International Economics, Second Edition

Paul Torelli

• Publisher: Business Expert Press
• Year: 2017
• ISBN:
  9781631576157
• Topic: Economía
• Subtopic: Economía comparada

Today's news media displays an intense fascination with the global economy—and for good reason. The degree of worldwide economic integration is unprecedented. Rising globalization has lifted living standards and reduced poverty, while foreign markets and new technologies continue to present opportunities for entrepreneurs and corporations. Still, economic shocks can spread across the world in minutes, impacting billions of lives. The political framework supporting globalization is now under scrutiny, and recent elections suggest economic policies may be readjusted in the coming years. This book will help you learn about economics in everyday language, using little or no math, giving you better tools to interpret current events as well as long-term economic and political developments. Modern economics offers a powerful framework for understanding globalization, international trade, and economic growth. You may possess years of hands-on experience dealing with business cycles and foreign competitive pressures, but lack a solid grounding in economic concepts that shed light on the forces of globalization. This book is here to help.

CHAPTER 1

A Brief History of Modern Economic Globalization

Introduction

The urge to exchange goods and services is a fundamental characteristic of any economy, and human beings have traded across far-flung locales for millennia. Archaeologists point to Mesopotamia, in modern day Iraq, as the place where Western civilization began. The ancient Sumerians of Mesopotamia were inveterate traders with a culture that featured writing, mathematics, laws, and cities. Over the subsequent centuries, trade networks and economic integration grew to cover ever-greater regions of the Eurasian landmass, depending on the stability and reach of existing political regimes. The 4,000-mile “Silk Road,” a network of overland trade routes connecting China to the Mediterranean, transferred goods and spread ideas between the East and the West. Many scholars believe these exchanges constitute the nascent beginnings of intercontinental economic globalization within the “Old World.”

The rise of the Mongol Empire under Genghis Khan in the early-13th century—several centuries before the discovery of the “New World”—led to the “Pax Mongolica” (or Mongol Peace). The Mongol conquests unified Central Eurasia, promoting overland trade all the way from Western Europe to East Asia. According to some contemporary accounts of this era, the Silk Road was safe for travel and business. Under the Pax Mongolica, Europeans such as the Venetian merchant Marco Polo came to China for Asian silks and spices. Chinese silks sold in Italy for no less than three times their purchase price in China, and the markets of Constantinople contained all the wares of Asia. Because information flowed east to west and vice-versa, Europeans took advantage of many Chinese inventions and scientific concepts. Meanwhile, the Mongols—who lacked culture and craft but possessed a taste for fine textiles and other riches—forcibly transplanted European artisans and Middle Eastern weavers back to Asia.

The Mongol Empire provided a conduit not only for trade but also for disease. In the mid-14th century, the Silk Road trade route aided the transmission of the plague from China to Europe. Economic integration declined, and the Mongols, possessing more skill in conquest than in governance, lost their grip on power shortly thereafter. As Europe’s population recovered, feudalism gave way to nation-states, and seafaring adventurers discovered the New World, sparking an unprecedented globalization boom. Since then, the volume of world trade and degree of global economic integration has trended upward at an increasing pace. Few today believe that international economic integration will be reversed, although the period from World War I to World War II was the great exception, proving that disintegration is possible, and that taking part in globalization is a choice that nations face, not an imperative.

Mercantilist World View

Modern economists trace their field’s origins back to Adam Smith’s 1776 Wealth of Nations. This treatise examined trade’s role in facilitating specialization and the division of labor, thereby increasing productivity and promoting prosperity. Its content was in opposition to the popular mercantilist beliefs that reached their apogee in the 17th century. Mercantilism of that era was a nationalistic doctrine promoted by a diffuse group of pamphleteers who advocated for specific interests and industries. Mercantilist writers were usually appreciative of international trade—just not unfettered free trade. In the 16th century, mercantilist pamphlets from England were the first writings that treated economic concerns as worthy of separate study, as opposed to remaining part of legal or moral concerns. For instance, one influential English thinker of this period, Sir Thomas Smith, emphasized the value of manufacturing raw materials at home and having a favorable “balance of trade,” meaning that exports ought to be greater than imports.

Compared to later economic analysts such as Adam Smith, mercantilists did not focus on increased productive efficiency within or across nations. Instead, they concentrated on the importance of amassing factor inputs, such as land, labor, and raw materials, including bullion. Mercantilist principles prized national gold and silver holdings, made possible through heavy exporting with a minimum of importing. Because foreign colonies could supply raw resources and gold or silver bullion, mercantilists advocated a strong military with colonialist ambitions. Materials could be transported to the home nation and made into finished products for export. The militant mercantilist outlook was responsible for many tariffs and legal restrictions hindering international trade. It also required a robust navy to aid in navigation, enforce maritime laws, and deal with trade-related conflict.

Mercantilists emphasized the zero-sum aspect of economic development and trade. Viewing the gains from trade as fixed, they intended their own nation to capture the greater portion of them. In England and other parts of Europe at this time, imports were normally luxury consumption goods such as silk. Mercantilist writings regularly advocated for tariffs on these opulent imports because their purchase did not stimulate domestic production or increase national wealth. Yet mercantilists were in favor of importing raw materials to stimulate manufacturing. They desired high value-added processes such as manufacturing to be performed on domestic—not foreign—soil. Mercantilists advocated little to no restrictions on exports, and a few even called for export subsidies. They believed that higher exports stimulated domestic economic development, manufacturing capacity, and labor demand.

Often merchants themselves, mercantilist writers were altogether favorable toward trade and commerce, viewing state oversight as necessary to ensure trade enriched the nation, and not just tradespersons. On the other hand, specific mercantilist policies regularly benefitted narrow interests, such as the business owners within one domestic industry who were all too happy to block foreign competitors through high tariffs and other import restrictions. Although the influence of mercantilism has sharply declined over the past three centuries, mercantilist style policies exist in some nations today. China has been described as “neo-mercantilist” because of its strategic protectionism, forgoing of luxury spending to save and invest, amassing of foreign reserves, and, in lieu of military conquest, import of raw materials for manufacturing and investment, all under strong state administration. Other East Asian nations that have developed successfully (such as Japan and South Korea) expanded their exportoriented production capabilities in a manner broadly consistent with mercantilist principles.

Historical Background

The backdrop to mercantilism was an enormous drop in population due to the “Black Death,” a plague caused by the Yersinia pestis bacterium. The most common form was bubonic plague, which infected the lymphatic system and caused swellings and discolorations, killing most victims within a week’s time. Researchers have theorized that other types of the plague were present, including pneumonic (which infects the respiratory system), septicemic (which infects the blood stream), and enteric (which infects the digestive system). Following three centuries of strong population growth and expansion across arable lands, the Black Death of 1347 to 1353 swept through Europe and killed at least 25 million people from a population of 80 million. The Black Death ravaged the Middle East and Far East, too. Accounts of Egypt from that time describe depopulated towns, and between 1330 and 1420, the population of China fell from 72 million to 50 million. The plague then recurred for centuries in waves of decreasing intensity. Two of the last known major outbreaks in Europe were the Great Plague of London, which commenced in 1665, and the Great Plague of Marseille, which struck in 1720.

Unlike other disasters, the Black Death killed people but left property intact, meaning the remaining population had dramatically more resources to exploit. As a consequence, the Black Death brought about a huge drop in overall economic production with a simultaneous increase in per capita income and wealth. Because of the scarcity of labor, real wages increased—doubling in England over the next century—and peasant revolts became more common in Western Europe. Land was now abundant, so rents fell. With elevated incomes, there was an explosion in luxury goods such as high-quality wool textiles. Given the abundance of land relative to labor, land-intensive agricultural production such as sheep- and cattle-rearing experienced a boom as well. New “laborsaving” technologies, such as the printing press and firearms, may have been spurred by the relative scarcity of labor following the Black Death. After the plague, population growth favored cities, where there was more capital to complement workers. In Europe, it would take around 200 years for the population to return to pre-plague levels.

This period also saw the onset of the transition from feudalism to the nation-state in Europe. Despite its tendency toward disorder and conflict, feudalism was the dominant social structure of the later “Middle Ages” from the death of Charlemagne in the 9th century to the early Renaissance of the 15th century. In decentralized feudal economies, local lords retained administrative and judicial power over dependents who worked the land and paid homage by contributing taxes and performing military service. By rebalancing economic and social power in favor of labor over landowners, the Black Death contributed to the decline of the feudal system. Landlords were now forced to compete for labor because peasants were able to leave for more desirable circumstances. Those who failed to offer peasants better conditions or less onerous tasks could be faced with the prospect of labor shortages.

Elites were conscious of the difficulty of maintaining social control after the plague. In England, the 1351 Statute of Laborers attempted to suppress peasant wages and free movement, which ultimately led to social unrest and the Peasants Revolt of 1381. Modern economists have argued that the increased power and mobility of dependents—and the diminished authority of lords to tax them—sparked agricultural innovations and rural economic growth in Western Europe. A more prosperous and mobile peasantry shifted allegiance to the state, and centralized taxation and administration grew more common. Moreover, the inability of the Catholic Church to prevent the Black Death—along with the loss of many clergy to the plague itself—led to a loosening of the Church’s grip on power in Europe. Some historians maintain that the Black Death was a primary catalyst for the eventual Protestant Reformation that began a century and half later.

The New World

As the population recovered in the 15th century, competing European powers grew interested in exploration. Tiny Portugal, with a population of barely one million at the time, sought a sea route around the southern tip of Africa and successfully made the voyage in 1488 under Bartolomeu Dias. Another Portuguese, Vasco da Gama, was the first European to make it to India around the Cape of Good Hope via the southern coast of Africa. He returned to Lisbon in 1499, 2 years after his initial departure. Most famously, Christopher Columbus—traditionally believed to be the Genoa-born son of a wool weaver—made four round-trip voyages from Spain to the New World of the Americas between 1492 and 1504. Columbus discovered a continent entirely unknown to Europeans (and Asians), whereas Dias and da Gama were aware that Africa and Asia existed before setting off on their journeys.

Within decades of Columbus’s arrival, the Spanish had settled in parts of the Americas. New World crops were introduced to the rest of the world, fundamentally altering global agricultural and labor markets. Corn and sweet potatoes were spread all the way from the Americas to Asia, as were cocoa, tobacco, rubber, and tomatoes. Europeans brought horses, coffee, and sugarcane to the New World. They also infected indigenous populations with diseases from which they possessed no immunity, such as smallpox, cholera, measles, and typhus. As much as 95% of the native population was killed by these Old World diseases.

By the dawn of the 17th century, European navigators had made sense of Pacific and Atlantic Ocean wind patterns and improved upon longdistance maritime travel to such an extent that trade to and from the Americas occurred with relative ease. This period coincided with the middle of the “Scientific Revolution,” when Galileo was in the prime of his career. It was the birth of truly global trade, as goods now regularly passed en masse across the Pacific and Atlantic Oceans—and thus, around the world. Spain founded Manila, its primary Asian trading post, in 1579. As part of the “Manila Galleon Trade,” mammoth silver deposits in Mexico and Peru were shipped west to the Philippines to be exchanged for highquality Chinese silk, at a time when the Chinese valued silver over gold. Threatened Spanish silk growers complained to the Spanish Crown, and in response, the Crown issued anti-trade edicts multiple times. Yet the trade was so profitable that the edicts were ignored, and the volume of trade only increased.

New World sugar cultivation quickly took off in the 16th century. The “Sugar Belt” extended from Brazil to the Caribbean, drawing many Europeans in search of outsized profits. In northern Brazil, the Portuguese initially produced sugar with native slaves, though they eventually switched to West African slaves by the start of the 17th century. Holland, with its West India Company, attempted to break into the Brazilian sugar trade in the 17th century. The Dutch succeeded in capturing most of Brazil’s northern coast for several decades, thereby controlling much of the world’s sugar trade. However, by 1654 Holland had lost control of Recife to the Portuguese, and they eventually withdrew from Brazil in 1661. Outside of Brazil, Spain conquered nearly all the rest of South and Central America over the course of the 16th and 17th centuries.

East Indies Trade

During this “Age of Discovery,” European long-distance trade also opened to the East, using the route that the Portuguese first made around the southern tip of Africa to India and Asia. Ever since pre-Christian times, the “Spice Trade” had brought cinnamon, ginger, cardamom, and turmeric from Asia to the Middle East to Europe, via camel transport along the Silk Road. Arab traders had a lock on the Spice Trade throughout most of the Middle Ages, an epoch when Central Asia—not Europe or China—was the economic and cultural center of the world. By the 14th century, the break-up of the Mongol Empire and the rise of the Ottoman Turks had closed off overland trade routes through Constantinople. The Europeans were initially beholden to Venetian middlemen who held a virtual monopoly on the Spice Trade with the Middle East. The enormous profits the Venetians made in trade were an incentive for other European powers (such as Portugal) to find maritime routes that would allow trade with Asia. Their search became all the more imperative after the 1453 fall of Constantinople to the Ottomans, followed by the 1479 Treaty of Constantinople which closed the Black Sea to the Venetians.

The Portuguese continued to dominate the East Indies Spice Trade throughout the 16th century during the zenith of the Portuguese Empire. Portugal established ports across the coasts of Africa, the Middle East, India, and Asia. Regular trade was even initiated with Japan after finding Nagasaki in 1543. Nevertheless, running an extended empire from Lisbon was always difficult. It could take 2 years for a letter to pass from Lisbon to Goa, India, and the Portuguese Crown experienced difficulty monitoring the predatory activities of its many merchants, who were regularly inclined to plunder local populations. From 1580 to 1640, the Portuguese and Spanish crowns formed a union, which helped to promote trade and stability among their territorial possessions in the Americas and Asia.

Demand for European-made luxury goods lagged as spices and other goods from the East Indies and Americas flowed into Europe. Pepper from the East Indies was popular among Europeans but the Portuguese struggled to meet demand. The Dutch Republic, at war with the Spanish Crown, sent expeditions from Amsterdam to the East Indies at the very end of the 16th century. Some met with success, and in 1602, the Dutch East India Company was founded. They soon began raiding Portuguese territories in Indonesia and establishing outposts. Around the same time, England established its English East India Company. It made few inroads into Dutch-dominated Southeast Asia but was more successful in India.

Dutch Golden Age

The 17th century marked the decline of Portugal’s control over Asian trade. The Dutch and English—with their respective East India Companies—ascended in power and influence. In practice, these corporations acted as sovereign nations when in Asia, thousands of miles away from the Crown. Their aim was to conquer ports, install processing facilities, and reap enormous profits via sea trade between Asia and Europe. These long-distance ventures were conducted under state-sponsored monopolies. Specifically, the Dutch and English governments regulated this trade by granting monopoly charters within a given foreign territory. Risk, maritime warfare, and profits went hand-in-hand for these East India Companies. They were frequently brutal to the native populations, though European diseases did not cause nearly the same amount of indigenous deaths in the East Indies as they did in the Americas.

It was the Dutch who came out ahead of the English, despite having a population of fewer than two million and waging a war of independence against Spain until 1648 (after which time, they fought trade wars against England). The Dutch far outpaced any other nation in the 17th century. They held the highest per capita income in 1600 and their lead only grew over the next century, as England did not overtake the Dutch until at least the late-18th century. Dutch finance was unquestionably the most sophisticated in the world. The Bank of Amsterdam supported financial stability and was the preeminent financial institution of the 17th and 18th centuries. The Dutch financial system featured relatively low interest rates, fractional ownership of commercial ventures, maritime insurance, and futures markets.

Over the course of the 17th century, the Dutch Republic sent 1,770 ships to Asia, more than twice as many as the English. Much of this advantage is attributed to advanced Dutch financial arrangements that promoted efficient risk-sharing. Dutch trading colonies in Asia were relatively centralized and well run as compared to the British. This maritime East Indies trade hastened the decline of the Republic of Venice—which had once been the main player in the Spice Trade—and their successors, the Portuguese. The British also overtook the Venetian textile industry by selling their poorer quality clothing on the Mediterranean market for much lower prices. The future of global trade lay in the Atlantic, so European power and influence shifted away from the Mediterranean toward nations seated on the Atlantic.

Slave Trade

One principal distinction between the West and East Indies trade was the employment of West African slaves. Although European colonists in the East Indies did not rely heavily on imported slaves, the British, Portuguese, and French each transported millions of slaves across the Atlantic to cultivate sugarcane, coffee, cotton, and tobacco in land-abundant North and South America. The farming of these crops (especially sugar) was highly labor-intensive, and slaves became the critical factor of production that drove profitability. Native American populations were the predominant source of slave labor at first before being displaced by African slaves, who were commonly bought for cloth before being shipped across the Atlantic. Coerced labor was end...