6.8: Economic Power

The size of the economy, productivity and technology (including research and development) are crucial.

As we said earlier, geography (size, ports, location, climate, etc.) and natural resources (especially energy and food production) contribute to power. Location in terms of trade routes can also be a factor. Countries in the interior of continents are at a disadvantage because land transportation costs are much higher. (It costs the same amount to send a container from New York thousands of miles to the coast of Africa as it does to send the container 200 miles inland.)

The U.S. and Europe are blessed with many navigable rivers and good ports. This is important, since over 75% of goods are still shipped by water because it is so much cheaper. Many of Russia’s ports are frozen during winter, which is why Russia has tried for centuries to ensure access to the Mediterranean from its Black Sea ports. (However, global warming is now opening up the Northern Passage through the Arctic.)

Domestic geography is also important. Most of China’s best land and therefore most of its population are concentrated within 200 miles of its coasts. Brazil’s tropical soils are leached by heavy rains, but its scientists learned how to add mineral nutrients, grow export crops on former Amazon forest lands and become a world agricultural powerhouse. It is now challenging U.S. exports of soybeans and other crops. (Some of your frozen orange juice may come from Brazil.)

Europe, Japan and China spend a lot of money on imported oil, while Russia has the advantage of large oil reserves, not to mention large deposits of many other strategic minerals. China has lots of coal and exports 90% of the world’s so-called rare-earth metals, which are important in high tech products. During a dispute with Japan, China cut off these exports. After one of Trump’s tariff threats, Chinese President Xi Jin Ping conspicuously went on a tour of a Chinese rare earth processing plant. The warning was clear.

Population also affects the economy. Population size, age structure (e.g. size of the work force) and education are important. China has overcome the problem of feeding its 1.4 billion people, but faces problems of inequality and unemployment of millions of university graduates, millions of workers laid off from privatized and closed state factories and tens of millions of off-season farmers. India also now produces enough food for its 1.3 billion people, but still faces problems of widespread poverty, inequality, education and jobs. In developing countries typically half the population is under 30, and they need education and jobs. On the positive side, large low-wage populations mean a large production base for exports.

Japan, Russia and Europe face the opposite problem - declining populations, workforce shortages and growing numbers of seniors to take care of. Japan is responding by trying to hire more seniors, increasing child care so that more women can work, and quietly allowing more immigrant workers.

Developing a large middle class is also essential for economic prosperity, but many countries have large gaps between the rich and poor. China’s and India’s middle classes are growing, which helps their economies, but much of the population in India is still poor. Some African countries are also developing a middle class and growing their economies.

Economic policies also have a large effect. Ireland boomed because of a strong education system and investor-friendly tax policies. South Korea boomed with government financing of industry, technology and entertainment. In contrast, the United States has let its K-12 education system stagnate and its infrastructure slip, is running large budget deficits, does not have a systematic policy of supporting exports, and burns twice as much fuel per unit of production as Europe or Japan.

Questions

1. What led to the increase in global trade in the 1600s-1800s?

2. Which two countries developed as competitors to Britain before WWI?

3. List two global economic events after the 1929 Crash.

4. Briefly outline three reasons for the unraveling of post-WWII U.S. economic dominance in the early 1970s. What was Nixon’s response in 1971?

5. What is the balance of payments? What is the situation of the U.S. balance of payments? Why do foreign investors continue to invest in the U.S.?

6. Briefly outline Liberal and Realist trade goals and policies.

7. Why do countries resist depending on imports?

8. Why has the Doha Round of trade talks stalled?

9. What is Ricardo’s theory of comparative advantage? What do its critics say is are the comparative advantages today?

10. Briefly outline the three main features of the Bretton Woods system and compare it to today.

11. List three types of protectionism and give an example of each.

12. List three factors that influence economic power and give an example of each.