The Global Economy (Topic 1 Economics)

• A trading bloc is where countries enter preferential trade agreements, establishing free trade between themselves and external tariffs on imports for the rest of the world. This is beneficial if there is trade creation and not trade diversion (i.e. increased trade volumes overall), as countries are able to utilise comparative advantage. Trade diversion is where trade with non-member countries decreases.
• Monetary unions are formed when groups of countries share a common currency and monetary policy. This creates an increasingly integrated regional market, boosting financial efficiencies. An example of a monetary union (and trading bloc) is the Eurozone, consisting of all the European Union (EU) countries that adopted the Euro as their national currency.
• Free trade agreements are formal agreements between countries to reduce trade barriers such as tariffs. Free trade doesn’t necessarily mean no barriers at all; it refers to the reduction of barriers (some forms of protection may remain). Free trade agreements can be multilateral (e.g. WTO agreements), regional (e.g. the EU), or bilateral, (e.g. AUSFTA, the Australia-United States Free Trade Agreement).
• The EU is a customs and monetary union (for countries in the Eurozone), trading bloc, and multilateral agreement consisting of most European countries. The creation of a single European market through common trade and migration policies has allowed for increased efficiency in the allocation of resources in this region. The single currency of the Euro (C) managed by the European central bank, reducing transaction costs in an increasingly integrated regional market. The EU accounts for 17% of the world market for exports – larger than China or US.
• APEC is a multilateral trade agreement and regional economic forum created to promote free trade within the Asia-Pacific region. The aims of APEC include to: • Implement common trade policies with member nations • Develop mechanisms for closer trade and investment links in Asia Pacific APEC is non-discriminatory, as it agreed not to become a protectionist trading bloc, but also aims to reduce barriers to non-member countries as well. However, in recent years the significance of APEC has declined due to the forum’s large size and subsequent inefficiency.
• Even though APEC members account for approximately 40% of the world population, they account for 60% of world GDP and 47% of world trade. APEC had a target of ‘free trade’ by 2020 under the Bogor Declaration. Tariff levels within countries dropped from 20% to 13% between 1994–2018.
• NAFTA: multilateral free trade agreement consisting of Canada, Mexico, and the US mainly based on eliminating agricultural protection and tariffs. The benefits to the US and Canada include the opportunity to increase international competitiveness by exploiting lower production costs by shifting production to Mexico. The advantages for Mexico include greater access for firms to the large markets of the US and Canada. Despite this, consumers have benefited from lower prices, and US corporations from the lower costs. NAFTA accounts for 13% of global merchandise trade.
• The new name for the agreement is the United States-Mexico-Canada Agreement (USMCA), ratified in March 2020, replacing the goals of NAFTA. This new agreement focuses largely on automobile and agricultural exports, increases environmental and working regulation and incentivises more domestic production of automobiles. Analysis of the new agreement reveals mixed effects on the economic growth of member nations, but the International Trade Commission found the agreement will increase GDP by 0.35% and jobs by 176,000 in the next 6 years
• Association of South-East Asian Nations (ASEAN) is a free trade area covering emerging and developing economies in South-East Asia. The aim of ASEAN is to promote economic development, social progress, and cultural development within this region. It has acted as a counterweight to the APEC forum, which is dominated by the large economies like US and China. Australia and New Zealand created a multilateral agreement with ASEAN in 2010 called the ASEAN Australia New Zealand Free Trade Area (AANZFTA). ASEAN nations committed to eliminating tariffs on 96% of Australian exports to the region.
• One of Australia’s most significant bilateral trade agreements is the Australia New Zealand Closer Economic Relations Trade Agreement (ANZCERTA). This led to the elimination of all tariffs and trade restrictions on goods and services between the two nations.
• Protection refers to the use of artificial barriers which restrict the free flow of goods and services in international trade, to give domestic producers an artificial advantage.
• The main reasons for protection include the infant industry argument, domestic employment, dumping, and defence. These often come up in short-answer questions and can be used in essays to strengthen analysis, so this theory is very important to remember!
• Infant industry argument: allowing newly established industries sufficient time to achieve economies of scale to compete in global markets and become efficient. When companies engage in open trade policies, competition between firms becomes high. Those that achieve economies of scale and hold a competitive edge over others find the most success and profits. However, if protection is implemented for new firms, it should be temporary, until they are internationally competitive. Otherwise, this may result in inefficient resource allocation if firms become reliant on protection and don't innovate
• Domestic employment: if overseas countries offer cheaper production, then domestic jobs are put at risk as firms shift production elsewhere to decrease costs. Imposing tariffs or barriers can prevent job losses which have the potential to cause economic contractions and recessions. However, this may be at the expense of efficient export industries, as higher trade barriers may affect export competitiveness and terms of trade.
• Dumping: if a country has an oversupply of goods it may dump excess products on another economy at a very low price, damaging local businesses as they are unable to compete. This may be due to excess supply and stock levels. This especially hurts developing economies as they drive down world prices of key commodities and create unfair trade. A country may impose a quota on imports to restrict dumping from occurring. For example, Oxfam has called for the EU to review its Common Agricultural Policy, which causes excess production.
• Defence: involves defence of the nation in the event of war, or defence of a cultural preservation. It is a form of national security for countries to have their own goods, including weapons and essential goods such as food production, rather than solely rely on imports
• Tariffs are taxes on imported goods imposed for the purpose of protection.
• Quotas are quantitative restriction on certain categories of imported goods.
• Subsidies are forms of financial assistance paid to domestic producers such as farmers to allow them to increase supply and compete internationally.
• These specify that goods must contain a minimum percentage of locally produced parts, or a proportion of goods in the market must be locally made. An example of an Australian local content rule is that all commercial, free-to-air television licensees broadcast an annual minimum transmission quota of 55% Australian programming between 6:00 a.m. and midnight. This protects Australia’s dramatic and informative entertainment and culture.
• Export incentives give domestic producers assistance (e.g. grants, loans or technical advice) to encourage businesses to penetrate global markets and expand market share. For example, Austrade is a government body that helps businesses in importing and exporting. It provides advice and guidance on overseas investment opportunities. Austrade’s Export Market Development Grands (EMGDs) reimburse exporters for costs relating to the promotion of exports into new markets. Each dollar spent generates $13.50 for $27 worth of exports.
• Economic growth is the increase in GDP over time, adjusted for inflation (real GDP). Economic growth is a quantitative measure of the performance of an economy. In Australia, the average growth rate in recent years has been approximately 3%. In 2019, the annual economic growth rate was 2.2%.
• Economic development is the structural changes needed for growth to occur in an economy and to sustain increases in living standards. Economic development is a qualitative measure of the performance of an economy. Economic development can be measured by the Human Development Index (HDI), a metric devised by the UN.
• Gross national income (GNI) measures the sum of value added by all resident producers in the economy, plus primary income from foreign sources, on a purchasing parity basis (US$).
• The main global factors that contribute to inequality between nations include: • Global trade system • Global financial architecture • Global technology flows
• High global protectionism in the agricultural sector has caused high inequality globally, as developing economies aren’t exporting to developed economies due to the restricted market access. The failure of the Doha Round is an example of the inequality caused by the global trade system, as high-income nations resisted making concessions on the issues that would provide the greatest benefit to developing countries.
• Many advanced economies will engage in short-term financial investment in emerging economies, as they offer high returns due to the high risk involved. This creates economic volatility, as money is moved in and out of the financial market quickly, which can have flow-on effects for investor confidence, market stability, terms of trade and exchange rates. Furthermore, due to the high rates of foreign borrowing and low incomes of developing nations, massive foreign debt burdens occur for those nations who are already experiencing balance of payment difficulties.
• Technology flow between advanced and emerging economies entrench rather than alleviate inequalities between nations, as advanced economies have access to greater amounts of capital, boosting productivity.
• Domestically, a variety of factors can contribute to a nation’s inability to accumulate wealth. These can be separated into two core reasons: economic resources and institutional factors.
• Overall, there has been an international convergence of economies due to the increased integration of market economies. The economies of the world have built stronger relationships and implemented international organisations, forums and treaties to stabilise these relationships and manage any tensions and disputes.
• Environmental sustainability involves sustaining the increasing living standards as a result of globalisation. This is a global issue of increasing importance, as economies of the world must work together to implement policies that preserve the natural environment. Advanced economies have created many of the global environmental problems that exist through high pollution and energy use, due to high rates of production and consumption. An OECD report predicts in 2050 the world economy will be about four times bigger than it is today, using approximately 80% more energy.
• Financial contagion refers to "the spread of market disturbances – mostly on the downside – from one country to the other, a process observed through co-movements in exchange rates, stock prices, sovereign spreads, and capital flows".
• The global economy refers to the integration between economies of the world. It considers the sum of all economic activity of individual countries, and the interactions between them. This integration has increased in recent years, along with the process of globalisation.
• Economic integration refers to the liberalisation of trade between two or more countries. This means goods and services, labour, and other resources can move more freely between economies. We live in a global economy whereby economies of the world take advantage of increased economic integration to maximise output and efficiency. However, with increased integration comes increased risk, such as financial contagion.
• Gross World Product (GWP) is the total value of goods/services that are produced worldwide (income) over a period of time (e.g. a year) measured in $USD for consistency. This is used to measure the overall trend of growth or decline for the global economy.
• GDP at Purchasing Power Parity (PPP) is the total value of Gross World Product in a given time period, adjusted for national variations in price and different exchange rates. Purchasing power parity is where currencies are converted to be in equilibrium, or ‘on-par,’ so prices can be compared accurately. This is used to compare GDP levels across different economies more accurately.
• Globalisation refers to the integration and removal of barriers between countries/economies.
• The forces driving globalisation, according to the World Bank, include: • New markets: growth of global markets in services, such as finance and international transportation, motivates deregulation of financial markets and antitrust laws. This ensures such markets continue to grow rapidly and expand internationally, facing increased competition, innovation, and opportunity.
• The forces driving globalisation, according to the World Bank, include: • New actors: the growth of multinational corporations (MNCs) has caused reformations to global supply chains, where supplies are commonly sourced internationally to take advantage of cheaper inputs. This has increased supply chain links and global integration. The WTO has also been an instrumental actor in facilitating globalisation, as they govern free and fair trade internationally. Nongovernment organisations which provide foreign aid, trading blocs and organisations like the EU.
• The forces driving globalisation, according to the World Bank, include: New rules and norms: with the increased spread of democracy, human rights awareness, action agendas for developing countries, and market-based economic policies, governments of the world have sought greater global communication and integration. For example, the creation of multilateral and bilateral agreements has facilitated greater global trade links.