World trade is the exchange of goods and services and capital across international borders based on the principles of markets, where price acts as the primary regulatory mechanism. The patterns of world trade are shaped by the forces of demand and supply of goods and services and capital along with the pricing mechanism of markets whereby demand, supply and prices co-determine each other.
The world market however, is not completely autonomous and countries and institutions place legal regulations to check the circulation between the interlinked global economy and domestic markets. When a country purchases something from global markets, it is called an import, and when a country sells something to global markets, it is called an export.
Theoretical Basis of World Trade
World trade is governed by many theories that economists use in their inference with world trade. In the patterns of world trade, the dominant contribution was made by David Ricardo in his Ricardian model of comparative advantage, which has a huge influence on neoclassical economic theory.
The Ricardian model is based on comparative advantage due to differences between the individual capacity of countries (such as labour, technology and natural resources) as the primary driver of world trade.
In the Ricardian model, comparative advantage has a bearing on exchange rates between countries and market prices available in traded items in markets in the resulting global hierarchy. The structure of global trade is thus fixed by the trading capacities of individual countries and the comparable advantage that they can wrest in determining market prices of items in markets and market valuations.
However, in an emerging global order where countries are not the only major players in global markets, with multinational corporations and global communication technologies entering the fray, the patterns of world trade are changing to accommodate a range of theories that depict the changes wherein, such as the new trade theory, the gravity model and the specific factors model.
Commodity Trading
Among the traded goods are commodities, which is defined as raw materials that can be bought or sold (in a market). Commodity markets are those that trade in items of primary production and not manufactured goods.
Commodities represent a bulk of the natural resources extracted for economic purposes and can include agricultural produce and biofuels and also materials excavated from the Earth such as gold and oil.
Both types of commodities can be called physical commodities, which are commodities that are produced by forces of nature. Physical commodities can be primary commodities that are extracted directly from natural resources such as agricultural harvests and coal, and also secondary commodities that are produced from primary commodities for the market as primary goods for the economy such as conversion of crude oil to gasoline, which is used as a fuel source (Commodities Demystified, 2016).
The volumes of traded goods are calculated on the basis of the shares or contracts traded for a specified security, such as futures contracts, bonds, stocks, etc (Investopedia, LLC, 2017). The volumes are calculated for specific time periods and are represented as increases or declines from previous periods. The total volume of futures and options exchanged globally was 25.22 billion contracts in 2016 (FIA, 2017).
Among commodities, the chief sort of commodities exchanged include agricultural, energy, and metal and mineral commodities, along with investments in commodity futures. Commodity futures are contractual agreements that mandate a particular commodity to be traded at a particular exchange as per specifications, which function to protect investors and markets from price fluctuations in commodities.
Patterns of World Trade
Prominent among the patterns of world trade globally is that the prices of global commodities except oil have overall been falling since 2011. However the World Bank predicts that due to tighter supply and increasing demand, the prices of commodities such as energy and metals could rise in 2017. Cumulatively, prices for agricultural commodities however, are expected to rise by not more than 1 per cent in 2017 (World Bank, 2017).
Fig: The Global Decline in Commodity Prices Since 2011
Source: The Economist
By the end of 2016, the prices for most commodities had bottomed out. This fall in commodity prices, especially energy, can be attributed to an easing of energy requirements globally after the 2008-09 recession, leading to a lessening of consumption and use.
Commodity prices fell further with the appreciation of the US dollar in 2014-15, as most primary products are represented by their dollar price, and the dollar’s appreciation allows quantities of primary goods to be purchased with fewer dollars (WTO, 2016). Other reasons include productivity increases in countries and increased efficiency in supply chains. Also, there is slowing demand from China, which incidentally is a top destination for shipments from 29 countries (UN, 2016).
Although the prices of certain commodities are lower than others, most prices are in the low range. The economic slowdown in China and the recession in Brazil, the falling prices of commodities and exchange rate volatility have all contributed to a weakness in the cumulative patterns of world trade since 2015.
The trajectory of India’s exports since India liberalized its economy in 1991, opening up its economy to global trade, has been a shift towards more value-added manufactured and technology-based products such as pharmaceuticals, refinery goods and engineering goods.
For example, according to CMIE, Economic Outlook, only 12.5 per cent of India’s exports for FY 2014-15 were made up of agricultural and allied products while 18.3 per cent were made up of petroleum and crude products.
The rest of the exports were composed mostly of value-added products. Among imports, the highest share before liberalization and after has been crude petroleum and petroleum products, with most other principal imports being value-added goods with the exception of gold and precious stones.
With a growth rate of 3.6 per cent expected for global trade in 2017, the sluggish world economy means that India’s exports overall might suffer, which might mean incentives for increased competition in the economy (FICCI, 2016). The lack of an overarching dependence on global markets for essential commodities has protected India to a great extent from the negative shortfalls of world markets.
World Trade and Climate Change
The most fundamental question to ask as regards climate change and global trade is whether climate policies are in sync with the legal regime around the World Trade Organization (WTO) – the organization that governs the rules that supplement international trade.
According to the United Nations Conference on Trade and Development (UNCTAD), climate change policies and trade policies internationally and of individual nations can be mutually reinforcing if they are both focused on achieving sustainable development goals to the greatest extent possible (UNCTAD, 2015). However, we must ask as to how attuned the WTO’s current policies are to climate change.
A giant leap forward in regard of climate legislation has been the Paris Climate Agreement. In order to fight climate change however, a significant road block is the lack of access to clean technologies for underdeveloped nations.
Alternatives to certain policies of the WTO that govern preferential market access regulations, investment regimes and laws governing intellectual property rights between countries such that underdeveloped nations benefit from access to clean technologies from other nations is a basic necessity in curbing carbon emissions.
The Trade Related Investment Measures (TRIMS) Agreement which allows developing nations to protect certain industries temporarily and at will can also be reworked to include stipulations concerning climate change. Preferential Trade Agreements (PTAs) can also be reworked to include protection for climate policies (R. Saner, 2016).
All these represent potential benefits that attuning WTO’s legal regime to the Paris Agreement can provide. Although the WTO displayed symbolic support for the Paris Climate Agreement by lighting the World Trade Center building in green in light of the Paris Agreement, a more compelling gesture would be adjusting its legal regime to accommodate climate policies.
In practice the world is still very far from sustainable trade policies and such would require international consensus and co-operation in favour of climate change policies before the trade balance globally moves towards sustainable climate policies. This is especially important given how the world economy is largely based on goods that are produced by natural forces, which should only make the goal of achieving sustainability more necessary.
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The United Nations has shaped so much of global co-operation and regulation that we wouldn’t recognise our world today without the UN’s pervasive role in it. So many small details of our lives – such as postage and copyright laws – are subject to international co-operation nurtured by the UN.
In its 75th year, however, the UN is in a difficult moment as the world faces climate crisis, a global pandemic, great power competition, trade wars, economic depression and a wider breakdown in international co-operation.
Still, the UN has faced tough times before – over many decades during the Cold War, the Security Council was crippled by deep tensions between the US and the Soviet Union. The UN is not as sidelined or divided today as it was then. However, as the relationship between China and the US sours, the achievements of global co-operation are being eroded.
The way in which people speak about the UN often implies a level of coherence and bureaucratic independence that the UN rarely possesses. A failure of the UN is normally better understood as a failure of international co-operation.
We see this recently in the UN’s inability to deal with crises from the ethnic cleansing of the Rohingya Muslims in Myanmar, to civil conflict in Syria, and the failure of the Security Council to adopt a COVID-19 resolution calling for ceasefires in conflict zones and a co-operative international response to the pandemic.
The UN administration is not primarily to blame for these failures; rather, the problem is the great powers – in the case of COVID-19, China and the US – refusing to co-operate.
Where states fail to agree, the UN is powerless to act.
Marking the 75th anniversary of the official formation of the UN, when 50 founding nations signed the UN Charter on June 26, 1945, we look at some of its key triumphs and resounding failures.
Five successes
1. Peacekeeping
The United Nations was created with the goal of being a collective security organisation. The UN Charter establishes that the use of force is only lawful either in self-defence or if authorised by the UN Security Council. The Security Council’s five permanent members, being China, US, UK, Russia and France, can veto any such resolution.
The UN’s consistent role in seeking to manage conflict is one of its greatest successes.
A key component of this role is peacekeeping. The UN under its second secretary-general, the Swedish statesman Dag Hammarskjöld – who was posthumously awarded the Nobel Peace prize after he died in a suspicious plane crash – created the concept of peacekeeping. Hammarskjöld was responding to the 1956 Suez Crisis, in which the US opposed the invasion of Egypt by its allies Israel, France and the UK.
UN peacekeeping missions involve the use of impartial and armed UN forces, drawn from member states, to stabilise fragile situations. “The essence of peacekeeping is the use of soldiers as a catalyst for peace rather than as the instruments of war,” said then UN Secretary-General Javier Pérez de Cuéllar, when the forces won the 1988 Nobel Peace Prize following missions in conflict zones in the Middle East, Africa, Asia, Central America and Europe.
However, peacekeeping also counts among the UN’s major failures.
2. Law of the Sea
Negotiated between 1973 and 1982, the UN Convention on the Law of the Sea (UNCLOS) set up the current international law of the seas. It defines states’ rights and creates concepts such as exclusive economic zones, as well as procedures for the settling of disputes, new arrangements for governing deep sea bed mining, and importantly, new provisions for the protection of marine resources and ocean conservation.
Mostly, countries have abided by the convention. There are various disputes that China has over the East and South China Seas which present a conflict between power and law, in that although UNCLOS creates mechanisms for resolving disputes, a powerful state isn’t necessarily going to submit to those mechanisms.
Secondly, on the conservation front, although UNCLOS is a huge step forward, it has failed to adequately protect oceans that are outside any state’s control. Ocean ecosystems have been dramatically transformed through overfishing. This is an ecological catastrophe that UNCLOS has slowed, but failed to address comprehensively.
3. Decolonisation
The idea of racial equality and of a people’s right to self-determination was discussed in the wake of World War I and rejected. After World War II, however, those principles were endorsed within the UN system, and the Trusteeship Council, which monitored the process of decolonisation, was one of the initial bodies of the UN.
Although many national independence movements only won liberation through bloody conflicts, the UN has overseen a process of decolonisation that has transformed international politics. In 1945, around one third of the world’s population lived under colonial rule. Today, there are less than 2 million people living in colonies.
When it comes to the world’s First Nations, however, the UN generally has done little to address their concerns, aside from the non-binding UN Declaration on the Rights of Indigenous Peoples of 2007.
4. Human rights
The Human Rights Declaration of 1948 for the first time set out fundamental human rights to be universally protected, recognising that the “inherent dignity and of the equal and inalienable rights of all members of the human family is the foundation of freedom, justice and peace in the world”.
Since 1948, 10 human rights treaties have been adopted – including conventions on the rights of children and migrant workers, and against torture and discrimination based on gender and race – each monitored by its own committee of independent experts.
The language of human rights has created a new framework for thinking about the relationship between the individual, the state and the international system. Although some people would prefer that political movements focus on ‘liberation’ rather than ‘rights’, the idea of human rights has made the individual person a focus of national and international attention.
5. Free trade
Depending on your politics, you might view the World Trade Organisation as a huge success, or a huge failure.
The WTO creates a near-binding system of international trade law with a clear and efficient dispute resolution process.
The majority Australian consensus is that the WTO is a success because it has been good for Australian famers especially, through its winding back of subsidies and tariffs.
However, the WTO enabled an era of globalisation which is now politically controversial.
Recently, the US has sought to disrupt the system. In addition to the trade war with China, the Trump Administration has also refused to appoint tribunal members to the WTO’s Appellate Body, so it has crippled the dispute resolution process. Of course, the Trump Administration is not the first to take issue with China’s trade strategies, which include subsidises for ‘State Owned Enterprises’ and demands that foreign firms transfer intellectual property in exchange for market access.
The existence of the UN has created a forum where nations can discuss new problems, and climate change is one of them. The Intergovernmental Panel on Climate Change (IPCC) was set up in 1988 to assess climate science and provide policymakers with assessments and options. In 1992, the UN Framework Convention on Climate Change created a permanent forum for negotiations.
However, despite an international scientific body in the IPCC, and 165 signatory nations to the climate treaty, global greenhouse gas emissions have continued to increase.
Under the Paris Agreement, even if every country meets its greenhouse gas emission targets we are still on track for ‘dangerous warming’. Yet, no major country is even on track to meet its targets; while emissions will probably decline this year as a result of COVID-19, atmospheric concentrations of greenhouse gases will still increase.
This illustrates a core conundrum of the UN in that it opens the possibility of global cooperation, but is unable to constrain states from pursuing their narrowly conceived self-interests. Deep co-operation remains challenging.
Five failures of the UN
1. Peacekeeping
During the Bosnian War, Dutch peacekeeping forces stationed in the town of Srebrenica, declared a ‘safe area’ by the UN in 1993, failed in 1995 to stop the massacre of more than 8000 Muslim men and boys by Bosnian Serb forces. This is one of the most widely discussed examples of the failures of international peacekeeping operations.
On the massacre’s 10th anniversary, then UN Secretary General Kofi Annan wrote that the UN had “made serious errors of judgement, rooted in a philosophy of impartiality”, contributing to a mass murder that would “haunt our history forever”.
If you look at some of the other infamous failures of peacekeeping missions – in places such as Rwanda, Somalia and Angola – it is the limited powers given to peacekeeping operations that have resulted in those failures.
2. The invasion of Iraq
The invasion of Iraq by the US in 2003, which was unlawful and without Security Council authorisation, reflects the fact that the UN is has very limited capacity to constrain the actions of great powers.
The Security Council designers created the veto power so that any of the five permanent members could reject a Council resolution, so in that way it is programmed to fail when a great power really wants to do something that the international community generally condemns.
In the case of the Iraq invasion, the US didn’t veto a resolution, but rather sought authorisation that it did not get. The UN, if you go by the idea of collective security, should have responded by defending Iraq against this unlawful use of force.
The invasion proved a humanitarian disaster with the loss of more than 400,000 lives, and many believe that it led to the emergence of the terrorist Islamic State.
3. Refugee crises
The UN brokered the 1951 Refugee Convention to address the plight of people displaced in Europe due to World War II; years later, the 1967 Protocol removed time and geographical restrictions so that the Convention can now apply universally (although many countries in Asia have refused to sign it, owing in part to its Eurocentric origins).
Despite these treaties, and the work of the UN High Commission for Refugees, there is somewhere between 30 and 40 million refugees, many of them, such as many Palestinians, living for decades outside their homelands. This is in addition to more than 40 million people displaced within their own countries.
While for a long time refugee numbers were reducing, in recent years, particularly driven by the Syrian conflict, there have been increases in the number of people being displaced.
During the COVID-19 crisis, boatloads of Rohingya refugees were turned away by port after port. This tragedy has echoes of pre-World War II when ships of Jewish refugees fleeing Nazi Germany were refused entry by multiple countries.
And as a catastrophe of a different kind looms, there is no international framework in place for responding to people who will be displaced by rising seas and other effects of climate change.
4. Conflicts without end
Across the world, there is a shopping list of unresolved civil conflicts and disputed territories.
Palestine and Kashmir are two of the longest-running failures of the UN to resolve disputed lands. More recent, ongoing conflicts include the civil wars in Syria and Yemen.
The common denominator of unresolved conflicts is either division among the great powers, or a lack of international interest due to the geopolitical stakes not being sufficiently high. For instance, the inaction during the Rwandan civil war in the 1990s was not due to a division among great powers, but rather a lack of political will to engage.
In Syria, by contrast, Russia and the US have opposing interests and back opposing sides: Russia backs the government of the Syrian dictator Bashar al-Assad, whereas the US does not.
5. Acting like it’s 1945
The UN is increasingly out of step with the reality of geopolitics today.
The permanent members of the Security Council reflect the division of power internationally at the end of World War II. The continuing exclusion of Germany, Japan, and rising powers such as India and Indonesia, reflects the failure to reflect the changing balance of power.
Also, bodies such as the IMF and the World Bank, which are part of the UN system, continue to be dominated by the West. In response, China has created potential rival institutions such as the Asian Infrastructure Investment Bank.
Western domination of UN institutions undermines their credibility. However, a more fundamental problem is that institutions designed in 1945 are a poor fit with the systemic global challenges – of which climate change is foremost – that we face today.