Global Business and Trade - Literature review Example

Global Economy Name Course Lecturer Date How did the trade regime that followed WWII differ from the regime that operated throughout the interwar period? Discuss ideas, interests, and institutions that drove this change. A global trade regime can be non-cooperative and at times it can be characterized by substantial efforts at global cooperation as Williamson (2011) indicates. Global cooperation in trade matters can be said to be implicit but other time it can take the form of explicit global trade agreement. In the post WWII era, the global trade regimes was highly characterized by both sustained and significant attempts to cooperate over trade matters at a multilateral level by way of voluntary but more explicit global trade agreement. Fixed exchange rates on a global scale have not been long lived. During the First World War the normal operations of what is known as gold standard were suspended and inflation rates greatly differed across countries. Amsden (2007) asserts that after the war exchange rates were floating and the attempt to restore the gold standard failed. The Bretton woods system that occurred after the WWII addressed this problem by way of introducing fixed but more adjustable exchange rates to what was known as fixed dollar exchange rate system. Countries pegged their monies to the US dollar. In the two decades after the Second World War, global trade expanded most in the 20th century. Between the year 1948 and 1968, the total volume of merchandise exports from non-communist nations grew by 290%. Additionally, the growth of global trade during this time exceeded the expansion of globe output. This paper seeks to discuss how the trade regime that followed WWII differs from the regime that operated throughout the interwar period. It is quite evident that the end of WWII marked the beginning of a new era for the globe economy. Policy makers embraced global trade as necessary for economic growth shifting away from what was known as isolationists’ policies that took place during the interwar period. Within this new established framework of cooperation, global trade grew rapidly and constantly during the year 1950s to 1960s. In the 1960s, the mean yearly rate of export volumes was more than 8% as Jacks, Meissner & Novy (2011) reports. Further, in the 50s and 60s, the growth of the international trade reliably outpaced the growth of the global output. For instance, from 1953 to 1963, trade in the manufactured products grew by 54% and this continued up until in the 1970s. In the period after the WWII, one may tend to think that the structural effects through trade diversions, production and changes in foreign investment would be limited. This is because similar shocks as a result from WWI and the great depression that had pushed an internal division of labor along way back towards exclusive trading blocs. The trade regime that followed the Second World War was followed by economic expansion. The increase in the production levels increased the output and this increased the trade between countries due to increased consumption as Pease (2012) reports. This trade regime was known as the postwar economic boom and the golden age of capitalism. The period started after WWII in 1945 and ended on 970s. The real growth domestic product (real GDP) averaged over four percent every year in the 1950s. The growth rate increased to more than five percent in the 1960s. There was high productivity after the war and it continued to grow until in the 1970s when there was economic recession. The manufacturing industry recorded high growth and it was highly aided by the developments of the automation technologies like the feedback controllers. Distribution warehouses, highway systems and material handling equipment like forklifts were a great benefit to the retail trade and the whole trade. There were the developments in oil production and many industries and manufacturing industries started using oil instead of coal. There was the deve1opment of more sophisticated ships and locomotives. On the part of agriculture, there was widespread introduction and application of chemical fertilizers, tractors, pesticides and combine harvesters as Head, Mayer & Ries (2010) pin points. These were developments that helped the production of crops. The volume in the crop production increased from three percent to eight percent in the 1950s. There was increase in population and there was worldwide demand for agricultural products. Countries such as the United States that had the recent developments in agriculture produced agricultural products in mass production for export purposes. There was increase in world population due to stability as well as increase in food production after the WWII. Many economies were not able to have mass production of agricultural products because of lack of capital and technological advancement. As such, the rich countries (OECD) exploited the opportunity and produced and exported many agricultural products because they had skilled labour and technological advancement. This increased trade among many countries as countries exported and imported agricultural products, many treaties and economic cooperation blocs were formed aimed at increasing trade among the countries as (Chang, 2012) underscores. The United States committed itself to supporting some of the poor countries that had suffered the effects of the war such as Japan in order to recover. The America and Europe enjoyed much of the developments and discovery of such things as the agricultural products as well as technological advancement. One of the crucial factors in aiding the increased trade regime after the WWII was the low interest rates Jacks, Meissner & Novy (2008). Actually, there were negative real interest rates meaning that the interest rates were below the taxation and the inflation. This was the trade regime of financial repression. Capital was readily available and it was also very cheap. Many people borrowed funds to start businesses and this increased trade volume, by 1963 trade volume had double. After the WWII, governments around the world were determined and cooperated in efforts to reduce as well as eliminate restrictions on import and export subsidies (Winant, 2009). They were convinced that deregulating or trade liberalization would trade volume, improve the living standards and promote economic growth worldwide. These measures increased the volume of trade among countries considerably. The measures resulted to bilateral trade agreements after rounds of discussions. The agreements made it possible for countries to export more products as well as import more products thereby increasing the trade levels. There were nondiscrimination principles for eliminating trading restrictions and increasing cooperation among trading partners, the imported products were to be treated properly than the domestically produced goods as Jones & Olken (2005) emphasis. These measures and principles were not in existence before and during the WWII. As such, they changed trade regime with many countries around the world taking part in the trade among and between countries (bilateral, regional and international trade agreements). By 1951, there were 37 tariff reductions. There was formation of the General Agreement on Tariffs and Trade (GATT) in 1947, the role of this agreement was to promote trade among the partner members (Chang, 2012). The agreement made trade to increase to a record expansion with merchandise export around the world raising by more than eight percent every year between1950 to 1965. The agreement quickly became an essential arrangement for multilateral trade. It eliminated the protectionism policy that many countries had during and before the WWII. After the setting of the agreement, tariffs reduced from forty percent to five percent. The reduction of tariffs was instrumental in promoting the tremendous expansion and growth of the world trade after the WWII. The agreement, mostly referred to as GATT, was later changed to world trade organisation (WTO) in 1995. Broader economic policies, global integration, broader political changes and technological innovations were instrumental in increasing the trade after the WWII as Findlay & O'Rourke (2007) underpins. The technological innovations were the chief driver of increase in trade, there were inventions in communication and transport industry and these improved efficiency. The inventions in the transport system improved the road infrastructure and allowed large shares of trade by fright trucks as well as transportation of people. The invention of jet engines was instrumental in transporting people and goods around the world, there was also improvement in international shipping and containerlisation and these increased trade considerably. There was global macroeconomic stability after the WWII and this provided a very conducive environment for trade integration among many countries. This is a major difference because there was no global macroeconomic stability after before or during the WWII. There was no trust among countries and 90 percent of trade was domestic. After the world war and with the global macroeconomic stability after, trade regime changed and international trade became very significant, it surpassed the domestic trade. Moreover, after the world war two, there was emergence of stronger economies such as Japan and Korea. The emerging economies especially in Asia provided very strong support and boost on trade (Baier, Bergstrand & Vidal, 2007). They provided markets for innovations and manufactured products as well as increased production of products and therefore increasing trade. There was emergence of economic globalisation after the WWII. Jacks, Meissner & Novy (2008) found out that the protectionist policy and tendencies that many countries ad adopted came to an end and countries started opening up for international trade. The globalisation carried an aura of inevitability and this was a significant aspect of the long run intensification of international trade. Domestic companies started to invest and venture in the international markets. This was very important because some countries were having resources but they did not the technology and human resource capital to extract and or exploit the resources. The move by companies venturing and setting operations in foreign countries provided employment opportunities, the governments encouraged the globalisation. This was a major factor for the trade expansion after the WWII. Surprisingly, there was no globalisation throughout the interwar period of the WWII. Throughout the WWII interwar, there was no much control of the economy in terms of trade because of the war. After the war, countries had time to reflect and correct loses suffered in the war. The political system became more involved in the economic side of their countries and they made policies for influencing trade positively as Liu & Diamond (2005) suggest. The purpose of the policies was to create employment opportunities, improve living conditions as well as increase economic growth. Countries were suffering from the after war effects and therefore they needed things to spur growth and restore things. The major economies manipulated the international trade in order to make advantage and protect their national interests in the international trade. The WWII influenced trade patterns and international production. There was increase in direct production as well as the effects of diverting trade between the competing trading blocs as Keohane (2005) reports. After the WWII was over, there were combatant production recoveries in labour investments and specific capital. This necessitated a net upsurge in the total supply relative to the aggregate demand. There was no major change in export capacity during the war; after the war, there were major developments of additional export capacity especially among the neutrals. This produced an offsetting expansion of the export sector in many economies. Novy (2006) adds that there was addition of exporting capacity and import substitution to the preexisting capacity, the world market prices increased and the share of the over1all export capacity roughly corresponding to the interwar period increased productive capacity, this turned out to be very competitive and hence the increase in trade regime after the war The empirical evidence demonstrates and suggests that the conventional explanations do support and adequately account for the surge of trade after the WWII. The political system and policy makers embraced trade, and especially international trade, as very essential for the recovery of their economies as well as economic growth (Hummels, 2007). Countries supported free trade and made every effort to ensure that there was free trade; this was a contrast to the interwar period where regimes used protectionism and restrictions. There is a strong and concrete case of how the trade regime following the WWII differs from the regime that operated throughout the interwar period. This report has discussed the ideas, interests and institutions that drove the changes in the trade regimes. References Amsden, A. H. (2007). Escape from empire: The developing world's journey through heaven and hell. Cambridge, MA: MIT Press. Baier, S. L., Bergstrand, J. H., & Vidal, E. (2007). Free trade agreements In the americas: Are the trade effects larger than anticipated?. The World Economy,30(9), 1347-1377. Chang, I. (2012). The rape of Nanking: The forgotten holocaust of World War II. Basic Books. Findlay, R., & O'Rourke, K. H. (2007). Power and plenty: trade, war, and the world economy in the second millennium (p. 535). Princeton: Princeton University Press. Head, K., Mayer, T., & Ries, J. (2010). The erosion of colonial trade linkages after independence. Journal of International Economics, 81(1), 1-14. Hummels, D. (2007). 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(2012). International organizations. Longman. Williamson, J. G. (2011). Trade and poverty: when the Third World fell behind. Cambridge, MA: Mit Press. Winant, H. (2009). The world is a ghetto: Race and democracy since World War II. Basic Books. Read More