trade deficits
Neo-liberal economists say trade deficits are related to economic development and that capital inflows swell investment funds, generating future growth. Marxist economics believe that:
If the expansion of trade benefits MICs and LICs the expansion of trade deficits may bring problems
Trade deficits have to be financed by borrowing money from abroad (increasing debt) or by diverting investment away from important areas of the economy
High trade deficits constrain growth and produce high dependency
Emerging markets
Poor decisions are being made by Western policy makers in contrast with powerful growth figures of BRIC nations. High growth nations are emerging markets
The developed world grew by 2.1% per year from 2000-2010 while emerging markets expanded by 4.2%. In 1990, HICs controlled 64% of the global economy which was 52% in 2009. This has had political consequences with emerging economies exerting more power than they had in international negotiations. Major investors are seeking opportunities in faster growing emerging markets
Foreign exchange reserves
The G7 countries held 17% of the global total of foreign exchange reserves in 2010. The BRICs held 42% in 2010. The West no longer dominates global investment and finance. After a rebound following the 2008 financial crisis, global growth fell every year from 2010-2013. Emerging markets and developing economies will grow faster in the future
Free trade areas
Members abolish tariffs and quotas on trade between themselves but maintain independent restrictions on imports from non-member countries
Customs unions
Besides free trade between member nations, all members are obliged to operate a common external tariff on imports from non-member countries
Common markets
Customs unions that also allow free movement of labour and capital
Economic unions
Organisations that have the characteristics of a common market but also require members to adopt common economic policies on agriculture, transport, industry and regional policy
Regional trade agreements
A trade bloc is a group of countries that share trade agreements between each other to stimulate trade and obtain the benefits of economic cooperations. Regional trade agreements have increased in the last 20 years. In 1990 there were less than 25 and by 1998 there were over 90. These are geographically discriminatory trading arrangements (as described by the UN). Nearly all the WTO’s members belong to a regional pact which all have preferential terms that trade participants enjoy over non-participating countries
WTO concerns
Regional agreements can divert trade inducing a country to import from a member of its trading bloc rather than from a cheaper supplier elsewhere. Regional groups might raise barriers against each other creating protectionist blocs. Regional trade rules may complicate the establishments of new global regulations. International regionalism is rising. Regional agreements dominate the world economy with 67% of all trade and could cause world trade liberalisation to falter
Trade and development
In general, countries with a high level of trade are richer than those with lower levels of trade. Countries that can produce goods and services in demand elsewhere will benefit from strong inflows of foreign currency and from the employment their industries provide. Foreign currency allows a country to purchase from abroads goods and services it either does not produce itself or does not produce in large enough quantities
Free trade
When countries buy and sell goods and services with each other without tariffs or restrictions. This makes it cheaper and easier for businesses to trade across borders, encouraging competition, innovation and lower prices for consumers. Free trade can help economies grow by allowing countries to focus on what they do best but it can also lead to job losses in industries that struggle to compete with cheaper imports. Some governments try to balance free trade with protections for local businesses and workers
The world trade organisation
An international group that sets rules for trade between countries to ensure it flows smoothly and fairly. It helps solve trade disputes between countries when they disagree on tariffs, quotas or other trade barriers. It encourages countries to reduce restrictions on trade making it easier for businesses to buy and sell goods across borders
History of the WTO
Evolved from the General Agreement on Tariffs and Trade which was created in 1947 to reduce trade barriers after WWII
Was officially established on January 1st 1995 replacing GATT to oversee global trade with a stronger legal framework
Over time more countries joined and it expanded beyond goods to include services, intellectual property and dispute resolution
Has faced criticism for favouring richer countries struggling with major disputes and failing to update global trade rules
Benefits of the WTO
Promotes peace
Handles disputes constructively
Simplifies trade rules
Lowers living costs
Increases product variety and quality
Boosts income
Stimulates economic growth and employment
Enhances efficiency and resource allocation
Protects governments from lobbying
Encourages good governance
Challenges of free trade for exporting countries
Many developing countries rely heavily on exports, making them vulnerable to global economic downturns
Free trade can lead to a race to the bottom where businesses keep wages low and working conditions poor to remain competitive
Benefits of free trade for importing countries
Without tariffs, goods become cheaper
Free trade allows access to a wider range of profits and encourages competition which drives innovation
Challenges of free trade for importing countries
Domestic industries can struggle to compete with cheaper imports
Some countries imports more than they export leading to trade imbalances
WTO and wealthy nations
WTOs rules often benefit wealthier nations as they have the resources to negotiate favourable trade deals. While the WTO provides a system for resolving trade disputes wealthier countries tend to win more cases due to their stronger legal teams and economic influence. WTO rules on intellectual property have often favoured MNCs making it harder for developing countries to access affordable medicines and technology
Fairtrade
Aims to provide better trading conditions for farmers and workers in developing countries. It ensures producers receive a fair price for their goods so they can cover the costs of sustainable production and improve their quality of life. Also promotes environmental sustainability and prohibits child labour. Products with the fairtrade label meet strict social, economic and environmental standards
Importance of fairtrade
Many large MNCs dominate global supply chains, pushing prices down and exploiting cheap labour. Small scale producers struggle to compete and many live in poverty. Fairtrade ensures producers receive a fairer share of the profits. It also promotes economic stability in developing countries by providing farmers with a guaranteed minimum price. This allows producers to plan for the future, invest in their businesses and improve local communities
Challenges of fairtrade
Certification fees can be too expensive for small producers
It does not guarantee long term market access as retailers may buy from other cheaper sources
Certified products can be more expensive for consumers, limiting demand
Some large corporations have used Fairtrade as a marketing tool without committing to the ethical trade practices
Fairtrade products
Coffee
Chocolate and cocoa
Bananas
Tea
Cotton
Debt
The money that a country borrows from external sources to finance its trade deficits, development projects or other economic needs. This can come from foreign governments, international organisations or private leaders
Types of international debt
Trade deficit: when a country imports more than it exports it may need to borrow to pay for the excess imports
Sovereign: loans taken by governments from foreign institutions or countries to fund infrastructure, services or development
Private sector: borrowing by businesses within a country to finance international trade and investment
Structural adjustment: loans by international bodies with conditions requiring economic reforms
External debt
The money that a country borrows from foreign sources to fund its spending or development projects. This needs to be paid back with interest usually in foreign currencies
Debt service ratio
A measure of how much of a country’s income or export earning go towards paying off external debt as a percentage. A high ratio means a large part of the earnings are going to debt repayment, limiting its ability to spend elsewhere
Debt service ratio calculation
Debt payments / export earnings x 100%
Debt service ratio figures
Low (<10%): a country with manageable debt which can cover payments without major strain on its economy
Moderate (10-25%): Can manage debt but need to monitor the situation carefully
High (>35%): Under financial pressure struggling to balance repayments with economic growth
Odious debt
A type of government debt that is illegitimate or unjust because it was borrowed for purposes that did not benefit the country’s citizens or was incurred through corrupt or undemocratic actions by a government. It should not be the responsibility of the population to repay because it was taken on without their consent or for personal gain by corrupt leaders
Colonialism and debt
During the colonial era, European powers borrowed to finance projects and colonies were used as collateral. When they gained independence, the colonies inherited the debt even though it was not spent for their benefit. Colonial powers extracted wealth and resources from their colonies but much of this was sent back to the powers leaving the newly independent countries with underdeveloped economies and debt burdens from loans in the colonial period. After independence many former colonies struggled to repay debt incurred by colonial administrations. They were forced to take new loans to cover old debt leading to cycles of borrowing that still affect developing countries, contributing to long term economic struggles
Problems of debt for LEDCs (development)
Many LEDCs spend most of their money paying back loans so there is less available to build schools, hospitals or improve infrastructure. This causes struggles with growth and living conditions
Problems of debt for LEDCs (dependence)
To pay off debts, LEDCs borrow more from other countries or international organisations meaning they have to follow rules set by these lenders like cutting spending on public services making life harder for residents
Problems of debt for LEDCs (vulnerability)
Countries with a lot of debt are more likely to struggle when there are global economic issues so they might not have enough money to pay their debt
Problems of debt for LEDCs (limited growth and jobs)
Debt makes it harder for LEDCs to invest in industries that could create jobs and grow the economy. Without investment it is hard to reduce poverty or raise living standards
Problems of debt for LEDCs (social and political unrest)
When LEDC citizens see the government is spending most of its money on debt they can cause protests and political instability, making it harder for the country to move forward
Debt relief
The process of reducing or eliminating the debt owed by a country typically to international creditors such as foreign governments, banks or institutions like the IMF and the World Bank. Is often granted to heavily indebted poor countries (HIPC) to help them escape the debt trap allowing them to invest in essential services and infrastructure instead of repaying unsustainable loans
Debt cancellation
Writing off all or part of a country’s debt
Debt rescheduling
Extending the repayment period to make payments more manageable
Debt restructuring
Changing the terms of the loan such as reducing interest rates
Debt swaps
Converting debt into investment in development projects
Multilateral debt relief initiative
Launched in 2005 to provide 100% debt cancellation for eligible developing countries that had already completed the HIPC initiative. The goal was to free up resources for poverty reduction and economic development. Led by the IMF, World Bank and African Development Bank. Only countries that completed the HIPC process and met economic and government reforms were eligible. Aimed to boost investment in healthcare, education and infrastructure rather than repaying debt
Arguments for debt relief
Frees up government funds for healthcare, education and infrastructure, improving living conditions
Allows countries to invest in industries, job creation and development projects
Many developing countries debt comes from unfair historical lending, corruption or forced economic policies
Without relief, some nations must keep borrowing just to repay interest
Economic crises can cause political instability, migration and conflict affecting security
Debt repayment money could be better spent on climate change adaptation, food security and social services
Arguments against debt relief
Creates dependency, discouraging governments from making necessary economic reforms
May make countries less attractive to investors if seen as financially unstable
Cancelling debt unfairly punishes responsible lenders and countries that repaid their debts
Debt relief might encourage more reckless borrowing leading to future crises
Could set a bad precedent making other indebted countries demand similar treatment
Some countries misuse debt relief funds due to corruption or poor governance
