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The Necessity for Innovative Economic Approaches to Increase Global Welfare

Overcoming global economic crises and ensuring sustainable economic revival are some of the most important issues among modern economic problems at both the global and local level. To find innovative ways to overcome these problems has been the key goal of the research “Global Welfare Improvement – The Necessity for Innovative Approaches in Global Trade” conducted by Ia Natsvlishvili, Associate Professor at the TSU Faculty of Economics and Business and PhD in Economics.  Professor Natsvlishvili developed the research project in 2011-2012 while working at George Washington University in the St. Louis, with the support of the Open Society Foundation scholarship.

The research seeks innovative approaches for economic relations between states to create a modern global economy in the post-crisis period, and the study’s results show the role and importance of transatlantic cooperation for improving global welfare.  

Given the global financial crisis, the relevance of the existing global economic system has been put into question over the past years—for example protectionism has increased, and comprehensive trade agreements and investments have become more complicated.  New and creative approaches to negotiation are necessary in order to encourage more interest in international trade and further liberalization of investments. In the researcher’s opinion, these approaches are practical and realizable under current political conditions.          

Professor Natsvlishvili proposes several approaches to support free trade and free movement of capital: decentralization of trade negotiations; multilateral and sectoral agreements between states; strengthened and increased trade liberalization; a strengthened system of multilateral agreements through global investment policies; better conditions for market access for less-developed counties; and greater economic cooperation between the United States and the European Union, in order to promote economic welfare on the transatlantic market and throughout the world.

The researcher explains how global economic growth requires renewed leadership by two giants of the world economy – the United States and the European Union—and their engagement in transforming world institutions such as the World Trade Organization. Drastic changes in the world economy have relegated the ineffective, post-war model of trade agreements to the past. This model largely focused on a reduction of tariffs on industrial commodities; it was based on a traditional perception of trade as a zero-sum game that only covered commodity import and export.

At present four major elements have caused changes in international trade: 1) more global supply chains and multinational firms; 2) global trade increasingly directed by investments; 3) diminishing political support for open markets; and 4) lack of adequate leadership for multilateral agreements and relations.

The dramatic growth of intra-firm trade confirms the growth of global supply chains and multi-national firms. Intra-firm trade amounts to about 16% of total exports of member countries of the Organization for Economic Cooperation and Development (OECD). This process is most common among OECD member counties.  In the United States, 58% of imports from OECD member counties is intra-firm trade, while 29% of imports from Brazil-Russia-India-China (BRIC) is also intra-firm trade. Intra-firm trade amounts to 48% of all US imports and 30% of exports (A New Era for Transatlantic Trade Leadership. A Report from the Transatlantic Task Force on Trade and Investment, February, 2012).          

Today the key goal of investing is to maximize the efficiency of global supply chains and to base commercial representations on foreign markets, an important method of providing services for multinational firms. Making direct investments abroad enables companies to reach out to their consumers and find new ones within increasing markets. Many countries with growing economies have estimated that incoming foreign direct investments (FDI) offer them a quick path to industrialization and integration into the global economy. In the today’s global world, international trade and FDI are characterized by a mutually strengthening effect. The key task of modernity is to overcome the artificial division between trade policy and investment policy.

After the global financial crisis hit the world economy, the previously positive attitude towards market-oriented reforms began to decrease. The world is now witnessing an increasing tendency towards re-regulation of the financial sector and selective governmental intervention. Another characteristic of this tendency is less enthusiasm towards further trade liberalization.

Global trade now faces the challenge of creating bilateral, regional and multilateral trade strategies which can lead to economic growth and new jobs while simultaneously exerting pressure to increase trade liberalization in a non-discriminatory way. The modern global economy needs sufficient “pressure from outside” to motivate countries to carry out significant trade liberalization. A transatlantic trade initiative can serve as one such initiative. The United States and the European Union have the most bilateral trans-boundary trade and investments. In 2010 bilateral trade across the Atlantic Ocean amounted to USD 674 billion. In 2011 the transatlantic economy amounted to 54% of global GDP. In 2009, 28.2% of all global exports and 33.4% of global imports came to the United States and the European Union. In 2009, 62.9% of incoming FDI and 75.3% of outgoing FDI globally came to the US and the EU. In 2010, direct US investments in Europe totaled USD 1.1 trillion, i.e. 52% of total direct investments from the United States. Only 3.7% of total US FDI went to BRIC (Brazil, Russia, India, China) member countries. In 2000-2010, 76% of FDI inflows to the United States came from Europe. In 2009, EU foreign direct investments in US were significantly higher (Euro 1.1 trillion) than EU foreign direct investments in China (Euro 58.3 billion) and India (Euro 27.2 billion) together. In 2009, intra-firm trade amounted to 61% of European imports to U.S, totaling 31% of entire exports from the United States to the European Union (Hamilton, D. and Quinlan, J.  2011).

“The agenda of transatlantic economic policy, which has been established to support the creation and growth of new jobs, as well as to increase welfare in the United States and Europe, first and foremost, should be based on open trade and investment policy. It will promote greater flows of transatlantic trade and investments. The United States and European Union should develop new bilateral initiatives on trade and investment policies such as implementation of comprehensive trade agreements that will promote trade liberalization; develop a uniform approach toward tariffs and non-tariff barriers; they should promote liberalization of bilateral trade in the service sphere; carry out negotiations on transatlantic investment agreements and bilateral agreements on government procurements. Besides these bilateral initiatives, the US and the EU should develop the initiatives to revive global trade: multilateral and sectoral decentralized negotiations; trade liberalization in the service sphere; negotiations on agricultural policy; agreements on state procurements and trade liberalization; and promotion of the development of less-developed countries. The United State and the European Union should cooperate closely to improve the observance of discipline in global trade, and strengthen the system of the World Trade Organization.” This is the conclusion of the study “Global Welfare Improvement – Necessity for Innovative Approaches in Global Trade”.

As for the significance of this research for Georgia’s economy, Professor Natsvlishvili says, “Georgia is a part of global economy and thus the processes of the global economy have a direct or indirect influence on our economic development and welfare. Georgia’s aspiration for European integration further strengthens the importance of the US-EU transatlantic cooperation for our country. The US and EU member states are an important part of Georgia’s foreign trade turnover. As of 2013, the share of EU member states in Georgia’s foreign trade turnover amounted to 27% (CIS countries – 33%, all other countries – 40%). The United States is Georgia’s third largest trade partner after Azerbaijan and Turkey, the three making up a total of 70% of Georgia’s entire foreign trade turnover.”

A scientific poster entitled “Global Welfare Improvement – Necessity of Innovative Approaches in Global Trade” was published by the International Institute for Applied System Analysis in Vienna (Austria) on the official website of the international conference “Worlds Within Reach - From Science to Policy” held October 24-26, 2012. The main content of the paper was published in electronic format in the collection of symposium materials “The Economic Crisis: Time for a Paradigm Shift – Towards a Systems Approach” held at the University of Valencia on January 24-25, 2013.