Recent financial crises and social turmoil in many countries suggest that the economic models used nowadays are inappropriate. Each country is struggling specific financial issues. However, it is important to remember that people have entered the era of global cooperation and integration and this means all the countries are affected by global trends.
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Financial constraints of one country transfer to the rest of the world. The situation is worsen by the fact that different states have different capacity and more developed countries often take advantage of less industrialized states.
Thus, global trade imbalance can be regarded as one of the most burning issues to be solved in the nearest future. The present paper dwells upon this issue and contains a brief analysis of the most effective solution to the problem.
In the first place, it is necessary to understand that global trade imbalance is a real issue which can have deteriorating effects on the development of all countries. Pettis (2013) claims that states used to have numerous financial constraints but the issues never expanded to other countries.
Nonetheless, in the twenty-first century, countries’ economies have close ties and any financial imbalance within one country is quickly transferred to other states (Pettis, 2013). Developing countries are especially vulnerable to financial constraints. Admittedly, deteriorating economy is associated with crime and social instability.
Recent revolutions and military conflicts can be regarded as illustrations of negative effects of economic issues. Cleary, to avoid military conflicts involving many countries, it is crucial to address the global trade imbalance. Adams and Park (2009) claim that the global imbalance has been increasing for the past two decades and now the rate of the imbalance is rather alarming.
To provide an effective solution to the problem, it is necessary to consider the roots of the issue and its nature. Rodrik (2011) notes that global trade imbalance is often associated with different groups’ interests. Historically, countries tried to gain more benefits for themselves while trading with other states. One of the brightest illustrations of such policy is the mercantilists’ view on the society’s development.
Thus, mercantilists thought it was effective to buy raw materials (or simply take them from colonies) and manufacture goods inside the country so that the domain could accumulate wealth (Rodrik, 2011).
Admittedly, this approach cannot be applicable in the 21st century. Nonetheless, it is clear that countries pursue their national interests rather than try to focus on the good of all. This cause of the problem lies within the terrain of macroeconomic factors.
Sinn, Buchen and Wollmershauser (2011, p. 47) state that the major reason for the present trade imbalance is bursting of “debt bubbles”. In other words, developed countries (e.g. the USA) have borrowed a lot to solve certain issues, but the GDP growth was much lower than it had been expected and the countries faced severe financial constraints when they had to pay back.
Lane (2013) partially agrees with such a viewpoint and adds that the recent imbalance has not necessarily been caused by corrupted governments or banks.
The author focuses on the crisis of 2008 and claims that banks as well as Americans thought the market would never fall. Nonetheless, this crisis transferred to the rest of the world and affected all countries, to different extent. This can be regarded as a microeconomic root of the present global trade imbalance.
Clearly, there are micro- and macroeconomic roots of the problem. Therefore, it is possible to note that stakeholders can also be found at the two levels. First, the major stakeholders are countries and international organizations, which are regulating bodies.
Multinational businesses should also be regarded as a significant force, which can affect the global trade imbalance. At the same time, citizens of countries should be seen as stakeholders as citizens often affect their country’s policies.
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Admittedly, people have always struggled financial constraints in different countries. Nonetheless, the crises become more and more severe while more and more countries are involved. Potentially, this could have deteriorating effects on the development of humanity. It is possible to think of numerous scenarios. One of these scenarios is a global war (trade war or a global military conflict).
Another possible scenario is the increased gap between developed and developing countries. This imbalance can also result in numerous conflicts. Both scenarios are destructive and, hence, it is essential to diminish the global trade imbalance.
It is possible to consider a number of solutions to come up with the most effective one. At this point, it is necessary to note that the WTO can play the central role in each of possible solutions. Thus, it can be tempting to employ the strategic theory. Governments can try to affect some interactions between multinationals which control this or that industry.
The case of the US anti-dumping policies on shrimp from Viet Nam can be regarded as a good example of this approach. The US government restricted import of certain shrimp from Viet Nam (United States, 2011). The country tried to ensure domestic companies could get more profits. Admittedly, the increased profitability of some US companies was achieved at the expense of losses of Vietnamese firms, in this case.
The approach has certain benefits. First of all, it can affect global trade. Thus, if a country faces severe economic constraints other countries can affect certain multinationals to help the country cope with the issues. At present, the vast majority of industries and markets are controlled by huge companies. Remarkably, lots of countries have a big business which has certain influence on the global scale.
Therefore, it is possible to reach certain balance by controlling huge companies. However, the major downside of the approach is that countries tend to pursue their national interests. Countries are likely to try to gain benefits at the expense of others. This drawback makes the approach absolutely ineffective even though it is possible to introduce certain controlling body to make countries ready to strive for the good of all.
There was need for an international organization to regulate such relations long ago. The WTO is the contemporary international regulator. It was created in 1995 and it has tried to achieve global trade balance since then (World Trade Organization, 2009). For example, Viet Nam addressed the organization when the USA had started the anti-dumping policies.
Remarkably, the USA had to admit that the measures had been inconsistent with the country’s obligations in terms of the WTO participation. The conflict was solved but it took quite a lot of time and Viet Nam still lost a lot. Therefore, even in this particular case, the balance was not totally achieved. This suggests that the use of this approach will not be effective.
Theory of hegemonic stability is another approach which can be exploited to diminish global trade imbalances. This approach consists in the hegemony of a country, which controls global trade. This approach could be effective, but it has a serious downside.
First of all, it is necessary to state that the approach was in the twentieth century. The USA was the hegemony which set certain conventions and regulations (Gilpin, 2011). The country spread certain economic patterns as well as such concepts as democracy and liberalism.
Admittedly, this approach has certain strengths. For instance, it ensures that there is one dominant agent controlling interactions of other agents. The dominant agent ensures order and has the entire picture to be able to achieve global trade balance. Remarkably, the dominant agent is the country with strong economy, which is exemplary for other countries.
According to the theory of hegemonic stability, the dominant country is an inspirational leader and other countries are eager to follow it. This ensures compliance with regulations set. It seems that there is a win-win situation as one country dictates rules to achieve global trade balance while other states eagerly follow.
Nonetheless, the approach has a serious downside as the dominant country often tends to pursue national interests and declines, sooner or later. Thus, Gilpin (2011) articulates the ideas that the hegemon often strives for the good of all when it is consistent with hegemon’s national interests, while the dominant state often tries to achieve certain goals at the expense of other countries.
Admittedly, to diminish such negative effects, it is possible to create an organization (e.g. the WTO), which will control the activity of the hegemon. Though, in practice the co-existence of the hegemon and a controlling organization is impossible as the domain would be reluctant to follow other people’s rules. The anti-dumping policies launched by the USA are exemplary in this respect.
Although the USA had to comply with the regulations provided, the country asked for “a reasonable period of time” (United States, 2011, n.p.). Thus, the hegemon had an opportunity to continue certain policies for the necessary period of time. It is possible to note that the dominant country strives for global trade balance which is beneficial for the country and is often reached at the expense of the developing countries.
As has been mentioned above, the USA can be regarded as a modern illustration of the approach and its drawbacks. Clearly, at certain stage of the world’s development, the USA supported non-Communist countries and they all benefited, though the hegemon still got more. However, the decline of the hegemon led to the severe financial crisis, which affected lots of countries.
Therefore, this approach has proved to be ineffective as it failed to achieve the global trade balance. More so, the approach is short-lived as the hegemony of the USA is coming to an end while other countries gain more power in the world. For instance, Kharroubi (2011) states that China is becoming a powerful agent in the world arena and can become the next hegemon. Of course, China’s hegemony can also finish within decades.
Institutionalism is another approach which can be employed to achieve global trade balance. This approach consists in the belief that international relations as well as macroeconomic activities should be controlled by an international institution (or institutions) striving for global balance (Gilpin, 2011).
Clearly, this approach also has both benefits and drawbacks. One of the major benefits of the approach is its comprehensiveness. Thus, international institutions are constituted by representatives from many countries. Potentially, such an organization can include all countries in the world. Thus, all countries’ interests can be taken into account.
This comprehensiveness can ensure that countries will not take advantage of a state. Besides, such organizations (ideally) ensure availability of comprehensive data which can help come to the right conclusions. For instance, members of the organization can report about their problems or issues they foresee. This approach can be effective and can help countries achieve global trade balance.
However, there are a number of drawbacks. The members of the international institution are still likely to pursue their national interests. The discussion of the most burning issues is always associated with a lot of debate. Sometimes countries spend a lot of time discussing and still fail to come up with efficient solutions as each country tries to pursue certain goals.
This can be detrimental as even though some decisions can be made, the discussion takes up too much time while some issues need immediate actions and decisions. Apart from this, countries can distort data provided to get some support or get profit.
It is difficult to ensure that the data provided are adequate. Admittedly, decisions made on the basis of the distorted data are often erroneous. This undermines effectiveness of the approach.
Nevertheless, institutionalism is the most appropriate approach, which can help diminish global trade imbalance. The other two approaches mentioned above are far less efficient. It is possible to compare the three approaches in terms of a number of aspects. When it comes to fairness and transparency, strategic theory and theory of hegemonic stability are less effective.
Thus, Rodrik (2011) claims that in free trade there is always the winner and the loser, i.e. there are always stakeholder who gain profit at the expense of other stakeholders. The two approaches are characterized by existence of a single ruling force (a country or coalition of several countries or a hegemon).
These two approaches lead to global trade imbalance as the country (or countries) in power focus on their aims rather than the good for all. At the same time, institutionalism ensures that interests of all countries will be taken into account. Importantly, developed and developing countries have the same rights and can affect the decisions made.
When it comes to collecting and analyzing data all approaches are quite similar. Countries always try to pursue their national interests and can provide inadequate data to promote their nations.
Though, it is necessary to add that the latter approach (i.e. institutionalism) is more vulnerable to this kind of problem as countries can affect the decision made and are more interested in creating certain image of their states. It is also quite difficult to get all the necessary data for an international organization using own resources.
Finally, it is possible to consider such aspect as the pace of decision making. Admittedly, the contemporary business world often needs quick and correct decisions. Hesitation often leads to losses or even financial crises. It is possible to state that the theory of hegemonic stability can be regarded as the most efficient in terms of the flexibility and decision making ‘speed’.
The dominant country does not have to discuss decisions and can implement changes at once. As far as strategic theory is concerned, there can be certain amount of debate, but the agents are not numerous and they can be quite flexible as well. However, institutionalism is associated with a great deal of debate which makes decision-making process quite lasting.
At that, irrespective of certain downsides, institutionalism can be effective in addressing issues related to global trade imbalance. It can ensure fairness and transparency. All stakeholders involved can participate in the decision making.
Nevertheless, this approach can be effective if people understand the importance of cooperation. Countries should provide adequate data to make the international organization able to develop proper strategies. People should also understand that sometimes they have to waive some privileges and refrain from deriving advantages to enable other countries to benefit. Countries should learn how to cooperate effectively.
In conclusion, it is possible to state that global trade imbalance is one of the most burning issues as it has already led to numerous financial crises. It is also associated with military conflicts in developing countries. There are numerous ways to address the issue.
For instance, it is possible to employ strategic theory, theory of hegemonic stability or institutionalism. The third approach is the most efficient as it ensures fairness and transparency. However, to make the approach truly effective, people should start cooperating. It is time to understand that cooperation is the key to global trade balance, which, in its turn, it crucial for proper development of nations.
Adams, C., & Park, D. (2009). Causes and consequences of global imbalances: Perspective from developing Asia. Asian Development Review, 26(1), 19-47. Web.
Gilpin, R. (2011). Global political economy: Understanding the international economic order. Princeton, NJ: Princeton University Press.
Kharroubi, E. (2011). The trade balance and the real exchange rate. BIS Quarterly Review, 33-42. Web.
Lane, C. (2013). Banks aren’t the bad guys. The Washington Post. Web.
Pettis, M. (2013). The great rebalancing: Trade, conflict, and the perilous ahead for the world economy. Princeton, NJ: Princeton University Press.
Rodrik, D. (2011). The globalization paradox: Democracy and the future of the world economy. New York, NY: W.W. Norton.
Sinn, H. W., Buchen, T., & Wollmershauser, T. (2011). Trade imbalances – Causes, consequences and policy measures: IFO’s statement for the Camdessus commission. CESifo Forum, 1, 47-58. Web.
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