9
The Globalization of Economic
Relations
István Benczes
In the past 30 years, the term ‘globalization’
has earned considerable credit in the social sciences and has also gone into common use in
public debates. Nevertheless, there is hardly
any consensus on either its precise meaning, or
its determining forces or consequences. Held et
al. (1999) offer a convenient starting point for
any discussion on globalization by claiming
that it ‘may be thought of initially as the widening, deepening and speeding up of worldwide
interconnectedness in all aspects of contemporary social life’ (1999: 2). ‘Aspects’ can refer to
‘political, technical and cultural, as well as
economic’ features (Giddens, 1999: 10), implying that globalization is best thought of as a
multidimensional phenomenon.
Consequently, approaching globalization
from a purely economic perspective is ‘ … a
categorical mistake. That said, few discussions of globalization can, or do, ignore its
economic foundations’ (McGrew, 2008: 280).
This chapter has been written within the spirit
of such an approach. Without doubt, economic globalization does not constitute the
whole story of contemporary globalization,
09_Steger et al_Ch-09.indd 133
but in order to fully understand its meaning
and implication, the economic dimension, as
one of the major driving forces of the process
of globalization, requires special attention.
Following a short introduction, the first
section is dedicated to the clarification of the
definition, origin and consequences of economic globalization. As the two main fields of
economic globalization have been finance and
trade, the second section discusses the evolution of the major international monetary
regimes, including the gold standard, the
Bretton Woods system and European monetary integration. The third section discusses
trade relations and trade policies, with a special focus on the unilateral trade regime of the
late nineteenth and early twentieth centuries
and the multilateral regime of the post-World
War II era.
WHAT IS ECONOMIC
GLOBALIZATION?
According to one of the most often cited
definitions,
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[e]conomic globalization is a historical process, the
result of human innovation and technological progress. It refers to the increasing integration of
economies around the world, particularly through
the movement of goods, services, and capital across
borders. The term sometimes also refers to the
movement of people (labor) and knowledge (technology) across international borders. (IMF, 2008)
The phenomenon can thus have several interconnected dimensions, such as (a) the globalization of trade of goods and services;
(2) the globalization of financial and capital
markets; (3) the globalization of technology
and communication; and (4) the globalization of production.
What makes economic globalization distinct
from internationalization is that while the latter
is about the extension of economic activities of
nation states across borders, the former is
‘functional integration between internationally
dispersed activities’ Dicken (2004: 12). That is,
economic globalization is rather a qualitative
transformation than just a quantitative change.
If, however, globalization is indeed a ‘complex,
indeterminate set of processes operating very
unevenly in both time and space’ (Dicken,
2004: xv), a more substantive definition for
economic globalization is required than the one
offered by the IMF (2008). The definition provided by Szentes (2003: 69) befits the purposes
of this particular chapter: ‘In economic terms
globalisation is nothing but a process making
the world economy an “organic system” by
extending transnational economic processes
and economic relations to more and more countries and by deepening the economic interdependencies among them.’
The main advantage of the above definition is that although it does not deny the relevance of the ‘international’, ‘regional’ or
‘national’ levels, it refuses the assumption
that the nation (state) is the only unit of
analysis and that current trends in the world
economy are simply the redesign of the
external relations of interacting nations.
Instead, it claims that economic activities
and processes (production in particular) can
be interpreted only in a global context, i.e. in
an integrated world economy.
09_Steger et al_Ch-09.indd 134
To what extent is the nation state still a relevant (f)actor is a major topic of current
debates. For hyperglobalists such as Ohmae
(1995), states ceased to exist as primary economic organization units in the wake of a
global market. People are consuming highly
standardized global products and services produced by global corporations in a borderless
world. Globalization transforms the national
economy into a global one where ‘there will
be no national products or technologies, no
national corporations, no national industries’
(Reich, 1991: 3).
On a more balanced account, Boyer and
Drache admit that ‘[g]lobalization is redefining the role of the nation state as an effective
manager of the national economy’ (1996: 1),
but refuse the hypothesis of uniform state
policies and conceive the state as the main
shelter from the perverse effects of a free
market economy. It is, therefore, misleading
to assume that globalization has relegated the
nation state and its policies to an obsolete or
irrelevant status; governments instead ‘are
acting as the midwives of globalization’
(Brodie, 1996: 386). Even liberals recognize
that economic openness has increased vulnerability, also admitting that states (national
economic policies and the structure of domestic institutions) are not influenced uniformly
by globalization (Milner and Keohane, 1996).
As new actors appear on the stage of political and cultural globalization (such as the
United Nations (UN) or non-governmental
organizations (NGOs)), economic globalization produces its own new entrants as well. In
all probability the major players of presentday global economy are the transnational corporations (TNCs). For some, contemporary
globalization is equated primarily with TNCs,
the main driving forces of economic globalization of the last 100 years, accounting for
roughly two-thirds of world export (Gereffi,
2005).1 On the other hand, for realists, TNCs
still represent national interest (Gilpin, 2001),
while others (such as representatives of the
dependency school) are liable to identify
TNCs with the means through which the rich
can exploit the poor. What is important to note
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is that TNCs are constantly evolving: as economic integration is becoming more intensive,
production disintegrates as a result of the
outsourcing activity of multinationals
(Feenstra, 1998). This move induced Gereffi
(1999) to develop the concept of global commodity chains, an idea that reflects upon the
increasing importance of global buyers in a
world of dispersed production.
IS ECONOMIC GLOBALIZATION A
NEW PHENOMENON?
Just as there is no single definition of globalization, there is no consensus on its origin,
either. Yet, if we accept that economic globalization is a process that creates an ‘organic
system’ of the world economy, it seems reasonable to look beyond the last 30 years or so.
The question necessarily arises how far we
should look back. Gills and Thompson (2006:
1) very wittily suggest that globalization processes ‘have been ongoing ever since Homo
sapiens began migrating from the African
continent ultimately to populate the rest of the
world. Minimally, they have been ongoing
since the sixteen-century’s connection of the
Americas to Afro-Eurasia’.
Frank and Gills (1993: 3) also call for a
broader outlook, and located the origin of globalization in the (very) distant past: ‘the existence of the same world system in which we live
stretches back at least 5,000 years’. The best
known example of archaic globalization is the
Silk Road, which connected Asia, Africa and
Europe. Adopting Fernand Braudel’s innovative
concept of ‘long duration’, i.e. a slow-moving,
‘almost imperceptible’ (1973: 22) framework
for historical analysis, world-systems analysts
identify the origins of modernity and globalization with the birth of sixteenth century longdistance trade.
When Adam Smith wrote his magnum
opus, An inquiry into the nature and causes
of the wealth of nations (1776), he considered the discovery of America by Christopher
Columbus in 1492 and the discovery of the
direct sea route to India by Vasco de Gama
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135
in 1498 as the two greatest achievements in
human history.2 In the course of a couple of
decades these remarkable achievements
were overshadowed by the breathtaking
technological advances and organization
methods of the British Industrial Revolution.3
From the early 1800s, following the
Napoleonic wars, the industrial revolution
spread to Continental Europe and North
America, too.4
The economic nationalism of the seventeenth and eighteenth centuries, coupled with
monopolized trade (such as the first multinational corporations, the British and the Dutch
East India Companies, established in 1600
and 1602, respectively) did not favour, however, international economic integration. The
total number of ships sailing to Asia from
major European countries rose remarkably
between 1500 and 1800 (in numbers: 770 in
the sixteenth, 3,161 in the seventeenth and
6,661 in the eighteenth century; Maddison,
2001), but world export to world GDP did
not reach more than 1 to 2 per cent in that
period (Held et al., 1999). If global economy
did exist in this period, then it was only in the
sense of ‘trade and exchange, rather than
production’ (Gereffi, 2005: 161). Countries
were mostly self-sufficient and autarkic, the
UK and the Netherlands being the only
exceptions (though long-distance trade concentrated mostly on luxury goods).
The real break-through came only in the
nineteenth century. The annual average compound growth rate of world trade saw a dramatic increase of 4.2 per cent between 1820
and 1870, and was still relatively high, at 3.4
per cent between 1870 and 1913 (Maddison,
2001). By 1913, trade equalled to 16–17 per
cent of world income, thanks to the transport
revolution: steamships and railroads reduced
transaction costs and bolstered both internal
and international exchange (Held et al., 1999).
The relatively short period before World War
I (that is, 1870 to 1913) is often referred to as
the ‘golden age’ of globalization, characterized by relative peace, free trade and financial
and economic stability (O’Rourke and
Williamson, 1999).
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The structural transformation of the
Western world was, therefore, both a cause
and an effect of intensified economic integration. By the second half of the nineteenth
century, the division of labour entwined
modern world economy. Consequently, sceptics of globalization, such as Hirst and
Thompson (2002), recognize the origin of
globalization in this particular era and argue
that in some respects (especially with regard
to labour mobility), nineteenth century world
economy was even more integrated than the
present.
CONVERGENCE VERSUS
DIVERGENCE
Contemporary globalization is, however,
considered to be a myth (Bairoch, 1993) not
just because it is not without precedents.
More concerns have been raised with regard
to its impact on the worldwide distribution of
income. Those in support of economic globalization emphasize its ability to foster universal economic growth and development.
Dollar and Kraay (2002) argue that only
non-globalizer countries failed to reduce
absolute and relative poverty in the last few
decades. On the other hand, countries that
have embraced globalization (proxied by
trade openness) have benefited from openness considerably.5 Consequently, ‘the problem […] is not that there is too much
globalization, but that there is far too little’
(Wolf, 2004: xvii). On a more balanced
account, the World Bank (2002) claims that
globalization can indeed reduce poverty but
it definitely does not benefit all nations. SubSaharan Africa, where roughly half of the
population lives on less than US$1.25 (in
purchasing power parity) a day, has been
especially marginalized by globalization.
Nevertheless, whereas at the beginning of
the nineteenth century countries were moreor-less homogenous (i.e. poor and agrarian),
by the start of contemporary globalization
countries became highly stratified (Baldwin
and Martin, 1999). The ratio of the richest
09_Steger et al_Ch-09.indd 136
region’s GDP per capita to that of the poorest
was only 1.1 in 1000, 2 in 1500 and still only
3 in 1820. It widened to 5 in 1871 and stood
at 9 at the outbreak of World War I. In 1950
it climbed to 15 and peaked at 18 at the turn
of the new millennium (Maddison, 2003).6
Why are less developed regions unable to
catch up with developed ones – as predicted
by standard economic theories such as the
neoclassical Solow growth model? Bairoch
(1993) argues that while in the developed
part of the world, industrial revolution and
intensified international relations reinforced
growth and development on an unprecedented scale (as compared to the previous
era), the rest of the world did not manage to
capitalize on these processes. Reflecting
upon the division of labour between developed
and developing countries in the nineteenth century, Bairoch claimed that ‘the industrialisation of the former led to the de-industrialisation
of the latter’ (1998: 11).
The structural deficiencies of the world
economy are heavily emphasized by the socalled structuralists. Structuralism is a ‘cluster of theories which emerged in the 1950s,
1960s and 1970s … [and] share the idea that
North and South are in a structural relationship one to another; that is that both areas are
part of a structure that determines the pattern
of relationships that emerges’ (Brown, 2001:
197). The best known critical approach to the
prevailing social division of labour and
global inequalities is offered by worldsystems analysis, which claims that capitalism
under globalization reinforces the structural
patterns of unequal change. According to
Wallerstein, capitalism, ‘a historical social
system’ (1983: 13), created the dramatically
diverging historical level of wages in the economic arena of the world system. Thus, growing inequality, along with economic and
political dependence, are not independent at
all from economic globalization.
Accordingly, underdevelopment (i.e. a
persistent lack of economic growth and
development, together with impoverishment and even malnutrition) is not the initial stage of a historical and evolutionary
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unilinear development process (as predicted
by Rostow, 1960), but a consequence of
colonialism and imperialism. But while for
Hobson (1902/2005) imperialism was a
kind of ‘conscious policy’ adopted by leading capitalist nations, Wallerstein and his
followers identified imperialism as the
product of the world capitalist system which
has perpetuated unequal exchange.
The modern capitalist system is unique in
the sense that it created political structures
that guaranteed an endless appropriation and
accumulation of surpluses from the poor (or
the periphery) to the emerging (or the semiperiphery) and – in particular – the advanced
industrialized (or the core) countries. It is,
however, not just that the periphery is
dependent on the core: the latter’s development is also conditioned on the former. The
link between these groups is provided via
trade and financial transactions, and is organized by a dense web of businessmen, merchants, financial entrepreneurs and state
bureaucrats. Globalization, the product of the
long process of capitalist development, is,
therefore, nothing new for world-system analysts; it is simply the relabelling of old ideas
and concepts (Arrighi, 2005).
INTERNATIONAL MONETARY
SYSTEMS
According to Krasner (1983:2), regimes can
be thought of as all the ‘implicit and explicit
principles, norms, rules, and decision making
procedures around which actors’ expectations converge’. Consequently, an international monetary system or regime (IMS)
‘refers to the rules, customs, instruments,
facilities, and organizations for effecting
international payments’ (Salvatore, 2007:
764). In the liberal tradition, the main task of
an IMS is to facilitate cross-border transactions, especially trade and investment. An
international monetary system is, however,
more than just money or currencies; it also
reflects economic power and interests, as
‘money is inherently political, an integral
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137
part of “high politics” of diplomacy’ (Cohen,
2000: 91).
THE GOLD STANDARD
The origins of the first modern-day IMS dates
back to the early nineteenth century, when the
UK adopted gold mono-metallism in 1821.
Half a century later, in 1867, the European
nations, as well as the United States, propagated a deliberate shift to gold at the International
Monetary Conference in Paris. Gold was
believed to guarantee a non-inflationary, stable
economic environment, a means for accelerating international trade (Einaudi, 2001).
Following Prussia’s victory over France in
1872, Germany joined the new regime. France
decided to do so six years later. With the joining
of the United States in 1879, the gold standard
became the international monetary regime by
1880. Following the joining of Italy (1984) and
Russia (1897), roughly 70 per cent of the
nations participated in the gold standard just
before the outbreak of World War I (Meissner,
2005).
In practice, the gold standard functioned as
a fixed exchange rate regime, with gold as the
only international reserve. Participating countries determined the gold content of national
currencies, which in turn defined fixed
exchange rates (or mint parities) as well.
Consequently, ‘common adherence to gold
convertibility … linked the world together
through fixed exchange rates’ (Bordo and
Rockoff, 1996: 3). Monetary authorities were
obliged to exchange their national currencies
for gold at the official exchange rate without
limits on international markets.
One of the main strengths of the system
was the tendency for trade balance to be in
equilibrium. Balanced positions were ensured
by the automatic price-specie flow mechanism, which assumed a passive change in
money supply and a full flexibility in internal
prices. David Hume (1752) was the first to
elaborate on this mechanism by developing
his quantitative theory of money. Accordingly,
as a deficit nation’s gold reserves diminished
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(since its import was financed by gold), its
general price level started to decline as well,
which restored its competitiveness on international markets. The price that such countries
had to pay for the automatic adjustment
mechanism was the loss of autonomy in monetary policy. In practice, it also meant that
deficit nations were enforced to initiate serious deflationary policies.
In order to assess whether the gold standard was successful, a good reference point is
offered by Eichengreen (1996: 1), who
claims that the role of a properly designed
IMS ‘is to lend order and stability to foreign
exchange markets, to encourage the elimination of balance-of-payments problems, and
to provide access to international credits in
the event of disruptive shocks’. The regime
was indeed able to create stability; it also
helped nations to restore equilibrium in their
current accounts and provided an almost
unlimited access to world finance.
The outbreak of World War I brought an
end to the classical gold standard. Participating
nations gave up convertibility and abandoned
gold export in order to stop the depletion of
their national gold reserves. Although the UK
did attempt a return to the gold standard at
pre-war price levels in 1925, it did not finally
succeed. The overvalued pound sterling and
the emergence of new rivals, especially the
United States and France, reduced the competitiveness of the UK substantially. As
opposed to the pre-World War I era, the UK
could not finance its current account deficit by
capital inflow anymore; therefore, it had no
other choice but to abandon the gold standard
once and for all in 1931.
Indeed, the 1930s became the darkest
period of modern economic history.
Competitive devaluations, along with tough
capital controls and the imposition of (prohibitive) tariffs, induced a race to the bottom
which culminated in a devastating drop of
international transactions. The negative spiral of the 1930s provided historical evidence
to the close relationship between exchange
rate policy and trade measures (Eichengreen
and Irwin, 2009).
09_Steger et al_Ch-09.indd 138
The change from the gold standard to
competitive devaluations and floating was,
however, more than a simple shift from one
financial regime to another. In Karl Polányi’s
(1944) views, the deep structural changes of
the time, which were partly the causes and
also the consequences of universal suffrage
(labourers managed to influence domestic
politics), made the governments reluctant to
defend a pegging system at any cost. In the
classical gold standard regime, deflationary
policies were endorsed without much hesitation. After World War I, however, labourers
became more and more successful in preventing incumbents from adopting welfarereducing austerity measures.
THE BRETTON WOODS SYSTEM AND
ITS DISSOLUTION
The dramatic consequences of the beggar-thyneighbour policies of the inter-war period and
the wish to return to peace and prosperity
impelled the allied nations to start negotiations about a new international monetary
regime in the framework of the United
Nations Monetary and Financial Conference
in Bretton Woods, New Hampshire (US), in
July 1944. Delegates of 44 countries managed to agree on adopting an adjustable peg
system, the gold-exchange standard. The US
dollar was the only convertible currency of
the time, so the United States committed
itself to sell and purchase gold without restrictions at US$35 dollar an ounce. All other
participating but non-convertible currencies
were fixed to the US dollar. The goldexchange standard was not the only competing idea on the table, however. The British
economist, John Maynard Keynes, proposed
ambitious reforms for the post-war era and
recommended the creation of an international
clearing union, a kind of global bank, along
with the introduction of a new unit of account,
the ‘bancor’ (Keynes, 1942/1969).
Nevertheless, the United States insisted on its
own plan and branded the British proposal as
a serious blow to national sovereignty.
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Delegates also agreed on the establishment of two international institutions. The
International Banks for Reconstruction and
Development (IBRD) became responsible
for post-war reconstruction, while the explicit
mandate of the International Monetary Fund
(IMF) was to promote international financial
cooperation and buttress international trade.
The IMF was expected to safeguard the
smooth functioning of the gold-exchange
standard by providing short-term financial
assistance in case of temporary balance of
payments difficulties.
As opposed to Keynes’s plan of a new
international clearing union, the Bretton
Woods system did not prevent countries from
running large and persistent deficits (or surpluses) in their balance of payments.
Although nations were allowed to correct the
official exchange rate in order to eliminate
deficits (hence the name, adjustable peg system), adjustments did not happen frequently.
The UK, for instance, was put under constant
pressure by speculators to devaluate its currency (it did so only once in 1967). Abstention
from devaluations that were believed to be
humiliating triggered investors to relocate
their capital outside Britain.
The US’s situation was unique, however.
During the first few years of the new regime,
the country managed to maintain a surplus in
its balance of payments. As soon as Europe
regained its pre-World War II economic
power, the external position of the United
States turned into a persistent deficit as a
natural consequence of becoming an international reserve currency. Nevertheless, by the
mid-1960s, the dollar became excessively
overvalued vis-à-vis major currencies. As a
response, foreign countries started to deplete
the US gold reserves. Destabilizing speculations, fed by the huge balance of payments
and trade deficit, along with inflationary
pressures, forced the United States to abandon the gold-exchange standard on 15
August, 1971.7
Although industrialized countries were
keen to return to some kind of a controlled
exchange rate mechanism under the so-called
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139
Smithsonian Agreement (a de facto dollarstandard) in December 1971, neither the
devaluation of the US currency (and the
revaluation of the partners’ currencies), nor
the dollar’s non-convertibility to gold managed to stabilize world finances. In early
1973, industrialized countries decided to float
their currencies and intervene in financial
markets only in case of drastic short-term
fluctuations. Longer-term prices of currencies
were determined by demand and supply
forces exclusively. This shift in exchange rate
policy was acknowledged by the Jamaica
Accords in 1976.
Managed floating, however, did not perform any better, either; in fact, advanced
countries had to interfere on a few occasions
in order to avoid calamity. In 1985 for
instance, G7 countries agreed on a substantial
devaluation of the US dollar under the Plaza
Agreement, as a result of an increasing pressure of domestic US manufacturers and agrarians to restore their competitiveness on world
markets. Two years later, in 1987, the Louvre
Accord was drawn up in order to defend the
dollar from further devaluation on the markets. While the United States might have
benefited from these globally coordinated
actions, one of the main losers was evidently
Japan. The appreciation of the yen proved to
be disastrous for the Japanese economy,
which faced a decade-long struggle in the
1990s as a partial consequence of the ‘dollar
politics’ (see Destler and Henning, 1989).
The 1990s saw the triumph of the neoliberal, pro-market Washington Consensus.
Its programme points were advocated and
disseminated by the major international
financial institutions.8 The IMF used these
points as part of its adjustment requirements
(or conditionalities) in exchange for financial
assistance. Several countries, especially the
so-called emerging markets such as Mexico,
Brazil or the East Asian tigers, deregulated
their financial sectors and fully liberalized
capital transactions from the late 1980s
onwards. Reforms, however, were not supplemented by strengthened domestic supervision or monitoring. Additionally, these
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currencies were pegged to the US dollar,
which happened to appreciate substantially
during the 1990s and caused a loss in the
price competitiveness of emerging markets.
The unregulated and free flow of capital, the
huge current account deficits and the soft
pegging regimes made these economies
highly vulnerable, resulting in a financial
crisis that first hit Mexico in 1994 and
reached East Asia in 1997–8.
The Washington Consensus and its freemarket ideology has been criticized by many
right from its conception. Stiglitz (2002)
blamed the IMF and its rigid conditionalities
for the failed development performance of
the periphery. His main argument was that
free-market policies such as liberalization or
privatization could not deliver the expected
results in an environment of imperfect or
incomplete markets and inadequate or missing institutions. From a wider perspective,
Wallerstein (2005) commented the change of
economic thinking of the late 1980s and
early 1990s by arguing that ‘development
was suddenly out. Globalization arrived in its
wake … Now, the way to move forward was
not to import-substitute but to export-orient
productive activities. Down not only with
nationalized industries but with capital transfer controls; up with transparent, unhindered
flows of capital’ (2005: 1265).
EUROPEAN MONETARY
INTEGRATION
In the post-World War II era, the United
States originally wanted to implement the
Morgenthau Plan, which intended to downsize the German economy into a pastoral and
agricultural one. As a response to the USSR’s
push for communism in Eastern Europe and
the rise of socialist and communist parties in
the West, the plan, however, became quickly
abandoned, and the United States started to
advocate an economically and militarily
strong Germany and Western Europe. The
United States activated its post-war reconstruction programme, the Marshall Plan, in
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1948, which was administered by the
Organization for European Economic
Cooperation, the predecessor of the
Organization for Economic Cooperation and
Development (OECD). The miraculous
growth performance of Western Europe
prompted a closer cooperation on a regional
level, resulting finally in the European Coal
and Steel Community in 1951.9 This was followed by the signing of the Rome Treaty in
1957, which established the European
Economic Community (EEC), and was the
first major step towards an ‘ever closer union’.
The original six founding members
(Germany, France, Italy, Netherlands, Belgium
and Luxembourg) aimed at the creation of a
common market, where goods, services, capital and labour moved freely. Originally, the
European six did not plan any direct cooperation in the field of finance or exchange rate
policies. The collapse of the Bretton Woods
system, however, placed the EEC under pressure, and member countries eventually
agreed on setting up a regional monetary
regime, the European Monetary System
(EMS) in 1979. The EMS was a unique system, since neither the US dollar, nor gold
could play a role in the stabilization process
of exchange rates. Instead, a symmetric
adjustable peg arrangement, the European
Exchange Rate Mechanism, was created
(Gros and Thygesen, 1998).
The success of the EMS and the total
abolishment of capital controls by the end
of the 1980s opened the way for Jacques
Delors, then President of the European
Commission, to propose a radical leap forward in European economic integration.
With the support of both late French
President Francois Mitterrand and German
Chancellor Helmut Kohl, the foundations
of a new European Economic and Monetary
Union (EMU) were laid down in the
Maastricht Treaty in 1992. By 1999, the
member states of the EMU abandoned their
national currencies and delegated monetary policy onto a supranational level,
administered by the European Central
Bank (ECB), whose primary goal has been
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the maintenance of price stability. The first
ten years of the EMU were an evident success for participating countries: trade and
capital transactions increased; economies
became more integrated; macroeconomic
stability was restored and the euro became
the second most widely used reserve currency (European Commission, 2008).
The global financial and economic crisis of
2008–9, however, posed dramatic challenges
for the European Union (EU). The euro-area is
suffering from serious design flaws. The ECB
is not a lender of last resort, that is, it cannot
bail out individual countries which have lost
their monetary authority (that is, they cannot
devaluate their currency or reduce domestic
interest rates in case of troubles). The EU is
not a fiscal union either; therefore, it does not
have any specific means to fix financial difficulties on a community level. Yet, the financial and economic crisis, which culminated in
an EU-wide sovereign debt crisis by late
2009, has demonstrated that the troubles of
some member states can easily undermine the
stability of the whole zone; contagion has
become a real threat. As a response to the crisis, the EU enacted a three-pillar financial
rescue programme in 2010, comprising the
following: (1) the European Financial Stability
Mechanism, (2) the European Financial
Stability Facility; and (3) the financial assistance of the IMF. Since the three-pillar system
was designed for a temporary period only, the
EU has decided to activate its own permanent
rescue facility, the European Stability
Mechanism, from 2013 onwards.
The critics of the Eurozone have always
underlined the fact that EMU would never be
able to qualify for a well-functioning and
stable monetary zone without a common
budget of the size of federal countries such as
the United States (Feldstein, 1997). The
future of the EMU depends on the willingness of member states to agree on more fundamental changes in the governance of the
Eurozone. One of the most promising ideas
is to develop the current structure into a fiscal union, supported by a pan-European
banking supervision. These innovations may
09_Steger et al_Ch-09.indd 141
141
lay down the foundations of a political union
as well in the distant future.
INTERNATIONAL TRADE AND TRADE
POLICIES
The late Nobel-laureate economist, Paul
Samuelson, was once asked if he could
name one proposition which he considered
as both valid and non-trivial in the social
sciences. Samuelson famously referred to
David Ricardo’s comparative advantage
theory (Samuelson, 1995). According to
Ricardo (1817), a country such as England
could benefit from voluntary trade even if
its trading partner (which in the original
example was Portugal) was more effective
in producing both wine and clothing.
England should specialize in the production
of the good with less disadvantage and let
Portugal produce the other product. The
appeal of the theory is that every single
nation must have a comparative (that is,
relative) advantage in something irrespective of its initial conditions.10
But trade is not without politics.
Alexander Hamilton and Friedrich List recognized quite early on (i.e. in the late eighteenth and early nineteenth century,
respectively) that voluntary trade can have
very different distributional effects and it
can also hinder the long-term development
prospects of the country producing the
lower value added (i.e. agricultural) products. A temporary retreat from international
trade can thus be beneficial for the less
effective nation. In his so-called ‘infant
industry argument’, List (1841/1928) did
not oppose the Ricardian comparative
advantage theory; but he did warn that trade
patterns should not be considered as static.
Instead, by temporarily restricting the free
flow of goods, a national industry can be
established, thereby fostering long-term
economic growth and political power. In the
realist and (neo)mercantilist school, protection is, in fact, still a natural way of securing
national objectives (Gilpin, 2001).
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Reformist and radical (new left and neoMarxian) theorists, such as Emmanuel (1972)
or Amin (1976), argued, however, that unequal exchange is a fundamental and systemic
distinguishing characteristic of modern world
economy.11 The social division of labour contributes to the economic development of the
core and hinders development at the periphery. By grasping the leading role in the transformation of the world economy, Europe,
and later on its Western offshoots, managed
to gain control of the rest of the world, creating a unique and unfair global division of
labour (Wallerstein, 1974, 1980).12 Core
economies ‘have had [thus] the best of two
worlds, both as consumers of primary commodities and as producers of manufactured
articles, whereas the underdeveloped countries had the worst of both worlds, as consumers of manufactures and as producers of
raw materials’ (Singer, 1964: 167).13
According to Amin (1993), if the world
economy is such that it benefits core countries at the expense of the periphery, the latter
should adopt protectionism in its extreme
form of de-linking, i.e. a total breaking up of
the ties between the subordinated developing
economies and the core.
International trade can trigger tensions
not just between nations, but also within a
particular country. Gains from trade within
a country will affect the relative well-being
of its citizens, especially producers and
consumers, differently, who will, therefore,
either support or oppose trade. Based on the
Stolper–Samuelson theorem, which claims
that international trade benefits the domestically abundant factor of production (land,
labour or capital) and weakens the scarce
factor, Rogowski (1990) managed to demonstrate how the owners of the locally
abundant factor of production increase their
political power and influence as well.
Consequently, the coalitions of potential
losers of trade provide permanent source
for a strong advocacy of protectionism
from the least developed countries to the
most advanced economies, including the
EU or the United States.
09_Steger et al_Ch-09.indd 142
UNILATERAL TRADE ORDER
In seventeenth and eighteenth century
Europe international trade was basically a
means to accumulate surplus (gold reserves)
in the balance of payments by stimulating
export and restricting import. The mercantilist era of the time was best characterized,
therefore, as a zero-sum game on the global
level. Trade and trade policies served the
interest of monarchs from Portugal to
England, who financed wars and consolidated authority over domestic constituents
with the help of accumulated gold stocks.14
The surge of international trade arrived
only with Europe’s industrial revolution and
the consequent repeal of the British Corn
Laws in 1846 in particular. Industrialists triumphed over landowners and farmers, opening the way for further industrialization in
Britain. The so-called Cobden-Chevalier
treaty of 1860 allowed the UK and France to
specialize in commodities based on their
respective comparative advantages and to
achieve further advances in industrialization.
Voluntary trade also helped to avoid the eruption of an abrupt war between the two countries (Dunham, 1930).15 Several other bilateral
trade agreements followed suit across Europe,
each built upon the so-called most-favoured
nation (MFN) principle, which stated that any
negotiated reciprocal tariff reductions
between two parties should be extended to all
other trading partners without conditions.
Overall average tariffs declined from 16.3 per
cent (1859) to 6.3 per cent (1875) in Britain,
from 11.8 per cent to 6.5 per cent in France,
from 7.1 per cent to 2.5 per cent in Germany
and from 7.3 per cent to 3.6per cent in
Austria-Hungary (Lampe, 2008). Europe witnessed the emergence of a sort of multilateral
system of bilateral agreements, giving birth to
the ‘first common market’ in the second half
of the nineteenth century (Marsh, 1999).
The era, however, was not without conflicts
and interruptions to free trade (Findlay and
O’Rourke, 2007). The United States adopted a
highly protective import substitution industrialization with tariffs on manufacturing goods,
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THE GLOBALIZATION OF ECONOMIC RELATIONS
averaging at 45 per cent. From the 1860s
onwards, France, the Scandinavian countries
and to a lesser extent even the UK enacted a
few protectionist measures as a response to
the inflow of cheap agricultural products from
the overseas territories and the industrialization efforts of catching-up countries like
Germany and the United States. Nevertheless,
neither the prevailing unilateral trade regime,
nor the hegemonic position of the UK was
threatened. Britain remained powerful enough
both in economic and military terms; it could
also rely on the vast reserves of its colonies,
especially India (Arrighi and Silver, 2003).
World War I, however, was a dramatic blow
to free trade. Protectionism, in turn, was detrimental to development, peace and stability
(Ruggie, 1982). Two rounds of World
Economic Conferences in 1927 and 1933
failed to deliver tariff reductions and exchangerate stabilization because of the unwillingness
of the United States to take the role of the
hegemon as a successor of a weakened Great
Britain. Domestic politics in the United States
evidently turned against restrictions-free trade
as a consequence of the Great Depression of
1929–33. The Smoot-Hawley Act of 1930
increased tariffs to record-high levels in the
United States. Retaliation was the rational
response from trading partners and international trade dropped by one- to two-thirds as a
consequence (Irwin, 1998).16
The enactment of the US Reciprocal Trade
Agreements Act in 1934 eventually put a stop
to any further decline in international trade.
The Act allowed the president to determine
trade policies and also eased the pressure put
on the Congress for protection. In practice, the
Act was a return to the principle of MFN and
it provided a solid base for a renewed international trade regime following World War II.
MULTILATERALISM: FROM THE
GATT TO THE WTO
While the United States was reluctant to take a
leadership role after World War I, this was
naturally not the case two-and-a-half decades
09_Steger et al_Ch-09.indd 143
143
later. The dollar became a world currency,
backed by two-thirds of the world’s gold
reserve in 1950 (Green, 1999). The United
States was the largest aid donor, mostly in the
form of the Marshall Plan. Due to the total collapse of the European and Japanese manufacturing industries, the global role of US
manufacturing increased substantially,
accounting for 60 per cent of the world’s total
in 1950, while its export amounted to one-third
of the world’s total (Branson et al., 1980).
As opposed to the pre-World War I regime
of non-institutionalized unilateralism, the
new trade regime was more or less a liberal,
multilateral rules-based system backed by a
solid legal approach to trade relations
(Winham, 2008). According to Ruggie
(1982), it was a compromise between the
extreme liberal international regime of the
long nineteenth century and the economic
nationalism of the inter-war period.
Originally, the new international trade
regime should have been steered by the
International Trade Organization (ITO),
which was originally conceived as one of the
three pillars of the Bretton Woods system
(the other two being the IMF and the IBRD).
Although the United States played an undisputable role in creating the ITO, a series of
vetoes in the US Congress blocked its formation. In place of a unique trade organization,
nations committed to a world of lowered
tariffs decided to coordinate their actions
under the auspices of the General Agreement
on Tariffs and Trade (GATT).
The GATT exerted influence via a series
of multilateral trade negotiations (or rounds).
The first five rounds concentrated on tariff
cuts exclusively (see Table 9.1).
From 1964 onwards, the scope of trade
negotiations experienced a slow but steady
expansion. The creation of the European
Economic Community in 1957 enforced the
United States to adopt the Trade Expansion
Act of 1962 and to call for a new round, the
so-called Kennedy Round. The result was an
across-the-board cutting (replacing the previous practice of item-by-item cuts) and reduction of non-tariff barriers, especially that of
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Table 9.1
GATT trade rounds
Year
Place/Name
Subjects covered
1947
1949
1951
1956
1960–1961
1964–1967
1973–1979
1986–1994
Geneva
Annecy
Torquay
Geneva
Dillon Round
Kennedy Round
Tokyo Round
Uruguay Round
Tariffs
Tariffs
Tariffs
Tariffs
Tariffs
Tariffs and anti-dumping measures
Tariffs, non-tariff barriers, ‘framework agreements’
Tariffs, non-tariff barriers, rules, services, intellectual
property, dispute settlement, textiles, agriculture,
creation of the WTO, etc.
No. of participating countries
23
13
38
26
26
62
102
123
Source: WTO (2012)
anti-dumping measures (Evans, 1971). In the
1970s, the Tokyo Round proceeded with the
same extended mandate, and, besides tariff
cuts, it also adopted a series of codes of conduct, such as the subsidies code or the government procurement code (Deardorff and
Stern, 1983).
The most famous multilateral trade negotiations were carried out under the Uruguay
Round between 1986 and 1994. While earlier
trade negotiations proved to be successful in
reducing tariffs, a series of other punitive
measures (namely non-tariff barriers) were
imposed by countries. Also, the pattern of
international trade changed dramatically.
Trade gravitated to multi- or transnational
corporations, which tried to optimize their
operations worldwide by allocating resources
(including manufacturing capacities) based on
principles other than comparative advantage.
By the early 1980s, intra-industry or even
inter-company trade has become the determining feature of the international division of
labour (Dunning, 1990.) The pervasive influence of TNCs resulted in a change in the politics of trade. According to Held and McGrew
(2001: 325), ‘it is global corporate capital,
rather than states, which exercises decisive
influence over the organization, location and
distribution of economic power and resources’
in the contemporary world economy.
The Uruguay Round extended multilateral
rules to new issues and sectors, such as agriculture (which culminated in a bitter dispute
between the United States and the EU).
09_Steger et al_Ch-09.indd 144
Furthermore, it invited a large number of
developing countries to participate in trade
negotiations, and it also created a new and
more efficient dispute settlement mechanism
(Walter and Sen, 2009). The major outcomes
of the trade negotiations were the agreements
on trade-related investment measures
(TRIMs), trade in services (GATS) and traderelated aspects of intellectual property rights
(TRIPs). The agreements were advocated by
major advanced countries and targeted
mostly developing nations with huge service
market potential (especially in finance and
telecommunication).
After almost 50 years of rules-based trade
negotiations, the Uruguay Round gave birth
to a ‘real’ international trade institution, the
World Trade Organization. The WTO was
launched on 1 January 1995 and has become
an official forum for trade negotiations. As
opposed to the GATT, it is a formally constituted organization with legal personality.
Although the developing countries represented a unified front for a new round of trade
negotiations in Seattle, 1999, the ministerial
conference closed without reaching concrete
results. Nevertheless, Seattle demonstrated the
strength of NGOs and anti-globalization movements, which protested not only in favour of
the disadvantaged and less-developed countries
but also against the current status quo of world
affairs – including the dominance of the US
economy, the selfish interest of large multinational corporations and the assumed discriminatory workings of the WTO.
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THE GLOBALIZATION OF ECONOMIC RELATIONS
Expectations were once again on the rise
in Doha in 2001. The quasi-official Doha
Round could have become a round on economic development, but the positions of the
opposing parties were so rigid that it eventually failed to meet expectations. Developing
nations insisted on the correct and full implementation of the Uruguay Agreement (especially in the sphere of agriculture), while the
United States tried to keep labour and environmental issues on the agenda, and the EU
wished to negotiate and codify competition
and investment policies. None of the following ministerial conferences could reach a real
breakthrough.17 The stalemate between the
two major camps, however, pushed developing countries to unite and strengthen their
positions within the WTO by forming a pressure group called the Group of 20 (G20). The
unprecedented coalition accounts for almost
two-thirds of the world’s population and onequarter of global agricultural export (Narlikar
and Tussie, 2004).
DEVELOPING COUNTRIES AND
INTERNATIONAL TRADE
Developing nations did not participate
actively in multilateral trade negotiations for
a relatively long time. Apart from the socalled East Asian newly industrializing countries, which adopted an outward-oriented
development strategy, most of the developing countries did not manage to integrate into
the post-World War II trading system successfully. On the one hand, they followed an
inward-looking, import-substitution industrialization strategy, which did not favour trade
openness (Findlay and O’Rourke, 2007). On
the other hand, advanced economies were
also reluctant to open their markets to commodities such as textile or agriculture products in which developing countries had a
natural comparative advantage.
The first major change in this state of
affairs happened in 1964, when the United
Nations Conference on Trade and Development
(UNCTAD) was established with the joint
09_Steger et al_Ch-09.indd 145
145
effort of the developing world. The aim of
UNCTAD was to promote trade and cooperation between the developing and the developed nations. A decade later plans for a new
international economic order were laid down,
with the multiple objectives of providing
preferential access to advanced countries’
markets, renegotiating debt, establishing
international commodity agreement (to stabilize primary product prices),18 providing
transfer of technology, and increasing aid
substantially (Salvatore, 2007). Nevertheless,
the two oil crises and the consequent
slowing down of economic activity in the
developed nations swept these initiatives
away. Instead, advanced countries adopted
highly protective measures (both tariffs and
non-tariff measurements) in order to cushion
the negative effects of the economic stagnation of the 1980s.
The change in the behaviour of developing
countries arrived with the Uruguay Round.
Originally, the round was meant to be a grand
bargain between developed and developing
economies (Ostry, 2002). The former were
expected to open their markets, especially to
agricultural and textile products, whereas the
latter accepted the new regulation on intellectual property rights and services. While
developing countries have opened up their
service markets, their export of agricultural
products is still blocked by advanced nations.
Agriculture has a share of one-third to a half
of the total economic output in most developing countries. Without the liberalization of
agriculture, it is simply impossible for developing nations to fully integrate into the
global economy.
By quantifying the gains from the round,
Harrison et al. (1997) argued that the aggregate welfare gains were between US$100 (in
the short run) and US$170 billion (in the
long run) annually. Developing countries,
however, might have easily found themselves on the losers’ side – at least in the
short term. Hertel et al. (1998) have also
acknowledged that Africa is a potential loser
of the Uruguay Round. Khor (1995) thus
views the WTO as the means by which
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industrialized countries can gain access to
the markets of developing countries.
In fact, a number of criticisms have been
voiced with regard to the current trade regime.
Wade (2003), for example, has condemned the
three major trade agreements, i.e. the TRIMS,
the GATS and the TRIPS, for constraining the
available set of industrial policies for development to such an extent that development ladder of developing economies had been
practically kicked away. DiCaprio and
Amsden (2004) regard the WTO as a logical
consequence of the Washington Consensus
approach to development, which considers
domestic interventions highly distortive and
ineffective. Stiglitz (2002) argues that today’s
advanced economies applied such ‘distortions’ widely at the onset of their own development. It is hypocritical, therefore, to enforce
developing countries to fully liberalize their
trade and financial sector.
All in all, the current trade regime and
especially its main propagator, the WTO, is
heavily criticized for ‘a striking asymmetry.
National boundaries should not matter for
trade flows and capital flows but should be
clearly demarcated for technology flows and
labor flows … This asymmetry … lies at the
heart of inequality in the rules of the game
for globalization’ (Nayyar, 2002: 158).
DISCUSSION QUESTIONS
1 Why did the Bretton Woods System collapse in
the 1970s?
2 In what ways is market globalism embedded in
contemporary global economic relations?
3 To what degree has intergovernmental cooperation to limit exchange rate volatility enabled the
globalization of finance?
2
3
4
5
6
7
8
9
10
NOTES
1 Hirst and Thompson (1996:185) sceptics of contemporary globalization, claim accordingly that
the basic difference between an internationalized economy and a strictly global economy is
that in the case of the latter ‘economic outcomes are determined wholly by world market
09_Steger et al_Ch-09.indd 146
11
forces and by the internal decisions of transnational companies’.
Quoted by Tracy (1990).
The industrial revolution of course was well on
the track at the age of Adam Smith already. The
textile industry was on a steady rise from the
1720s. The second half of the eighteenth century witnessed the discovery and the widespread
use of the steam engine.
European economies and their offshoots grew at
moderate levels in today’s standards but it outpaced extensively the pre-Industrial Revolution
era growth performance. Annual growth rates
accelerated from 0.14 per cent between 1500
and 1820 to 0.9 per cent in the following 50
years and peaked at an annual average of 1.33
per cent between 1870 and World War I
(Maddison, 2001).
They argue that due to increased trade openness,
globalizers (including China and India) achieved
an average annual growth rate of 3.5 per cent
and 5.0 per cent in the 1980s and 1990s, respectively, as opposed to non-globalizer rates of 0.8
per cent and 1.1 per cent for the same periods.
The richest region includes the United States,
Canada, Australia and New Zealand. Africa is the
poorest.
Apart from the closure of the so-called ‘gold
window’, the United States also initiated a wage
freeze and an import surcharge (Bordo, 1993).
The ten points of the Washington Consensus are
the following: 1. fiscal policy discipline; 2. effective public spending; 3. tax reform; 4. competitive exchange rates; 5. trade liberalization; 6.
financial market (interest rate) liberalization; 7.
liberalization of foreign direct investment; 8.
privatization; 9. deregulation; 10. security of
property rights (Williamson, 1994).
Major European economies regained their 1939level of GDP by 1951 (Crafts and Toniolo, 1996).
As an illustration let us assume that Portugal produces nine units of wine and six units of clothing
in one labour hour, while England produces three
units of each. Although Portugal has an absolute
advantage in the production of both goods, it is,
however, more productive in wine than in clothing if compared to England (9/3 versus 6/3).
Portugal should concentrate, therefore, on the
production and export of wine and England
should specialize in the production of clothing. If
the two nations engage in voluntary trade, each
can increase its overall wealth, i.e. more wine and
clothing can be produced in total than without
specialization and trade.
Emmanuel (1973), who developed the concept
of unequal exchange, has been heavily criticized
by Amin (1976), who claims that exchange (the
‘surface phenomenon’) cannot be separated
from production.
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THE GLOBALIZATION OF ECONOMIC RELATIONS
12 Asia possessed roughly two-thirds of world GDP
in 1700, while the West accounted for onequarter only. By 1950, the West had a 60 per
cent share, while Asia fell to 20 per cent (Dicken,
2004: 34–5).
13 Albeit the concept of unequal exchange has
gained substantial theoretical support, there has
been much less interest in its empirical testing. One
exception, however, is Köhler and Tausch (2002).
14 ‘Trade policy deals with the economic effects of
direct or indirect government intervention … [it]
deals with the winners and losers that arise from
government intervention in markets’ (Kerr,
2007: 1).
15 That international trade can enhance peace and
international political relations is a strong assertion
in liberal political theory, too (see Keohane, 1984).
For a more critical approach, see Strange (1985).
16 See Eichengreen (1989) on the political economy
of the Act.
17 Ministerial conferences in order of time were the
Cancún (2003) meeting, the Hong Kong meeting (2005), and two conferences in Geneva
(2009 and 2011).
18 The share of primary commodity export was 81
per cent in Africa, 79 per cent in the Pacific
Island states, 72 per cent in the former Soviet
Union countries and 55 per cent in Latin America
and the Caribbean in 2009 (UNDP, 2011).
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