Over the past decade, the world
has experienced a series of
economic misfortunes. The
subprime mortgage crisis
occurred in the United States from 2004
to 2006. It was a nationwide banking
emergency. The collapse of the housing
bubble made mortgage banks insolvent
and caused mortgage delinquencies and
foreclosures. This brought about the U.S.
recession from 2007 to 2009.
The U.S. subprime mortgage crisis naturally developed into a full-blown international banking crisis with the collapse of investment bank Lehman Brothers in September 2008. Massive bailouts were undertaken to prevent a possible collapse of the world’s financial system. Nonetheless, this crisis was followed by a global economic downturn—the so called Great Recession.
The Great Recession occurred during the late 2000s and early 2010s. The scale and timing of the recession varied from country to country. The IMF concluded that it was the worst global recession since World War II.
This global recession critically hit some weak economies in Europe. For example, the five countries in Southern Europe such as Portugal, Ireland, Italy, Greece and Spain had to
struggle with large debts
and trade deficits. Their tourism industry
was in shambles. Due to the inherent
defects of the currency union, the member
countries with large trade deficits in
the euro zone could not individually
implement a monetary policy. So they
could not resolve problems of low growth
and increasing high unemployment.
While free-market economies are suffering miserably, some socialist countries like China have been flourishing. Luckily or strategically, China capitalized on becoming “the factory of the world”. We have witnessed a grand migration of jobs to China from the rest of the world. Conventional trade theories have never predicted this phenomenon.
According to the conventional simple trade theory, in the world of two countries, two commodities and two factors, the capital-abundant country will export a capital-intensive commodity to the laborabundant country. Meanwhile, the laborabundant country will export labor-intensive commodity to the capital abundant country. Thereby both nations can gain mutual benefits by engaging in free trade. These trade predictions hold with a set of assumptions: the two countries share the same technology; labor and capital do not move between the two countries; and the two economies are in full employment. However, these three assumptions are not true in reality.
Another conventional theory says that if commodities are freely traded, wages will be equalized between the two countries. But in reality, wages are rarely equalized because neither the commodity market nor factor market are fully competitive. Under these circumstances, it is meaningless to compare the trade performances of China, the leader of socialist countries,
and of the United States, the leader of capitalist countries. More intellectuals
have begun to lose their confidence
in the traditional trade theories.
Instead, many countries tend to take a
nationalist position in taking economic
One of the most successful businessmen in the United States, President Donald Trump, must be in the same position. He would not give much credit to the theory per se. He is very practical and pragmatic. He declares that he is the president of the United States and not of the rest of the world. He is very nationalistic in the protection of the U.S economy. The same thing applies to China. President Xi Jinping is very nationalistic in the protection of jobs and the economy.
Under global economic nationalism, what policy options are available for Korea? If every country declares to take a nationalistic stance, all the countries will be losers eventually. The weakest economy will be the worst loser. Therefore, we have to try to persuade one another not to be nationalistic or protective in trade and investment. Second, we ought to take the give-and-take position which is the principle of reciprocity. Third, we should seek the best possible partners in a multicountry world. Lastly, we should try to export a technology-intensive commodity. In the future, higher technology will be the most important factor in international trade and investment.