International Trade

CHAPTER EIGHT

Dr. Clayton ThynePS 235-001: World Politics

Spring 2009

Goldstein & Pevehouse, International Relations, 8/e

Student notes version

Theories of Trade• International trade amounts to a __________ of the

total economic activity in the world.• Scholars of international political economy (IPE) study...

– Most focus is on the…

– Global South is…

– States are the most important actors in IPE, but not as important as in…

– Actors in IPE tend to act in…

– Collective goods problem is important throughout...

Liberalism and Mercantilism• Two major approaches within IPE

differ on their views of trade.1. Mercantilism

–

– Emphasizes relative power:

– Importance of economic transactions lies in their implications for…

– Characterized by:

Liberalism and Mercantilism• Mercantilism

– Economics should serve...– Creation of wealth underlies…– Achieved prominence...– Declined in…

• Favorable balance of trade: positive balance of trade versus negative balance of trade

Figure 8.3

Figure 8.2

US Balance of Trade

Liberalism and Mercantilism2. Liberalism

– Generally shares the assumption of…

– Holds that by building international organizations, institutions, and norms, states can…

– It matters little to liberals whether…

– Individuals and firms are…

– Dominant…

– Characterized by:

Figure 8.1

Liberalism and Mercantilism• Free market

– Bargaining space– Market price– Demand curve– Supply curve– Equilibrium price

Supply and Demand: Basic Curves

Price (p)

Quantity (q)

Supply: amount supplied at each price

Demand: amount demanded at each price

Supply and Demand:variation 1—price set too high

Price (p)

Quantity (q)

Supply: amount supplied at each price

Demand: amount demanded at each price

Example: government cartel, minimum wageReturn to equilibrium: suppliers have too much inventory, so they’ll lower prices

Example: government-set pricesReturn to equilibrium: consumers compete for small quantities w/ low price, produces raise price to maximize profits

Supply and Demand:variation 2—price set too low

Price (p)

Quantity (q)

Supply: amount supplied at each price

Demand: amount demanded at each price

Supply and Demand:variation 3—demand shift right

(increase)

Price (p)

Quantity (q)

Demand (old)Demand (new)

Example: coffee becomes trendy, summer driving seasonMore demanded (by definition), so the equilibrium price increases

Supply: amount supplied at each price

Supply and Demand:variation 4—demand shift left

(decrease)

Price (p)

Quantity (q)

Demand (old)

Demand (new)

Example: boycott of some state’s goods, product becomes less trendy, end of driving seasonLess demanded (by definition), so the equilibrium price decreases

Supply and Demand:variation 5—supply shift right

(increase)

Price (p)

Quantity (q)

Demand: amount demanded at each price

Supply (old)

Supply (new)

Example: invention more efficient production (computer industry), oil discoveredMore supplied because it (may be) cheaper to produce

Supply and Demand:variation 6—supply shift left

(decrease)

Price (p)

Quantity (q)

Demand: amount demanded at each price

Supply (old)

Supply (new)

Example: environmental laws make producing less profitable, OPEC cuts productionLess supplied because it (may be) more expensive to produce

Comparative Advantage• The overall success of liberal economics is due

to…

– These gains result from…

– Transaction costs• Two commodities of great importance

in the world are oil and cars.– Example:

2

Comparative Advantage:The easy example

State B

State A1 43 5 6

6

5

4

3

2

1

For 1 unit of resources, each state can produce…

2

Comparative Advantage:The easy example

State B

State A1 43 5 6

6

5

4

3

2

1

Who should produce apples? Bananas?

2

Comparative Advantage:A bit more complicated

State B

State A1 43 5 6

6

5

4

3

2

1

For 1 unit of resources, each state can produce…

Comparative Advantage: A bit more complicated

Who should produce apples? Bananas?

2

State B

State A1 43 5 6

6

5

4

3

2

1

Comparative Advantage• International trade generally expands …

• Trade is not without drawbacks:– Long-term benefits…

– Benefits and costs of trade tend…

– Protectionism

Political Interference in Markets

• A free and efficient market requires:–

–

–

Political Interference in Markets

• World markets

– Monopoly

– Oligopoly

– Corruption

– Movement from…

– Politics provides…

– Taxation is…

Political Interference in Markets

• Sanctions– Governments can apply sanctions…

– Very difficult to…• Autarky

– Self-reliance –

Protectionism• Definition: When states try to…

– Protection of domestic industries…

– Infant industry protection…

– Protection of industry vital to…

– Defense effort to…

Protectionism• Means to discourage imports

– Tariff or duties:

– Nontariff barriers:

– Subsidies to a domestic industry, which allow it to lower its prices without losing money:

– Restrictions and regulations

– Economic nationalism

• Protectionism can have both positive and negative effects on an economy– Problems:

Trade Regimes• Definition:

• Two contradictory trends are at work in global trading patterns today:–

–

The World Trade Organization

• WTO is a global, multilateral IGO that promotes, monitors, and adjudicates international trade.–

– Successor organization to – In 2007, WTO had 150 countries (all of the major

countries, with the exception of Russia) in membership.

•

•

The World Trade Organization

The World Trade Organization

• Reciprocity– Basis of…– Most favored nation (MFN) concept:

– Exception:

• Benefits to belonging to WTO outweigh the costs.

Bilateral and Regional Agreements

• Most international trade is governed by more specific international political agreements.

• There are generally two types:– Bilateral trade agreements

•

– Regional free-trade areas•

•

•

Cartels• Definition:

• Counter to…– 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)

– – –

Cartels• Consumers do not usually form cartels,

but the major oil-importing states formed their own organization – the International Energy Agency (IEA)

• Other cartels:– Coffee– minerals

Table 8.1

Industries and Interest Groups

• Definition:

– Lobbying, forming interest groups, paying bribes, and even encouraging coups

– Actors include industry-sponsored groups, companies, labor unions, and individuals.

– E.g., U.S. tobacco exports vs. American Cancer Society

• Industrial policy• Role of industries in trade negotiations

– Agriculture

Industries and Interest Groups

• Intellectual property rights– –

• Service sector of the economy

Industries and Interest Groups

• Arms Trade–

• Smuggling– –

Enforcement of Trade Rules• Economic agreements between states

depend strongly on…

• Enforcement of equal terms of trade is…

Enforcement of Trade Rules• Retaliation

– Dumping:

– Retaliatory tariffs…

• International Trade Commission (U.S. agency)

• Trade cooperation easier to achieve under…

– Post WWII:

– Now:

Economic Globalization• Def:

• Globalization is transforming not only trade, but…

The Evolving World Economy

• 1750, Britain had the world’s most advanced economy– –

• Today, the largest and most advanced economy belongs to the United States.– – –

The Evolving World Economy

– Technological innovation– Great Depression and resultant protectionist

policy– Keynesian economics– WWII– Soviet bloc - centrally planned economy

• • •

• Today there is a single integrated world economy that almost no country can resist joining.–

Figure 8.4

Resistance to Trade• Globalization of the world economy has …

– Growing nationalism

– Competition from low-wage countries in the global South

• •

– – Human rights

• – Environmental issues

Resistance to Trade• Benefits of free trade more diffuse than the

costs– Lower prices on goods…– Consumers may spend…– Cheap imports help keep…

Interdependence• Definition:

– This is a…– Mutually dependent on each other’s…

– In IPE, interdependence refers less often to a bilateral mutual dependence than to a multilateral dependence in which…

Interdependence• Short-term dependence versus long-term dependence

– • Over time, as the world economy develops and

technology advances…

– Impact on…– Integration through…– Arises from…– Inherently…

• Drawbacks of interdependence–