Chapter 5 The Political Economy of Global Production and Exchange
International Institutions and Global Trade
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- Negotiations Under GATT and Creation of the WTO
- The Domestic Political Economy of Trade
- III. The Impact of Transnational Firms Global Trade and Transnational Firms
- Foreign Direct Investment and Global Production
- TABLE V.5 Global FDI Inflows, 1990-2010 (billions $US) Nation/Region 1990 1995 2000 2005 2006 2007 2008 2009 2010
- France 15.6 23.7 43.3 84.9 71.8 96.2 64.2 34.0 33.9 Germany 3.0 12.0 198.3 47.4 55.6 80.2 4.2 37.6 46.1 UK 30.5 20.0 118.8 176.0 156.2 196.4 91.5 71.1 45.9
- South/Central Amer. 8.1 29.0 77.4 72.2 69.8 108.7 126.2 75.8 111.1 CIS 0.04 3.9 5.4 26.2 44.6 78.2 108.4 63.8 64.1
- TABLE V.6 Distribution of FDI, 1990-92 and 2007-09 (billions $US)
- TABLE V.7 Smallest Recipients of FDI, 2005-2010 Average Nation
- Figure V.3 FDI Inflows by Type of Nation
- Transnational Firms and the Global Economy
- TABLE V.8 Largest Twenty Nations by GDP (2013) 2010 (trillions $US)
International Institutions and Global Trade A central proposition of neoliberal thinking about international political economy is that high levels of interdependence promotes cooperation among nations, which is regulated through the creation of international institutions and regimes, which themselves further affect future cooperation. The specific forms and rules found in international institutions and regimes typically reflect the bargaining power and position of the states constructing the arrangements. We consider the global and multilateral institutions of GATT/WTO, regional trade institutions such as the European Union, and preferential trade institutions. Our interest is the manner and degree to which these institutions affect global economic exchange. The primary institution involved with global trade is the General Agreement on Tariffs and Trade (GATT), which in 1995 was morphed into the World Trade Organization (WTO). GATT’s ability to affect trade issues in the global economy was greatly hampered by its weak institutional position. In effect, GATT was primarily a forum for the negotiation of trade agreements with some limited capacity to deal with trade disputes and interpret the rules for trade. In important ways, GATT reflected the economic and domestic political interests of a small number of major economies, which did not always lead to the promotion of freer trade. Put simply, for decades after 1945 the political economy of global trade was very much mixed in its affinity for free trade and this placed important limits on GATT and on the political process for designing global trade rules.17 Specifically, this meant negotiations under GATT focused on obtaining reciprocal deals between nations on a “product-by-product” basis among goods traded by main suppliers – that affected major trading nations with similar factor endowments in selected areas of trade. Among those major economies, the GATT can be seen to have augmented trade.18 These effects were quite large for a small number of nations but also quite small for most nations. Even with the application of “most-favored-nation” rules, the deals reached were of little value to most nations. Negotiations Under GATT and Creation of the WTO The negotiation of meaningful agreements for international trade did not really begin until after the creation of the European Economic Community in 1958, for only then could the then six members of the EEC deal with the United States as an equal. Between 1963-1967, in the Kennedy Round, negotiations yielded both significant tariff reduction (if on only a limited set of products) and new forms of legal rules governing trade. The next set of negotiations, the Tokyo Round from 1973-1979, focused again on tariff reduction but also produced important innovations in addressing non-tariff barriers (NTBs) and some of the special problems created by the rise of developing nations in global trade.19 By the 1990s, the expansion of global trade, decades of economic growth and the GATT process led to a substantial convergence of trade policies, practices and preferences for major parts of the world. This convergence was embodied in the set of GATT negotiations called the Uruguay Round, with agreements signed in 1994 that led to the creation of the World Trade Organization (WTO) in 1995. There were substantial obstacles to the eventual achievements of the Uruguay Round and the WTO. These were rooted in the role that protectionism played in the politics of many nations and the political difficulties associated with reducing or eliminating these benefits so as to reduce or eliminate these restraints on trade. Many nations, especially Japan and in Europe, have long won and sustained political support for ruling parties through subsidies to farmers, who on a global scale were not really economically competitive. Similar arrangements existed for textile producers and workers, who needed to be shielded from competition coming from emerging economies. New issues relating to the protection of intellectual property and defining rules for trade in services presented obstacles to agreement. After more than a decade of negotiation, agreement was reached on tariff reductions, new rules for agriculture and textiles and, most important, a new global institution for the management of trade, the WTO. The WTO is a significant step in the process of global cooperation and in establishing effective rules and rules enforcement arrangements. The GATT was an institution designed to the negotiation of agreements and had a very limited capacity to adjudicate disputes and enforce the rules. The WTO is a much more formal and robust institution created to do just what the GATT could not. Members of the WTO now are obliged to treat the agreements as a whole and are not free to pick and choose what to abide by. Further, members are required to remake their domestic laws so as to conform to the WTO rules. And when one nation chooses to bring a dispute over compliance with WTO rules, the other nations involved are obliged to submit to the process of adjudication and to accept the decision in effect as final. The very existence of the WTO as an outcome of decades of trade negotiations is testament to the emerging global consensus on the value of a common set of effective rules to govern trade relations and a willingness to cede some measure of control over that process to an international body.20 The Domestic Political Economy of Trade The rules developed under WTO and various other trade agreements and institutions have increasingly come to be affected by firms powerful enough to insert their preferences into agreements via the positions of governments.21 This suggests we examine how domestic politics leads to certain kinds of global economic policies by states with a focus on the role of the interests of domestic actors and the institutions within which these interests are expressed and related to policy choices. At the same time, international trade and finance serve to engage and even help to formulate domestic interests.22 The expansion of global trade can lead existing firms and interests to press harder for free trade and even bring other firms’ interests into the free trade camp. And the political institutions of a society may be able to link interests across sectors. Here firms focused on trade and other firms focused on finance may have their interests linked through political parties, ministries and political entrepreneurs. Global institutions such as the WTO create penalties for rules violation that encourage interests in an affected nation to lobby domestically in favor of free trade. An important form for the analysis of the political economy of trade is to link the interests of different business groups to their position in the overall economy, attempting to predict interests on the basis of economic position as defined by the distributional consequences of policies of free trade and protection. That is, analysts want to predict reliably how business groups will gain or lose from free trade based on their economic position and then link these patterns to political conflict over this policy. From this pattern of gains and losses, interests and political conflict, scholars hope to explain why some nations act to create and open economy and others choose to erect barriers to trade while others adopt a more mixed system. An early model of trade politics links interests to the basic ideas of comparative advantage. This theory is based on the relative distribution of the factors of production (land, labor, capital) within and among nations. Business groups in a society that use intensely those factors plentiful in the nation but scarce globally will have globally competitive advantages and should support a policy of free trade. By contrast, those groups using factors scarce in the nation but plentiful globally will be at a competitive disadvantage and should back a policy of protection.23 This analysis is often better at understanding broad patterns of trade politics rather than the specifics of which groups of economic factors will align for and against policies. Another approach has been to examine the factors of production in a more finely grained manner, primarily by seeing them as politically affected more by industry. This view asks whether these factors are closely tied to a specific industry or whether they can move somewhat freely from one industry to another. Here, all the factors in an industry with competitive global advantages are thought to align together and with other like industries to favor free trade, whereas these same factors more closely tied to industries lacking these advantages will align over policies of protection. Not only do these ideas often help to explain trade politics, but similar thinking can be used to examine policies relating to exchange rates, foreign direct investment and global finance more generally. Of course, understanding preferences of various groups alone is insufficient to understand politics choices and outcomes. Equally important is the characteristics of the political institutions in which these preferences are embedded. One interesting result of studies is the difficulty in determining the precise nature of institutional characteristics that matter. For example, it is not clear that democratic nations tend to develop dramatically distinct patterns of outcomes than autocratic nations.24 In particular, autocratic nations can often be seen to follow along behind more democratic (and advanced economies) with policies that mimic but do not exactly duplicate the tendencies toward openness. However, it is much easier to examine the more transparent democratic systems and we often find various structural reasons for outcomes as much as institutional reasons. For example, it is much easier to organize politically around a policy of protectionism – especially in societies like the U.S. and Japan, which emphasizes local interests – than around a policy of free trade. This is because the benefits of protection flow to a very specific group, which maintains its incomes as a result of such policies. The gains from free trade are much more diffuse and more difficult to identify, flowing mostly to consumers in the form of lower prices and more plentiful products. The gains may be large but are less concentrated and therefore less politically relevant.25 III. The Impact of Transnational Firms Global Trade and Transnational Firms The central actor in the globalization of production and trade has been the transnational firm (TNCs).26 There are many different kinds of transnational firms, with significant differences in the degree to which they operate internationally. Broadly, these are corporations engaged in the production and/or distribution of goods and services that span multiple nations, but it also can include firms who simply operate a business in two or more nations.27 Such activities usually require these firms to make investments in production and/or assembly facilities abroad, but may include using contract manufacturers for production. Facilities abroad can also include product development, testing and marketing operations in the various markets where they sell. In some cases, TNCs have established research and development operations abroad to take advantage of specialized knowledge capabilities. Frequently, such firms will have operations abroad that are larger than those in their home countries. The cumulative effect of these investment, production and knowledge transfer actions has been the globalization of production and trade. The operations of transnational firms take on a complex variety of interrelationships among these firms, and we will focus especially on international production, offshore outsourcing of production and services, fragmentation of the value chain, global and regional production networks and a myriad of forms of contractual relationships by which production, sales and distribution are organized and controlled. Thus, transnational firms are responsible not only for production and sales, but also for massive global investment flows, the globalization of product and process technology and knowledge, and for much of the restructuring of global economic relationships. The economic prospects of much of the world are intensely affected by the calculations and actions of these corporations, which include both privately owned and state-owned firms. Many nations now devote considerable resources to developing national capabilities – an educated and trained work force, significant infrastructure for production, communication and transportation, and cooperative and supportive policies – to attract and retain transnational firms. A considerable part of the surging role for emerging economies as a proportion of the global economy is a consequence of the investment and knowledge transfer policies of transnational firms.28 Foreign Direct Investment and Global Production There are various mechanisms by which corporations create and operate a global enterprise. Traditionally – before about 1965 – most production was done by a single firm and within the home nation of that firm. Internationalization consisted of exporting some part of that production to other nations, which may have required establishing a marketing and distribution operation in other nations. The growth and importance of the European Economic Community and the European market led many U.S. firms to establish some production facilities inside the EEC, largely to avoid the tariffs and other barriers imposed on imports. Creating production, marketing and distribution facilities in a foreign nation requires foreign direct investment (FDI). This refers to an investment in another nation to acquire assets that provide effective control over the operation of a business in that nation. Thus, the purpose of FDI is to create or obtain a business to be used to make a profit and therefore establishes a long-term position for that company in this nation. Once the investment has been made, it cannot be sold easily. A distinction is often made between a greenfield investment, when a firm sets up a new business operation in another country, and activities such as buying an existing firm in another nation in what is called a merger and acquisition (M&A) process. An example of a greenfield investment helps define this process: In 1972, a very new company named Intel, making computer memory and seeking to control the costs of manufacturing, established a facility on the small island Penang that is part of Malaysia. Intel paid for the facilities and the machinery, hired 100 employees and began production by air shipping nearly complete memory chips to Penang. These were assembled with the housing, tested for any errors and then shipped out to Intel’s customers. Over the next 40 years, Intel has expanded these facilities, increased dramatically the complexity of the operations in Penang and is now employing 8,000 workers in there. The money invested in Penang is an example of foreign direct investment. INSERT PICTURE of the INTEL PLANT IN PENANG Foreign direct investment has become of increasing importance as a source of business investment in many nations and as a main engine of economic growth and development. However, flows of foreign direct investment are both highly volatile and highly skewed toward some nations, specifically those where transnational firms expect the greatest benefits. This can be because a nation or region has a special combination of worker skills, low costs, high quality infrastructure, specialized suppliers and knowledge resources. Or, this can result from large and expanding markets with a particular value from being close to customers. Nations lacking in special production resources or important markets are not large recipients of FDI. This can be seen in TABLE V.5 and TABLE V.6 TABLE V.5 Global FDI Inflows, 1990-2010 (billions $US) Nation/Region 1990 1995 2000 2005 2006 2007 2008 2009 2010 World 207.5 342.4 1,403 982.6 1,462 1,971 1,744 1,185 1,244 EU 97.3 132.0 698.3 496.0 581.7 850.5 488.0 346.5 304.7 France 15.6 23.7 43.3 84.9 71.8 96.2 64.2 34.0 33.9 Germany 3.0 12.0 198.3 47.4 55.6 80.2 4.2 37.6 46.1 UK 30.5 20.0 118.8 176.0 156.2 196.4 91.5 71.1 45.9 US 48.4 58.8 314.0 104.8 237.1 216.0 306.4 152.9 228.3 China/Hong Kong 6.8 43.7 102.7 106.0 117.8 137.9 167.9 147.4 174.6 South/Central Amer. 8.1 29.0 77.4 72.2 69.8 108.7 126.2 75.8 111.1 CIS 0.04 3.9 5.4 26.2 44.6 78.2 108.4 63.8 64.1 Africa 2.8 5.7 11.0 38.2 46.3 63.1 73.4 60.2 55.0 Source: UNCTAD Annex Tables, No, 1, http://www.unctad.org/Templates/Page.asp?intItemID=5545&lang=1 This data demonstrates the remarkable growth in FDI, along with its volatility and substantial redistribution over these twenty years. From 1990 to the peak in 2007, FDI increased by a factor of nearly 10. But for several nations in Europe, the decline from 2007-2010 was more than two-thirds. Though developed nations were major beneficiaries of FDI across this period, poorer nations were proportionally much bigger gainers. In 1990, the European Union plus the United States received 70% of all FDI, while China/Hong Kong, South and Central America, the CIS and Africa together received less than 1%. In 2010, the EU plus US totaled 43% of global FDI while the emerging economies in our chart received 33% of this much larger total. TABLE V.6 Distribution of FDI, 1990-92 and 2007-09 (billions $US) Sector 1990-1992 (%) 2007-2009 (%) Total 175.8 1,633 Primary 14.9 (8.0) 164.3 (10.0) Manufacturing 53.6 (30.0) 393.0 (24.0) Services 92.6 (53.0) 1,025 (63.0) Remaining FDI is unspecified by sector Source: UNCTAD Annex Tables, No, 26, http://www.unctad.org/Templates/Page.asp?intItemID=5545&lang=1 This chart helps to show how FDI is flowing into primary product and services areas and less into manufacturing over this two-decade period. There are enormous gaps in the level of FDI, with some nations receiving very large absolute amounts and in proportion to GDP and population, and some with tiny amounts. TABLE V.7 Smallest Recipients of FDI, 2005-2010 Average Nation Population Average FDI Average FDI (millions) 2005-2010 Per Capita (2005-2010) ($ US millions) Pakistan 187.3 3,654 $19.51 Bangladesh 158.6 833.7 $5.26 Burma 54.0 615.3 $11.40 Tanzania 42.7 627.0 $14.68 Kenya 41.1 195.2 $4.75 Uganda 34.6 701.5 $20.27 Afghanistan 29.8 218.8 $7.23 Nepal 29.4 13.3 $0.45 Ghana 24.8 1211 $48.84 Yemen 24.1 515.2 $21.38 Haiti 9.7 79.8 $8.23 By comparison: US 313.2 207,570 $662.74 Singapore 4.7 24,050 $5,117 China 1,337 89,614 67.03 Source: CIA World Factbook (for population data) https://www.cia.gov/library/publications/the-world-factbook/rankorder/2119rank.html UNCTAD Annex Tables, No, 1, http://www.unctad.org/Templates/Page.asp?intItemID=5545&lang=1
Source: The Economist, January 29, 2012 http://www.economist.com/node/21543571 effort. Sometimes this means special natural resources, but at least as often TNCs are looking for a combination of high quality infrastructure, a somewhat skilled work force willing to accept lower wages, and specialized firms that complement their business. They may also look for a regulatory environment that is lax as a way of further reducing costs. Much about the presence and attractiveness of a particular location comes from efforts by national governments willing to make the investments to create and support these capabilities. Nations at the bottom of the list for FDI have usually been unable or unwilling to improve their ability to attract FDI by making the needed investments. One measure of the importance of FDI is the ratio of the stock of FDI29 to gross domestic product (GDP). In 1990, for the world as a whole, FDI represented 9.6% of global GDP, with developed nations receiving an average of 8.9% of their GDP and developing nations receiving 13.4% of their GDP. Not surprisingly, there was considerable variation across nations, with some, such as Hong Kong, at more than 2 ½ time GDP and many, such as India, at 0.5%. In 1990, the United States saw FDI coming into the U.S at 9.3% of GDP while China saw inward FDI at only 5.1% of GDP. In 2010, FDI across the world represented 20.2% of global GDP, even with more than a doubling of GDP levels of two decades earlier. Developed nations now received FDI totaling 30.8% of GDP and developing nations received 29.1%. The United States now saw this measure soar to 23.5%, while China experienced a rise to 9.9% of GDP.30 Transnational Firms and the Global Economy TNCs are very important actors in the global economy. States provide a geographic, political, infrastructure, knowledge and worker base for production of goods and services. But firms, and especially transnational firms, actually engage in production, making decisions about what, where and how to produce and typically retaining the profits. The growing scale of TNCs can be seen from some basic data. Though a large number of states contain an aggregate of economic strength of enormous size, many firms generate and control very large economic resources as well. Of course, the economies of states are composed of millions of economic actors while firms involve some significant centralized control over the resources of the firm. Here is some data that allows us to compare the economic resources of states and firms. In 2013, world GDP was $74.2 trillion. TABLE V.8 Largest Twenty Nations by GDP (2013) 2010 (trillions $US)31 Nation GDP 1. U. S. 16.72 2. China 13.39 3. India 4.99 4. Japan 4.73 5. Germany 3.23 6. Russia 2.55 7. Brazil 2.42 8. U. K. 2.39 9. France 2.28 10. Mexico 1.85 11. Italy 1.81 12. South Korea 1.67 13. Canada 1.52 14. Spain 1.39 15. Indonesia 1.28 16. Turkey 1.17 17. Australia 1.00 18. Iran .99 19. Saudi Arabia .93 20. Taiwan .93 Source: CIA, World Factbook, https://www.cia.gov/library/publications/the-world-factbook/rankorder/2001rank.html The concentration of economic power can be seen from just the largest five nations, which together amount to $43 trillion or 58% of global GDP. If we count only the United States and the twenty-seven nations of the European Union, which together represent 10% of the world’s population, these nations represent 44% of global GDP. Measuring the size and important of global firms can be done using a variety of metrics. In Table V.9 we measure global financial firms in terms of assets and non-financial firms in terms of revenues. Directory: tlairson -> ipe tlairson -> Nyt amid Tension, China Blocks Crucial Exports to Japan By keith bradsher published: September 22, 2010 tlairson -> China Alters Its Strategy in Diplomatic Crisis With Japan By jane perlez tlairson -> The Asia-Pacific Journal, Vol 11, Issue 21, No. 3, May 27, 2013. Much Ado over Small Islands: The Sino-Japanese Confrontation over Senkaku/Diaoyu ipe -> Chapter IX power, Wealth and Interdependence in an Era of Advanced Globalization tlairson -> Nyt india's Future Rests With the Markets By manu joseph published: March 27, 2013 tlairson -> Developmental State tlairson -> The Economist Singapore The Singapore exception To continue to flourish in its second half-century, South-East Asia’s miracle city-state will need to change its ways, argues Simon Long tlairson -> History of the Microprocessor and the Personal Computer, Part 2 ipe -> For richer, for poorer Growing inequality is one of the biggest social, economic and political challenges of our time. But it is not inevitable, says Zanny Minton Beddoes Download 225.82 Kb. Share with your friends:
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