Comparing networks in trade and finance

Each week, Symposium Magazine invites authors to guest-blog. This week’s featured article is Why U.S. Financial Hegemony Will Endure by Sarah Bauerle Danzman and W. Kindred Winecoff.

What does our network approach have to do with other aspects of the global economy, such as trade? It’s an important question, since the United States is in the process of negotiating two significant preferential agreements — one with the European Union and another Trans-Pacific deal — as well as the perpetually ongoing Doha round in the World Trade Organization. The first question to ask is whether the trade system is as hierarchical as the financial system.

A forthcoming article in the peer-reviewed journal New Political Economy by Mark Abdollahian and Zining Yang of Claremont Graduate University suggests that the answer is “no.” Convergence in trade has been much more extensive than convergence in finance. While there are some valid questions about the appropriateness of the data — a $599 iPad shipped from China to the U.S. would count as a Chinese export even though most of the income goes to Americans — but even still this comports with intuition. Many emerging markets have become quite important in trade even if they lag behind in finance. This has increased the bargaining power of emerging markets in international trade negotiations such as the Doha round, perhaps providing an incentive for the U.S. and E.U. to pursue alternative trade deals.

So does a less hierarchical trade network mean an erosion of U.S. economic power? We don’t think so. A more diffuse trade network may alter bargaining dynamics around trade treaties, but international trade is already highly institutionalized through the WTO and its dispute settlement mechanism. Moreover, the global trade system requires a functioning global financial system to work, and a real economy can function only if it can pay for goods and services. Buyers and venders need functioning asset transfer systems to finance production, and the critical importance of these banking networks increases as supply chains become more fragmented.

In other words, the global financial and trade systems are not distinct but rather nested networks that adapt to each other. In future work, we plan to explore these connections more concretely.

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