HISTORICAL PERSPECTIVE ON GLOBALIZATION AND REGIONAL INTEGRATION

HISTORICAL PERSPECTIVE ON GLOBALIZATION AND
REGIONAL INTEGRATION
 
Regional economic integration and globalization are not new concepts to the world.
History of regional economic integration is much older than the one of globalization. But,
as globalization is much wider concept, in economic/political sense, than the regionalism
concept, this chapter will study firstly the brief history of globalization. After studying the
history of globalization, the history of regional economic integration will be covered
shortly. As the main concern of this study is regional economic integration prevailing in
the GATT/WTO system, this history will begin with the GATT (1947) as its inception. 

4.1 Brief History of Globalization
 
When it is measured by the ratio of world trade to  world output, the history of
globalization has been generally divided into two stages or waves as the first wave and the
second wave of globalization. While the first wave  of globalization involved the period
between the years 18701
 and 1914, the second wave that is related to the modern world has
started to develop in the 1950s and become dominant on the stage of international order
since the late 1980s. Hence, this section will initially study history of the first wave of
globalization, and then history of the second wave.
 
4.1.1 First wave of globalization

The factors behind the first wave of globalization were several. The leading contributors
were as follows: the industrial revolution in the Western countries; the colonization
policies of the hegemonic powers like Britain, France, Spain, Netherlands, Italy and
Belgium; the technological advances in transportation and communication; the
                                                
1
 For the period 1500 1800, there were also growing trade volumes, especially in Europe, but the main reason
for such an increase was the “…outward expansion of European import demand fuelled by population growth
or Asian export supply rather than by market integration per se” (O’Rourke & Williamson, 2002a, p.426).    27
international monetary system of the time; the hegemonic power and ‘the last resort’ role
of Britain; bilateral trade agreements throughout Europe and the lower tariff levels
prevailing in the international trading system. 

Industrialization had resulted in increase in the intensity of trade via the advances in
production techniques. Industrialized countries of Western Europe exported manufactured
goods and capital which in turn “fueled the growth of primary exports, such as wheat and
beef from Argentina, wool from Australia, rubber from Malaya, tea from Ceylon”
(Findlay, 1996, p.49). The industrial revolution had changed not only the economic
patterns of the old world, but also the political balances. With increased military and
industrial power, West European countries consequently started to search for new markets
to dominate in the 1840s. This search eventually gave rise to the colonization period. The
emergence of colonial empires at the end of the nineteenth century can be stated as a
reaction to stagnant trade among European countries and “the need to expand markets in a
period when protectionism on the rise” (Alesina, Spolaore & Wacziarg, 2000, p.1291). 

Hence, the colonization policies of the leading countries had been the utmost factor behind
the spread of globalization in the first wave. To increase their economic relationships with
the colonized countries, imperialist countries had  removed restrictions, be it tariffs or
quotas, on their mutual trade. As a result, the first examples of preferential trade relations,
i.e. RIAs, were seen in the colonial relationships of hegemonic powers.

Technological developments in transportation and communication were other contributing
factors behind the growth of world trade in the first wave of globalization. Improvements
in long distance transportation through completion  of the Suez Canal and of the Union
Pacific railroad in 1869, invention of the steamships and construction of the new railroads
made cross country transportation easier in this period. These factors together with other
productivity developments on long distance transportation led price gaps between Britain
and Asia to decrease (O’Rourke & Williamson, 2002b, p.38). Transport costs, which fell
significantly before 1914, but then increased sharply up to 1939 due to protectionist
policies, consequently played a significant role on the upward and the downward
movements of trade. The assembly of telephone and telegraph cables under the oceans, on   28
the other hand, had facilitated the overseas communication, as a result international trade,
since 1859. 

Additionally, the beginning and the end years of the first wave of globalization, i.e. 1870
and 1914, have another significant feature in the area of international economics. That
period has been dubbed as the period of international gold standard. Besides being the first
global monetary system, the international gold standard system depended on full
convertibility of currencies to the gold and free export and import of gold. When it is taken
account that “payment frictions associated with currency regime” is one of the barriers of
trade, it would be easy to conclude that the natural outcome of gold standard was increased
international trade (Estevadeordal, Frantz & Taylor, 2003, p.362). Hence, it has been
argued that the effect of common currency explained a large portion of the change in trade
volumes in the first wave of globalization. In addition to the common currency system, the
Napoleonic Code, which represented a common legal coding on international trade and
business, had further contributed to the development of international integration (SavaL,
2004, p.16).

The Great Britain’s financial and the “lender of last resort” roles on the first wave also
deserve attention. Free trade ideology prevailing in that period started with Britain’s
movement in the 1840s through the removal of exports and imports taxes, and the repeal of
the Corn Law. Accordingly, the repeal of the Corn Law was seen as the ultimate victory of
the Classical liberal economic doctrine over mercantilism (Chang, 2007, p.28). Bilateral
trade agreements, initiated through steps taken by Britain, were also one of the elements of
the first wave of globalization. The Cobden Chevalier treaty of 1860 that freed trade
between Britain and France was the first example of such agreements in the period1
. The
other countries had followed suit, and similar treaties had been signed all over the Europe
in those years. At the same time, the newly founded countries like Germany incorporated
the principle of free trade as their basic national policy. Eventually, free trade ideology had
been accepted, willingly or not, by most of the remaining countries
2
 through colonialism
                                                
1
 It is noted that the degree of protectionism in France was already quite low relative to the one in Britain on
the eve of the treaty (Chang, 2007, p.33).
2
 The US that maintained very high tariffs was the obivous exception to the free trade trend (Chang, 2007,
p.30).    29
and through “unequal treaties in the cases of a few nominally independent countries like
the Latin American countries, Thailand [formerly, Siam], China, and the Ottoman Empire”
(Chang, 2007, p.25). 

The factor of low tariff levels, although promoted  global integration, was not specific
element of the first wave of globalization. Since the idea of free trade was dominant prior
to the first wave of globalization, trade restrictions were low during the period. Among the
European countries, free trade ideology had further spreaded via the colonization process
and the political wars among the leading nations. On the other hand, for the leading power
of Asia, namely for Japan, the ‘Meiji renovation’ had taken free trade into account as an
integral part of the economic and social life. Nevertheless, the minimal role of tariffs
throughout the world continued until 1914, even though this situation had been reversed
after that time. 

The outbreak of the World War I (WWI) had ended the first globalization period of the
world. After World War I, many countries ran into severe financial disorders and rapid
inflation rates (hyperinflations for some). While Britain lost its hegemony through the
breakdown of its financial system, most of the countries turned into protectionist policies.
The Great Depression of 1929 had further worsened the situation. Until the World War II
(WWII), without any ruling power or the international institution, international order was
left to its own.  While the US raised tariffs via the Smooth Hawley Tariffs (1930), Britain
–the leader of the laissez-faire policies of the previous period– turned into tariff protection
in those years. Furthermore, many of the US trading partners like Canada, Cuba, France,
Mexico, Italy, Spain, Australia and New Zealand increased their tariff rates as a response
to the Smooth Hawley Tariff Act (Bagwell & Staiger, 2002, p.43). As Haberler (1964, p.7)
notes: “Tariffs everywhere were raised rapidly and almost all countries introduced quotas,
exchange control, import prohibitions, bilateral clearings – methods of international trading
which in peacetime had literally not been known for centuries.”

For the international trading system, the conditions prevailing in the interwar period can be
summarized as (League of Nations, 1942, p.101; cited in Bagwell & Staiger, 2002, p.44):
“While there were frequent international conferences and committees in which   30
governments proclaimed their intentions to pursue ‘freer and more equal trade’, it is also
true that ‘never before in history were trade barriers raised so rapidly or discrimination so
greatly practiced.” Hence, in spite of the continued economic growth, due to protectionism
that grew in the 1920s, trade expansion of the previous decade had turned into a trade
contraction in the interwar period.