International Relations Essay 2 ONLY ONTIME

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The Globalization of World Politics (6e)

27. Global trade and global finance

Baylis, Smith & Owens

Baylis, Smith & Owens: The Globalization of World Politics 6e

The globalization of trade and finance

• Intensity of global flows of trade and finance refers to the degree to which national economic borders are traversed by such flows

• Equivalent Extensity refers to the geographical dispersal of the flows

• The word ‘globalization’ is frequently used to describe both dimensions

Baylis, Smith & Owens: The Globalization of World Politics 6e

The globalization of trade and finance: intensity measures

• Globalization hotspots have centred on advanced industrial countries, where there has been significant intensification of cross-border economic activity

• In spite of the severe economic downturn during and after the financial crisis, world trade is still trending upwards

• By contrast, many of the poorest countries of the world remain more or less untouched by the new economic structures

Baylis, Smith & Owens: The Globalization of World Politics 6e

• Extensity factors are more likely to be apparent the more deeply embedded a country is within a regional trading system

• Extensity effects will almost certainly be more notable within the regional bloc than beyond its borders

• Foreign direct investment is the most obvious example of extensity

The globalization of trade and finance: extensity measures

Baylis, Smith & Owens: The Globalization of World Politics 6e

• Global finance is concentrated in the north Atlantic economy

• The massive increase in world trade since the 1970s can to a large extent be explained by regional economic integration rather than by ‘genuine’ globalization

• Financial trading patterns do not correspond with actual impact of that trading, which is more likely to be global in reach

The globalization of trade and finance

Baylis, Smith & Owens: The Globalization of World Politics 6e

• The 1944 Bretton Woods Conference aimed to design a post-war governance structure that would prevent the world economy from entering a depression

• The General Agreement on Tariffs and Trade (GATT) was established in 1947 with a weaker mandate than some had envisioned

• The GATT system was unwieldy, depending on individual negotiations for each tariff concession

The regulation of global trade

Baylis, Smith & Owens: The Globalization of World Politics 6e

• GATT was replaced in 1995 by the World Trade Organisation (WTO)

• The WTO was designed to embed free-trade norms in international law with multilateral reach

• WTO membership is an implicit assurance that a market-based mindsets permeates macro- economic management of the country in question – This can help poor countries secure positive

assessments by the IMF and credit rating agencies

The regulation of global trade

Baylis, Smith & Owens: The Globalization of World Politics 6e

• WTO has been notably bad at getting industrialized to abandon the systems of agricultural support which prevents many developing countries from exploiting their comparative advantages

• For the average developing country, WTO membership hinges on lifting restrictions on rich country access to non-agricultural markets but without gaining similar access to rich countries’ agricultural markets

The regulation of global trade

Baylis, Smith & Owens: The Globalization of World Politics 6e

• The structural decision-making at the WTO reflects the fact that member power is unequally distributed – Votes are not taken on individual measures

to incrementally build up a body of international trade law that is acceptable by all

– At each WTO ministerial meeting, members must instead decide whether or not to accept a whole package of reforms known as the Single Undertaking

– Rich countries thus enjoy overwhelming agenda-setting power

The regulation of global trade

Baylis, Smith & Owens: The Globalization of World Politics 6e

• Unlike the WTO, the principal bodies that regulate global finance have no democratic pretensions associated with its governance system

• The International Monetary Fund and the World Bank are both expert-run and dominated by the countries that finance the maintenance of the regulatory system

• To gain access to loans, borrowers have to accept specific (politically mandated) conditions

The regulation of global finance

Baylis, Smith & Owens: The Globalization of World Politics 6e

• Critics of these institutions are not necessarily protesting against finance per se, but usually focus on the ideological effects that follow from the set conditions – Groups like the Occupy Movement have criticized

the concentration of wealth in the hands of the already well-heeled; a consequence of self-regulating financial markets

– The IMF and the World Bank are visible formal symbols of global finance and so draw these groups’ attention

The regulation of global finance

Baylis, Smith & Owens: The Globalization of World Politics 6e

• The IMF and the World Bank have embraced substantial elements of ‘mission creep’, touching on a role reversal, since their inception – The priority of global economic governance

at the end of WW2 was to stimulate free- market flows of traded goods rather than to stimulate free-market flows of finance

– Market self-regulation of finance was formally disqualified in this period, and the IMF was to ensure that capital controls were robust

The regulation of global finance

Baylis, Smith & Owens: The Globalization of World Politics 6e

Case study 1: The sub-prime crisis

Baylis, Smith & Owens: The Globalization of World Politics 6e

Case study 1: The sub-prime crisis

• The sub-prime crisis brought a large number of Western banks to effective bankruptcy in 2007 and 2008

• Only public bailouts prevented a wider contagion of problems

• from the end of the 1990s, house prices rose in most Western countries

• This masked the banks’ overexposure to risks associated with mortgage-based securities

Baylis, Smith & Owens: The Globalization of World Politics 6e

Case study 1: The sub-prime crisis

• In some cases, the massive potential profits led banks to suspend due diligence tests on customer creditworthiness as the credit bubble hit its peak

• There was no structure of adequate public authority over these activities in place at the time

• The prevailing policy trend of financial liberalization was incompatible with the required control regimes, restricting imaginable options