Economic
globalization
PROF. SAMUEL STANDAERT
UGENT | ACADEMIEJAAR 2023-2024
,Inhoudsopgave
Chapter 1 – Globalization ............................................................................................................................................ 3
1.1 What is (economic) globalization ? .................................................................................................................... 3
1.2 Is globalization good ? ....................................................................................................................................... 3
1.3 Globalization over time...................................................................................................................................... 4
1.4 Who trades with whom ? (Gravity model) ......................................................................................................... 5
1.5 What’s next ? .................................................................................................................................................... 6
Chapter 2 – The classical trade theory ......................................................................................................................... 7
2.1 Absolute advantage ........................................................................................................................................... 7
2.2 Comparative advantage ..................................................................................................................................... 8
2.3 How are wages and prices determined ?............................................................................................................ 8
2.4 Misconceptions about comparative advantage ................................................................................................ 10
2.5 Comparative advantage in real life ................................................................................................................... 10
2.6 Should Nigeria strive for self-sufficiency in food ? (EXTRA INFO IN PPT) ........................................................... 11
Chapter 3 – Neoclassical models of trade .................................................................................................................. 13
3.1 Labour and trade ............................................................................................................................................. 13
3.2 Multiple factor economy ................................................................................................................................. 13
3.3 Market equilibrium in autarky ......................................................................................................................... 14
3.4 The Heckscher-Ohlin model ............................................................................................................................. 15
3.5 Trade and the distribution of income ............................................................................................................... 17
3.6 The Heckscher-Ohlin model in real life ............................................................................................................. 17
3.7 If not trade , what is to blame ? ....................................................................................................................... 18
Chapter 4 – Modern trade theory ............................................................................................................................. 20
4.1 Why do we need more trade theory ? ............................................................................................................. 20
4.2 Why do countries trade what they already have ?............................................................................................ 20
4.3 Internal economies of scale ............................................................................................................................. 20
4.4 External economies of scale............................................................................................................................. 22
4.5 Firm heterogeneity & trade costs..................................................................................................................... 22
4.6 Dumping ......................................................................................................................................................... 23
Chapter 5 – FDI and MNE .......................................................................................................................................... 24
5.1 The basics of FDI and MNE .............................................................................................................................. 24
5.2 OLI (Ownership Location Internalization) ......................................................................................................... 25
5.3 FDI and Welfare ............................................................................................................................................... 25
Chapter 6 – Migration ............................................................................................................................................... 27
6.1 Introduction on the migration phenomenon .................................................................................................... 27
6.2 Migration on the rise: evolution and composition ............................................................................................ 27
6.3 The migration decision and location choice ..................................................................................................... 28
6.4 Implications for the country of destination ...................................................................................................... 30
6.5 Implications for the country of origin ............................................................................................................... 31
1
,Chapter 7 – The instruments of trade policy .............................................................................................................. 32
7.1 How does the government intervene in trade ? ............................................................................................... 32
7.2 Export supply and import demand ................................................................................................................... 32
7.3 The impact of tariffs ........................................................................................................................................ 33
7.3.1 Small country case .................................................................................................................................... 33
7.3.2 Large country case .................................................................................................................................... 34
7.4 Measuring the effective protection rate ........................................................................................................... 35
7.5 Non-tariff barriers ........................................................................................................................................... 35
Chapter 8 – The political economy of trade policy ..................................................................................................... 38
8.1 The case of free trade ...................................................................................................................................... 38
8.2 Arguments used against free trade .................................................................................................................. 38
8.3 How does trade policy come about ? ............................................................................................................... 41
8.3.1 Political modals of trade policy ................................................................................................................. 41
8.3.2 Strategic trade policy ................................................................................................................................ 42
Chapter 9 – Regional integration ............................................................................................................................... 43
9.1 What are regional integrations agreements ..................................................................................................... 43
9.2 Economic integration agreements ................................................................................................................... 43
9.2.1 Static analysis: Viner ................................................................................................................................. 44
9.2.2 Dynamic: new regionalism ........................................................................................................................ 45
9.3 RIAs in the global system ................................................................................................................................. 45
9.3.1 The spaghetti bowl ................................................................................................................................... 45
9.3.2 Russia ....................................................................................................................................................... 46
Chapter 10 - Trade and development ....................................................................................................................... 47
10.1 Trade as a pathway to development .............................................................................................................. 47
10.1.1 The Asian tigers ...................................................................................................................................... 47
10.1.2 Not all trade is good ................................................................................................................................ 48
10.2 Trade and labour standards ............................................................................................................................... 48
10.3 Trade and the environment ........................................................................................................................... 49
Chapter 11 – GATT and the WTO ............................................................................................................................... 50
11.1 A brief history ................................................................................................................................................ 50
11.2 WTO principles .............................................................................................................................................. 51
11.3 WTO Structure............................................................................................................................................... 52
11.4 Examples of WTO cases ................................................................................................................................. 52
11.5 The future of the WTO ................................................................................................................................... 53
2
, Chapter 1 – Globalization
1.1 What is (economic) globalization ?
• Globalization = anything that facilitates expanded economic interaction across countries
o E.g.: Phoenicians developing square-rigged sails to trade in Mediterranean , European explorers , silk
road …
• Definition from Deardorff and Stern :
o Globalization :
▪ Increase in international transactions in markets for goods, services and factors of
production (labor & capital)
▪ Growth and expanded scope of international institutions and organizations including
multinational corporations and international institutions (UN, World Bank, IMF, WTO)
o Globalization =
▪ 1. Increased trade
• Containerization of trade
• Key aspect through which the world economy became more globalized
• Became vital to many companies and countries worldwide
▪ 2. Increased foreign investment
• International economics are more than just trade in goods/services
• Also FDI has spurred (stimulated)
▪ 3. Increased migration
• Labor migration …
• Increased international travel (temporary/permanent) has helped globalization
• Globalization brings diverse cultures into everyday contact
▪ 4. Increased political connections
• Countries became more politically connected
• Work together to enact trade agreements & open borders to factor movement
1.2 Is globalization good ?
• Yes, because voluntary (not always -> slavery) exchange between 2 entities -> lower prices , higher quality ,
higher efficiency , higher welfare
• No, because not everyone wins & this assumes that the market works well
• BUT overall : people gain
• Why study economic globalization ?
o National governments often restrict international movement of goods/services and factors of
production via boycotts, quota …
▪ Especially movement of production factors (immigration)
▪ BUT these countries prefer free flow within their borders so why not international …
• Globalization = a controversial process
o The “Battle of Seattle” = meeting of World Trade Organization that was protested by thousands of
people opposed to globalization -> turned violent
o Mostly low-skilled workers were against globalization
Proponents Opponents
• Lifted many out of poverty with jobs (China) • Unfair working conditions and exploitation of
• Increased students studying abroad the poor & the environment
• Helps people communicate • Outsourcing causes job loss in wealthy
• Increases speed with which aid agencies can countries
respond to natural disasters • Western culture destroys local cultures
• Helps availability and affordability of advanced
medicine
3
globalization
PROF. SAMUEL STANDAERT
UGENT | ACADEMIEJAAR 2023-2024
,Inhoudsopgave
Chapter 1 – Globalization ............................................................................................................................................ 3
1.1 What is (economic) globalization ? .................................................................................................................... 3
1.2 Is globalization good ? ....................................................................................................................................... 3
1.3 Globalization over time...................................................................................................................................... 4
1.4 Who trades with whom ? (Gravity model) ......................................................................................................... 5
1.5 What’s next ? .................................................................................................................................................... 6
Chapter 2 – The classical trade theory ......................................................................................................................... 7
2.1 Absolute advantage ........................................................................................................................................... 7
2.2 Comparative advantage ..................................................................................................................................... 8
2.3 How are wages and prices determined ?............................................................................................................ 8
2.4 Misconceptions about comparative advantage ................................................................................................ 10
2.5 Comparative advantage in real life ................................................................................................................... 10
2.6 Should Nigeria strive for self-sufficiency in food ? (EXTRA INFO IN PPT) ........................................................... 11
Chapter 3 – Neoclassical models of trade .................................................................................................................. 13
3.1 Labour and trade ............................................................................................................................................. 13
3.2 Multiple factor economy ................................................................................................................................. 13
3.3 Market equilibrium in autarky ......................................................................................................................... 14
3.4 The Heckscher-Ohlin model ............................................................................................................................. 15
3.5 Trade and the distribution of income ............................................................................................................... 17
3.6 The Heckscher-Ohlin model in real life ............................................................................................................. 17
3.7 If not trade , what is to blame ? ....................................................................................................................... 18
Chapter 4 – Modern trade theory ............................................................................................................................. 20
4.1 Why do we need more trade theory ? ............................................................................................................. 20
4.2 Why do countries trade what they already have ?............................................................................................ 20
4.3 Internal economies of scale ............................................................................................................................. 20
4.4 External economies of scale............................................................................................................................. 22
4.5 Firm heterogeneity & trade costs..................................................................................................................... 22
4.6 Dumping ......................................................................................................................................................... 23
Chapter 5 – FDI and MNE .......................................................................................................................................... 24
5.1 The basics of FDI and MNE .............................................................................................................................. 24
5.2 OLI (Ownership Location Internalization) ......................................................................................................... 25
5.3 FDI and Welfare ............................................................................................................................................... 25
Chapter 6 – Migration ............................................................................................................................................... 27
6.1 Introduction on the migration phenomenon .................................................................................................... 27
6.2 Migration on the rise: evolution and composition ............................................................................................ 27
6.3 The migration decision and location choice ..................................................................................................... 28
6.4 Implications for the country of destination ...................................................................................................... 30
6.5 Implications for the country of origin ............................................................................................................... 31
1
,Chapter 7 – The instruments of trade policy .............................................................................................................. 32
7.1 How does the government intervene in trade ? ............................................................................................... 32
7.2 Export supply and import demand ................................................................................................................... 32
7.3 The impact of tariffs ........................................................................................................................................ 33
7.3.1 Small country case .................................................................................................................................... 33
7.3.2 Large country case .................................................................................................................................... 34
7.4 Measuring the effective protection rate ........................................................................................................... 35
7.5 Non-tariff barriers ........................................................................................................................................... 35
Chapter 8 – The political economy of trade policy ..................................................................................................... 38
8.1 The case of free trade ...................................................................................................................................... 38
8.2 Arguments used against free trade .................................................................................................................. 38
8.3 How does trade policy come about ? ............................................................................................................... 41
8.3.1 Political modals of trade policy ................................................................................................................. 41
8.3.2 Strategic trade policy ................................................................................................................................ 42
Chapter 9 – Regional integration ............................................................................................................................... 43
9.1 What are regional integrations agreements ..................................................................................................... 43
9.2 Economic integration agreements ................................................................................................................... 43
9.2.1 Static analysis: Viner ................................................................................................................................. 44
9.2.2 Dynamic: new regionalism ........................................................................................................................ 45
9.3 RIAs in the global system ................................................................................................................................. 45
9.3.1 The spaghetti bowl ................................................................................................................................... 45
9.3.2 Russia ....................................................................................................................................................... 46
Chapter 10 - Trade and development ....................................................................................................................... 47
10.1 Trade as a pathway to development .............................................................................................................. 47
10.1.1 The Asian tigers ...................................................................................................................................... 47
10.1.2 Not all trade is good ................................................................................................................................ 48
10.2 Trade and labour standards ............................................................................................................................... 48
10.3 Trade and the environment ........................................................................................................................... 49
Chapter 11 – GATT and the WTO ............................................................................................................................... 50
11.1 A brief history ................................................................................................................................................ 50
11.2 WTO principles .............................................................................................................................................. 51
11.3 WTO Structure............................................................................................................................................... 52
11.4 Examples of WTO cases ................................................................................................................................. 52
11.5 The future of the WTO ................................................................................................................................... 53
2
, Chapter 1 – Globalization
1.1 What is (economic) globalization ?
• Globalization = anything that facilitates expanded economic interaction across countries
o E.g.: Phoenicians developing square-rigged sails to trade in Mediterranean , European explorers , silk
road …
• Definition from Deardorff and Stern :
o Globalization :
▪ Increase in international transactions in markets for goods, services and factors of
production (labor & capital)
▪ Growth and expanded scope of international institutions and organizations including
multinational corporations and international institutions (UN, World Bank, IMF, WTO)
o Globalization =
▪ 1. Increased trade
• Containerization of trade
• Key aspect through which the world economy became more globalized
• Became vital to many companies and countries worldwide
▪ 2. Increased foreign investment
• International economics are more than just trade in goods/services
• Also FDI has spurred (stimulated)
▪ 3. Increased migration
• Labor migration …
• Increased international travel (temporary/permanent) has helped globalization
• Globalization brings diverse cultures into everyday contact
▪ 4. Increased political connections
• Countries became more politically connected
• Work together to enact trade agreements & open borders to factor movement
1.2 Is globalization good ?
• Yes, because voluntary (not always -> slavery) exchange between 2 entities -> lower prices , higher quality ,
higher efficiency , higher welfare
• No, because not everyone wins & this assumes that the market works well
• BUT overall : people gain
• Why study economic globalization ?
o National governments often restrict international movement of goods/services and factors of
production via boycotts, quota …
▪ Especially movement of production factors (immigration)
▪ BUT these countries prefer free flow within their borders so why not international …
• Globalization = a controversial process
o The “Battle of Seattle” = meeting of World Trade Organization that was protested by thousands of
people opposed to globalization -> turned violent
o Mostly low-skilled workers were against globalization
Proponents Opponents
• Lifted many out of poverty with jobs (China) • Unfair working conditions and exploitation of
• Increased students studying abroad the poor & the environment
• Helps people communicate • Outsourcing causes job loss in wealthy
• Increases speed with which aid agencies can countries
respond to natural disasters • Western culture destroys local cultures
• Helps availability and affordability of advanced
medicine
3
