Global Trade and Global Finance

Chapter 21

Global Trade and Global Finance

By Mathew Watson

Introduction      

The globalization of trade and finance           

The regulation of global trade     

The regulation of global finance 

Conclusion          

Reader's Guide

This chapter will introduce students to important issues in the conduct of global trade and global finance. It shows that the two spheres are regu­lated by different governance institutions, but that disturbances in one sphere can result in related disturbances in the other. This corresponds to one of the most widely cited definitions of economic globalization, where globalization is understood as the increased sensitivity of one part of the world economy to events originating elsewhere. A brief outline is provided of the increased turnover of trade and finance flows in recent decades. However, it is not immediately obvious that such flows are genuinely global in their geographical scope, because they appear to be heavily concentrated in those countries which have shaped the interna­tional balance of power to their own advantage. The remaining sections focus on the institutional history of the regulation of trade and financial flows. Once again, they suggest the significance of the inter­national balance of power, demonstrating that a global elite has successfully imprinted its interests in prevailing institutionalized regulatory norms. The political dominance of this elite has generally over­ridden the search for systemic regulatory coherence, enhancing the degree to which difficulties in either trade or finance create knock-on problems in the other sphere.

What is global trade?

Global trade, also known as international trade, is simply the import and export of goods and services across international boundaries. Goods and services that enter into a country for sale are called imports.

What is global financial? 

The global financial system is the worldwide framework of legal agreements, institutions, and both formal and informal economic actors that together facilitate international flows of financial capital for purposes of investment and trade financing.

Introduction

The 1970s was a troubled, even crisis, decade for the advanced industrialized countries of the Western world. Growth rates fell quite substantially from their post- Second World War plateau, with both unemployment and inflation increasing rapidly. This led to the identification of a qualitatively new economic phenomenon, stagfla­tion, in which advanced industrialized countries seemed to be powerless to re-energize their economies but paid the price for attempting to do so in the form of accelerat­ing prices. The political response to perceptions of such powerlessness was a concerted reaction against govern­ment intervention in the economy. National controls on the free movement of capital, money, goods, services, and people were progressively eased, and the language of ‘markets’ began to dominate the way politicians talked about their economic priorities. International institutions were also given extra authority to deprive markets of the overwhelmingly national character that they had dis­played in the 1970s and to superimpose an increasingly global character in its place (see Ch. 11).

The 2010s look set to be at least a similarly troubled decade, with all current predictions for the trajectory of the world economy in the immediate aftermath of the Great Recession suggesting that the end of the turbulence is by no means in sight. Growth rates amongst the advanced indus­trialized countries have been more badly affected since the onset of the global financial crisis than at any time in the 1970s, while unemployment is considerably higher now than it was then. As yet, though, there has been no evidence of the systematic rethink of governance priorities which occurred last time the world economy was gripped by a sense of endemic crisis. There have certainly been changes in individual aspects of regulation—especially in relation to the banking practices which are widely held to have precipitated the crisis—but the broader framework of regulation has remained intact. In general, both Western governments and the global governance institutions have stuck to the old story that, in essence, markets know best.

The biggest surprise of the post-2007 global financial crisis is just how little looks likely to change as a result of the public policy response. The language of markets and the image of a largely self-regulating world econ­omy still tend to dominate when political parties say that they cannot protect jobs throughout the economy because of the overriding priority of paying back recent record increases in public debt. Ironically, though, the debt was only initially run up to such an extent to pro­tect the financial bottom line of an otherwise bank­rupt banking sector as well as the jobs in that sector. Governments have had to bail out the banks while refusing to support other industries, so the argument goes, otherwise global markets themselves will enact their own form of retribution by making the underly­ing economic situation even worse. It is global markets, then, that are commonly seen to have dictated the print­ing of money in enormous sums to be pumped freely into the banking system, and it is also global markets that allegedly dictate the embrace of austerity and its accompanying harsh economic medicines for the rest of the population.

This might sound a bit like a Frankenstein’s Monster scenario, in which the creation—here, economic global­ization—runs out of control and turns on its creator. In Shelleys original story, though, the Monster ended its vengeful attacks on those who Frankenstein held dear by taking its own life, but we are currently a long way from the same ending with respect to economic globalization. This is because it is not globalization per se which some­how determines what governments can and cannot do in the wake of the global financial crisis. Rather, it is the structure of interests embedded within the choice of how to regulate economic globalization today which serves to circumscribe the range of possible outcomes. These interests show no signs of voluntarily withdrawing from the scene in the same way that Frankenstein’s Monster did, which is why a replica of Shelleys denouement is not to be expected. The chapter proceeds to investigate this structure of interests, but first a few words are in order about the prevailing pattern of global trade and global finance itself.

The globalization of trade and finance

There remains significant disagreement in the academic genuine economic globalization actually is (Hay 2011) literature about just how prevalent the trend towards The word ‘globalization’ has become synonymous with the time period of enhanced national market inte­gration since the crisis of the 1970s, but it also tends to be used—with varying degrees of analytical preci­sion—to describe the pattern of interdependent eco­nomic flows which has resulted (see Ch. 1). There have certainly been large increases over the last forty years in the integration of national markets for both traded goods and financial flows, but this does not mean in itself that the ensuing market arrangements incorpo­rate all countries of the world in any way evenly. As Held et al. (1999) have argued, it is important to dif­ferentiate between the ‘intensity’ and the ‘extensity’ of supposedly global flows of trade and finance. Intensity measures reveal the degree to which national economic borders are now traversed by such flows: they indicate whether there are more than previously but remain silent on their geographical character. Extensity mea­sures, by contrast, focus on the geographical dispersal of contemporary trade and finance, asking not simply whether there are more such flows but also whether they systematically incorporate more countries of the world. The distinction, then, is between the speeding up and the spreading out of flows of trade and finance. Somewhat confusingly, the single word ‘globalization’ is frequently used to describe both resulting patterns, even though it would clearly be preferable to keep them analytically distinct.

What seems to have occurred in general is the emer­gence of particular globalization ‘hotspots’ centred on the most advanced industrialized countries, in which there has been a significant intensification of cross- border economic activity (Pickel 2005). Intensity mea­sures therefore appear to capture the essence of these changes better, although this should not detract from the fact that in some very important cases—the emer­gence of the BRICs economies, for instance, as well as the continued rise of East Asia—a greater extensity of economic globalization is also apparent (see Ch. 5). At the same time, though, many of the poorest countries of the world remain largely untouched by the new eco­nomic structures and appear to have little connection to the prevailing structure of globalization hotspots. They have been largely bypassed, both intensively and extensively.

Partly this is an issue of development, because the organization of cross-border economic activities has tended to focus only on the most advanced sectors of the world economy. Partly it is an issue of political asymmetries in the regulatory system for global trade and global finance, with the advanced industrialized

countries keeping most of the economic gains from globalization for themselves. As development issues are dealt with elsewhere in the book (see Ch. 20), this chapter focuses instead primarily on the regulatory principles on which global trade and global finance are today grounded. The aim is to highlight the means through which the balance of power in the inter-state system is imprinted on the regulation of global trade and global finance. This will enable students to concep­tualize the tendency towards economic globalization as a clearly political process. Insofar as the crisis of the 1970s resulted in greater trust being placed in market mechanisms to guide economic activity, for those mar­kets to exist as concrete historical phenomena they first had to be ‘made’ politically (see Box 21.1).

When treated as a purely economic phenomenon, the most frequently cited indicator of globalization is the eye-catching increase in world trade witnessed in the last forty years. Here, then, we see evidence of the successful constitution of ever deeper international markets for traded goods. The relevant increase is demonstrated best by looking at standardized figures for the volume of world exports, because this allows for meaningful direct comparisons to be made. Taking the 2000 figure as the baseline number of 100—which itself corresponded in value terms to approximately US$8.6 trillion of world trade—this compares with standardized numbers of 22 for 1970, 37 for 1980, and 54 for 1990. In other words, in this take-off and early maturation stage of economic globalization, the vol­ume of world exports grew by roughly a factor of 4.5 between 1970 and 2000, a factor of 3 between 1980 and 2000, and a factor of 2 between 1990 and 2000 alone. This signifies an accelerating trend, and fur­ther increases in global trade after 2000 continued to be marked until the destabilizing impact of the sub­prime crisis of 2007-8 (World Trade Organization.  The figures for 2009, in fact, represent the largest post-Second World War year-on-year reduc­tion in world trade: by recent historical standards the drop was a barely believable 12 per cent. There was a significant rebound of 13.8 per cent in 2010, followed by slower growth of 5 per cent in 2011 and slower still projected growth of 3.7 per cent for 2012, but all this means that world trade is still significantly trending upwards despite the collapse in 2009. Between 1991 and 2011 the trend increase in merchandise exports was an annual 5.5 per cent, and the dollar value of world trade reached US$18.2 trillion in 2011, moving beyond the previous peak of US$16.0 trillion in 2008 (World Trade Organization 2012).

The figures also show that the world economy was becoming more systematically open to global trade from 1970s onwards. The relevant indicator here is the ratio of growth in global trade to growth in global GDP. If the two numbers are exactly the same, and therefore the ratio is 1:1, all increases in world export demand are fully accounted for by the fact that the world economy is becoming richer as a whole, and not by the fact that it is becoming generically more open to trade. However, taking 1970-2000 as a single time period, the ratio was 1.77:1, showing that increases in global trade were almost double those of global GDP. Between 2000 and 2011, even allowing for the collapse of merchandise trade in 2009, it has been more than double (all figures calculated from World Trade Organization 2007, 2012).

On their own, though, the figures here can only demonstrate unequivocally an increasing intensity of global trade flows. The extensity figures are signifi­cantly more complex and can, in truth, only be pre­sented on a case-by-case basis to conclude with any certainty that a particular country is experiencing the globalization of trade extensively as well as inten­sively. In general, extensity factors are more likely to be apparent the more deeply embedded a country is within a regional trading agreement (Farrell, Hettne, and Van Langenhove 2005). Yet even here the geo­graphical pattern of the observed extensity will almost certainly be more pronounced within the regional bloc than beyond its borders. Those borders in fact often present a good proxy for the outer limits of the global­ization of trade flows.

The same tends to be true of financial flows which are activated as a means of ensuring that new plant and machinery can be paid for in one country but physically established in another. This is called foreign direct investment and is the most obvious example of the extensity of flows of global finance (Jensen 2008).

However, most of the more remarkable changes ii global financial markets since the 1970s are of a quali­tatively different nature (see Box 21.2). They do no: require money to change hands in any conventional sense, and therefore the relevant flows do not have a geographical character consistent with a movement across space. Most financial markets today have a global component, insofar as advances in computer technology allow their trading relationships to be accessed by anyone who has a suitable network con­nection. Yet the trading itself typically takes place through highly capitalized and reputable counter­parties—banks, insurance companies, hedge funds, professional investment bodies, pension funds, etc.— swapping giant IOUs, which are either added to or sub­tracted from their ‘paper’ position at the end of each day’s trading. At most in this instance it might be pos­sible to talk about intensity measures.

However, we should be under no illusions about just how significant trading flows on financial market: now are. The average daily turnover on world currency markets alone was US$3.98 trillion in 2010, up by one fifth from the previous survey in 2007. This means that while world merchandise trade has increased on average by 5.5 per cent per year between 1991 and 2011 over the same time period average daily turnover on world currency markets has increased in total by a staggering 675 per cent (Bank for International Settlement 2010). To write the most up-to-date figure out in long-hand requires the addition of ten noughts after the ‘3’, the ‘9’, and the ‘8’. Flows of global finance consequent completely dwarf flows of global trade, with the doll value of currency market turnover alone being pretty much eighty times higher than the dollar value of countries’ export activities in aggregate. Moreover outstanding positions on currency markets are them­selves only a fraction of those on derivatives contracts, the type of financial instrument to which banks found themselves hopelessly overexposed after the sub-prime crisis. While not as big in purely monetary terms, bond markets have also recently been in the news as the sub-prime crisis evolved through various other forms into the eurozone debt crisis (see Box 21.6). It was adverse patterns of trading on bond markets which pushed the debt repayment schedules of Italy, Spain, Portugal, Cyprus, Ireland, and, in particular, Greece so high that they were required to seek external support in exchange for commitments to enhanced levels of public spending cuts.

Trading patterns on financial markets tend to become newsworthy in circumstances of high speculative pres­sure. A large proportion of the US$3.98 trillion of daily turnover on world currency markets, for instance, now represents currencies being bought and sold for purely speculative purposes (Kenen 1996). Such speculation represents two things. On the one hand, it is a bet placed on the power of private financial institutions to force the movement in relative currency prices that they most desire. On the other hand, it is a bet placed against gov­ernments’ ability to maintain a truly autonomous policy course in the face of the disciplinary power of private financial institutions.

However, the source of such attacks is by no means evenly spread geographically, because neither is the ownership of financial assets. Global finance is spatially

concentrated in the North Atlantic economy. Indeed, the concentration is so marked—and intensifying— that the adjective ‘global’ is questionable as a descrip­tion of both the character of financial flows in the world economy and the recent crisis which ensued when those flows suddenly dried up. According to figures produced by the McKinsey Global Institute just before the onset of the crisis in 2007, two-thirds of the world’s US$196 trillion of active financial assets were held in the US, the UK, and Western Europe. Despite the continued rise of East Asia in global trade and the emergence of China as a genuine trading superpower, global financial flows have not followed the same pattern in a gradual shift in their centre of gravity to the East (Hirst, Thompson, and Bromley 2009).

Key Points

There are more flows of trade and finance around the world economy today than at any previous time, but care should be taken about the precise sense in which such flows are labelled as 'global'.

The increase in world trade since 1970 is dramatic, although it might be that the process of regional economic integration accounts for those changes more readily than the process of genuine global economic integration. Trading on financial markets only very rarely involves money physically changing hands, so that the consequences of such trading are much more likely to have a genuinely global reach than its pattern.

The regulation of global trade

The Bretton Woods Conference was held in 1944 in the New England town of that name. The Conference was attended by forty-four soon to be victorious Allied countries from 1-22 July of that year. It was organized in an attempt to design a post-war governance struc­ture for the Western world that would prevent the world economy from returning to the Great Depression that had so blighted lives and livelihoods in the preced­ing decade (see Ch. 11). The new Keynesian economic theory of that time suggested that it was output rather than prices which adjusted to global imbalances in trade, thus forcing national economies into a repetitive cycle of reduced production and job losses. The ensu­ing severe rises in unemployment preceded the political mobilization of many European populations to radical right-wing ideologies in the 1930s, and Keynes was determined that the structure of global trade should be stabilized in order to prevent history from repeating itself on this point.

His priority was to create a multilateral institution that would facilitate continual expansions in global trade. The proposed institution was to be called the International Trade Organization (ITO). However, con­certed dissent domestically within US politics meant that President Truman did not even bother sending the final bill to Congress for ratification. It was deemed too interventionist for US politicians’ tastes, for it would have introduced common conditions on things such as labour and environmental standards in order to create a genuine level playing field for the conduct of global..

Box 21.1

What is international trade?

At its most basic, international trade occurs when the citizens of one country produce a good that is subsequently consumed by the citizens of another country. There is consequently a geographical mismatch between the site of production and the site of consumption, with the good travelling across at least one national border to connect the producer economically with the consumer. The country producing the good for sale elsewhere in the world is the exporter; the country in which the good is eventually sold is the importer.

Box 21.2 What is international finance?

Even though the language and economic imagery used to describe the two is often the same, in practice the dynamics of international finance differ substantially from those of interna­tional trade. Except for the case of foreign direct investment, it i is very difficult to think of examples from the financial sphere in which one country ‘produces' money for another country to 'consume'. Activity generally takes place on financial markets through taking paper positions using advanced information technology networks—financial products only very rarely flow across borders in any straightforward import/export sense. What makes finance international is the scale of its reach into, and influence over, global politics.