Trade Lessons from the World Economy

ALL ECONOMICS IS INTERNATIONAL

In recent years the economies of all developed nations have been stagnant, yet the world economy has still expanded at a good clip. And it has been growing faster for the past 40 years than at any time since modern economies and the discipline of economics emerged in the eighteenth century. From this seeming paradox there are lessons to be learned, and they are quite different from what practically everyone asserts, whether they be free traders, managed traders or protectionists. Too many economists, politicians and segments of the public treat the external economy as something separate and safely ignored when they make policy for the domestic economy. Contrary lessons emerge from a proper understanding of the profound changes in four areas--the structure of the world economy, the changed meaning of trade and investment, the relationship between world and domestic economies, and the difference between workable and unworkable trade policies.

The segments that comprise the world economy--the flows of money and information on the one hand, and trade and investment on the other--are rapidly merging into one transaction. They increasingly represent different dimensions of cross–border alliances, the strongest integrating force of the world economy. Both of these segments are growing fast. The center of world money flows, the London Interbank Market, handles more money in one day than would be needed in many months--perhaps an entire year--to finance the real economy of international trade and investment. Similarly, the trades during one day on the main currency markets of London, New York, Zurich and Tokyo exceed by several orders of magnitude what would be needed to finance the international transactions of the real economy.