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3 Trade Theory and Economic Globalization

Exploring Economics in the News Is the f inancial tsunami unfavourable to

economic globalization?

News Archive Thefinancialtsunamiandeconomic

globalization

New Horizon Economics (Elective Parts 1 & 2)

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New Horizon Economics Extended Reading Materials (Elective Parts 1 & 2) Sample

Is the financial tsunami unfavourable to economic globalization?

Theme Examines how the global financial crisis has affected the financial and labour markets

ObjectiveTo enable students to understand more about the relationship between the spread of the crisis and economic globalization

Related topic(s)Elective Part 2 Chapter 1 Section 1.2 ‘Comparative advantage and its relationship with globalization’ (pp.18–34)

Affected by the

financial tsunami,

t h e L a s Ve g a s S a n d s

faces financial difficulties and

has to stop the 5th and 6th

phases of the Venetian Macao

development plan. Many Hong

Kong people working there

were forced to return to Hong

Kong as a result. A spokesman

of the Hong Kong Construction

Association said that mid-2009

would be the peak season for

their return. He estimated that

as many as 10,000 people

would return around that time.

C01 World news DAILY NEWS 2 December 2008

Under the shadow of the financial tsunami, many people and government officials in the US have long been pessimistic about the economic prospect. The National Bureau of Economic Research (NBER) officially announced yesterday that the US economy had been in recession since December 2007. According to NBER, employment in the US labour market has continued to drop in 2008. An accumulative total of 1.2 million jobs has been cut during the first 10 months of this year, showing that recession started in the US economy last year. An economist estimated that over 320,000 more jobs would be cut in November.

The US economy has long been in recession: jobs have decreased sharply

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Area 3 Trade Theory and Economic Globalization Exploring Economics in the News

C01 World news DAILY NEWS 16 November 2008

The G-20 Leaders Summit on Financial Markets and the World Economy closed in Washington, D.C. yesterday. Its declaration stresses the leaders’ acknowledgement of the importance of rejecting protectionism in times of financial uncertainty. The leaders object to the raising of new barriers to investment or to trade in goods and services, the imposition of new export restrictions, and the implementation of World Trade Organization (WTO) inconsistent measures to stimulate exports.

G-20 rejects protectionism

The globalization of the world’s economy has continued through recent years –– the persistent expansion of international trade, the capital flow across countries, an increase in foreign direct investment and imported labour... These are all signs of economic globalization. However, the financial tsunami in September 2008 has made great impact on economic globalization.

The impact on the financial and investment market and the labour marketWith the outbreak of the financial tsunami, there is a global credit contraction. Besides the hugely reduced capital flow across countries, foreign direct investment also falls. For example, the economic developments of Macau and Dubai have slowed down because of the decrease in inward investments. Many Hong Kong people working in Macau have to return to Hong Kong because they have lost their jobs.

The impact on international tradeThe financial tsunami has led to the global economic slowdown. The International Monetary Fund (IMF) believes that in 2009, there will be recession in advanced economies such as Europe, the US and Japan. The recession will lead to a fall in imports, which reduces international trade. Some commentaries even said that the US economy might experience severe recession or even depression, and that the US government might impose trade restrictions to protect local industries and prevent a drastic rise in unemployment rate.

I M F e x p e c t s

recession in many

countries in 2009

IMF expects many advanced

economies to have negative

growth and be in recession

i n 2 0 0 9 . F o r e x a m p l e t h e

economies in the US, the UK and

Japan are expected to fall by

0.7%, 1.3% and 0.2% respectively.

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International economic cooperationTo prevent the emergence of protectionism, representatives of various countries reached a consensus in the G-20 (members include 19 countries, such as the US, the UK, Japan, China and Russia, and the European Union) Summit held in November 2008. They stressed the rejection of protectionism in times of financial uncertainty.

In sum, the financial tsunami has slowed down economic globalization, but if governments learn from experience and reform the international financial system and strengthen the regulation of the financial sector through negotiation, economic globalization will benefit countries worldwide in the long run.

Economic globalization facilitates

global economic growth, but it increases financial risks, too. How do you think

the two can be balanced?

1. Economic globalization: The

process of which international

trade and production activities

across countries or regions

become more frequent.

2. Protectionism: The doctrine

that urges for the protection

of domestic industries from

f o r e i g n c o m p e t i t i o n b y

imposing trade barriers such

as tariffs and quotas.

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Area 3 Trade Theory and Economic Globalization News Archive

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The financial tsunami and economic globalizationSince the outbreak of the financial tsunami in September 2008, all governments have been cooperating closely to minimize its shock to international trade. G-20, an international organization, reached a consensus in November of the same year on the rejection of protectionism. US president, Barack Obama stated his support for fair trade in his platform. The following is some related information. Teachers may use it in conjunction with ‘Is the financial tsunami unfavourable to economic globalization?’ and the following chapters:

Related chapters Relevant economic concepts

Book 5B Chapter 9 ‘Trade Barriers’ Protectionism

Elective Part 2 Chapter 1 ‘Extension of Trade Theory’

Chapter 2 ‘Economic Growth and Development’Economic globalizationEconomic growth, free trade, business cycle


G-20 promised to have closer cooperation to stabilize the financial marketLeaders of the G-20, which includes 20 major industrial countries and emerging countries around the world, declared at the close of the Summit yesterday that they would cooperate more closely to prevent a more severe recession in the global economy and to restore economic growth.

To deal with the financial and economic problems faced by the world, the G-20 announced 5 action plans. They include strengthening the transparency and accountability of the financial markets, enhancing the sound regulation, promoting the integrity in financial markets, reinforcing international cooperation and reforming international financial institutions.

G-20 is a forum for international economic cooperation. It was set up in Berlin, Germany on 16 December 1999 with the aim to promote global economic stability. At present, G-20 members comprise about 90% of global GNP and 80% of world trade. The following are the members of G-20.

Members of G-20

• Argentina• Australia• Brazil• Canada• China• France• Germany

• India• Indonesia• Italy• Japan• Mexico• Russia• Saudi Arabia

• South Africa• South Korea• Turkey• U.K.• U.S.A.• European Union

G-20 Summit held in Washington D.C.

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IMF: Negative growth for advanced economies in 2009

The International Monetary Fund (IMF) released its economic outlook projections for 2009 yesterday. Many countries were expected to have negative economic growth (refer to the table below). IMF expected that in advanced economies in the following year, there would be the first economic contraction since World War II: a negative economic growth of 0.3%. Among the advanced economies, the US would have a negative growth of 0.7%; Germany and France, which are members of the European Union, would have negative growths of 0.8% and 0.5% respectively.

Economic outlook projections(Percentage changes year over year)

Advanced economies~ USA~ European Union

• Germany• France• Italy• Spain

~ Japan~ UK

- 0.3- 0.7- 0.5- 0.8- 0.5- 0.6- 0.7- 0.2- 1.3

The photo shows the logo of IMF.

Source: ‘World Economic Out look Update’, International Monetary Fund, 6 November 2008. Downloaded from http://www.imf.org/external/pubs/ft/weo/2008/update/03/.


Obama: Fight for fair trade

President-elect, Barack Obama has posted on his website ‘Barack Obama and Joe Biden’s Plan’ to elaborate the policies of the next administration. In the area for trade, the website emphasizes that Obama and Biden ‘believe that trade with foreign nations should strengthen the American economy’. Under ‘Fight for Fair Trade’, the point is further stressed: ‘Obama and Biden will fight for a trade policy that opens up foreign markets to support good American jobs.’ The plan also states that they will ‘stand firm against agreements that undermine [the US] economic security.’

Source: The Obama-Biden website, 2008. Downloaded from http://www.barackobama.com/issues/economy/.

The photo shows the Obama-Biden website.

Area 3 Trade Theory and Economic Globalization News Archive

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C01 World news DAILY NEWS 2 December 2008

Authority said US economy in recession last year

The National Bureau of Economic Research (NBER) officially announced yesterday that the US economy had been in recession since December 2007. It also said that it was probably the most severe recession since World War II. The NBER defines recession as a ‘significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.’ The table below shows the periods when there were recessions in the US since World War II (1939–45).

US in recession DurationNovember 1948–October 1949 11 monthsJuly 1953–May 1954 10 monthsAugust 1957–April 1958 8 months

April 1960–February 1961 10 months

December 1969–November 1970 11 monthsNovember 1973–March 1975 16 months

January 1980–July 1980 6 months

July 1981–November 1982 16 monthsJuly 1990–March 1991 8 monthsMarch 2001–November 2001 8 monthsDecember 2007– ? ?

Source: National Bureau of Economic Research (NBER), 2008. Downloaded from http://www.nber.org/.

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