international trade

1. the political economy of
International Trade
Lecture 1
Introduction
and
The three ideologies of IPE
29 February 2012 Raymond Cairo

2. Introductory Remarks I
General approach: IPE not quantitative
Structure
lectures: in three clusters
(theory; ITS and regional aspects)
seminars: just as important!
Assessment
35% Group Assignment
Deadline: Week 4, Monday March 19, 16:00hrs
65% Close Book Exam
(still faaaaar away………..)

3. Introductory Remarks II
A challenging module…….
Focus is not on companies but on
states/governments and the international
system →
new and different theoretical frameworks →
much more preparation required →
and on a weekly basis
LEAVING IT ALL TILL THE VERY LAST IS A
RECIPE FOR FAILURE!

4. Introductory Remarks III
………but also a rewarding one!
Only module in your Programme that centres
on the international system and the role of
states in economic and business settings
Highly topical and practical: on a weekly, if
not daily basis aspects of the Political
Economy of International Trade make the
national and international news
Many of the dynamics that apply to the WTO in
the international context apply to other IGOs
so if you would like to work for IGOs this
module will provide you with useful insights

5. Reading material
Gilpin, Robert (1987). The Political Economy of International
Relations. Oxford: Princeton University Press. Chapters 2 & 5
Suggestions for further reading:
Goddard, C. Roe; Cronin, Patrick and Dash, Kishore C. (eds.)
(2003). International Political Economy: State-Market
Relations in a Changing Global Order. Boulder, CO: Lynne
Rienner Publishers (chapters 2-4, 6, 11-13).
Miller, Raymond C. (2008). International Political Economy:
Contrasting world views. London: Routledge. (All chapters,
especially strong on Marxism.)
Oatley, Thomas (2010). International Political Economy:
Interests and Institutions in the Global Economy. New York:
Longman (Pearson).
Ingham, Barbara (2004). International Economics. Harlow:
Pearson Education Limited (chapter 2)
Gilpin, Robert (2001). Global Political Economy:
Understanding the International Economic Order. Princeton:
Princeton University Press. Chapter 3.

6. At the end of this lecture
you should......
...understand what IPE is
...have some idea what the three main ideologies
are and what they stand for
...see how they differ from each other
...be able to assess whether this is an approach
you are interested in
...hopefully have enough ammunition to start
thinking about your assignment (we shall deal
with the same topic tomorrow at the 1st seminar)

7. “Theories”
The three main ideologies (not actual theories!):
Ideology:
“systems of thought and belief by which
[individuals and groups] explain…..how their social
system operates and what principles it exemplifies”
(Heilbroner, 1985, p.107 as in Gilpin, 1987, p.25).
Applicability does not seem to abate!
Politics versus economics
What role should the market play in economic life
and society at large?

8. Quick introductions I
Mercantilism / economic nationalism
(“Realism” in Frieden & Lake GCD chapter 2):
Politics over Economics
Developed from practice of statesmen from
14th century
Effective state-building

9. Quick introductions II
Liberalism
Economics over Politics; Separate spheres
(therefore)
No market efficiency with political intermingling
Building on the Enlightment era 18th century
Reaction to Mercantilism

10. Quick introductions III
Structuralists / Marxists
Economics determines politics (empirically)
Mid-19th century
Reaction to both Mercantilism and Liberalism
Struggle amongst classes for distribution of wealth

11. Mercantilism
• All cases: state primacy and economics serves
to obtain power: but benign and malevolent
mercantilism
• No separation between politics and economics
• Trade is zero-sum, only relative gain matters
• Self-sufficiency rather than economic
interdependence (!!!)
• No faith in market mechanism for state building

12. Some consequences for trade
• Mercantilist’s lack of faith in market mechanism
results in a (clearly) visible hand
• State should do ALL in its power for its protection
including economic measures (tariffs, quotas, etc.).
• Foreign actors (i.e. countries, companies, international
organisations!!!) should be treated with prudence
(benign) or suspicion (more malevolent) → can lead to
beggar thy neighbour policies
• Protection of infant industry not necessarily temporary
• From Strategic Trade Policy to more offensive forms
• DO trade but to build the country’s economic position
which fortifies its political strength

13. Liberalism
• Commitment to free markets and minimal state
intervention (“laissez faire”)
• Adam Smith: “The Father of International Economics”
(absolute advantage)
• Liberalism amalgamation of many forms: classical, neo-
classical, Keynsian, monetarist, Austrian, etc.
• One thing in common: market price mechanism to
organise and manage a market, achieve maximum
efficiency, economic growth and individual welfare,
both nationally and internationally

14. (more) Liberalism
• Economic activity and power of the state?
• Basis of society: individual consumer, the firm or
household.
• Individuals behave rationally in the pursuit for certain
values at the lowest possible cost to themselves
• Rationalism and equilibrium: attempting to obtain an
objective until cost equal benefits
→ Economic rational behaviour in tandem with the
market mechanism will lead to equilibrium (at least in
the long run)
• Trade can foster peace amongst nations!!! (EU)

15. Knowing David from Adam
Adam Smith: founding work in economics
An Inquiry into the Nature and Causes of the
Wealth of Nations (1776):
• A nation’s wealth depends on its productive capacity
(even gold and silver can be wasted);
• Laissez-faire creates the best environment to increase
such productive capacity
• International trade will benefit all trading countries;
free trade has no losers.
Absolute advantage and absolute disadvantage…..

16. Absolutely Adam
Output per unit
of labour Suriname Cuba
Production of 5 20
oranges
Production of 10 6
sugarcanes
Suriname concedes the production of oranges to Cuba and
Cuba concedes the production of sugarcanes to Suriname

17. …..and this is…..
David Ricardo
The Principles of Political Economy and
Taxation (1817):
But what if there is
no absolute
disadvantage?
Comparative advantage!

18. …..definitely David
Output per unit Suriname Cuba
of labour
Production of 4 24
oranges
Production of 3 9
sugarcanes
One unit of Cuba labour produces 24 units of Cuban oranges or 9 units of sugarcanes.
If trade takes place between the two and Cuba produces oranges it sacrifices 9 units
of sugarcanes but it will obtain 18 units of sugarcanes from Suriname
(24:4=6 → 6x3=18)
Similarly in the case of Suriname, one unit of labour can produce 4 units of oranges or
3 units of sugarcanes. Suriname produces 3 units of sugarcanes and sacrifices 4 units
of oranges but will obtain 8 units of oranges from Cuba
(9:3=3 → 24:3=8)

19. Further theoretical developments
More countries, more products, more variables:
More theories!
What determines comparative advantage?
Relative Factor Endowments determine a
country’s pattern of trade (Heckscher-Ohlin model)
Exit labour theory value:
(How many Cubans does it take to......?)
Neo-classical theory: more attention to consumer
and producer behaviour (Jean Baptiste Say)
Quantitative Economics and Econometrics are having
numerous field days

20. Marxists/Structuralists interpretations
Further developments and other theoretical streams since
Karl Marx und Friedrich Engels
• Dialectic approach: society is dynamic, conflictual (class struggle);
no social harmony or equilibrium
• Although individual rational (liberalist), the capitalist system is
irrational
• Capitalist system carries traces of its own destruction through
accumulation by the “have’s”
• Development of productive forces and economic activities leads to
class struggles throughout history
• Legacies include: Lenin’s and Mao’s interpretation of capitalist
imperialism and, later, Gramsci (role of hegemony), the
dependency school (centre and periphery argument), Prebish,
Gunder Frank, Cardoso, Wallerstein’s Modern world System, etc.

21. Some consequences for trade
• International trading system:
rejected by most extreme radicals;
important changes sought by the more
benign streams
• State intervention to shield from capitalist
system (extreme) or from capitalist
excesses (benign)

22. Final remark
Central thread in this module:
which ideological position does the actor take
and
what are the consequences for trade?