1. Intensification of International Trade and Capital Flows

The remarkable increase in international economic integration since World War II can be observed with regard to trends in trade, finance, and foreign direct investment.

Trade

The integration of national economies through cross-border exchanges of goods and services has increased greatly since World War II. We may gain a sense of this increased integration by reference to Exhibit 1, taken from the report by the U.S. Council on Economic Advisers, which provides indices for both total world exports and total world economic activity, as well as average tariff levels of the industrialized countries, during the period from 1950 and 1997.

As can be observed in the exhibit, the industrialized countries reduced their average tariffs after World War II from about 40% in 1946 to about 5% at the end of the 1990s.This helped to spur a boom in world exports:total real exports in 1997 were roughly 14 times that in 1950; by way of comparison, total real economic activity was about six times greater in 1997 than in 1950.

Source:U.S., Council of Economic Advisors, “America’s Interest in the World Trade Organization:An Economic Assessment,” p. 17, and available on the World Wide Web at http://www.whitehouse.gov/WH/EOP/CEA/html/wto.

An important example of a country experiencing enhanced international trade integration is that of the United States:as can be observed in Exhibit 2, while U.S. exports and imports equaled less than 10% of American Gross National Product (GNP) in the early 1950s, total U.S. trade equaled almost 25% of U.S. GNP at the end of the 1990s.

Source: U.S., Council of Economic Advisors, “America’s Interest,” p. 6; athttp://www.whitehouse.gov/WH/EOP/CEA/html/wto.

Within this general framework of international trade integration since World War II, there have been three particular developments.First, there has been an increase in what economists call intra-industry trade:rather that the exchanges of shoes for computers, we often see exchanges across borders of similar goods.Second, many developing countries, especially in East and Southeast Asia, have integrated into the world economy with great success.This success on the part of the East Asian and Southeast Asian countries can be observed in Exhibit 3, which indicates that while these countries were the source of about 10% of total world exports in 1980, they were the source of about 16% of global exports in 1995.

Source:World Trade Organization, “Participation of Developing Countries in World Trade:Overview of Major Trends and Underlying Factors,” (Geneva:August 1996), p. 8, and available on the World Wide Web at http://www.wto.org/english/tratop_e/devel_e/w15.htm.

The third main characteristic of the contemporary trading system is a continuing and perhaps growing importance of regional trading networks.This can be observed in Exhibit 4, which reports on trade encapsulation on the part of countries in various regional arrangements, that is, the percentage of total exports from countries in a particular trading arrangement that were shipped to countries in the same arrangement.As can be observed in the exhibit, while 40% of the exports from the United States, Canada, in Mexico (which formed a regional trading area under the terms of the North American Free Trade Agreement, or NAFTA, in 1993) went to one another’s market in 1990, about 52% of exports went to regional partners in 1998.An even more pronounced regionalization of trade occurred between Argentina, Brazil, Uruguay, and Paraguay, which in 1991 formed the Common Market of the South, whose Spanish acronym is Mercosur: while about 9% of exports from these countries were shipped to regional partners in 1990, this increased to 25% by 1998. Only the countries that form the European Union (EU) appear to have experienced a decrease in regional concentration of trade during the 1990s (although in 1998 the figure still exceeded 50%), although this may have been due to the expansion in the membership of the EU during the period.

Source:World Bank, World Development Indicators 2000, available on the World Wide Web at http://www.worldbank.org/data/wdi2000/pdfs/tab6_5.pdf

Finance: Portfolio and Foreign Direct Investment

·Portfolio investments: these consist of cross-border purchases and sales bonds; the establishment of money market accounts; the purchase of foreign equity securities whose ownership levels do not imply a capacity of the buyer to influence the management of the firm issuing the equities; and financial derivatives such as future contracts and options.

·Foreign direct investments (FDI):these consist of the purchase by residents of one country of a sufficient level (10 percent or more) of the publicly traded shares or their equivalent of an enterprise in another country, or the establishment by a firm of a new enterprise in a foreign country, with the purpose of having a lasting interest in and influence on that enterprise.

·Other foreign investments:these include trade credits, bank deposits, and bank loans.They are often very short-term in maturity.

International cross-border flows have increased greatly during the post-World War II era, and especially in recent years. One estimate is that total capital flows averaged about $384 billion between 1980 in 1994; these more than doubled by the 1990-94 period, during which they totaled an average of about $867 billion per year.The process of global financial integration intensified during the 1990s: including data from Taiwan, total capital flows jumped from an average of about $896 billion per year during 1990-94 to about $1.7 trillion in 1996.[2]

We can appreciate the growing relative importance of international flows of capital by reference to exhibit 5, which presents data on U.S. inflows and outflows of capital relative to U.S. GNP during the period from 1923 through 1998.The exhibit indicates that while the sum of flows of capital into and out of United States equaled about 4 to 6 percent of U.S. GNP during the 1970s, such flows equaled 8 to 10 percent of U.S. GNP by the end of the 1990s.

Source:U.S., Council of Economic Advisors, 2000 Economic Report of the President (Washington, February 2000), p. 206; see http://w3.access.gpo.gov/usbudget/fy2001/pdf/2000_erp.pdf.

A great deal of media attention is devoted to portfolio and especially short-term capital flows and the role these played in international financial crises such as those that occurred in the 1990s in Mexico, Korea, Thailand, Indonesia, and Russia.However, foreign direct investments, particularly those by multinational enterprises, may be playing an even more important long-term role in forging a truly globalized world economy.Foreign direct investments, recent analyses suggest, have come to constitute a larger and larger share of total global capital flows, from about 12% of such flows in the early 1980s to about 25% in the early to mid-1990s.[3]Moreover, FDI is coming to play an increasingly important role in the process of capital formation in many groups of countries.This growing importance of FDI in capital formation can be observed in Exhibit 6.It indicates that FDI inflows constituted about 8% of world gross-fixed capital formation in 1997, up from 5% in 1990 and about 2% in 1980.For developing countries the increase in the role of FDI has increased at an even more dramatic rate:while FDI made up about 1% of gross capital formation in those countries in 1980, this increased to 4% in 1990 and over 10% in 1997.

Source:United Nations Conference on Trade and Development (UNCTAD), World Investment Report:1999 (Geneva, 1999), p. 12.

2. The Main Actors in the International Political Economy

We can identify at least four main categories of political actors in the contemporary international political economy:

Multinational Enterprises (MNEs)

As a recent UN report indicates, about 60,000 parent firms direct the operations of over 500,000 affiliates around the world.Most important among these parents are the top 100 non-financial MNEs, almost all of which come from Europe, Japan and America.These 100 largest non-financial MNEs—companies such as General Electric, Ford Motor Company, Royal Dutch Shell, IBM, and Nestle—had foreign sales in the range of $2.1 trillion in 1997, or about 22% of the sales of all MNEs.International banks, such as Citigroup of the United States, are another major category of private actors in the world economy.[4]

Global Institutions

• International Monetary Fund (IMF): The IMF came into existence in December 1945 as a result of negotiations that were concluded in Bretton Woods, New Hampshire, in the summer 1944. It began with 29 member-states; as of late-2000 it was composed of 182 members, and is headquartered in Washington, D.C. with 2700 staff members. The IMF member-states make their key decisions on the basis of votes weighted by the members’ financial contribution to the Fund. The IMF serves as the main institutional mechanism through which member-states assure one another that they are not seeking to manipulate exchange rates in an effort to attain an international competitive advantage. This mutual surveillance/assurance function is carried out in the context of annual visits by IMF staff to member-countries to review each member’s international economic policies (termed Article 4 consultations, from the portion of the IMF articles of agreement that serves as the basis for such consultations), and through biannual reviews of national economic circumstances and policies undertaken in the context of the preparation by the IMF staff of its World Economic Outlook In addition, the IMF provides short-term financing to countries facing balance of payments difficulties on the condition that a country that is experiencing a balance of payments short-fall undertakes specific measures to re-establish a sustainable balance of payments position; as of April 2000, 92 member-states were the recipients of about $66 billion in IMF credits for the purpose of balance-of-payments support.[5]

• The World Bank: the World Bank was also founded as a result of the Bretton Woods Conference. Like the IMF, the World Bank today has 182 member-states; it too is headquartered in Washington and has 10,000 professional staff. The World Bank makes loans to developing countries for longer terms developmental projects. It had outstanding loans to approximately 100 countries during 1999, and disbursed approximately $15.3 billion in new loans that year. Its main decisions are taken, as is the case with the IMF, on the basis of weighted voting.[6]

• The World Trade Organization (WTO): The WTO was established in 1995 as the more formal, institutionalized successor to the General Agreement on Tariffs and Trade (GATT). The GATT had been the main international forum for international trade diplomacy from its establishment as an interim agreement in 1947 among 23 countries and in the wake of the failure of the main trading countries to bring to fruition a more comprehensive International Trade Organization (ITO). As of the fall of 2000, the WTO has 139 member-states, with 28 more states seeking membership; it has a secretariat with 500 staff members. Before 1995, the GATT carried out two main functions. First, it served as the framework within which member-states conducted periodic “rounds” of multilateral trade negotiations aimed at agreements that reduced tariffs and, later, established greater international discipline over the use by members of non-tariff barriers. There were eight such rounds between 1947 and 1994; the last of these produced the agreement to make the GATT a more formalized international legal entity, the WTO. At present the WTO members are negotiating the terms for the launching of a new “Millennium Round” of trade talks. Second, the GATT in the past, and the WTO to an even greater extent today, is responsible for the development and implementation of rules and procedures whereby member-states can resolve disputes regarding their rights and duties under the terms of the GATT/WTO agreements.[7] The GATT multilateral rounds officially relied upon decision-making by consensus, but in practice has employed a “major interests” or “principal supplier” rule, that is, the countries with a predominant interest in a trading sector (typically the industrial countries) would reach accords on the specific issues surrounding that sector and invite secondary states.[8] Dispute settlement procedures operated in the GATT on the basis of unanimous acceptance of dispute settlement rulings by panels of experts, but because the country against which a panel might find could thereby block the report’s findings and remedy, the WTO agreement on the settlement of disputes prevents such blockage by the country whose trade practices are being challenged by another member on dispute settlement operations of the WTO.[9]

Regional Arrangements

• European Union (EU): this is the main regional economic arrangement in the contemporary global economy. At present it consists of fifteen European member-states, with as many as thirteen countries seeking membership as of the end of 2000.[11] The European Union, which is the successor body to the European Coal and Steel Community (ECSC, founded in 1951) and the European Economic Community (founded in 1957), has sought to reduce barriers to all forms of economic interchange among the member-states, and thereby to promote greater overall cooperation among the members. In more recent years it has developed a common currency and central banking system (the euro and the European Central Bank, or ECB), and it has taken some first steps toward the formation of a common foreign and security policy. The EU’s main institutions are the European Council, though which the governments of the member-states give overall guidance to the work of the Community; the Commission, the administrative body that may initiate proposals for Community policy and is responsible for the implementation of most of the policies of the Community (a big exception is monetary policy, which is the responsibility of the new European Central Bank), and which consists of a President, a number of Commissioners appointed by the president to oversee particular functions of work by the Commission, and a professional staff of about 15,000 persons; the European Parliament, which has limited but growing oversight functions in the Union; the European Court of Justice (ECJ), which adjudicates cross-border disputes regarding European Community law; and the European Central Bank (ECB), which is an independent entity charged with establishing a common, single monetary policy for the eleven EU members that have adhered to the single-currency[12]

• North American Free Trade Agreement (NAFTA): This is a regional trade arrangement that came into effect in January 1994 and that includes the United States, Mexico, and Canada. Its main institutional form is the Free Trade Commission, constituted by the trade ministers of the three countries; there are also a number of working groups formed by specialized governmental representatives.[13]

1. How new is the new world economy?

• One argument emphasizes that contemporary economic integration is not unique from an historical perspective, and indeed that international economic integration may have been as high in the years just before the outbreak of World War I in 1914 as it is today.[15]

• An alternative view acknowledges that, on basis of several aggregate measures such as trade as a percentage of Gross Domestic Product (GDP), it is the case that today’s level of international economic integration by many industrial countries is just now reaching that attained by the main trading countries in the years up to 1914. However, proponents of this perspective suggest that there are some elements of today’s integration that point to a higher intensity of integration at present compared to that during the first “golden age” of interdependence prior to 1914: these elements include the newly important participation in the world economy of a range of developing countries; the much higher level of participation by the United States in the world economy (see Exhibit 2); and the new role played by multinational enterprises in forging, perhaps for the first time, truly global industries. 

A second area of research and controversy among students of IPE centers on efforts to locate the mainsprings of world economic integration.[16]Among the key arguments on this question include:

• Technology. Some authors emphasize that international economic integration since World War II reflects important technological changes in computers, telecommunications, and transportation (the jet aircraft and extremely large cargo ships). From this perspective, technological developments, together with increases in the knowledge on the part of managers to coordinate the far-flung activities of corporate affiliates around the globe, have permitted the intensification of cross-border linkages forged by multinational enterprises to a degree that was infeasible in earlier periods.[17]

• International political conditions: hegemonic leadership. A number of scholars have emphasized that international economic openness requires a hegemonic leader that will have both the interest and the capacity to bring about and to maintain the political, institutional, and military conditions that are associated with an expanding world economy.[18] This role of hegemonic leader was occupied and played by Britain during the bulk of the 19^th century, according to these scholars, and Britain’s incapacity to perform the tasks of the hegemon after World War I, and America’s unwillingness to accept the roles and tasks, contributed to the decline and ultimate collapse of the world economy in the wake of the Great Depression of 1929-1939. After World War II, this perspective emphasizes, the United States did provide the military security to Japan and the Western European countries so that they would be willing to open their markets to one another; it did take the lead role in the establishment and work of the key international economic institutions, and in particular the GATT and the IMF; it decisively promoted European integration through the institutions cited above; and it permitted its Western European and Japanese allies to be selectively protectionist against U.S. goods and firms in the interest of conducting the Cold War against the Soviet Union while at the same time making steady progress toward the overall opening of the world economy. 

·International regimes.A fourth argument about the sources of international economic openness emphasizes the roles played by the GATT/WTO, the IMF, and other international institutions.[20]From this perspective, after American hegemony declined, international institutions created a favorable context in which the United States and its partners could maintain and extend international openness.Such institutions, from this perspective, have fostered greater transparency in the behavior of partners, as wells as the creation of a framework in which partners have an interest in developing reputations for faithful adherence to their international commitments; the effect is to reduce the attractiveness and cheating among the partners, as well as the reduction of the costs of reaching agreements, thus promoting economic cooperation.

3. What are the effects of contemporary international economic integration?

A number of bodies of research have sought to understand the effects of international economic integration on political-economic relations within and across countries.Three of the key areas of research include:

·International economic integration and state autonomy.One argument is that, compared to what may have been true in the 1950s and perhaps the 1960s, when the major industrial countries and most of the developing nations had numerous controls on trade and especially financial flows, international economic integration during the past thirty years has sharply reduced the economic policy autonomy of all countries so linked to the world economy.According to this perspective, a nation that is facing unemployment and that in the past might have sought to increase economic demand and employment by incurring large national budgetary deficits or expanding the country’s monetary supply must now be worried that doing so might instigate a flight of capital and an overly large decline in the international value of its currency. In the same vein, the concern is sometimes expressed that national governments are being forced by contemporary increases in international economic integration to engage in a “race to the bottom” in respect to national welfare and safety and environmental policies; that is, in seeking to attract and maintain the presence of multinational enterprises in their borders, countries may be finding themselves compelled to reduce government welfare expenditures and to revert to lower policy standards when these affect the costs of business.[21]

·International economic integration and world peace.Pursing arguments put forward by such classical writers and Adam Smith and Immanuel Kant and, in more recent times, Norman Angell, it has been suggested that increases in the level of international economic interdependence between countries (measured, for example, by the amount of each country’s exports to its partner relative to GDP) reduces the likelihood of military conflict between those two nations.[22]A very different perspective suggests that increases in international economic interdependence, by increasing the points of contact between countries and therefore the risk of potential disagreements between nations, may contribute to the risk that conflicts might develop between countries.[23]A third argument is that the effects of economic interdependence are contingent on the presence or absence of other conditions.For example, economic interdependence may mitigate conflict between a pair of countries if each believes that its partner will retain economic openness in the future rather than close off its economy, and it is likely to have a depressive effect on conflict if both countries have democratic political systems rather than if both have authoritarian regimes or if one has a democratic and the other has an authoritarian regime.[24]

·International economic integration and developing countries.A third area of continuing research concerns developing countries and whether participation by them in the world economy helps or hurts their prospects for sustained national growth.In contrast to the 1970s and the early 1980s, during which there were ongoing academic and policy debates that cast the question in terms of whether developing countries would be wise to de-link from the world economy, very few scholars argue today that such de-linkage is desirable or even realistic.[25]Still, as the scholarship on multinational enterprises and developing countries highlights, there remain significant questions about the relationship between international integration and the long-run growth prospects of developing nations.One contemporary perspective on this subject suggests that developing countries can use linkages with such key international economic actors as multinational enterprises to enhance national growth and to upgrade the country’s overall skills and capacity to interact successfully with the world economy.[26]An alternative, less optimistic view is that multinational firms will not make the kinds of large investments that most developing countries need to enjoy a substantial improvement in their relative status in the world economy, and from this viewpoint developing countries may grow as a result of international integration but they are likely to remain relegated to the less advanced segments of the world economic system.[27]Finally, a third perspective suggests that whether the impact of multinationals on developing countries is positive or negative, as with other linkages between the international economy and these countries, depends upon their social and political and even cultural characteristics.[28]

There may be strong grounds to believe that international economic integration will continue to intensify in the years ahead.However, it is also possible to identify circumstances in which the rate of integration might be slowed or even reversed:

1. The issue of system instability

During the 1990s, a number of countries, and indeed the entire international financial system, witnessed a number of crises in Latin America, East and Southeast Asia, and in Russia; often a financial crisis in one country would spread to others as a result of cross-national capital flows and the tendency of investors to view emerging-market developing countries or transitional economies as having similar risk profiles.[29]Although to date these crises have been contained and managed as a result of U.S. leadership within the IMF, it is possible that at some point a financial crisis might bring about sufficient domestic political and social turmoil in a developing country that it could experience political collapse and the rise of a government hostile to international economic integration.[30]Less dramatically, but still worrisome, the case of Long Term Capital Management (LTCM) in the summer of 1998, in which foreign financial losses by a U.S. investment firm led to a severe sell-off in U.S. equity markets and threatened the stability of a number of major U.S. financial enterprises (and which ultimately required the intervention of the U.S. Federal Reserve to help arrange a bail-out of LTCM), provides evidence that even the United States is not immune to externally induced financial shocks of a serious magnitude.

2. The issue of system legitimacy.

In recent years, there has developed in the advanced industrial countries a modest backlash against international economic integration.This backlash can be observed in the street demonstrations that took place in the background to the Seattle WTO Ministerial meetings in 1999.Such “globalization fatigue” may be observed as well in the reluctance of the European Union countries (prompted in turn most strongly by France) to agree to trade liberalization in the audio-visual field as a result at least in part of a concern that such liberalization would lead to greater American cultural domination of Europe and indeed the world.[31]It may also be seen in the EU expressions of concerns that further liberalization of trade in agricultural products would expose Europeans to unsafe American genetically-modified food products.Again, these popular and governmental concerns in the advanced democracies about globalization have to date touched only on the margins of the international economy, and it is unlikely that they presage some larger alienation from the long-term process of world economic integration.However, if a significant number of citizens in an advanced industrialized democracy were to become convinced that world economic integration meant a diminution of the capacity of their government to maintain the social-welfare side of the embedded liberalism compromise, including strong national regimes to protect worker rights or the natural environment, and that such integration threatened their national culture, then it is possible that they would press their government at least to delay further integration of their country with the world economy.By consequence, economic integration in the future will depend on the capacity of governments to work individually and collectively to manage the risks and instabilities associated with that integration.