0807068 EC104 Essay 2 Seminar Tutor: Elaine Hardy

What were the main forces promoting globalization in the late 20th century? How different was this from what had happened in the late 19th century? Globalisation is the process of integration of goods and capital markets across the world that results from decreasing barriers to international trade and factor flows (Crafts, 2004, p.45). The integration of markets is reflected in the narrowing gap between countries in the prices of goods and services and the rate of return to factors. There are however both natural and artificial challenges to the process of globalisation. Distance is a natural deterrent to international trade because of transport costs and its associated risks. In addition, politicians sometimes impose artificial restrictions on trade such as tariff and import quotas. Globalisation was thus propelled by the overcoming of these challenges. In the late twentieth century, globalisation was driven by technological developments, in particular, falling transport costs and reduction in informational barriers to exchange, policy changes that reduced protectionism and favoured economic liberalisation, and institutional development that promoted globalisation and regulated trade conflict.

These forces also applied in the late nineteenth century but to a different extent and with different trends. While inventions since the mid-nineteenth century steamships, rail, the telegraph and the Internet amongst others have been consistently pro-globalisation, economic policy has been much more variable (Crafts, 2004, p.45). Becoming more restrictive in the interwar period and then more liberal in the post-war period, often, the interruption of globalisation was due to policy rather than technologically-driven factors. Hence late nineteenth century globalisation was propelled by a rapid decline in transportation costs, and in the post-war period was supplemented by policy and institutional measures to reduce tariff and non-tariff barriers to trade, and it is the combined effect of these measures that enabled a high degree of integration by the late twentieth century.

0807068 EC104 Essay 2 Seminar Tutor: Elaine Hardy

Technological Developments Technological developments as a driving force for globalisation entails both falling transport costs as well as reductions to informational barriers to exchange. Technological progress has increased the speed of transporting goods around the world and expanded the array of available delivery mechanisms (Bordo, Eichengreen and Irwin, 1999, p.17) while the internet has changed the nature of services. The transport revolution of the nineteenth century brought into being steamships and the completion of the Suez Canal in 1869 that linked continents, complemented by the development of railways for overland transport. This drastically reduced transport costs that the terms of trade improved for all countries (Hadass and Williamson, 2001 cited in Crafts, 2004, p.55). By the twentieth century, transport cost was further reduced in shipping and air freight. In shipping, the resulting efficiency from containerisation, bulk shipping and improved fuel efficiency drove down costs as seen in the downward real cost trend of ocean shipping in table 1. In air freight, technological improvements enabled the freight rate index on American export routes to fall by more than 40 percent between 1870 and 19131 (ORourke and Williamson cited in Bordo, Eichengreen and Irwin, 1999, p.16) and by 1975 to 1993, air cargo rates on long distance routes declined by approximately 15 to 20 percent (Bordo, Eichengreen and Irwin, 1999, p.17). In the United States, the overall trade-weighted average transport cost declined from 6 percent to 4 percent over the early twentieth century (Anderson and van Wincoop, p.703). The decline in transport cost thus set the stage for the convergence in prices of traded goods. Table 1. Real Cost of Ocean Shipping 1750 1830 1870 1910 1950 1980 2000 298 287 196 100 80 53 21

Sources: Harley (1988); Kaukiainen (2003)

1

When measured deflated by the general U.S. price index.

2

0807068 EC104 Essay 2 Seminar Tutor: Elaine Hardy

However, there are also limits to falling transport costs. Distance still matters in a globalised world. Transport cost has fallen proportionately more for short than long distances as handling costs have fallen relative to fuel cost. Transport costs are undeniably lower than before but are still not negligible, particularly with the higher opportunity cost of time now.

In addition to transport costs, informational barriers to exchange can limit the extent of market integration. Before the age of mass communications, it was exacting to exchange information about goods and demand patterns of foreign consumers. By the late nineteenth century, the high level of migration enabled the flow of such information. By the late twentieth century, these communication networks were enhanced by multinational corporations that could convey information across borders.

Policy The economic policies of governments are a strong impetus for and against globalisation. In particular, policy changes that reduce protectionism, liberalise foreign investment rules and make migration easier (Crafts, 2004, p.45) drive globalisation. The general pattern of trade policy (table 2) has been a rise in tariff barriers between 1875 and the pre-World War II period, compounded by non-tariff barriers during the interwar period, and it was only after the end of World War II that there was significant reduction in trade barriers under the General Agreement on Tariffs and Trade (GATT). Table 2. Average Tariffs on Imported Manufactured Goods 1875 1913 1931 30 21 46 n.a. -n.a. 48 1950 18 26 25 23 --14 Pre-Uruguay Round ----5.7 9.0 4.6 PostUruguay Round ----3.6 4.8 3.0

France 12-15 20 Germany 4-6 17 Italy 8-10 18 United 0 0 Kingdom European --Union Canada n.a. 26 United 40-50 44 States Source: Bordo, Eichengreen and Irwin, 1999.

0807068 EC104 Essay 2 Seminar Tutor: Elaine Hardy

With a renewed optimism in multilateral cooperation after World War II, trade negotiations conducted under the auspices of the GATT successfully reduced average tariffs to under 5 percent (Bordo, Eichengreen and Irwin, 1999, p.18). For industrialised countries2, policy barriers were reduced to about 8 percent (Anderson and van Wincoop, 2004, p.693). In addition, regions formed free trade zones, or at the least zero tariff areas, the most eminent of which is the European Economic Community founded in 1958 which eliminated tariffs on member countries trade. Political efforts to eliminate trade barriers thus contributed to deeper economic integration than experienced a century ago. As tariff barriers were brought down, so were non-tariff barriers of import quota and exchange controls phased out. Such policies were a key factor in driving globalisation.

In contrast, between 1875 and the outbreak of World War I, average tariffs rose in most European countries to the 20 percent range3. In 1879, Germany imposed the Bismark tariff on manufactured goods which ratcheted up tariffs elsewhere, while trade wars and capital controls characterised the interwar globalisation backlash. There was a huge contraction in the ratio of foreign assets to world gross domestic product (GDP) from 17.4 percent in 1914 to 4.9 percent at the end of World War II (Crafts, 2004, p.46). In a harsh conviction by ORourke and Williamson (1999, p.29), they concluded that all the commodity market integration in the Atlantic economy after the 1860s was due to the fall in transport costs between markets, and none was due to more liberal trade policy. The difference between tariff barriers of the nineteenth century and that of the twentieth century is in the motivation for their erection. In the former, tariff protection was in part implemented as compensation to domestic workers from foreign competition in the absence of social insurance4. Many late nineteenth century American tariffs for example, were set higher than necessary to ensure effective autarky (Bordo, Eichengreen and Irwin, 1999, p.23). In the post-depression era however, beggar-thy-neighbour policies were implemented

2 3

This considered both tariff and non-tariff barriers. th With the exception of Great Britain, the bastion of free trade in the late 19 century. 4 Examples of social insurance include unemployment insurance and adjustment assistance.
4

0807068 EC104 Essay 2 Seminar Tutor: Elaine Hardy

because many economic analysts thought that inward-oriented growth policies were the way to development.

Since the financial crises of the 1970s, a new protectionism has emerged including antidumping actions and voluntary restraint agreements, but broadly speaking, it is clear that trade barriers have fallen substantially in the post-war period and are lower in the late twentieth than late nineteenth century.

Institutions Institutional innovations in the past century play a pivotal role in the success of globalisation. Given that integration is more pervasive now than in the late nineteenth century, it is surprising that trade tensions and financial instability have not been worse in recent years (Bordo, Eichengreen and Irwin, 1999, p. 5). Exclusion and inequality are endemic to globalisation and thus national safety nets and international regulation are crucial to promoting the positive aspects of globalisation whilst simultaneously weeding out the negative. The GATT was the cornerstone to the formative years of pro-globalisation trade policy with the seventh GATT round of talks in the 1970s achieving more than US$300 billion in tariff reductions. The World Trade Organisation, International Monetary Fund and the Basle Committee of Banking Supervisors have since also played vital roles in providing functions of global governance. Despite the imperfections of these institutions, such a high degree of integration would not have occurred without these facilitators.

Effects of the driving forces on globalisation While the reduction of transport costs resulted mostly in an increase of tradable goods, the effect of more open economic policy is also evident in the financial sector. Already in the late nineteenth century, net financial flows from the core countries of Western Europe to peripheral Europe were large relative to GDP. But what differs besides the fact that financial integration is greater today is that foreign investment and trade affect a larger range of sectors and activities (Bordo, Eichengreen and Irwin, 1999, p.27). This was due to the consequences of information asymmetries, contracting problems and macroeconomic
5

0807068 EC104 Essay 2 Seminar Tutor: Elaine Hardy

risks that limited the extent of capital and commodity flows prior to 1913 and that continue to limit them, albeit to a lesser extent, today. The problem of information asymmetries ties in with communications technology. Technological advancements in communication methods makes long-term lending possible and enables currency traders today to respond almost instantaneously to minute-tominute changes in currency values. The inauguration of the transatlantic cable in the 1860s for instance, reduced the duration for information to travel from New York to London from three weeks to one day. By 1914, cable transmission took less than a minute. Garbade and Silber (1978) found that this resulted in a significant decline in the mean absolute difference between the London and New York prices of American bonds (Bordo, Eichengreen and Irwin, 1999, p.33). Institutional developments also helped to address contractual problems and macroeconomic risks. Standardised accounting practices were developed while legal security claims, business and bankruptcy laws became more transnational, facilitating cross-border transactions. Exchange risk, unstable monetary and fiscal policies and political risk limited pre-1913 international investment flows but twentieth century institutional regulation and safeguards helped in part to mitigate these risks.

Conclusion The factors that drove globalisation though similar in both time periods, differ markedly in extent and scope. While transport cost reductions are a common factor in both time periods, many analysts argue that twentieth century technological improvements were more advanced. On the other hand, liberal trade policy drove late twentieth century globalisation while restrictive policy hindered nineteenth century economic integration. The post-World War II era also saw the creation of liberal trade-inclined institutions that greatly facilitated the process of globalisation. Such institutions were largely absent in the late nineteenth century. The differences in the patterns, occurrences and pervasiveness of these factors thus explain the difference in the degree of economic globalisation in the late nineteenth and twentieth centuries. Word Count: 1644
6

0807068 EC104 Essay 2 Seminar Tutor: Elaine Hardy

Bibliography Anderson, J. and van Wincoop, E. (2004), Trade Costs, Journal of Economic Literature, 42, 691-751. Bordo, M., Eichengreen, B., and Irwin, D. (1999), Is Globalization Today Really Different than 100 Years Ago?, NBER Working Paper No. 7195. Crafts, Nicholas (2004), Globalization and Economic Growth: an Historical Perspective, The World Economy , 27, 45-58. ORourke, K. and Williamson, J. (2002), When Did Globalization Begin?, European Review of Economic History, 6, 23-50. Rodrik, D. (2002), Feasible Globalizations, NBER Working Paper No. 9129.