Managing Trade Relations in the New World Economy

Thomas Andersson

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136145643
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Managing Trade Relations in the New World Economy analyses the implications of the new world economy for global trade. Thomas Andersson explores how manufactured exports have increased exponentially while the western economies have accrued massive current account deficits. Warning against the dangers of protectionism, he argues that the future of the world trading system, may depend upon the external policies of the EC.

1

CHALLENGES OF A NEW ERA

A number of disconcerting developments have led to a change in the balance of power in international relations, and a replacement of the issues at the heart of the international agenda. This has involved a shift in the competition between geographical regions or economic systems. The second world of state planned economies has collapsed and ceased to exist as we knew it. Controlling resource use through central command has proved to be a hopelessly outdated mode of management. It is somewhat less evident that the first world – the industrialized and market-oriented economies of the West – has lost its formerly dominant position. The third world of developing countries, finally, has split into subcategories which display divergent economic trends.

Africa and most of South Asia face enormous economic problems. Above all, they are characterized by a state of poverty and stagnation that governs the lives of the majority of their rapidly growing populations. Irrespective of whether people remain in the countryside or move to the sprawling slums of the urban areas, there appears to be little escape. The Latin American and Caribbean experience is largely the same, although there are now encouraging signs of industrial progress in parts of the region.

East Asia, on the other hand, is characterized by a phenomenal dynamism, which stands out as a remarkable success story. The leading economy in this part of the world, Japan, has not only been transformed into a major industrialized nation, but has also become a global power in trade, investment and finance. Although affected by the weak state of the global economy in the early 1990s, its record is unlikely to be more than temporarily set back. While Japan so far remains dominant in East Asia in economic terms, the Asian newly-industrialized economies (ANIEs) are following closely behind. The members of the Association of South-East Asian Nations (ASEAN) have also recorded steady growth for several decades.¹ Poorer countries in the region are showing progress as well. This includes China itself, the world's most populous country which historically used to be the undisputed heart of Asia, in cultural as well as economic respects.

The turbulent changes in different regions have had repercussions on each other. The structure of the Soviet Union was eradicated by centrifugal forces, while the costs of trying to match the armaments of the United States speeded up the reappraisal of policies. Asian Pacific dynamism also played a role, exposing the lagging Soviet Union to unfavourable comparisons. A dynamic Far East, and not just a threatening West, undermined the relative strength of the economic base provided by the Soviet system for military security.

As the Cold War seems to be over, the ideological struggle between industrialized and developing countries has fewer military connotations. In the South, the image of a ‘bloc’ of exploited countries has started to fade. The doctrines upon which the third world based itself have become less relevant and less realistic. Foreign investors are now called for rather than resented, and the expropriation of foreign equity has virtually stopped. Export opportunities to industrialized countries are no longer viewed as signs of exploitation. Instead, evil is associated with the elimination of such opportunities.

Although foreign policies of appeasement and coexistence may be applied at less risk, security problems have not disappeared. Violent and dangerous conflicts are still occurring. However, military force has become a less viable and effective instrument for managing them. There are conspicuous exceptions, such as the Allied reply to Iraq's annexation of Kuwait. Most conflicts, such as those in Sri Lanka, Palestine or former Yugoslavia, to mention just a few, emanate from inner antagonisms, fuelled by economic and social tensions. Although the world community can undoubtedly still play a positive role in the resolution of such conflicts, specific measures now appear to require the support of broad international coalitions. At long last, the United Nations may fulfil a proper function in this respect.

The United States and the Soviet Union used to assume special roles on the basis of armed might. Now, military build-up has ceased to be a ‘virtue’, because of the costs of modern weaponry and the intensified pursuit of economic goals rather than ideological struggles across the world. The Russian Republic and the other ‘heirs’ of the USSR must dismantle obsolete structures and build new societies with small financial means and limited experience of functioning markets. While the area threatens to remain a source of destabilization for itself and for others, the only conceivable interference from outside is that of economic cooperation and assistance. Meanwhile, the previously undisputed leadership of the United States is now gone as a result of an inability to ‘keep its own house in order’ and correct its deficits, combined with the unavoidable relative decline as others grow.

Broadly speaking, national size no longer constitutes the advantage for growth that it used to. While ‘bigness’ can be effectively managed over the strategic or military dimension, it is not so easy over the social or economic one. Getting the Russian economy to work will not be facilitated by its dimensions – resource-rich economies in Africa and Latin America are among the most troubled, while the United States is in difficulty regarding its long-term vitality. The most successful economies are now relatively small. What matters is not a comfortable home market but the competitive pressure that follows from international exposure. Rewards do not first and foremost emanate from dominance at home or a rich endowment of natural resources, but rather from technology, high quality of human resources, knowledge and the ability to handle information.

Some observers see ‘new’ sources of conflict around the corner. History reminds us that, unfortunately, there is a tradition here. The ultimate wishes of Berlin and Tokyo might still be unclear. Their renewed ambitions point towards permanent seats in the Security Council of the United Nations, alongside those who were appointed after the Second World War. Unable to bring an independent foreign policy into military might, Germany and Japan have concentrated their energies on economic pursuits. This has again provided them with the means, if they should so desire, to widen their foreign policy into military might. Or have they found that the goals of foreign policy are better achieved through trade and investment than through diplomacy and the power to pursue the ultimate stage of diplomacy?

In fact, economic issues have replaced a concern for military security at the core of the international agenda. Japan and a reunited Germany are centres of the two regions that attract increasing attention. Questions are raised everywhere regarding how to counter the new competition from East Asia, and how to respond to the opportunities arising there. The Western economies are experiencing substantial trade deficits, particularly with Japan, but also with the ANIEs and China. It has become crucial to understand why East Asia has taken off, and to what extent it is possible to emulate, or learn from, its performance.

Germany, on the other hand, is the economic heavy-weight of the European Community (EC), and of Europe in general. Plagued by a severe economic and cultural segmentation between its many small national economies, Europe was for long a continent associated mainly with the past. Its firms have been too small to take full account of economies of scale, but too large for their national economies, resulting in high market concentration and monopolistic behaviour. Under growing external pressure, however, the French Commissioner Jacques Delors set off a major process of restructuring. The project of creating a ‘Single Market’, providing ‘full freedom’ for goods, services, capital and labour through the adoption of more than 300 common European laws, was planned for completion at the end of 1992. The door was opened to a new and potentially stronger Europe.

The Single Market is not the end of European integration. It is possible that the European Economic Area (EEA) will link most of the Western European ‘outsiders’ to the Single Market. Without means to influence the policies of the Community within that framework, however, it would appear that at least Sweden, Austria and Finland may be heading for membership. The process of restructuring has rapidly taken on additional dimensions within the EC itself. The weight of the unified Germany has created a strong drive to forge it into an even more united and secure Community. The changing and less stable international arena has raised demands for political and monetary unification as well.

In 1991 these movements were abruptly transformed into the Treaty of Maastricht. This has been countered by national and provincial concerns. The first act of popular consultation – the national referendum in Denmark – did not pass the test. Although the referendums in Ireland and France managed somewhat better, the integration process has become less predictable. Europe has been damaged by economic turbulence partly unleashed by the hardships and tensions resulting from German unification. Volatile exchange rates and excessive interest rates have become commonplace, business is suffering and unemployment, already high, is growing again.

While Western Europe must yet again take a closer look at how to manage its internal structure, Eastern Europe has problems to even get started. As sweeping changes are introduced in order to open up and transform the economies, formerly repressed incongruities and ethnic conflicts keep emerging. Being the largest capital-goods exporter in Europe, and also because of cultural and structural ties, Germany should eventually benefit the most from economic revitalization in Eastern Europe. On the other hand, it may have the most to lose from continued, and possibly even enlarged, turmoil.

The attempts to consolidate the European house have counterparts in processes towards regional integration elsewhere. The North American Free Trade Agreement (NAFTA) is planned to establish free trade between the United States, Canada and Mexico from 1994. Various constellations of developing countries are moving in the same direction. While East Asia fears that such regional constructs mainly intend to exclude its exports and investments, there are now conscientious efforts to establish more open exchange and cooperation in the Asian Pacific as well. This is becoming less unrealistic as the growing and maturing economies in the region become more compatible with each other. Hence, there is a widespread fear that the world economy will become segmented into ‘blocs’ of countries which liberalize trade amongst themselves but pursue protectionist policies vis-à-vis each other.²

The risk of segmentation of world markets does not stem from regional liberalization per se, but rather from a weakening of the multilateral trade system. After the Second World War, the General Agreement on Tariffs and Trade (GATT) established rules for world trade based on the principle of multilateralism – a country should not do against one of its trade partners what it does not do to all of them. For decades, trade and incomes grew steadily in the industrialized economies. Following the overhaul of the Bretton Woods system of fixed exchange rates, the ‘oil crises’ of the 1970s and the rise of new competitors, the world economy entered a phase of greater uncertainty and instability.

Parallel to these developments, business operations are characterized by rapid internationalization. Previously national firms have expanded into multinational enterprises that control affiliates in foreign markets through so-called foreign direct investment. Traditional trade in dissimilar products between countries with sharply different comparative advantages has given way to trade in differentiated products within industries, and even within firms, between countries which are highly similar. This trade is based primarily on technology and human skills, and specialization occurs in the form of quality or design. A relatively small number of giant corporations now operate intricate networks of transactions across national boundaries. Some flows are associated with a tangible, lasting restructuring. Other flows are completely flexible and occur with minimal time delay. Huge financial transactions are completed within minutes or seconds.

From the viewpoint of nation states, the internationalization process disentangles firms from their national bases. The financial and organizational capabilities of multinational firms, together with their weight in technology, production and trade, grant a capacity to circumvent requirements set up by individual governments. Workers and households are becoming more adaptive and mobile as well. Many regulations and controls are becoming less viable and more costly, which does not necessarily mean that they are dismantled. Governments throughout the world experience mounting difficulties in manoeuvring economies through financial or monetary policies.

From the standpoint of multinational firms, operations need to be organized in accordance with the special advantages of different locations. These hinge crucially on the actions of other players with which a firm interacts, private as well as public, and how they relate to the firm's needs and abilities. Activities based on advanced technology are particularly demanding with respect to inputs from outside, in the form of an appropriate infrastructure, an adequate work force, and proximity to other innovating units. Both firms and countries are confronted with strategic decisions. Which technology should be developed and which should be purchased or acquired? Which activities ought to be located in which markets? What skills should be promoted in the work force, and how? These circumstances generate an intensified interaction between actors on the national as well as international level, speeding up competition between locations, and between economic ‘systems’.

The changing international scene accounts for many controversial issues with which the Uruguay Round of multilateral negotiations has battled for years. In the meantime, the old set of rules continues to hold, but is gradually becoming obsolete. Above all, the United States has adjusted its trade and investment policy, and has ceased to be constructive from a multilateral perspective. Many Americans accuse East Asian countries, particularly Japan, of unfair policies, while the United States itself has developed selective barriers at home. For example, ‘Super 301’ and ‘Regular 301’ have emerged as powerful bilateral instruments to bypass GATT requirements. Still, the inflexibility of the EC with respect to its agricultural policies has carried the major responsibility for the stalemate of the Uruguay Round. Following the United States, the EC has also developed a powerful agenda of voluntary export restraints and antidumping proceedings to selectively and arbitrarily impede competitive imports.

As old champions of free trade try on new clothes, and new ones are not yet fully dressed, there is a lack of haute couture. The tactical prowess which can be mobilized on a bilateral or regional basis threatens to determine the conditions for trade and the prospects of nations. With a diminished role for the United States in the world economy, the major question now is what paths will be chosen by Europe and East Asia. More specifically, how will these regions behave with regard to each other?

In the 1960s, Servan-Schreiber warned against American dominance over European industries. The advancement of East Asia, especially the Japanese, gives rise to similar concerns today. While the EC is preoccupied by its own restructuring, East Asian firms have expanded their efforts to be successful in this part of the world. For various reasons, many Europeans view their competition as damaging. Some react against the Japanese capturing of high technology segments that are of strategic importance. Others worry that the ANIEs or ASEAN will dominate activities based on medium technology. At the same time, European firms are often unwilling to make efforts within the markets of East Asia.

The external policy of the EC remains uncertain. This is also partly true of the principles or forces which are to shape the Community in general. To what extent should unguided market forces prevail? Should active industrial policies be adopted, and which policies in that case? The lack of determination in these matters is related to the question of how Europe should respond to the challenge of East Asia.

Western economic thought since Adam Smith has been based on the understanding that market forces are the result of human desires and ambitions. John Maynard Keynes advocated a role for governments as coordinators when transactions get stuck, which led the way out of the economic turmoil of the 1930s. The negative experience of ‘fine-tuning’, coupled with the insight that policy makers often look after their own ‘selfish’ objectives rather than social welfare, subsequently led to the denouncement of discretionary economic policies. Hayek opted for liberty, in the form of unconstrained freedom of choice for individuals, as the prime objective of society. The breakdown of the planned economies has been taken as further support for this perspective.

The fact is that the model of unchecked market forces and minimal public action is losing pace. However, those Western economies which have tried mixed regimes, guiding private markets through heavy intervention and provision of transfer payments, are facing equally severe problems. Most of these economies suffer from weaknesses in industrial production as well as macroeconomic conditions, while the public sector keeps growing. In East Asia, on the other hand, growth is virtually nowhere a product of non-interventionist government. In Japan, the powerful Ministry of International Trade and Industry (MITI) has undoubtedly been a planner and catalyst of the Japanese record. In Korea, the Ministry of Trade and Industry (MTI) has played a major role in the expansion of industrial exports. At the same time, economic progress throughout takes place in the private sector, where corporate networks rapidly transform technologies and innovations into highly demanded products. The prevailing structures have contributed to the revival of the ideas of Joseph Schumpeter, who highlighted the importance of dynamic progress and the mechanisms in knowledge creation which lay behind it. Furthermore, attention is increasingly paid to the handling of human resources in East Asia.

Beyond international economic competition and the conditions for commercial trade, there are other acutely pressing issues which require action on a wide scale. The shadow of poverty continues to plague mankind, and threatens to get out of hand in the years ahead. With meagre improvement, or none at all, in the living conditions that confront the majority of the world's population in third world countries, there is little hope of bringing down birth rates and managing the demographic transition. The growing number of human beings on Earth exerts mounting pressure on the natural resource base, esp...