Trade and globalization have evolved over centuries through various regimes and systems. The current global economic system emerged from the collapse of previous attempts at international cooperation during the interwar period. Regional economic integration developed through processes of diffusion, emulation, and opportunism in response to economic crises and security concerns. Absolute gains concerns within security communities promote trade by focusing on mutual benefit rather than relative gains between partners.

1. Trade and Globalization
Trends and Consequences

2. I. A Brief History of the World
Economic System
A. Trade Before the World Trade System
1. Trade routes for all recorded history
2. Evolution about 1000 years ago: financial
houses to underwrite trade expeditions,
reliable permanent markets, etc (China
and Italy)
3. About 500 years ago: Western Europe
develops global reach (beginning of
political-economic exploitation)

3. B. Origins of Per-Capita Growth

4. C. The World System to 1914
1. 16th
-18th
Centuries:
a. Mercantilism (increase capital/bullion
through trade surpluses) – Trade at the
point of a gun; exclusive deals
b. Problems: Uncontrolled inflation,
deflation, and “Dutch disease,” emphasis
on relative gains instead of absolute
gains

5. 2. 19th
Century Trade
a. Emergence of modern banking
(stockholders instead of families)
b. Emergence of modern paper currency
(backed by silver/gold for public
confidence)
c. 1846: Britain pushes for “free trade” –
i.e. no tariffs. Unilaterally repeals
“Corn Laws”  1860 British-French
Treaty of Commerce

7. d. Interdependence
"International finance has become so
interdependent and so interwoven with trade and
industry that ... political and military power can in
reality do nothing.... These little recognized facts,
mainly the outcome of purely modern conditions
(rapidity of communication creating a greater
complexity and delicacy of the credit system), have
rendered the problems of modern international
politics profoundly and essentially different from the
ancient."
-- Norman Angell, 1910

8. Interdependence?
Exports as % of GDP
1913: 13%
1992: 14%
FDI as % of GDP
1914: 11%
1993: 11%
British-German trade was high before
WW I
Lloyd’s insured Germany’s ships!

9. D. The Interwar Years
1. Allied Debt to US, German Debt to Allies
2. Return to Gold Standard (Example of an
international regime)
a. Reason: early approach to the time inconsistency problem
b. US leads with easy domestic credit, allows UK to build up
trade surplus (gold reserves)  UK and others begin
adoption 1925
c. Key weakness of system: Gold adopted by core countries
and others hold reserves of both gold and core currencies
(designed to avoid gold price shock)
i. Implication: World economic growth increases demand
for core currencies  loss of competitiveness
ii. Implication: Non-core dependent on monetary policies
of core

10. 3. Reparations and the Credit Crunch
a. The 1920s:
i. US invests/lends to Germany and Allies
ii. Germany pays Allies
iii. Allies repay US
b. The Crunch:
i. Late 1920s: US stock market boom
reduces willingness to lend/invest in
Europe

11. ii. The Stock Market Crash
US stock market crash leads to
business failures and bankruptcies 
banks find themselves without enough
reserves to cover outstanding deposits
US banks call in loans  international
credit crunch

12. 4. Collapse of the Gold Standard
a. Decreased US demand exports recession
elsewhere
b. Strong incentive to devalue currency:
devaluation boosts exports, lowers imports
 stimulates domestic demand
c. Trade deficits undermine gold standard
(purchases made “in gold” so deficits drain
gold reserves)
d. Prewar stabilization mechanism (borrowing
from neighbors’ banks) unavailable due to
credit crunch

13. e. Devaluation and domestic politics
i. Democratic governments more likely
to devalue (domestic costs vs.
international ones)
ii. Countries with large foreign
investments less likely to devalue
(would undermine own investments)

14. f. Cascade: Devaluation by Core States
Spilled Over to Non-Core
Years on
Gold
Standard
1923-39 

15. f. Cascade: Devaluation by Core States
Spilled Over to Non-Core
Direct: Britain leaves system in 1931,
immediately followed by all countries
holding British pound as reserve
currency
Indirect: Early-exit states able to
moderate economic damage

16. Collapse of the Gold Standard

17. 5. Collapse of the Trade System
a. “Beggar Thy Neighbor” – As
complement to or substitute for
devaluation, tariffs are used to shut
out imports (US: Smoot-Hawley 1930)

19. 5. Collapse of the Trade System
a. “Beggar Thy Neighbor” – As
complement to or substitute for
devaluation, tariffs are used to shut
out imports (US: Smoot-Hawley 1930)
b. Other countries retaliate with tariffs
c. Trade spirals downward

21. E. The Rise and Fall of Bretton Woods
1. Goal: Avoid another Great Depression and
World War III.
2. INSTITUTIONS:
a. Rebuild industry and avoid another credit
crunch: International Bank for Reconstruction
and Development
b. Avoid competitive devaluation: US pegs to gold,
everyone else pegs to dollars. Stabilization to
be provided by International Monetary Fund.
c. Avoid trade wars through the “MFN principle:”
General Agreement on Tariffs and Trade

22. 3. Evolution of the financial system
a. Europe and Japan rebuilt: IBRD turns
to development of postcolonial states,
becomes known as “World Bank”
despite being only one agency in
Group
b. 1950s-1060s: World Bank Group
assumes role of mediating investment
and international lending disputes

23. 4. Evolution of the Trade System
a. GATT
“Rounds”
lower tariffs
on
manufactured
goods 
trade
expansion

24. b. The World Trade Organization
Created in 1995 by “Uruguay Round” of
GATT Talks
Function = Resolve trade disputes,
especially over “non-tariff barriers” (NTBs)
Mechanism = Trade court with power to
permit sanctions
Controversy: Many health, safety,
environmental laws can be viewed as
NTBs

25. Sample WTO Cases
A government cannot ban a product based on the
way it is produced
Child labor
European objections to U.S. hormone fed beef
U.S. laws requiring shrimp boats to use nets that don’t
entangle sea turtles
Dolphin-safe tuna
U.S. Clean Air Act required stricter pollution
standards for companies without reliable data (i.e.
that already required to be collected by US
regulations)
A government cannot ban a product based on the
dealings of the company

26. c. The Doha Round: Key Issues
Services: Developed countries want to export
services (banking, health, law, etc).
Developing countries (except India) resist.
Agriculture: Developing countries want end to
subsidies. Developed countries resist.
Industry (NAMA): Developed countries want
further reduction in developing-country tariffs.
Developing countries resist.

27. 5. Evolution of the monetary system
a. The decline of the dollar:
i. Vietnam + Great Society  Inflation.
ii. Inflation + Economic Recovery Outside
America = Dollar overvalued (too easy to
acquire dollars  speculative attack on
the dollar)

28. b. From fixed to floating exchange rates:
The US abandons gold in 1971

29. II. Hegemons and Regimes
Explanations for the modern global economy
(Post-18th
Century: Per Capita Growth)
0
–100
100
200
300
400
500
600
700
800
900
1,000%
11th 12th 13th 14th 15th 16th
Century
17th 18th 19th 20th 21st

30. A. Hegemonic Stability Theory
1. Assumptions: Primarily Economic Theory
a. Depressions  Major Wars
b. International Economic Cooperation Prevents
Depressions

31. Assumptions
c. Public Goods Theory:
i. World Economy as “Public Good:” Cannot exclude
countries from existing in a prosperous world and stability
is non-rivalrous
ii. Problem: World economic stability costs money (currency
stability, free trade/lost jobs, military intervention,
international law, etc.) – but no one wants to pay since
their contributions won’t make a difference!
iii. Free Riding: Enjoying benefits of stable world economy
without paying costs
d. Hegemony: When a single state…
i. CAN pay the costs of world economic stability
ii. MUST pay those costs or stability won’t be provided
iii. is WILLING to pay those costs because the benefits to
itself outweigh the costs

32. e. “Law of Uneven Growth”

33. 2. Evidence
a. Free Trade
i. Napoleonic Wars: Challenge to British Hegemony
(Continental System) – Consistent
ii. 1815-1840: Increased Protectionism: Corn Laws, etc –
Inconsistent
iii. 1840s-1850s: Rise of free trade in Britain -- Consistent
iv. 1860s-1880s: Rise of free trade in Europe, i.e.
Cobden-Chevalier Treaty (1860) -- Consistent

34. v. Free Trade and US Hegemony –
Consistent?
AVERAGE AVERAGE
US TARIFF WORLD
YEAR RATE TARIFF
-------- --------- ----------
1940 36% 40%
1946 25% --
1950 13% 25%
1960 12% 17%
1970 10% 13%
1975 6% --
1984 5% 5%

35. b. American decline coincides with failure of
Bretton Woods monetary system

36. B. Regime Theory
1. Goal: Understand why economic system didn’t
collapse in 1970s
2. Argument: Hegemons create regimes, which
persist after hegemony –
“Principles, norms, rules, and decision-making
procedures around which actor expectations
converge in a given issue area”
3. Emphasis on nonstate actors: regimes perpetuate
themselves
4. Problem: Regime theory adds little to predictive
power

37. III. Contagion as a Cause of
Regionalism and Globalization
A. Processes of contagion in IR
1. Diffusion: Affinity, Agreements, or Spill-Over
2. Emulation: Modeling or Harmonization
3. Opportunism: Altered decision calculus

38. B. Processes of Economic Contagion
1. Diffusion
a. Affinity: Tourism, Remittances, Immigration
b. Alliances and Agreements: Incentive to
trade more with allies / MFN countries than
enemies
c. Spill-over: Alter economy of one state 
alter economies of neighbors

39. In Detail: East Asian Crisis
May – July 1997: “Bahtulism” in Thailand
Thai businesses begin to default on debts;
government promises to “buy” the bad loans but
reneges; Thai banks begin to go under; fear of
recession leads to beliefs that baht will be devalued
Attack on the baht: Foreign speculators exchange
baht for dollars, betting they will get more baht for
their dollars later.
June 19: “We will never devalue the baht.” 
Repeated June 30.
July 2: Devaluation of the baht

40. July 1997: Devaluation Spreads
• Investor fears (similarInvestor fears (similar
problems in neighbors’problems in neighbors’
economies) and competitiveeconomies) and competitive
pressure (need to devaluepressure (need to devalue
to save export industries)to save export industries)
• 22ndnd
: Attack on the: Attack on the
Philippine pesoPhilippine peso 
devaluation on 11devaluation on 11thth
• 88thth
: Attack on: Attack on
Malaysian ringgitMalaysian ringgit 
devaluation on 14devaluation on 14thth
• 1111thth
: Attack on: Attack on
Indonesian rupiahIndonesian rupiah 
devaluation August 14devaluation August 14thth
• 1414thth
: Singaporean: Singaporean
dollar devalueddollar devalued
• 2424thth
: Currency meltdown.: Currency meltdown.

41. Devaluation to
Recession
• August-September 1997: Fears of
recession  Actual slowdowns
• October: Vietnam, Taiwan
devalue  Hong Kong stock market
crashes  global plunge in stock
markets (Dow Jones posts biggest
single-day loss, trading suspended)
• November: South Korean won
and Japanese yen depreciate vs.
US dollars  new round of stock
market crashes as investors pull out
of South Korea and Japan
• Crashes  Banks call in loans 
Failing businesses, unemployment
 recessions in East Asia

43. 2. Emulation
a. Institutions: Dollarization, Euros,
WTO/IMF standards
b. Learning: Copy success stories (avoid
socialism, sign on to neoliberalism or
developmental state)

44. 3. Opportunism
“Beggar Thy Neighbor” and the Great
Depression
Free-Riding
“Race to the Bottom”
Trading Economics for Politics (Cold
War)

45. C. Problems with Contagion
1. Why some regions rather than others?
2. Modeling, Opportunism or Diffusion?
3. Uncertain regional boundaries
4. Few specific predictions

46. IV. Security Communities as a Cause
of Regionalism
A. Requirements
1. Expectation of Nonviolence: Trust,
Predictability, Knowledge
2. “We-feeling”
3. Shared long-term interests  Reciprocity
4. Security Communities  Institutions, not the
other way around

47. B. Emergence
1. Democratic Peace? No democracy
vs. democracy wars  expectation of
peaceful interaction
2. Interdependence? Creates common
interests  incentives for reciprocity
3. Regime stability? Creates
predictability
4. Interaction? Creates “we-feeling”?

48. C. Assumption: Expectation of
Cooperation
1. Promotes Absolute-Gains Concerns
Over Relative-Gains Concerns
Why is this so important?

49. 2. Absolute gains concerns = incentive
to trade
Question becomes: Is this profitable for me?
Rather than:
Is this more profitable for me than it is for you?

50. a. Absolute
Advantage
USA Colombia
Missiles
OR
20 5
Coffee 10 200
Given 100 resources, what
can each country
produce?
•Production possibilities without trade
•Trade  Specialization. Coffee < 10
resources, Missiles < 20 resources
•Example: Coffee = 2, Missiles = 10.
US trades 5 missiles (50 resources) for
25 coffee (50 resources)
•Result: Both sides achieve levels of
consumption outside of the original200
20
Missiles
Coffee
10
10010

51. b. Comparative
Advantage
USA Britain
Wheat 100 20
Cars 10 5Given 100 resources, what
can each country
produce?
•US has absolute advantage in both goods!
•US has comparative advantage in…
•5:1 wheat, 2:1 cars  wheat
•UK has comparative advantage in
•1:2 rather than 1:5  cars
•UK buys wheat at <5 resources,
US buys cars at <10 resources
•Example: Wheat = 2, Cars = 8.
US sells 12 wheat (24 resources), buys 3
cars (24 resources)
50
10
100
Wheat
Cars
5

52. C. Evidence: Regional Economic
Organizations and Cooperation
1. ASEAN:
Only
minimal
political
conflict

53. 2. European Union: No war since WW II

54. 3. US FTAs: Trade Policy or Security Policy?
Year Country % US Exp % US Imp
1985 Israel 1 1
1989 Canada 23 18
1994 Mexico (NAFTA) + 14 + 12
2001 Jordan trivial trivial
2003 Chile < 1 < 1
2003 Singapore 2 1
2004 Morocco trivial trivial
2005 Australia 2 1
2006 Central America (DR-
CAFTA)
2 1
2006 Bahrain trivial trivial

55. E. Problems with Security Communities
1. Causality not established
2. Eurocentric: projects other regions will
follow path of Europe
3. 19th
-Century European Peace: security
community was absent
4. Parsimony: The “Liberal Peace” thesis
(democracy/trade/IOs  peace)
explains war better, and peace 
trade

56. V. A final challenge to liberalism and
globalization: commerce and coalitions

57. A. Heckscher-Ohlin Theorem: Relative factor
abundance determines production.
1. Prediction: Countries with abundant labor export
labor-intensive goods, countries with abundant
capital export capital-intensive goods
2. Expansion by Stolper-Samuelson theorem: Price
rise in factor-intensive good increases price of
factor
3. Implication: Tariff on capital-intensive goods
raises price of capital relative to wages, Tariff on
labor-intensive good raises wages relative to
capital

58. B. Extending the factors
1. Capital: Banks and investors
2. Labor: Workers
3. Land: Farmers
4. Free trade generally helps industries
using relatively abundant factors, hurts
industries using relatively scarce
factors

59. C. Predictions
1. Obvious: Relative strength of
organized interest groups
representing each factor determines
trade policy
2. Less obvious: Trade policy selectively
weakens or strengthens factors,
altering domestic political balance!
3. Some evidence supports model, but
most propositions too vague to test