Introduction: Globalization in the Datagregory.corcos.free.fr/epp/M1EPP_lect0_intro.pdfHistorical PerspectiveTrade globalizationFinancial globalizationQuestions raised by globalization

Historical Perspective Trade globalization Financial globalization Questions raised by globalization

Introduction: Globalization in the Data

Gregory Corcos

Eco572: International Economics

September 10, 2014

mailto:[email protected]

http://gregory.corcos.free.fr/epp/EPP.html


International Economics

Analysis of cross-border economic relationships

Trade relationships (Lectures 1-5) and monetary/financialrelationships (Lectures 6-9)

Two sides of the same coin: any trade flow generates amonetary payment, shocks to the financial system have animpact on international trade

What is specific to international economics that needs to bestudied outside the macro class?

Welfare gains from international trade and factor mobilityDynamics of the balance of paymentsDetermination of exchange ratesInternational coordination of economic policies

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Course Outline

1. The theory of comparative advantage

2. The neo-classical model of international trade

3. International trade under imperfect competition

4. Trade policies

5. Multinational firms and foreign direct investment

6. Intertemporal choice and the balance of payments

7. The foreign-exchange market

8. The equilibrium exchange rate

9. Foreign exchange crises

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Organization

A ”normal” week = 1.5 hour lecture + 2 hour tutorial.

Problem sets will be handed out one week in advance and willbe solved in class by students.

Final exam

3 hour written exam, closed book2 parts (trade/international macroeconomics) with equalweightsproblem sets with possibly one short essay questionpast exams available at http://www.isabellemejean.com/internationaleconomics.html.

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http://www.isabellemejean.com/internationaleconomics.html

http://www.isabellemejean.com/internationaleconomics.html


This Lecture

Globalization: Historical perspective

- Trade globalization- Financial globalization

Questions raised by globalization

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What Does Globalization Mean?

Integration of national economies into the internationaleconomy through trade, foreign direct investment, capitalflows, migration, and the spread of technology

⇒ Cross-border exchange of goods, services, assets, labor

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Globalization in Historical Perspective

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Measures of Trade and Financial Globalization

Trade globalization: Growth in international flows of goodsand services as measured by

Trade Openness: (X+M)/GDP,Restrictions to free trade (tariffs and regulations)

Financial globalization: Extent of cross-border financialtransactions as measured by

Financial Openness: (Domestic assets held by foreigners +Foreign assets held by domestic agents)/GDP, Inflows/GDP,Outflows/GDP,Restrictions to international capital movements (taxes andregulations)

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Two episodes of globalization

1870-1914, “Golden Age” of TradeFall in transportation costs (railway, steamboat, telegraph)Europe’s colonial expansion → trade in raw material,agricultureIndustrialization in the North, dis-industrialization in the SouthLong-run capital flows (railway)Gold StandardShare of British wealth invested overseas = 17% in 1870 and33% in 1913 (larger than any country today)

⇒ Stopped by WWI, Protectionist Pressures during the GreatDepression (eg Smoot-Hawley tariffs in the US and retaliationfrom many countries) and until the end of WWII

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Two episodes of globalization (2)

1960-?, Second “Golden Age” of Trade?Fall in transportation and communication costs (shippingcontainer, telecom, internet)General Agreement on Tariffs and Trade (now WTO), IMFNorth-North intra-industry trade (manufactured goods)Industrialization in the South (high growth rates +multinationals + intra-firm trade)Since 1980, financial liberalization, especially in emergingmarkets → Increase in capital flows (three times faster thantrade growth since 1990)Regional tradeSince 1973, floating exchange rates

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World trade over time

Table: World exports as a share of GDP (%)

Source: Krugman (1995). Exports of merchandise. (a) OECD countries only

0

5

10

15

20

25

30

1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011

Source: CEPII-Chelem. Exports of goods and services

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World trade over time: Non-smooth process

Exports of goods (% GDP)

Source: Baldwin & Martin (1999), CEPII-CHELEM database.

Globalization is not entirely new: 1870-1914, 1960-?

Globalization is not irreversible: Aftermath of Great Depression

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World trade over time: Heterogeneous across countries

Exports of goods (% GDP)

Source: Baldwin & Martin (1999), CEPII-CHELEM database.

Evolution more recent in the South

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World trade over time: Heterogeneous across countries0

24

6T

rade

Val

ue (

billi

ons

US

D)

1970 1980 1990 2000 2010

North−North North−SouthSouth−South South−North

050

010

0015

0020

0025

00T

rade

Val

ue (

1990

=10

0)

1990 1995 2000 2005 2010

North−North North−SouthSouth−South South−North

Source: UN ComTrade

High income countries dominate world trade

But strong growth of low/middle income countries trade since thebeginning of the 90s

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Trade barriers over time

Trade Barriers over Time

Source: Feenstra & Taylor

Trade barriers = all the factors that influence the amount of goods andservices shipped across international borders (transport costs, tariffs,frictions, etc)

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Transport costs

Transport costs (% production costs)

Source: Bairoch (1989) cited in Baldwin & Martin (1999).Figures for an hypothetical 800 km shipment

Role of technological innovation and infrastructure investments

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Transport costs (2)

Transportation and communication costs

Source: World Bank (1995)

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Transport costs (3)

Role of container shipping in the second wave of the globalization:

1950 1970

Loading time (per man hour) 0.627 4.234Time in port 3 weeks 18 hoursCharge (tons per boat) 10,000 40,000

Source: SF Chronicle Cited in Feenstra & Taylor

Role of communication costs in the second wave of theglobalization:

1986 1991 1996

Telephone capacity (Thousands of voice paths)Transatlantic 100 504 2,021.6Transpacific 41 141.2 1,098.6Internet hostsThousands 5.1 617 12,881

Source: Cairncross (1997) Cited in Baldwin and Martin (1999)

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Tariffs over time

Average tariff on manufactured goods (%)1913 1931 1950 1980 1999 2004

France 20 30 18 8.3 4.1 2.5Germany 13 21 26 8.3 4.1 2.5USA 44 48 14 7 .4.5 2.2

Sources: Mayer and Martin (2008), Boumellassa et al. (2009)

Strong increase in the interwar period: Smoot-Hawley tariffs in theUS during the Great Depression (60% tariffs on some importcategories) → Cause other countries to retaliate

Reduction after WWII: International agreements (GeneralAgreement on Tariffs and Trade, now World Trade Organization)

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Trade barriers: Unachieved liberalization

Average protection in %

0%

5%

10%

15%

20%

25%

30%

35%

40%

USA

New ze

aland

Europe

an U

nion

Japan

Mexico

Brazil

China

Malaysi

a

Egypt

India

Niger

Chad

World

2001 2004

Source : MacMaps-HS6-v2 database, Boumelassa, Laborde and Mitari-tonna (2009)

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Trade barriers: Heterogeneity across countries/goods

World protection in 2004 in %

Goods World HICs MICs LDCs Agricultural goods 18.9 18.0 20.8 14.1 of which: Primary and semi-processed 12.8 12.1 14.2 9.5 Final 22.8 21.7 25.4 16.8 Industrial goods 4.4 2.7 8.9 11.7 of which: Primary and semi-processed 2.8 1.2 6.2 10.9 Final 5.0 2.9 9.9 11.9 Extraction and energy products 1.9 0.6 5.6 12.7 of which: Primary and semi-processed 1.4 0.3 4.6 14.4 Final 3.3 1.4 7.6 11.2 All products 5.1 3.3 9.6 12.2 of which: Primary and semi-processed 3.3 1.8 6.8 11.4 Final 6.0 3.9 11.0 12.4

Source : MacMaps-HS6-v2 database, Boumelassa, Laborde and Mitari-tonna (2009)

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Trade costs today

Trade costs continue to be large today, see Anderson & vanWincoop (2004)

The ad-valorem tax equivalent of all trade costs for therepresentative rich country is estimated to reach 170%

Total = 55% tax equivalent for local distribution costs + 74%tax equivalent for international trade costs

International trade costs = 21% tax equivalent fortransportation + 44% for border-related trade barriers

Transport cost = 12% directly measured freight costs + 9%tax equivalent of the time value of goods in transit

Border-related trade barriers = 8% policy barriers (tariffs andNTB) + 7% language barrier + 6% information cost + 3%security barrier (insecurity associated with contractualenforcement problems and corruption)

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Geography of Globalization: Regionalization

Intra-bloc trade (% total)

Source: CEPII-Chelem

Trade within Europe accounts for about 25% of world trade

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The emergence of China

Imports and Exports (% of world trade)

20,00

25,00

30,00

35,00

40,00

45,00

X USA

M USA

X EMU

M EMU

X CHN

0,00

5,00

10,00

15,00

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

X CHN

M CHN

Source: ComTrade

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International Financial Integration

02

46

810

1970 1980 1990 2000 2010

over GDP over Trade

International Financial Integration in Advanced countries. Source: Lane P. & Milesi-Ferretti G.M.

(2006), Financial integration measured as the ratio of foreign assets + foreign liabilities over GDP

(green) or Trade (red)

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International Financial Integration (2)

International Financial Integration by regions

11.

52

2.5

3Ex

t. As

sets

and

Lia

bilit

ies

over

GD

P

1995 2000 2005 2010

Advanced countries Emerging AsiaLatin America

Source: Lane P. & Milesi-Ferretti G.M. (2006)

Financial integration heterogeneous across countries

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De jure financial openness

2. Financial opennessdefinition

De jure financial openness since 1970

• Current-account convertibility: The national currency can be exchangedfreely for the purpose of importing goods and services, paying currenttransfers, and factor income. This is the case in a majority of countries.

• Financial-account convertibility: Direct investments, portfolio

Source: Chinn and Ito (2008), based on the IMF Annual Report on Exchange Arrangements and Exchange Restrictions, 1970-2007.

investments, and bank loans are permitted without restriction. It issynonymous with capital mobility and may concern some financial

Note: the index is the first principal component of 4 categories of restrictions: (i) existence of multiple exchange rates; (ii) restrictions on current account transactions; (iii) restrictions on financial account transactions; (iv) requirement of the surrender of export proceeds. Non-weighted average of 24 advanced economies and 128 emerging and developing economies

transactions, partially or totally, and not others (e. FDI in national security-related industries).

9

and developing economies.

Andrade & MéjeanInternational Economics 2012-2013

Source: Chinn & Ito (2008). The index is the first principal component of 4 categories of restric-

tions: (i) existence of multiple exchange rates; (ii) restrictions on current account transactions;

(iii) restrictions on financial account transactions; (iv) requirement of the surrender of export

proceeds.

Measurement issues, see Lecture 6

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Volatility of capital flowsFlows are more volatile than stocks: in the 2008 crisis, collapse of international flows

Financial Globalisation

Flows are more volatile than stocks

Collapse of international flows during the 2008 crisis

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Volatility of capital flows (2)

selling of foreign gassets

Capital flows are much more volatile than trade29/34


Growth in FDI

Figure: FDI Net Inflows, by destinations

-5E+11

0

5E+11

1E+12

1.5E+12

2E+12

2.5E+12

1970 1975 1980 1985 1990 1995 2000 2005 2010

World

High Income

Asia

Low income

Source: World Bank, Data are in current US$. Net inflow = Investment - Disinvestment

FDI is a recent phenomenon

FDI is extremely concentrated, in large part among developed countries30/34


Questions raised by globalization

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At the macro level

Gains from trade in goods and services

Global gains? Distribution across countries and productionfactors?Compensation of losers?

Trade policies

Multilateral versus regional and bilateral (“noodle bowl”)agreementsTariffs versus non-tariff barriers (Agriculture and services)

Gains from financial integration

Gains from risk-sharing or more instability?Conditions under which capital inflows benefit the hostcountry? Some flows have a stronger effect on TFP (FDI),some institutional background is needed.Transmission of (positive and negative) shocks acrosscountries?Needs for global governance?

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At the micro level

How does globalization affect firms’ strategy?

Which firms engage in internationalization? Export versusFDI? Participation to international supply chains?Implications for policy instruments: export subsidies, taxcoordination...

Organization of financial institutions

To what extent are portfolio diversified?Regulation (eg capital requirements in Basel agreements)

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Conclusions

Globalization represents the increase in cross-border trade ofgoods and services and movement of production factors.

Two episodes: 1870-1914 and 1960-. Globalization is neithernew nor irreversible.

Capital flows are much more volatile than trade.

Globalization raises macro issues related to the distribution ofgains from trade and the transmission of shocks, and microissues related to firms’ strategies and the organization offinancial institutions.

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Documents

Introduction: Globalization in the Datagregory.corcos.free.fr/epp/M1EPP_lect0_intro.pdfHistorical PerspectiveTrade globalizationFinancial globalizationQuestions raised by globalization