Lesson 2: THE GLOBALIZATION OF WORLD

ECONOMICS

 INTERNATIONAL TRADING SYSTEMS

What is international trading system?
-The international trading system comprises many thousands of unilateral, bilateral,
regional, and multilateral rules and agreements among more than two hundred nations.
International trading systems are not new. The oldest known international trade route
was the Silk Road-a network of pathways in the ancient world that spanned from
China to what is now the Middle East and to Europe. It was called as such because
one of the most profitable products traded through this network was silk, which was
highly prized especially in the area that is now the Middle East as well as in the West
(today's Europe). Traders used the Silk Road regularly from 130 BCE when the Chinese
Han dynasty opened trade to the West until 1453 BCE when the Ottoman Empire
closed it.
-According to historians Dennis O. Flynn and Arturo Giraldez, the age of globalization
began when "all important populated continents began to exchange products
continuously both with each other directly and indirectly via other continents and in
values sufficient to generate crucial impacts on all trading partners." Flynn and Giraldez
trace this back to 1571 with the establishment of the galleon trade that connected
Manila in the Philippines and Acapulco in Mexico." This was the first time that the
Americas were directly connected to Asian trading routes. For Filipinos, it is crucial to
note that economic globalization began on the country's shores.
-The galleon trade was part of the age of mercantilism. From the 16th century to the
18th century, countries, primarily in Europe, competed with one another to sell more
goods as a means to boost their country's income (called monetary reserves later on).
To defend their products from competitors who sold goods more cheaply, these regimes
(mainly monarchies) imposed high tariffs, forbade colonies to trade with other nations,
restricted trade routes, and subsidized its exports. Mercantilism was thus also a system
of global trade with multiple restrictions.
Why is international trade system important?
-Trade is central to ending global poverty. Countries that are open to international trade
tend to grow faster, innovate, improve productivity and provide higher income and more
opportunities to their people. Open trade also benefits lower-income households by
offering consumers more affordable goods and services.
KEY TAKEAWAYS
-International trade is the exchange of goods and services between countries.
-Trading globally gives consumers and countries the opportunity to be exposed to
goods and services not available in their own countries, or more expensive
domestically.
WHAT ARE THE 3 TYPES OF INTERNATIONAL TRADE?
Export Trade
  In global trade, exporting is the process by which companies from one country
sell their goods and services to companies or consumers in a different country.
Common exports exchanged from one country to another include energy and
natural resources, raw materials like food or textiles, and finished consumer
products like electronics.
IMPORT TRADE
 If we look at this transaction in reverse, we see import trade. This is where goods
or services are brought into one country from another, where they were originally
manufactured or created. Goods are normally imported when the country of
origin does not have the demand for the goods. Or, where the manufacture of
goods in one country is significantly lower than it would be in the receiving
country. Goods can also be imported if they cannot be manufactured in the
desired country – an example being the import of crude oil.
ENTREPOT TRADE
 Also known as transshipment, Entrepot Trade is where goods are imported into a
country and then re-exported out, without being distributed within the importing
country. For example, if metal is imported from India to Singapore, processed
and then re-exported to China, it is entrepot trade. This form of trade is used for a
number of reasons, including access to machinery, the development of
technology and to help reinforce international relations.

 THE BRETTON WOODS SYSTEM

What was the Bretton Woods System and what was its purpose?

-This system was largely influenced by British economist John Maynard Keynes
(1883-1946).
-The Bretton Woods agreement established in July 1944. Approximately 730 delegates
representing 44 countries at the United Nations Monetary and Financial Conference
held in Bretton Woods, New Hamsphire. Thus, the name “Bretton Woods Agreement”.
-It was created in order to replace the gold standard with the US Dollar as the global
currency.
-Under the Bretton Woods Agreement also created two International Institutions:
-The International Monetary Fund (IMF) – aims to promote global economic growth
and financial stability to encourage international trade and reduce poverty.
-The International Bank for Reconstruction and Development (IBRD) also known as
The World Bank – to provide financial assistance to countries affected by World War 1
to reconstruction projects in 1945.
-Under the Agreement, countries promise that their central banks would maintain fixed
exchange rates between their currencies and the dollar and agreed to avoid trade wars.
-The Bretton Woods System gave nations more flexibility than a strict adherence to
the gold standard. It also provided less volatility than a currency system with no
standard at all.

The Difficulties and End of Bretton Woods System

-The system dissolved between 1968 and 1973. In August 1971, U.S. President Richard
Nixon announced the “temporary” suspension of the dollar’s convertibility into gold.
While the dollar had struggled throughout most of the 1960s within the parity
established at Bretton Woods, this crisis marked the breakdown of the system. An
attempt to revive the fixed exchange rates failed, and by March 1973 the major
currencies began to float against each other.
-Since the collapse of the Bretton Woods System, IMF and IBRD have been free to
choose any form of exchange arrangement they wish (except pegging their currency to
gold): allowing the currency to float freely, pegging it to another currency or a basket of
currencies, adopting the currency of another country, participating in a currency bloc, or
forming part of a monetary union.

 NEOLIBERALISM AND ITS DISCONTENTS

What is Neoliberalism?
-Neoliberalism is a political and economic policy model that emphasizes the value of
free market capitalism while seeking to transfer control of economic factors from the
government to the private sector. Also incorporating the policies of privatization,
deregulation, globalization, and free trade, it is commonly—though perhaps incorrectly
—associated with laissez-faire or “hands-off” economics. Neoliberalism is considered a
180-degree reversal of the Keynesian phase of capitalism prevalent from 1945 to 1980.
Key Takeaways: Neoliberalism
-Neoliberalism is a model of free market capitalism that favors greatly reduced
government spending, deregulation, globalization, free trade, and privatization.
-Since the 1980s, neoliberalism has been associated with the “trickle-down” economic
policies of President Ronald Reagan in the United States and Prime Minister Margaret
Thatcher in the United Kingdom.
-Neoliberalism has been criticized for limiting social services, overly empowering
corporations, and exacerbating economic inequality. 
Origins of Neoliberalism
-The term neoliberalism was first coined in 1938 at a conference of noted
economists in Paris. The group, which included Walter Lippmann, Friedrich Hayek,
and Ludwig von Mises, defined neoliberalism as an emphasis on “the priority of the
price mechanism, free enterprise, the system of competition, and a strong and impartial
state.”
Having both been exiled from Nazi-controlled Austria, Ludwig von Mises and Friedrich
Hayek viewed social democracy, as exemplified by U.S. President Franklin Rooseve.
lt’s heavily government-regulated New Deal programs and the rise of Great Britain’s
post World War II welfare state, as manifestations of collective ownership of production
and wealth occupying the same socioeconomic spectrum as Nazism and communism.

Freedom, once a rallying cry of the Left, is now the stated ideology of the neoliberal
program of upward redistribution of wealth. Indeed, the past decades have seen
stagnating wages and a widening income disparity, even though women, LGBT people,
people of color, and others who once faced legally enforced, identity-based social
exclusion now appear to be more “free” than they were during the pre-neoliberal period
of high Fordism. These two aspects of neoliberalism—its identitarian inclusiveness and
its anti-working class agenda—appear to go hand-in-hand. Today, discontentment with
the neoliberal order are expressed in terms of identity-based political constituencies,
e.g., “women,” “labor,” “the black community”, integrated “democratically” as objects of
the state (in the US, primarily through the Democratic Party). This appeal however,
remains no less authoritarian for all of its apparent liberalism.

Although the politics of the New Left has achieved a dubious, partial success in the
neoliberal era, today we are perhaps further than ever from the goal of global socialism.
In its passing from the 1960s and through the 1980s, the New Left became
institutionalized into two semi-autonomous camps, the “academic left” and the “activist
left” –– the devolution of the ‘Marxist left’ into activist organizations in the 1980s was
part of this transformation. While these camps continue to express a discontent with the
status quo, they lack the mass appeal and political opportunity of the 1960s. 2016 has
manifested the crisis of Neoliberalism in an acute manner with such phenomena as
Brexit and the US Elections. In the 2016 U.S. presidential elections, discontent with
neoliberalism expressed itself in the dual form of Donald Trump and Bernie Sanders’
candidacies.

 THE GLOBAL FINANCIAL CRISIS AND THE

CHALLENGE TO NEOLIBERALISM
 Russia’s case was just one example of how the “shock therapy” of neoliberalism did
not lead to the ideal outcomes predicted by economist who believed in perfectly free
markets. The greatest recent repudiation of this thinking was the recent global financial
crisis of 2008-2009. Neoliberalism came under the significant strain during the global
financial crisis of 2007-2008 when the world experienced the greatest economic
downturn since the Greatest depression.

The scaling back of regulations continued until the 2000s, paving the way for a
brewing crisis. To mitigate the risk of these loans, banks that were lending
houseowners’ money pooled these mortgage payments and sold them as “mortgage-
backed securities” (MBSs). Since there was so much surplus money circulating, the
demand for MBSs increased as investors clamored for more investment opportunities.
They began extending loans to families and individuals with dubious credit records-
people who were unlikely to pay their loans back. This high risk mortgages became
known as sub-prime mortgages. Since there was so much surplus money circulating,
the demand for MBSs increased as investors clamored for more investment
opportunities. Financial experts wrongly assumed that, even if many of the borrowers
were individuals and families who would struggle to pay, a majority would not default.
Moreover, bank thought that since there were so many mortgages in just one MBS, a
few failures would not ruin the entirety of the investment. Financial experts wrongly
assumed that, even if many of the borrowers were individuals and families who would
struggle to pay, a majority would not default. Banks also assumed that housing prices
would continue to increase.

Therefore, even if homeowners default on their loans, these banks could simply
reacquire the homes and sell them at a price, turning a profit. This realization triggered
the rapid reselling of MBSs, as banks and investors tried to get rid of their bad
investments. The crisis spread beyond the Unites States since many investors were
foreign government, corporations, and individuals. The loss of their money spread like
wildfire back to their countries. Until now, countries like Spain and Greece are heavily
indebted (almost like Third World Countries), and debt relief has come at a high price.
Moreover, the reduction in government spending has slowed down growth and ensured
high levels of unemployment.

The United States recovered relatively quickly thanks to a large Keynesian-style

stimulus package that President Barack Obama pushed for in his first months in office.
In Europe, the continuing economic crisis has sparked a political upheaval.
  ECONOMIC GLOBALIZATION TODAY
-Exports, not just the local selling of goods and services, make national economies grow
at present.
-In the past those that benefited the most from free trade were the advanced nations
that were producing and selling industrial and agricultural goods.
-The United States, Japan and the member-countries of the European Union were
responsible for 65% of global exports, while the developing countries only
accounted for 29%.
-By 2011, developing countries like Philippines, India, China, Argentina and Brazil
accounted for 51% of global exports while the share of advanced nations-
including United States had gone down to 45%.
-The WTO-led reduction of trade barriers, known as trade liberalization, has
profoundly altered the dynamics of the global economy.

-In the recent decades, partly as a result of these increased exports, economic
organization has ushered in an unprecedented spike in global growth rates.
-According to the IMF, the global per capita GDP rose over five-fold in the second
half of the 20th century. It was this growth that created the large Asian economies like
Japan, China, Korea, Hong Kong and Singapore.
-Economic globalization remains uneven process, with some countries, corporations
and individuals benefiting a lot more than others.
-The series of trade talks under the WTO have led to unprecedented reductions in tariffs
and other trade barriers but these processes have often been unfair.

-First, developed countries are often protectionist, as they repeatedly refuse to lift
policies that safeguard their primary products that could otherwise be overwhelmed by
imports from the developing world. The best example of this double standard is Japan’s
determined refusal to allow rice imports into the country to protect its farming sector.
The United States likewise fiercely protects its sugar industry, forcing consumers and
sugar-dependent businesses to pay higher prices instead of getting cheaper sugar from
plantations of Central America.

-The beneficiaries of global commerce have been mainly transnational corporations

(TNCs) and not governments. These TNCs are concerned more with profits than with
assisting the social programs of the governments hosting them.
-Host countries, loosen tax laws, which prevents wages from rising while sacrificing
social and environmental programs that protect the underprivileged members of their
societies,
-The term “race to the bottom”, refers to countries’ lowering their labor standards,
including the protection of workers’ interest, to lure in foreign investors seeking high
profit margins at the lowest cost possible. Governments weaken environmental laws to
attract investors, creating fatal, consequences on their ecological balance and depleting
them of their finite resources (like oil, coal, and minerals)

LOCALIZING THE MATERIAL

-Many Philippine industries were devastated by unfair trade deals under the GATT and
eventually the WTO. One sector that was particularly affected was Philippine
agriculture.
-According to Walden Bello and a team of researchers at Focus on the Global South,
the US used its power under the GATT system to prevent Philippine importers from
purchasing Philippine poultry and pork- even as it sold meat to the Philippines.

-Although the Philippines expected to make up losses in sectors like meat with gains in
areas such as coconut products, no significant change was realized.
-In 1993, coconut exports amounted to $1.9 billion and after a slight increase to $2.3
billion in 1997, it returned to $1.9 billion in 200
-Most strikingly, Bello and company noted that the Philippines become a net food
importer under the GATT. In 1993, the country had an agricultural trade surplus of $292
million. It had a deficit of $764 million in 1997 and $794 million in 2002.

 CONCLUSION
-International economic integration is a central tenet of globalization. In fact, it is
so crucial to the process that many writers and commentators confuse this integration
for the entirety of globalization. Economics is just one window into the phenomenon of
globalization; it is not the entire thing.

-Much of globalization is anchored on changes in the economy. Global culture, for

example, is facilitated by trade. Filipinos would not be as aware of American culture if
not for the trade that allows locals to watch American movies, listen to American music,
and consume American products. The globalization of politics is likewise largely
contingent on trade relations. These days, many events of foreign affairs are
conducted to cement trading relations between and among states.

-Given the stakes involved in economic globalization, it is perennially important to ask

how this system can be made more just. Although some elements of global free trade
can be scaled back, politics cannot do away with it as whole. International policy
makers, therefore, should strive to think of ways to make trading deals fairer.
Government must also continue to device ways of cushioning the most damaging
effects of economic globalization, while ensuring that its benefits accrue for everyone.