Week 1-International Economic System

The International Economic System

What is PIER?

• Political: studies the political battle between the winners and the losers from economic exchange.
• Economic: investigates the origins and effects of developments in the international economic system.
• International: examines the connections between economics and politics beyond the confines of a single state.

PIER connects

• Politics: international and domestic.
• Economics: international and, in brackets, domestic.

Globalization

• Economic: long-distance flows of goods, capital and services across national borders and continents.
• Political: diffusion of government policies across countries through the spread of international norms and/or integration into international institutions.
• Social: spread of ideas, information, values and people across countries and continents.

Why PIER?

Evolution of International Relations

• 1950s onward: realism.
• From the 1960s: neorealism.
• From the 1970s: neoliberal institutionalism.
• From the 1980s: domestic politics.
• Around the 2000s: rationalism vs. constructivism.

Evolution of themes

• Interstate conflict; war; security; deterrence; nuclear threat; Cold War; arms races; system structure; power distribution.
• Cooperation; institutions; globalization; human rights; international law; interest groups; domestic institutions; rationality; ideas; norms.
• Civil wars; multipolarity; power competition; geopolitics; institutions and disintegration; (non-)cooperation; financial crises; populism.

Political economy topics include institutions, globalization, interest groups, domestic institutions, financial crises and populism.

A Very Short History of Globalization

When did globalization begin?

• Possible dates: 1492? 1820? 1980?
• Trade ≠ globalization: the effect on “ordinary people” is crucial for globalization. Things like the Silk Road don’t count, normal people didn’t buy silk.
• Key obstacles:
  • Freight costs: technology.
  • Taxes and tariffs: policy.
  • Basically, when did they decline in a way that trade affected a large amount of people?
• Measurement: convergence of prices in the origin and destination countries. Can ordinary people afford the products?

Price convergence

• The graph compares spice and coffee mark-ups between Amsterdam and Southeast Asia, 1580–1939.
• Commodities shown: cloves, black pepper and coffee.
• Source: O’Rourke/Williamson 2002.

Policy vs. technology

Price of coffe suddenly became more expensive between 1780 and 1820 because of the Napoleonic wars (blockades and other obstacles to trade). Then when they ended, the price lowered a lot. The markups converged and globalisation began. It was thus in the 19th century when globalisation happened.

Also trains and refrigerators (for oversea transport of agricultural products) appear among others which accelerates this phenomenon further. Little by little technology starts playing a lower effect and policy a bigger one.

Period	Price gaps	Reason
1820–1914	Cut by 81%	Fewer barriers: 28%; cheaper transport: 72%
1914–1950	Increased by 100%	More barriers
1950–2000	Cut by 76%	Fewer barriers: 74%; cheaper transport: 26%
1820–2000	Cut by 92%	Policies: 18%; technology: 82%
Source: O’Rourke & Williamson 1999.

First era of globalization

19th-century trade

• Policy shift: gradual dismantling of tariffs until the 1870s. From the 1780s onwards Britain tries to experiment with trade liberalisation.
• Key events:
  • Napoleonic Wars, 1803–1815.
  • Corn Laws, 1815. Tariffs on agricultural products to Britain
    • British farmers were very opposed to trade because they couldn’t export much. Britain was mostly manufacturing and they weren’t competitive (much more land than capital in Germany or France compared to Britain). The workers in the industry did want liberalisation though, they were competitive and didn’t want to pay for overpriced agricultural goods.
  • Repeal of the Corn Laws, 1846.
    • Working class and capital class ally against these laws. Trade increases quite a bit.
  • Cobden–Chevalier Treaty, 1860.
    • One of the first free-trade treaties, famous and has the first most-favoured nation clause.
  • National unifications, 1860s/1870s.
• Result: exports as a percentage of world output peaked in 1913.

19th-century money

• Gold Standard: Britain moved to gold; other countries followed; tipping point around 1870 (pretty much everyone joined, since so many followed Britain). Money value linked to precious metals in some countries. Isaac Newton, master of the Mint, overvalued the price of gold which caused the silver coins to disappear and get used more than the gold ones.
• Features:
  • Fixed exchange rate, since all the currencies are based on these metals.
    • You have to make sure though that your interests rate are such that these exchange rates are always fixed. The policies for this require prioritising external stability over internal stability, you pay the price domestically for exchange rate stability (increase unemployment or go through a recession even).
  • External stability and internal adjustment.
  • Free convertibility.
  • International gold flows.

Interwar collapse

Rising protectionism

• Key events:
  • Smoot–Hawley tariff, United States, 1930.
    • Protectionism because of the recession, then other states that weren’t into agriculture (what the tariff initially protected) demanded protection and tariffs went up to 41% average.
  • Imperial Preference system, United Kingdom, 1932.
    • Britain followed.
  • Retaliation by other countries.
    • Trade collapsed.

Collapse of trade

Average monthly trade, million US dollars:

Year	1929	1930	1931	1932
Trade	2.858	2.327	1.668	1.122

End of gold

• Phases:
  • Hyperinflation in the early 1920s.
  • Return to gold, 1924–1931.
    • Hoping it’ll be the solution.
  • Great Depression, from 1929 onward.
• Dissolution:
  • Germany and Great Britain: 1931.
  • United States: 1933.
  • France, the Netherlands and Switzerland: 1936.
  • Why didn’t it work? Why did everyone leave little by little? The price of gold was fixed in Britain for several hundred years and then just collapsed? How is this explained?
    • Politics. Democratisation created an incompatibility, voters didn’t want internal adjustment when they were going through a crisis.

Post-war trade regime

GATT system

• Evolution: GATT established in 1947; membership increased from 23 to 164; formal organization in 1995.
• Features:
  • Non-discrimination.
  • Regulation of trade in goods and services.
  • Intellectual property rights (IPR).
• WTO functions:
  • Forum for negotiations.
  • Administration of trade agreements.
  • Trade policy review.
  • Dispute settlement.

Negotiation rounds

Little by little they moved from tariffs, which declined, to the new biggest obstacle to trade: non-tariffs instruments (e.g standards).

Place	Years	Topics
Geneva	1947	Tariffs
Annecy	1949	Tariffs
Torquay	1951	Tariffs
Geneva	1956	Tariffs
Dillon	1960–1961	Tariffs
Kennedy	1964–1967	Tariffs
Tokyo	1973–1979	Tariffs; non-tariffs
Uruguay	1986–1993	Tariffs; non-tariffs; services; IPRs; dispute settlement
Doha	2002–	Tariffs; non-tariffs; services; IPRs; dispute settlement

Bretton Woods

• Evolution:
  • United States–United Kingdom negotiations.
  • Bretton Woods Conference, 1944.
  • Collapse from 1973 onward.
• Features:
  • Fixed but adjustable rates.
  • US dollar linked to gold.
  • Capital controls.
• IMF: formal organization created to oversee and coordinate monetary policies and manage crises.
  • Originally Keynesian idea not so neoliberal, contrary to current perceptions.

End of the millennium

• Preferential trade: GATT stagnation; regional trade blocks such as the EU, NAFTA and Mercosur; preferential trade agreements from the 1990s onward.
  • Doha round never finished, countries switched away from multileral GATT to preferential trade agreements.
• Monetary “non-system”: spread of floating exchange rates from 1973 onward; variety of exchange-rate regimes; Eurozone.
• Capital mobility: dismantling of capital controls; rise of foreign investment.

Conclusion

The “End of History”?

• 1990s thesis: history has ended with the global dominance of democratic capitalism.
• Victory of liberalism: future conflicts will occur within, not against, the liberal democratic model.
• International Relations: increasingly focused on economic cooperation rather than military competition.

Does history repeat itself?

• “End of History” postponed.
• Political challenges: rising populism challenges liberal democracy and international cooperation.
• Economic challenges: rising protectionism challenges globalization.

PIER: politics and economics

Politics	Economics
WTO	Trade
Power	Exchange-rate regime
Elections	Economic crisis
Populism	Policy autonomy

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