Chapter 13 International
Economic Cooperation
Professor Michael R. Baysdell
PS130 World Politics
Saginaw Valley State University
Origins of Economic Cooperation
• Liberal idea of creating a global economy was slow
to take hold
• Began to take shape in 1930s and 1940s
• End of WWII and creation of global and regional
intergovernmental organizations
– World Bank, IMF, GATT, and the WTO
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Criteria for Economic Development
• Economic diversification
• Limited economic reliance on primary
products
• International market and investment access
• A stable currency
• Strong physical and technological
infrastructure
• Domestic order
• Effective government that controls corruption
Development in the South: Requirements
• Loans
• Private investment—FDI and FPI
• Trade (major weakness for most LDCs; too
dependent on primary products like oil)
• Foreign aid
• Internal reforms to combat protectionism
and corruption
• May also benefit from ex-pat remittances
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Economic Cooperation & Development:
The Institutions
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United Nations (general cooperation)
GATT and WTO (trade cooperation)
IMF (monetary cooperation)
The World Bank Group (development
cooperation)
• OECD and the Group of 8 (EDC institutions)
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The UN and Economic Cooperation
• Global umbrella organization for numerous
agencies and programs
– UN General Assembly, UN Economic and Social
Council, UN Development Program
– Economic focus for United Nations: global
economic regulation and economic development
of the South and debt relief and economic aid for
poorest countries
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The UN & Global Economic Regulation
• Regulation of transnational or multinational
corporations (TNCs/MNCs)
• Creation of global labor standards
– International Labor Organization (ILO)
– Focus on child labor and the creation of the UN
Children’s Fund (UNICEF)
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The United Nations and
Economic Development of the South
• United Nations provides forum for world
leaders from the North and South
• Numerous programs that promote
development
– UN Development Program (UNDP)
– UN Conference on Trade and Development
(UNCTAD)
– Group of 77 (G-77)
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Trade Cooperation
• Generalized Agreement on Tariffs and Trade
(GATT, 1948)
• World Trade Organization (WTO) 1995
– Has power to enforce GATT
– Uruguay Round : Tariff reductions agreed upon:
1/3rd over 10 years
– Doha Round: Negotiations collapsed over
North/South tensions
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Structure and Role of the WTO
• Power to enforce provisions of GATT
– Assess trade penalties
• Countries can withdraw
• Three-judge panel hears trade violation
complaints
– Sanctions
– Each country has one vote
– Imposed by 2/3 vote
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The Future of GATT and the WTO
• Tension between sovereignty and global
governance
– What if a country rejects WTO rules?
• Criticism of the WTO as an agent of globalization
• Revising the GATT: The Stalled DOHA Round
(2001-2007)
– Controversial issues include agricultural subsidies,
consumer and workers’ rights, environmental standards,
and developing nations opening their markets up to
industrial goods and services to the rest of the world
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Monetary Cooperation
• Early monetary regulation
– Bretton Woods system operated on the basis of
“fixed convertibility into gold”
– Unexpected fluctuations of exchange rates
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The Role of the IMF
• Helps maintain exchange-rate stability
• Special Drawing Rights
• Efforts in the 1990s
– Stabilize economies of LDCs
– Aid CIT reorientation to market economy
– Asian financial crisis
– Russian financial crisis
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Controversy about the IMF
• Voting based on member contribution
• Conditionality of Lending Operations
– Interferes with sovereignty
– Destabilizes countries
– Maintains dependency of LDCs
– Capitalism and social justice
– Imposes tight budget restrictions that limit a recipient
nation's ability to manage domestic health, education,
and welfare
– Weak anti-corruption protections for loans
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The Defense of the IMF
• Since EDCs provide the funds, they ought to
have a say in how they are invested
• Reforms are necessary to correct the
problems
• Some evidence that IMF is easing its
requirements
– Case of Argentina
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Development Cooperation:
The World Bank Group
• International Bank for Reconstruction and Development (similar
to commercial bank)
• International Development Association (focuses on loans to
poorest countries)
• International Finance Cooperation (loans to LDCs and
guarantees private investment promoting private-sector
development)
• Multilateral Investment Guarantee Agency (promotes flow of
private development capital to LDCs through guarantees)
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Controversy about the World Bank
• Dominated by North, particularly U.S. & Europe
• Too little funding
• No understanding of the needs of South and narrow,
monetary-based definition of poverty
• Terms of loans violate sovereignty, damage economies
• Not enough attention to human and environmental impacts
of projects
• Promotes market economies, economic globalization, foreign
direct investment, and other aspects of capitalism
• Corrupt use of World Bank funds by recipient nations
• Tension over Wolfowitz appointment
• World Bank is seen as
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Economic Cooperation and Development:
EDC Institutions
• Organization of Economic Cooperation and
Development (OECD)
• The Group of 8 (G-8)
• Canada, France, Germany, UK, Italy, Japan, United
States
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Annual summit meetings
Role of public diplomacy
G-8 includes Russia sometimes
G-20 at ministerial level for some meetings
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Regional Economic Cooperation and
Development
• Bilateral and multilateral economic
cooperation is more advanced at the
regional level
• Regional trade organizations (RTOs)
• Moving from economic cooperation to
economic integration
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Economic Integration:
Surrender Some Sovereignty
• Levels
– Free trade area
– Customs union
– Economic union
– Monetary union
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The Western Hemisphere
• Economic integration not yet to the level of
Europe, but the process is under way
– NAFTA
– FTAA
– Mercosur
– DR-CAFTA
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The North American Free Trade Agreement
(NAFTA):
Canada, Mexico, and the United States
• The evolution of NAFTA
– Took effect in 1994
– Established schedules for reducing all tariff and
nontariff barriers to trade by 2009
• The impact of NAFTA
• Economic and nationalistic problems
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The Dominican Republic-Central American
Free Trade Agreement (DR-CAFTA)
• DR-CAFTA seeks to liberalize U.S. and Central American
markets creating a free-trade zone similar to NAFTA's
• Signatories include U.S, Guatemala, El Salvador, Nicaragua,
Honduras, Dominican Republic, and Costa Rica
• All nations have ratified DR-CAFTA
• Provisions eliminate tariffs on basic grains such as rice,
beans, and corns both immediately and gradually
depending on country and product specific agreements
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Concerns about DR-CAFTA
• Small farmers will not be able to compete with subsidized
agricultural imports from U.S.
• Inability of Central American farmers to compete with U.S.
agricultural imports will increase poverty and retard
development in this predominately rural and agriculture
based region
• Spur "race to the bottom" in labor and environmental
standards in Central American countries
• Promotes de-stabilizing deregulation and privatization of key
public services
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Other Trade Agreements/Unions
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Mercosur-South American common market
Brazil, Paraguay, Uruguay, Argentina
Bolivia, Chile, and Peru are associate members
Small amount of trade but huge symbolic step
• ASEAN-Association of Southeast Asian Nations
• Brunei, Cambodia, Indonesia, Laos, Malaysia,
Myanmar, the Philippines, Singapore, Thailand,
Vietnam
• Important counterweight to China
FTAA The Free Trade Area of the
Americas
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NAFTA + DR-CAFTA + Mercosur = FTAA someday??
Missed 2005 Target date for agreement. Why?
Concerns about tidal wave of U.S. imports
Concerns about American investors buying local
businesses and property
• Concerns in U.S. about job loss and outsourcing
Europe
• European Union: Most extensive regional
effort toward full economic integration
• Movement toward significant political
cooperation as well
– Importance of the euro in stimulating further
political and economic integration by member
states
– Expanding membership (currently, 27 member
nations)
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Asia, the Pacific, and Elsewhere
• Association of Southeast Asian Nations
(ASEAN)
• Asia-Pacific Economic Cooperation (APEC)
• Slow progress in economic integration
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The Future of Regionalism
• Integration versus revival of regionalism
– Current trend of proliferation of regional
agreements
– Controversial role of preferential trade
agreements (PTAs) and their many forms
– Pessimistic view that the rise of RTOs is actually
undermining the globalization of free economic
interchange represented by the WTO
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Cooperation and Development:
Debating the Future
• Economic interdependence intertwines personal,
national, and global prosperity
• Domestic economies, employment, inflation, and
overall growth are all heavily dependent on foreign
markets, imports of resources, currency exchange
rates, and capital and human flows
• But how much global economic interdependence
should or will there be?
– What are the advantages and disadvantages?
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The Case for Economic Internationalism
• Economic Advantages
– Leads to general prosperity
– Allows for benefits from specialization (vs. cost of
protectionism)
– Promotes competition
– Provides development capital
• Noneconomic Advantages
– Increases world cooperation
– Decreases violence
– Promotes democracy
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The Case for Economic Nationalism
• Economic Advantages
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Protects the domestic economy
Encourages diversification
Compensates for existing distortions
Puts domestic needs first
• Noneconomic Advantages
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Protects national sovereignty
Protects national security
Can be used as a policy tool
Protects society and the environment
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The Globalization Debate in
Perspective
• Costs and benefits have been unequally distributed
• Negative consequences of globalization
– Damage to the environment, creation of sweatshops, utilization
of child labor
• Advances of globalization go far beyond the growth of
economic interdependence
– Modern communications and travel are bringing people
together
• Different theoretical perspectives approach the debate
differently
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Is Trade Good or Bad?
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Depends on who you ask
UAW Worker: Trade bad
Economist: Trade maximizes economic efficiency
Defense Secretary: Jeopardizes national security if
you ship high-powered computers or B-2s.
• Average consumer: Trade is wonderful, lowers
prices and improves quality
• Without international trade, many products would
not be available on the world market
• Elixir of Sulfanilimide and Thalidomide incidents
Myths about Trade
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#1: International Trade is “Different.”
#2: International Trade is about competition between nations
#3: Exports are the goal of international trade
#4: High productivity is the key to competition.
#5: International Trade destroys jobs.
#6: “We need a new partnership between business and
government.”
• When’s the last time the US SERIOUSLY competed with another country? Nations
don’t compete—firms do
• Michael Dell and Bill Gates destroyed the auto industry—we’re too good at
producing other stuff—comparative advantage
• VW Beetle made in Mexico creates jobs in U.S. export industries. Japanese
voluntary restrictions to avoid tariffs under Reagan hurt U.S.
Resource Distribution and Trade
• Each country of the world possesses different types and
quantities of land, labor, and capital resources.
• By specializing in the production of certain goods and
services, nations can use their resources more efficiently.
• Specialization and trade can benefit all nations.
David Ricardo & Comparative Advantage
• David Ricardo (1772-1823) was a Classical Economist who opposed
England’s Corn Laws. The Corn Laws, in force between 1815 and
1846, were import tariffs ostensibly designed to "protect" British
farmers and landowners against competition from cheap foreign
grain imports. They were repealed by PM Robert Peel after the Irish
potato famine.
• A person or nation has an absolute advantage when it can produce a
particular good at a lower cost than another person or nation. Korea
has absolute advantage in producing cars.
• Comparative advantage is the ability of one person or nation to
produce a good at a lower opportunity cost than that of another
person or nation. South Korea can make cars and t-shirts cheaper
than the U.S., but it is more productive at cars.
• The law of comparative advantage states that nations are better off
when they produce goods and services for which they have a
comparative advantage in supplying.
Key Assumptions of Ricardo
There are no transport costs.
Costs are constant and there are no economies of scale.
There are only two economies producing two goods.
The theory assumes that traded goods are homogeneous
(i.e. identical).
Factors of production are assumed to be perfectly mobile.
There are no tariffs or other trade barriers.
There is perfect knowledge, so that all buyers and sellers
know where the cheapest goods can be found
internationally.
Imports and Exports of the United States
Major Imports and Exports of the United States
Chemicals
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The United States is the
world’s largest exporter.
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The United States is also the
world’s largest importer
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The United States’ main
trading partners are Canada,
Mexico and Japan. See
handouts for trade
deficits/surpluses between the
U.S. and other countries
Industrial machinery
Electrical machinery
Data-processing
equipment
Exports
Airplanes and parts
Vehicles:parts
Power-generating
machinery
Vehicles: cars and trucks
Scientific instruments
Telecommunications
equipment
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Imports
20
30
40
50
60
70
80
Vehicles: cars and trucks
Crude oil and petroleum
preparations
Electrical machinery
Data-processing
equipment
Clothing
Industrial machinery
Telecommunications
equipment
Vehicles; parts
Power-generating
machinery
Chemicals
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20
30
40
50
60
70
Dollars per year (in billions)
Source: Statistical Abstract of the United States
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Trade and Employment
As nations begin to specialize in certain goods, dramatic changes in
the nation’s employment patterns also occur.
 Workers who lose their jobs due to specialization face three
options:
 Unemployment: inability to adapt and find a new job
 Relocation: moving to where current skills meet current jobs
 Retraining: gaining new human capital to meet the demands of
specialized labor markets
Trade Barriers
A trade barrier is a means of preventing a foreign product or service
from freely entering a nation’s territory.
• Import Quotas--An import quota is a limit on the amount of a good
that can be imported.
• Voluntary Export Restraints--a self-imposed limitation on the
number of products shipped to a certain country. Best example:
Japanese car companies and President Reagan
• Tariffs--a tax on imported goods, such as a customs duty. EX: Bush
30% import steel tax. Tariffs can be protective or revenue tariffs.
• Other Barriers to Trade--include high government licensing fees and
costly product standards.
Arguments AGAINST Protectionism
Increased Prices for Foreign Goods
Tariffs and other trade barriers increase the cost of
imported products, making domestic products more
competitive. EX: American cars were forced to improve by
Japanese competition
Although manufacturers of many products may benefit
from trade barriers, consumers can lose out.
Trade Wars
When one country restricts imports, its trading partner
may impose its own retaliatory restrictions.
Arguments FOR Protectionism
Protectionism is the use of trade barriers to protect a nation’s
industries from foreign competition
Balance of Payments Argument—keep them favorable
Protecting Jobs
• Protectionism shelters workers in industries that would be hurt
by specialization and trade.
Protecting Infant Industries
• Protectionist policies protect new industries in the early stages
of development.
Safeguarding National Security
• Certain industries may require protection from foreign
competition because their products are essential to the defense
of the United States.
• Not as needed as you might think—some people are always
betting on war.
The United States Trade Deficit
DO NOT confuse with National Debt or budget deficit
The Trade Deficit
• The United States has run a trade deficit since the early 1970s.
Why the Trade Deficit?
• Imports of foreign oil as well as Americans’ enjoyment of imported
goods account in part for the large American trade deficit.
Reducing the Trade Deficit
• Quotas and other trade barriers can be used to raise prices of
foreign-made goods and urge consumers to buy domestic goods.
But should we try to reduce it??????
Chapter Objectives
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After completing this chapter, you should be able to:
1. Discuss how the theories of economic nationalism, internationalism, and structuralism
affect efforts for global cooperation.
2. Examine what is required for the development of the South, taking note of loans, private
investment, trade, foreign aid, and internal reforms.
3. Discuss the role of the UN in economic cooperation and development.
4. Examine the role of the WTO in trade cooperation and development.
5. Understand how the IMF supports development and monetary cooperation, noting the
controversy about the IMF.
6. Discuss the role of the World Bank Group in development cooperation and examine the
controversy about the World Bank
7. Discuss the role of institutions in economic cooperation and development.
8. Evaluate the role of regional trade organizations.
9. Debate the case for and against economic internationalism.
10. Debate the case for and against economic nationalism.
11. Discuss the pros and cons of globalization.
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