208 - Geopolitics & World Economic Systems UNIT 2

208_ Geopolitics & World
Economic Systems
UNIT2:
The Trading System: Debate over
Free Trade – Functions of GATT and WTO,
The Uruguay Round and World
Trade Organization, Trade Blocs – EU,
OECD, OPEC, SAARC, ASEAN, NAFTA,
Threats to Open Trading System,
Developments in International Trade
Theory, Bi-lateral, Multilateral Trade
Agreements, Impact of Trade wars in
liberalized economy. (6)

Free trade is a type of economic policy that allows member
countries to import and export goods among each other with
lower or no tariff imposed. While supporters say that it is a win-
win situation for both consumers and traders with free access to
the market and information and without trade barriers, not all
people (including economists) agree, saying that this way of
trading allows for foreign competition to cause certain
economic issues.
To build a well-informed opinion whether free trade is more
beneficial than not, let us take a look at its key advantages and
disadvantages.
The Trading System: Debate over
Free Trade

1. It provides consumers with more options and the benefit of lower prices.
Proponents argue that, with imported products from other countries with lesser
or without tariff, consumers can choose from a plethora of products, unlike
when there is monopoly in the market. Also, the high level of freedom in this
trade will result to reduced prices.
2. It benefits trading countries through competitive advantage. It is stated that
countries that have enough resources to produce certain products will enjoy
competitive advantage to specialize in such goods and be their only suppliers
to other countries. In return, the purchasing countries can also benefit from the
low prices of these imported products. Therefore, it is a winwin situation for both
trading nations.
3. It is a key to economic growth. Countries that are engaging in free trade are
seen to have richer economies. By specializing in certain products with plenty of
materials to make of, they maintain a high level of productivity. Also, there exists
productive competition, where products are traded at lower prices. All these
aspects are good for economic growth.
Advantages of Free Trade

1. It will have an unfavorable effect on local businesses and producers.
Opponents argue that free trade is not beneficial to local businesses and
producers in terms of profits. They explain that, with the reduced or zero
tariffs imposed making foreign suppliers easily lowering their prices, local
companies have to compete with the prices, which they should do even
if it is difficult for them, or consumers will go for imported goods over their
locally produced products.
2. It would cause workers to live in desolate places for their jobs and be paid
with low wages. Free trade is believed to force laborers in poorer
countries to work long hours and live in shanties without the basic facilities,
just to be able to keep their work and send money to their families.
3. It would rob the citizens of jobs that are supposed to be theirs. Some
groups say that this form of trading has taken away job opportunities for
the average American, as some manufacturers are encouraged to hire
foreign workers for cheaper labor and even relocate their facilities
overseas.
Disadvantages of Free Trade

Strengths of Protectionism
1. One strength of protectionism is that it keeps the domestic
economy flowing. Since there is a decrease in imports,
domestic firms have less completion, and so are able to
continue.
2. The domestic economy also strengthens, because the
unemployment rate will be minimal. This is because the
domestic firms are able to produce and sell more goods
with a lot less difficulty, giving firms less incentive to
decrease its cost by decreasing its work force. The people
with jobs will keep consuming, allowing a flow of the
economy.
ADVANTAGES AND DISADVANTAGES OF
PROTECTIONISM

Strengths of Protectionism
3. Protectionism allows the green, fledgling firms to function and
develop at a decent rate, because these firms are not pressured
by the foreign, more experienced firms. The fresh firms can grow
until they themselves are able to complete in international
markets, promising positive aspects for the domestic economy in
the future.
4. Protectionism also prevents dumping. This is where foreign, grand
economies enter an economy and sell their goods at a price
lower than the costs of production. Consequently, the consumers
of that specific economy are spending more, than the
consumers in the overseas areas
PROTECTIONISM

Weakness of Protectionism
There are also weaknesses in using the system of
protectionism.
For example, protectionism can cause a retaliation reaction
from other countries, ruining the relationship of the two
nations. This is a major issue right now between the United
States and China.
U.S. put restrictions on the Chinese tires, so China retaliated
by putting up barriers against different U.S. goods, such us
their chicken. This hostility decreases the specialization
level of the two nations, harming their economy. Also,
protectionism prevents nations from maximizing their
specialization level, using up
PROTECTIONISM

The former GATT was not really an organisation; it was merely a
legal arrangement. On the other hand, the WTO is a new
international organisation set up as a permanent body. It is
designed to play the role of a watchdog in the spheres of trade
in goods, trade in services, foreign investment, intellectual
property rights, etc. Article III has set out the following five
functions of WTO;
(i) The WTO shall facilitate the implementation, administration and
operation and further the objectives of this Agreement and of
the Multilateral Trade Agreements, and shall also provide the
frame work for the implementation, administration and
operation of the plurilateral Trade Agreements.
Functions of GATT and WTO,

(ii) The WTO shall provide the forum for negotiations among its
members concerning their multilateral trade relations in matters
dealt with under the Agreement in the Annexes to this
Agreement.
(iii) The WTO shall administer the Understanding on Rules and
Procedures Governing the Settlement of Disputes.
(iv) The WTO shall administer Trade Policy Review Mechanism.
(v) With a view to achieving greater coherence in global
economic policy making, the WTO shall cooperate, as
appropriate, with the international Monetary Fund (IMF) and
with the International Bank for Reconstruction and
Development (IBRD) and its affiliated agencies.
Functions of GATT and WTO,

The seven agreement of Uruguay round and WTO are as
follows:
I. Agreement on Manufactured Goods
II. Agreement on Agriculture
III. Agreement on Trade in Textiles and Clothing (Multi-Fibre
Arrangement)
IV. Agreement on Trade-related Investment Measures (TRIMS)
V. Agreement on Trade-Related Intellectual Property Rights
(TRIPS)
VI. Agreement on Trade in Services
VII. Agreement on Anti-dumping.
The Uruguay Round and World
Trade Organization

I. Agreement on Manufactured Goods:
With regard to manufactured goods other than textiles the developed
nations agreed to reduce their tariffs by 40 per cent to an average
of 3-8 per cent from the pre-UR level of 3-6 per cent.
II. Agreement on Agriculture:
It was for the first time that agriculture was brought under the GATT
purview and major areas were covered by the treaty. According to
the treaty, countries with closed farms are to import at least three
per cent of domestic consumption of a product, raising the
percentage to 5 over six years. Trade distorting support for farmers is
to be cut by 20 per cent in a period of six years for developed
countries, and by 13.3 per cent for the developing countries. All non-
tariff barriers like quotas are to be converted into tariffs that would
be reduced by 36 per cent for industrialized countries, and by 24
percent for developing countries

III. Agreement on Trade in Textiles and Clothing (Multi-Fibre
Arrangement):
The treaty allows for abolishing the Multi-Fibre Arrangement
(MFA) in international textile trade which allows quota
restrictions by importing countries largely, the developed
nations – on export countries. Beginning in 1995, the MFA
is to be erased within a decade so that textile and
clothing is integrated into GATT.
All parties to GATT must abide by its textile and clothing
agreement to ensure market access, enforcement of
policies favouring a fair international climate for trading
activities and on discrimination against imports. Special
treatment is envisaged for member nations that are not
part of the MFA agreement and for new members and
least-developed economies.

IV. Agreement on Trade-related Investment Measures (TRIMS):
The TRIMS agreement aims to remove any TRIMS that is inconsistent
with Article III of GATT that provides for national treatment of
foreign investment, and Article XI that prohibits quantitative
restrictions.
According to it, investment measures inconsistent with GATT provisions
are imposing the foreign investors (i) to use local inputs, (ii) to
produce for exports as a condition to obtain imported goods as
inputs, (iii) to balance foreign exchange outgo on importing inputs
with foreign exchange earnings through export, and (iv) not to
export more than a specified proportion of the local production.
According to Article 5(2) of the TRIMS Agreement, the deadline for
the elimination of TRIMS inconsistent with GATT terms is not the
same for all countries: the industrialized countries have to eliminate
them by 1, July 1997, the developing nations by 2000 AD, and the
least developed countries (LDCs) by 2002 AD.

V. Agreement on Trade-Related Intellectual Property Rights (TRIPS):
The agreement on TRIPS aims at introducing fair trade by taking
the different standards prevalent worldwide for protection and
implementation of Intellectual Property Rights (IPRS) in the areas
of copyright, trademarks, trade secrets, industrial designs,
integrated circuits, geographical indications and patents. IPRs
with respect to copyright calls for compliance with the Berne
convention provisions for protecting literary/artistic productions.
Computer programs included under literary works are to be
protected. The term of protection for copyrights and rights of
performers and producer’s phonograms is to be no less than 50
years. In case of broadcasting organizations, however, the term
of protection is to be at least 20 years. ‘Industrial designs’ will be
entitled to a protection for 10 years. The patent term provided
for in the TRIPS agreement is 20 years.

VI. Agreement on Trade in Services:
The General Agreement on Trade in Services (GATS) brought, for
the first time, trade in services like banking, insurance, travel,
maritime transportation, mobility of labour, etc., within the ambit
of negotiation. For the purpose of regulating trade in services,
the trade has been defined to include four modes of supply:
supply through cross-border movement; movement of
consumers, commercial presence; and presence of natural
persons. The agreement contains three elements: a framework
of general rules and disciplines; annexes addressing special
conditions relating to individual sectors; and national schedules
of market areas commitment. It is adapted on the basic GATT
principles such as MFN (Most Favoured Nation) status to other
member nations, non-discrimination, maintenance of
transparency and a commitment for liberalization in general
terms.

VII. Agreement on Anti-dumping:
The anti-dumping agreement allows anti-dumping
measures of an item which is exported at a price much
less than its normal value, as such imports would
adversely affect the domestic industry concerned in the
importing country. The agreement provides criteria to
determine that a product is dumped and is responsible
for affecting the domestic industry along with the rules
involved in any antidumping investigation activity. The
agreement specifies the valid time period of any anti-
dumping action that is taken. In addition to the above,
the Uruguay Round also reached agreements on
preshipment inspection, rules of origin, import licensing,
safeguards, etc.

A trading bloc is a type of intergovernmental agreement, often part
of a regional intergovernmental organisation, where regional
barriers to international trade, (tariffs and non-tariff barriers) are
reduced or eliminated among the participating states, allowing
them to trade with each other as easily as possible.
What is a trading bloc?

Many countries group together for different reasons;
1. TRADE - There are several trading blocs, such as the NAFTA (North American
Free Trade Association), the African Union (AU), OPEC and the European
Union
2. GLOBAL GOVERNANCE (economic)– such as other ECONOMIC groupings
include the World Bank (An international organisation dedicated to
providing financing, advice and research to developing nations to aid their
economic development), IMF (International Monetary Fund who…) and the
World Trade Organisation (WTO) who try to organise and make trade free.
3. GLOBAL GOVERNANCE (SOCIAL) - There are global organisations of countries
too, including the United Nations who have a huge role to play in organising
the countries of the world to combat environmental issues such as Global
Warming, tackle poverty through the UNDP, and ensure safety of people in
conflicts through the use of the UN’s peace keeping force
4. DEFENCE – There are defence groupings such as NATO (North Atlantic Treaty
Organisation)
5. SOCIAL, POLITICAL and ECONOMIC unions – the European Union is a great
example of this, where various aspects of politics, law, society and the
economy of member states are governed by the group of nations.

A trading bloc is defined by four characteristics:

1. There is a special trade relationship that promotes and
allows trade within that group of countries in preference
to trade with outside nations by discriminating against
non-members (through import tariffs for example)
2. It has the goal of trade liberalisation or integration with
the aim of establishing a free trade area, customs union,
or common market
3. It strives to reach common positions in negotiations with
third countries, with other trade blocs, or in multilateral
forums
4. It attempts to coordinate national economic policies to
minimize disruption to intra-bloc economic transaction

The main advantages for members of trading blocs
1. Free trade within the bloc: Knowing that they have free
access to each other's markets, members are encouraged
to specialise. This means that, at the regional level, there is a
wider application of the principle of comparative
advantage.
2. Market access and trade creation: Easier access to each
other’s markets means that trade between members is likely
to increase. Trade creation exists when free trade enables
high cost domestic producers to be replaced by lower cost,
and more efficient imports. Because low cost imports lead
to lower priced imports, there is a 'consumption effect', with
increased demand resulting from lower prices.
ADVANTAGES FOR MEMBERS OF TRADING
BLOCS

3. Economies of scale: Producers can benefit from
the application of scale economies, which will
lead to lower costs and lower prices for
consumers.
4. Jobs: Jobs may be created as a consequence of
increased trade between member economies.
5. Protection: Firms inside the bloc are protected
from cheaper imports from outside, such as the
protection of the EU shoe industry from cheap
imports from China and Vietnam.
ADVANTAGES FOR MEMBERS OF TRADING
BLOCS

1. Loss of benefits: The benefits of free trade between countries
in different blocs is lost.
2. Distortion of trade: Trading blocs are likely to distort world
trade, and reduce the beneficial effects of specialisation
and the exploitation of comparative advantage.
3. Inefficiencies and trade diversion: Inefficient producers
within the bloc can be protected from more efficient ones
outside the bloc. For example, inefficient European farmers
may be protected from low-cost imports from developing
countries. Trade diversion arises when trade is diverted
away from efficient producers who are based outside the
trading area.
DISADVANTAGES FOR MEMBERS OF TRADING BLOCS

4. Retaliation: The development of one regional trading bloc is
likely to stimulate the development of others. This can lead
to trade disputes, such as those between the EU and
NAFTA, including the Boeing (US)/Airbus (EU) dispute. The
EU and US have a long history of trade disputes, including
the dispute over US steel tariffs, which were declared illegal
by the WTO in 2005. In addition, there are the so-called
beef wars with the US applying £60m tariffs on EU beef in
response to the EU’s ban on US beef treated with hormones;
and complaints to the WTO of each other’s generous
agricultural support. During the 1970s many former UK
colonies formed their own trading blocs in reaction to the
UK joining the European common market
DISADVANTAGES FOR MEMBERS OF TRADING BLOCS

The best-known examples of trading blocs in Europe are:
EU – The European Union
This is the most important trade bloc in Europe. The EU combined is
amongst the world’s biggest exporters and around two thirds of EU
countries’ total trade is done with other EU countries
EFTA – European Free Trade Association with member countries Iceland,
Liechtenstein, Norway and Switzerland
EEA – The European Economic Area EU members plus the three EFTA
states of Iceland, Norway and Liechtenstein
CEFTA – The Central European Free Trade Agreement which covers
Albania; Bosnia and Herzegovina; Croatia; Former Yugoslav Republic of
Macedonia; Moldova; Montenegro; Serbia;
Trade Blocs – EU

The European Union (EU) was founded in 1951 by six neighboring
states as the European Coal and Steel Community (ECSC). Over
time, it became the European Economic Community (EEC), then
the European Community (EC), and was ultimately transformed
into the European Union (EU). EU is the single regional bloc with
the largest number of member states (28).
Members − Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech
Republic, Denmark, Estonia, Finland, France, Germany, Greece,
Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta,
Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden,
The Netherlands, and the United Kingdom.
Goal of EU − To construct a regional free-trade association of states
through the union of political, economic, and executive
connections.
Trade Blocs – EU

A common European area without borders : The objective is to
create a free and safe Europe with no internal borders. The
citizens living in the area enjoy the rights granted by the European
Union.
Internal market: The objective is to ensure smooth and efficient
trade within Europe. Competition between companies is free and
fair.
Stable and sustainable development: It means balanced economic
growth and stable prices. The European Union seeks to create a
competitive market economy which takes into account people’s
wellbeing and social needs. An important issue is environmental
protection. Efforts are made to protect the environment and
repair any damage made.
European Union’s main objective

Scientific and technological development: The European Union
supports the advancement of science and technology and
invests in education. Another objective is to achieve a skilled
workforce and a high standard of technological production.
Prevention of social exclusion: Efforts are made to eliminate poverty.
The Union works for equality. Minority rights are protected. Social
security is improved. Men and women must be treated equally.
Children’s rights must be protected and children given a happy
childhood. Old people must be looked after and respected.
Solidarity: Solidarity between countries and people is promoted in
the field of the economy, social equality and regions. The
member states must be loyal to one another. It means that states
must take responsibility for and be understanding of one another.

Respect for languages and cultures: The European Union respects
the languages and cultures of the individual countries. National
cultures and the common European culture are cherished and
developed.
Common foreign and security policy: It seeks to ensure that peace is
maintained in Europe and that people have security. With the
common foreign policy, the European Union wants to make sure
that the resources of the planet are used sensibly and that the
environment is not destroyed. The European Union also wishes to
respect other countries and nations. It works for free and fair trade
and tries to eliminate poverty. Human rights are important all over
the world. The European Union follows the Charter of the United
Nations and underlines the importance of common international
rules.

○ The OECD's origins date back to 1960, when 18 European
countries plus the United States and Canada joined forces
to create an organisation dedicated to economic
development.
○ Presently, 36 Member countries span the globe, from North
and South America to Europe and Asia-Pacific.
○ They include many of the world’s most advanced countries
but also emerging countries like Mexico, Chile and Turkey.
○ OECD also work closely with emerging economies like the
People's Republic of China, India and Brazil and developing
economies in Africa, Asia, Latin America and the
Caribbean.
○ Together, our goal continues to be to build a stronger,
cleaner and fairer world.
Trade Blocs –OECD

○ It is a forum of countries describing themselves as
committed to democracy and the market economy,
providing a platform to compare policy experiences,
seeking answers to common problems, identify good
practices and coordinate domestic and international
policies of its members.
○ Most OECD members are high-income economies with a
very high Human Development Index (HDI) and are
regarded as developed countries.
○ As of 2017, the OECD member states collectively comprised
62.2% of global nominal GDP (US$49.6 trillion) and 42.8% of
global GDP (Int$54.2 trillion) at purchasing power parity.
○ OECD is an official United Nations observer.
Trade Blocs –OECD

○ In 1948, the OECD originated as the Organisation
for European Economic Co-operation (OEEC),led
by Robert Marjolin of France, to help administer
the Marshall Plan (which was rejected by
the Soviet Union and its satellite states).
○ This would be achieved by allocating United States
financial aid and implementing economic
programs for the reconstruction of Europe after
World War II. (Similar reconstruction aid was sent to
the war-torn Republic of China and post-war Korea,
but not under the name "Marshall Plan".)
Trade Blocs –OECD

○ In 1961, the OEEC was reformed into the
Organisation for Economic Co-operation and
Development by the Convention on the
Organisation for Economic Co-operation and
Development and membership was extended to
non-European states.
○ The OECD's headquarters are at the Chateau de
la Muette in Paris, France.
○ The OECD is funded by contributions from member
states at varying rates and had a total budget of
€374 million in 2017.
Trade Blocs –OECD

OBJECTIVE:
OECD analyses and recommendations are
independent and evidence-based.
OPEN: OECD encourage debate and a shared
understanding of critical global issues.
BOLD: OECD dare to challenge conventional
wisdom starting with our own.
PIONEERING: OECD identify and address emerging
and long term challenges.
ETHICAL: OECD credibility is built on trust, integrity
and transparency.
Trade Blocs –OECD

The South Asian Association for Regional Cooperation (SAARC)
comprises Bangladesh, Bhutan, India, the Maldives, Nepal,
Pakistan and Sri Lanka. SAARC is a manifestation of the
determination of the peoples of South Asia to work together
towards finding solutions to their common problems in a spirit
of friendship, trust and understanding and to create an order
based on mutual respect, equity and shared benefits. The
main goal of the Association is to accelerate the process of
economic and social development in member states, through
joint action in the agreed areas of cooperation. The idea of
regional cooperation in South Asia was first mooted in
November 1980.
Trade Blocs –SAARC

After consultations, the Foreign Secretaries of the seven countries
met for the first time in Colombo, in April 1981. This was
followed, a few months later, by the meeting of the
Committee of the Whole, which identified five broad areas for
regional cooperation. The Foreign Ministers, at their first
meeting in New Delhi, in August 1983, formally launched the
Integrated Programme of Action (IPA) through the adoption
of the Declaration on South Asian Regional Cooperation
(SARC). At the First Summit held in Dhaka on 7-8 December
1985, the Charter establishing the South Asian Association for
Regional Cooperation (SAARC) was adopted.
Trade Blocs –SAARC

To promote the welfare of the peoples of South Asia and to
improve their quality of life;
To accelerate economic growth, social progress and cultural
development in the region and to provide all individuals the
opportunity to live in dignity and to realize their full potentials;
To promote and strengthen collective self-reliance among the
countries of South Asia;
To contribute to mutual trust, understanding and appreciation
of one another’s problems;
To promote active collaboration and mutual assistance in the
economic, social, cultural, technical and scientific fields;
OBJECTIVES:

To strengthen cooperation with other developing countries;
To strengthen cooperation among themselves in international forums on
matters of common interests; and
To cooperate with international and regional organizations with similar
aims and purposes
Cooperation within the framework of the Association is based on respect
for the principles of sovereign equality, territorial integrity, political
independence, non-interference in the internal affairs of other states
and mutual benefit.
Such cooperation is to complement and not to substitute bilateral or
multilateral cooperation.
Such cooperation should be consistent with bilateral and multilateral
obligations of the member states.
Decisions at all levels in SAARC are taken on the basis of unanimity.
Bilateral and contentious issues are excluded from its deliberations.
OBJECTIVES:

1. Cooperation with international and regional
organizations designated SAARC years,
2. SAARC Regional Fund (SRF, SAARC funds,
regional conventions/agreements),
3. SAARC regional institutions,
4. Promoting people-to-people contact,
5. Trade and economic cooperation,
6. poverty eradication,
7. Technical committee,
8. financial arrangements in SAARC.
Contribution:

The Association of Southeast Asian Nations (ASEAN) was formed
in 1967 by Indonesia, Malaysia, the Philippines, Singapore,
and Thailand to promote political and economic
cooperation and regional stability. The member countries of
the Association of Southeast Asian Nations (ASEAN) are
Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei
Darussalam, Vietnam, Laos and Myanmar. The ASEAN
Community is comprised of three pillars, the Political-Security
Community, Economic Community and Socio-Cultural
Community. Every year following the ASEAN Ministerial
Meeting, ASEAN holds its Post-Ministerial Conference (PMC)
to which the Secretary of State is invited. In 1994, ASEAN took
the lead in establishing the ASEAN Regional Forum (ARF),
which now has 27 members.
Trade Blocs –ASEAN

OBJECTIVES: The ASEAN nations came together with three main
objectives in mind:
To promote the economic, social and cultural
development of the region through cooperative
programmers
To safeguard the political and economic stability of
the region against big power rivalry; and
To serve as a forum for the resolution of intra-regional
differences.
Trade Blocs –ASEAN

NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA)
In January 1994, the United States, Mexico and Canada
entered into the North American Free Trade Agreement
(NAFTA), creating the largest free trade area and richest
market in the world. The NAFTA is the most comprehensive
regional trade agreement ever negotiated by the United
States and is scheduled to be fully implemented by the year
2008. In 1996, U.S. two-way trade in goods under the NAFTA
with Canada and Mexico stood at $420 billion–a 44 %
increase since the NAFTA was signed.
Trade Blocs –NAFTA

Objectives:
1. The objectives of this Agreement, as elaborated more specifically
through its principles and rules, including national treatment, most-
favored-nation treatment and transparency are to:
eliminate barriers to trade in, and facilitate the cross border
movement of, goods and services between the territories of the
Parties;
promote conditions of fair competition in the free trade area;
increase substantially investment opportunities in their territories;
provide adequate and effective protection and enforcement of
intellectual property rights in each Party’s territory;
Trade Blocs –NAFTA,

Objectives:
create effective procedures for the implementation and
application of this Agreement, and for its joint administration
and the resolution of disputes; and
establish a framework for further trilateral, regional and
multilateral cooperation to expand and enhance the benefits
of this Agreement.
2. The Parties shall interpret and apply the provisions of this
Agreement in the light of its objectives set out in paragraph 1
and in accordance with applicable rules of international law.
Trade Blocs –NAFTA,

Activities:
to reduce barriers to trade
to increase cooperation for improving working
conditions in North America
to create an expanded and safe market for
goods and services produced in North America
to establish clear and mutually advantageous
trade rules
to help develop and expand world trade and
provide a catalyst to broader international
cooperation

Contribution: The North American Free Trade
Agreement (NAFTA) will not be fully implemented
until 2008. However, it is evident that NAFTA has
already proved its worth to the United States by
playing an important and vital role in increasing
consumer choice, improving market access for U.
S. products, and expanding U.S. jobs supported
by exports. It also contribute in agricultural trade,
automotive industry, and textile and apparel.

A trading system in which countries allow fair and
nondiscriminatory access to each other's stock
exchanges and financial markets.
Threats to Open Trading System

Economic Warfare
Globalization has a tough challenge against polarization and conflicting
issues. The world is experiencing increased conflicts, major economic
powers are seizing influence, financial sanctions are being used as a
weapon, and the Internet is breaking into pieces. Therefore, the
international flow of money, information, products and services may slow
down.
Geo-politicization
Globalization is a kind of Americanization. The United States is still a
dominating economy and the hallmark of the international financial
system. Moreover, information age is promoting the democratization of
information. It is paving the way for demanding more information and the
autocrats now need to care more about public opinion. The
developments of developing countries are making them more or less like
America.

State Capitalism
The United States was a strong nation in the last quarter of the century. But
now, state capitalism in a modern form is gripping many nations. This is
creating new segments in the markets and destroying the uniformity
expected from globalization. Now, there is nothing predominantly
American or about globalization itself.
Lack of Leadership
Globalization will continue rapidly, but the U.S led world order is getting
diminished. An inconsistent, war-ridden United States lacks the will and
ability to provide global leadership. Moreover, no other country is
interested in taking its place. The West is having its own problems, and
allies are only interested in hedging their bets. Therefore, there is no clear
and definite way for globalization to progress and it is getting distorted.

Power Distribution
China, Russia, Turkey, India, and some other emerging nations are getting
powerful enough to dismantle the US led theory of globalization. But they
lack synchronization and influence. Their values and interests are not
compatible. So, a regionalized world is emerging. Americanization and
globalization are neither believed to be one and the same now nor is it
preached by these power-seeking nations.
Weaker Underdogs
The regional economic powerhouses are getting more room to operate in
today’s world. Russia is intruding in its backyard, Germany is experiencing
firm control over Euro zone, and China is rapidly rising in the Asia-Pacific.
These major countries are trying to consolidate power without caring for
the smaller countries near them. It is a kind of ‘hollowing of the peripherals’
that is accelerating.

Price Fluctuations of Natural Resources
The oil monopoly is deteriorating and many clashes and terrorist
incidents are tearing the world apart. In such turmoil, the very
essence of globalization is somehow getting blurred. These time-
sensitive challenges are being faced by all international and
huge global companies. While the problems don’t seem to end
soon, the global companies now have the choice to exercise
their power in a global scale. They may or may not adapt to the
new trend, but their superiority and powers have definitely got a
boost due to the predominantly geopolitical crises.

○ There are many theories and concepts associated with
international trade. When companies want to go international,
these theories and concepts can guide them to be careful and
prepared.
○ There are four major modern theories of international trade.
Developments in International Trade Theory

The Heckscher and Ohlin Model
The Heckscher–Ohlin theory deals with two countries’ trade goods
and services with each other, in reference with their difference
of resources. This model tells us that the comparative advantage
is actually influenced by relative abundance of production
factors. That is, the comparative advantage is dependent on
the interaction between the resources the countries have.
Moreover, this model also shows that comparative advantage also
depends on production technology (that influences relative
intensity). Production technology is the process by which various
production factors are being utilized during the production cycle.

The Samuelson and Jones Model
According to Samuelson–Jones Model, the two major reasons for which trade influences the
income distribution are as follows −
❖ Resources are non-transferable immediately and without incurring costs from one
industry to another.
❖ Industries use different factors. The change in the production portfolio of a country
will reduce the demand for some of the production factors. For other factors, it will
increase it.
There are three factors in this model − Labor (L), Capital (K), and Territory (T).
Food products are made by using territory (T) and labor (L), while manufactured goods use
capital (K) and labor (L). It is easy to see that labor (L) is a mobile factor and it can be
used in both sectors. Territory and capital are specific factors.
A country with abundant capital and a shortage of land will produce more manufactured
goods than food products, whatever may the price be. A country with territory
abundance will produce more foods.
Other elements being constant, an increase in capital will increase the marginal productivity
from the manufactured sector. Similarly, a rise in territory will increase the production of
food and reduce manufacturing.

The Krugman and Obsfeld Model
The Krugman–Obsfeld Model is the standard model of trade. It implies
two possibilities −
The presence of the relative global supply curve stemming from the
possibilities of production.
The relative global demand curve arising due to the different
preferences for a selected product.
The exchange rate is obtained by the intersection between the two
curves. An improved exchange rate – other elements being constant
– implies a substantial rise in the welfare of that country.

The Michael Porter Model
Michael Porter identified four stages of development in the
evolution of a country. The dependent phases are − Factors,
Investments, Innovation, and Prosperity.
Porter talked extensively on attributes related to competitive
advantages which an organization can achieve relative to its
rivals which consists of Lower Cost and Differentiation. These
advantages derive from factor(s) that permit an organization
to outperform its competition, such as superior market position,
skills, or resources.
In Porter's view, the strategic management of businesses should
be concerned with creating and continuing competitive
advantages.

Bilateral trade agreements are the agreements between two
nations for the purpose of exchange of goods and service
each other for mutual benefit of both of the countries. Under
Bilateral trade agreements; the exchange of agreements takes
place in commercial relationship, trade facilitation, finance
investment etc. So the trade between both of countries makes
simple by simple procedures of imports and exports, cutting
down or minimizing the taxes or duties on overseas trade etc.
The ultimate aim of any bilateral trade agreement between
countries is to improve the economic status of both of the
countries. Compared to multilateral agreements, bilateral
agreements are easy to negotiate with terms and conditions of
agreements.
Bi-lateral Trade Agreements,

Multilateral trade agreements are made between two or more
countries to strengthen economy of member countries by
exchanging of goods and services among them. The multilateral
trade agreement builds commercial relationship, trade
facilitation and financial investments among member countries
of such multilateral trade agreement. Compared to bilateral
trade agreement, multilateral trade agreements are difficult in
negotiation of agreement, as more member countries are
involved in multilateral trade agreements. Up to the level of
norms in multilateral trade agreement, the member countries are
treated equally.
Multilateral trade agreements

The multilateral trade agreements can be formed in regional
basis also. There are many multilateral trade agreements
between countries worldwide regionally for the
development of economy of each member countries
signed in each multilateral trade agreement. SAARC
(South Asian Association for Regional Cooperation), NAFTA
(North American Free Trade Agreement) etc. are some of
the multilateral trade agreements constructed
geographically. The multilateral trade agreements are
moved globally for public health, environment etc. also
other than
Multilateral trade agreements

the world economy being globalized, it is indeed the case that in a highly
competitive world economy interconnected and integrated by
globalization and driven by Free Trade, such decisions would indeed affect
economies worldwide in addition to creating problems for global
corporations that operate across jurisdictions and ordinary individuals as well.
For instance, most of the goods and products that giant retailers such as Wal-
Mart stock are made in China and imported into the United States. Thus, any
decisions involving levies of tariffs and duties would push the cost of these
goods and hence, result in higher prices for the American consumers.
Similarly, global corporations that operate in multiple economies worldwide
would see their profits going down as their basic business model that entails
making goods and products where they are cheaper and selling them
where they are costlier would take a hit since they no longer can enjoy and
reap the benefits of arbitrage that Free Trade provides.
Impact of Trade wars in liberalized economy

Before the 1930s, America’s trade policy was generally set
unilaterally by Congress — that is, without the international
negotiations used today.
Lawmakers, already in a protectionist mood, responded to the pain
of the Great Depression by passing the infamous Smoot-Hawley
Tariff Act of 1930, which raised duties on hundreds of imports.
Meant in part to ease the effects of the Depression by protecting
American industry and agriculture from foreign competition, the
act instead helped prolong the downturn. Many U.S. trading
partners reacted by raising their own tariffs, which contributed
significantly to shutting down world trade.
Beggar thy neighbor

Fortunately, the U.S. and the world learned a lesson from this
experience. With the Reciprocal Trade Agreements Act of 1934
and its successors, which granted the president authority to
reach tariff reduction agreements with foreign governments, U.S.
trade policy came to be global and strategic. This new
approach was institutionalized at the international level with the
creation of the General Agreement on Tariffs and Trade in 1948
and its successor, the World Trade Organization, in 1995.
The basic principle of these agreements is reciprocity — that each
country will agree to liberalize its trade to the extent that other
countries liberalize theirs. The approach uses international
negotiations to overcome protectionist political pressures and
recognizes that trade is a global phenomenon that generates
national interdependence.
Beggar thy neighbor

208 - Geopolitics & World Economic Systems UNIT 2

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208 - Geopolitics & World Economic Systems UNIT 2