1. International Trade CHAPTER EIGHT International Relations 9/e Goldstein and Pevehouse Pearson Education, Inc. publishing as Longman © 2010

2. Theories of Trade International trade amounts to a sixth of the total economic activity in the world. Scholars of international political economy (IPE) study the politics of international political activities- especially trade, monetary relations and multinational corporations. Most focus is on the industrialized regions of the world. Global South is receiving growing attention. States are the most important actors in IPE, but not as important as in international security. Actors in IPE tend to act in their own interests. Pearson Education, Inc. publishing as Longman © 2010

3. Liberalism and Mercantilism Two major approaches within IPE differ on their views of trade. Mercantilism Generally shares with realism the belief that each state must protect its own interests at the expense of others. Emphasizes relative power: what matters is not so much a state’s absolute amount of well-being as its position relative to rival states. Importance of economic transactions lies in their implications for their military. Pearson Education, Inc. publishing as Longman © 2010

4. Liberalism and Mercantilism 2. Economic Liberalism Generally shares the assumption of anarchy but does not see this condition as precluding extensive cooperation to realize common gains. Holds that by building international organizations, institutions, and norms, states can mutually benefit from economic exchanges. It matters little to liberals whether one state gains more or less than another – just whether the state’s wealth is increasing in absolute terms. Pearson Education, Inc. publishing as Longman © 2010

5. Liberalism and Mercantilism Liberalism and mercantilism are theories of economics and also ideologies that shape state policies. Liberalism is the dominant approach in Western economics, though more so in microeconomics than in macroeconomics. Pearson Education, Inc. publishing as Longman © 2010

6. Liberalism and Mercantilism Mercantilism Economics should serve politics. Creation of wealth underlies state power. Achieved prominence several hundred years ago – Britain Declined in the 19th century. Favorable balance of trade: positive balance of trade versus negative balance of trade Pearson Education, Inc. publishing as Longman © 2010

7. Figure 8.3 Pearson Education, Inc. publishing as Longman © 2010

8. Comparative Advantage The overall success of liberal economics is due to the substantial gains that can be realized through trade. These gains result from the comparative advantage that different states enjoy in producing different goods. Transaction costs Two commodities of great importance in the world are oil and cars. Example: Saudi Arabia and Japan A state need not have an absolute advantage in producing one kind of good in order to make specialization pay. Pearson Education, Inc. publishing as Longman © 2010

9. Political Interference in Markets A free and efficient market requires a fairly large number of buyers looking for the same item and a large number of sellers supplying it. Also requires that participants have fairly complete information about the other participants and transactions in the market. Pearson Education, Inc. publishing as Longman © 2010

10. Political Interference in Markets World markets Monopoly Diamond market – De Beers foreign governments have little power to break them up Oligopoly OPEC Corruption Movement from centrally planned economies to market economies Politics provides a legal framework for markets Taxation is another political influence on markets Pearson Education, Inc. publishing as Longman © 2010

11. Political Interference in Markets Sanctions Governments can apply sanctions against economic interactions of certain kinds or between certain actors Autarky Self-reliance – avoid trading and instead try to produce everything the state needs itself Pearson Education, Inc. publishing as Longman © 2010

12. Protectionism When states try to manipulate international trade to strengthen one or more domestic industries and shelter them from world markets Protection of domestic industries from international competition Infant industry protection considered a relatively legitimate reason for (temporary) protectionism Protection of industry vital to national security Defense effort to ward off predatory practices by foreign companies or states Pearson Education, Inc. publishing as Longman © 2010

13. Protectionism Means to discourage imports Tariff or duties Tax imposed on certain types of imported goods as they enter a country Nontariff barriers Quota- often voluntary Subsidies to a domestic industry, which allow it to lower its prices without losing money -- Tax breaks Restrictions and regulations Economic nationalism Protectionism can have both positive and negative effects on an economy Short term protectionism – stabilizing effect Pearson Education, Inc. publishing as Longman © 2010

14. Trade Regimes Information technologies link the world across space Global integration process based on free trade is shaping the international economic agenda. World Trade Organization is central to this process. Pearson Education, Inc. publishing as Longman © 2010

15. The World Trade Organization WTO is a global, multilateral IGO that promotes, monitors, and adjudicates international trade. Central to the overall expectations and practices of states with regard to international trade. Successor organization to GATT (1947) In 2009, WTO had 153 countries (all of the major countries, with the exception of Russia) in membership. Most countries likely to become members Condition of membership – liberalization of the trading practices of would-be members Pearson Education, Inc. publishing as Longman © 2010

16. The World Trade Organization Reciprocity Most favored nation (MFN) concept: trade restrictions imposed by a WTO member on its MFN trading partner must be applied EQUALLY to all WTO members Exception: Generalized System of Preferences (GSP) Trade concessions to third world states to help economic development Benefits to belonging to WTO outweigh the costs. Pearson Education, Inc. publishing as Longman © 2010

17. Cartels An association of producers or consumers, or both, of a certain product – formed to manipulate its price on the world market Can use a variety of means to affect prices Most effective is to coordinate limits on production by each member so as to lower the supply, relative to demand, of the good. Organization of Petroleum Exporting Countries (OPEC) 40% of the world total Saudi Arabia largest oil exporter Headquarters in Vienna, Austria Pearson Education, Inc. publishing as Longman © 2010

18. Table 8.1 Pearson Education, Inc. publishing as Longman © 2010

19. Industries and Interest Groups Industries and other domestic political actors seek to influence a state’s foreign economic policies. Lobbying, forming interest groups, paying bribes, and even encouraging coups Actors include industry-sponsored groups, companies, labor unions, and individuals. Ex: U.S. tobacco exports Industrial policy Role of industries in trade negotiations Agriculture Pearson Education, Inc. publishing as Longman © 2010

20. Industries and Interest Groups Intellectual property rights Contentious area of trade negotiations World Intellectual Property Organization (WIPO) Service sector of the economy Banking, insurance Some countries have technological advantages Pearson Education, Inc. publishing as Longman © 2010

21. Industries and Interest Groups Arms Trade Operates outside of normal commercial transactions Military industrial sector of the economy Smuggling Illicit trade Black markets are widespread and flourish, particularly in economies heavily regulated by government. Pearson Education, Inc. publishing as Longman © 2010

22. Enforcement of Trade Rules Economic agreements between states depend strongly on the reciprocity principle for enforcement. Enforcement of equal terms of trade is complicated by differing interpretations of what is “fair”. Pearson Education, Inc. publishing as Longman © 2010

23. Enforcement of Trade Rules Retaliation Dumping: Here retaliation is aimed at offsetting the advantage enjoyed from goods imported at prices below the world market. Retaliatory tariffs raise the prices back to market levels U.S. steel industry International Trade Commission (U.S. agency) Trade cooperation easier to achieve under hegemony States have found it beneficial to expand trade steadily Pearson Education, Inc. publishing as Longman © 2010

24. The Evolving World Economy 1750, Britain had the world’s most advanced economy Industrialization Free trade Today, the largest and most advanced economy belongs to the United States. Industrialization Territorial expansion Immigrant labor Pearson Education, Inc. publishing as Longman © 2010

25. The Evolving World Economy Technological innovation Great Depression and resultant protectionist policy Keynesian economics WWII Soviet bloc - centrally planned economy State-owned industries Transitional economies Putin policies – choke off capitalist growth Shift to market economy - China Today there is a single integrated world economy that almost no country can resist joining. Mixed economies Pearson Education, Inc. publishing as Longman © 2010

26. Resistance to Trade Globalization of the world economy has created a backlash in many parts of the world, including the U.S. Growing nationalism Competition from low-wage countries in the global South Impact on wages in other countries Standards of labor regulation/worker safety Labor unions have been among the strongest political opponents of unfettered trade expansion. Human rights Minimum wage issues, child labor, and worker safety issues Environmental issues Pearson Education, Inc. publishing as Longman © 2010