Global economy

This module explains what global economy is, describes global production chains patterns and how and who is making the rules

What are the problems with free trade?

As is often the case with theories, this one is static and does not take into account unequal starting conditions. Three issues in particular need to be addressed:

  • Power: Where in theory states should regulate things together, often it is companies instead. As 82,000 transnational corporations conduct 2/3 of global trade, they have the power to change rules and to make new ones. Governments should have influence over the trade structures but are under the influence of the economic decision makers. In practice the industrialised countries are among the most avid practitioners of protectionism. An example of this is the agricultural industry of the EU.
  • Terms of trade: They decide the exchange rates. That is the ratio between export and import prices. But what would happen in the case of failed crops for example? The exchange rate would change dramatically and the national economy would need to change to a new product. However, that is not possible at short notice. Indeed it is impossible without temporarily protecting local industry.
    Example: Going back to the towels/wine example, if Portugal experienced a failed harvest, the exchange rate of both these products would change. In this case it would be better for Portugal to switch to towel production. As that is, however, impossible at short notice, Portugal would be unable to trade.
  • Transport costs: Currently the global economy is not based on local advantages, but rather on transport subsidy. Products are becoming competitive in remote parts of the world as realistic transport costs are not in place. If this subsidy disappeared, local products would become competitive again.

Sources

ATTAC (Hg., 2003): Die geheimen Spielregeln des Welthandels. Wien.

Task

Watch the following video. It explains the challenges of global trade through the example of chicken production.

Questions for reflection:

  • What are the reasons why Quame‘s meat is not competitive on its domestic market?
  • Why does Quame not export his meat to the EU? Which economic frameworks stop them from doing so?
  • Why does Klaus export his meat to Ghana?
  • What does this situation has to do with free trade?
  • Which possible actions for the improvement of the existing global trade system are suggested?
  • What do you look for when buying vegetables or meat?