Globalization, Gating, and Risk Finance

9Globalization and Trade: A Changing World

Motivation

This chapter outlines the importance of trade in globalization and how it contributes to sovereign policies and gating. We provide an overview of the evolution of trade, based on conventional approaches as well as its financial and gating aspects and analyze their underlying risks and related issues. These include inversion, outsourcing, risk externalities, strategic trade, and trade barriers. Trade models emphasizing Ricardo’s theory are outlined. We define trade models using three approaches: (1) the relative industrial and economic efficiency (2) the strategic approach to trade based on game theoretic models, and (3) a market‐based approach that reflects consumers’ demand and prices for goods, whether produced domestically or abroad. We contribute to trade modeling by introducing a strategic global and financial pricing approach to heterogeneous (and competing) agents based on dependent utilities, as well as competing suppliers. We outline a multi‐country financial consumption approach beginning with a one‐period utility–consumption–demand model, extended to a Cournot multi‐period financial consumption model accounting for both current and future consumption.

9.1 Introduction

Economic trade theory was advanced by Adam Smith, who rationalized the efficiency of free economic exchange in 1776. Subsequently, David Ricardo, in 1817, advocated the economic efficiency of trade based on nations’ comparative advantages. Gough ...