Trade and Protectionism
Lsn 19
Three Ideologies of Political
Economy
• Nationalism
• Liberalism
• Marxism
Nationalism
• Originally called mercantilism
• Assumes and advocates the primacy of
politics over economics
• Essentially a doctrine of state-building
• Asserts that the market should be
subordinate to state interests
• Political factors do, or at least should,
determine economic relations
Nationalism
• Mercantilism was the conventional trade
doctrine of Europe in the 17th and 18th Centuries
• Basic premise was that trade is a zero-sum
game
– Any advantage gained by one comes at the expense
of the other
• State apparatuses were used to develop the
national economy through public works,
attempts to create shipping and trade
monopolies in colonial areas, and occasionally
through outright plunder
Nationalism
• American Alexander
Hamilton and German
Friedrich List argued that
national power is based
on manufacturing and
that economic values
should be subordinated
to the more important
task of state-building
• In order to promote
industrial strength, the
state must organize
foreign trade and protect
infant industries with
tariffs and other
exclusionary devices
Friedrich List advocated the use of
high tariffs to keep cheap English
goods out of Germany while
building up German industry and
thus a strong German state
Nationalism
• The foremost objective of nationalists is
industrialization
– Industry has spillover effects (externalities) throughout
the economy and leads to its overall development
– The possession of industry is associated with
economic self-sufficiency and political autonomy
– Industry is the basis of military power and central to
national security in the modern world
Nationalism Example: Stalin’s Five
Year Plan
• In 1929 Josef Stalin inaugurated his first Five-Year Plan
– Designed to transform the Soviet Union from a predominantly
agricultural country to a leading industrial power
– Set targets for increased productivity in all spheres of the
economy, especially heavy industry, at the expense of consumer
goods
– Expropriated privately owned land to create collective or
cooperate farm units whose profits were shared by farmers
• Even though consumer goods were almost non-existent,
full employment in the midst of Global Depression made
a centrally planned economy appear a viable alternative
to some
– Still there was resistance, especially from peasants objected to
the Five Year Plan’s collectivization of land
– Stalin eliminated this resistance with the Great Purge
Liberalism
• Emerged from the
Enlightenment in the
writings of Adam Smith and
others as a reaction to
mercantilism
• A doctrine or set of
principles for organizing
and managing a market
economy in order to
achieve maximum
efficiency, economic growth,
and individual welfare
• Assumes that politics and
economics exist, at least
ideally, in separate spheres
Smith wrote An Inquiry
into the Nature and
Causes of the Wealth
of Nations in 1776
Liberalism
• Argues that markets– in the
interest of efficiency, growth,
and consumer choice– should
be free from political influence
• Assumes that a market arises
spontaneously in order to satisfy
human needs and that, once it is
in operation, it functions in
accordance with its own internal
logic
• The natural laws of supply and
demand determine what
happens in the marketplace
Liberalism
• Human beings are by nature economic animals and
therefore markets evolve naturally without central
direction
• Argues that markets– in the interest of efficiency,
growth, and consumer choice– should be free from
political influence
• Because of the role of self-interest, governments
should practice a policy of laissez-faire
– Through an “invisible hand,” self-interest guides the most
efficient use of resources in a nation’s economy, with public
welfare coming as a by-product
– State and personal efforts to promote social good are
ineffectual compared to unbridled market forces
Liberalism
• Provides the intellectual rationale for free trade
and capitalism
• In contrast to nationalism, in which the purpose
of trade is to build up the state and a modern
industrial base, the purpose of trade in liberalism
is to increase wealth
• To do so, nations should adhere to the principle
of comparative advantage
– Countries that enjoy particular advantages of
resources, climate, geography, knowledge, and the
like should specialize in producing those things that
they can make cheapest
Liberalism Example: Free Trade
Organizations
• Many observers saw the disasters of the
Great Depression and World War II as being
the results of competitive mercantilist policies
• They resolved to shape the post-war trade
order based on liberal principles
– Maximize free trade through dismantling tariffs,
quotas, and other trade-reducing policies
– Applying reciprocity
– Promoting free flow of investment funds,
information, and people
Liberalism Example: Free Trade
Organizations
• However such ideas could not be implemented unilaterally
– They would be the result of negotiations among
representatives of the leading economies, with the tacit or
explicit consent of many others
• International Monetary Fund (IMF) was founded at the BrettonWoods Conference in 1944 to promote market economies, free
trade, and high growth rate
• General Agreement on Tariffs and Trade (GATT) was signed by
23 non-communist countries in 1947 (now has over 120
members) and holds regular negotiations to remove or loosen
barriers to free trade
• In 1994, the GATT established the World Trade Organization
(WTO) which took over GATT activities in 1995 and became a
forum for settling international trade disputes with the power to
enforce its decisions
Marxism
• Appeared in the midnineteenth century as a
reaction against
liberalism and classical
economics
• Holds that economics
drives politics
• Political conflict arises
from struggle among
classes over
distribution of wealth
– Therefore political
conflict will cease
with the elimination
of the market and a
society of classes
Marx
Engels
Karl Marx and Friedrich Engels
met in Paris in 1844 and
developed a belief that the social
problems of the 19th Century were
the inevitable results of capitalism
Marxism
• Marx and Engels felt that capitalism divided
people into two main classes
– Capitalists who owned industrial machinery and
factories (the means of production)
– The proletariat who were wage earners with only their
labor to sell
• The state and its coercive institutions (police,
courts, etc) were agencies of the capitalist ruling
class and kept the capitalists in power and
enabled them to continue their exploitation of the
proletariat
Marxism
• In 1848, Marx and Engels wrote Manifesto of
the Communist Party
– All human history has been the history of struggle
between social classes
– The future lay with the working classes because the
laws of history dictated that capitalism would
inexorably grind to a halt
– Crises of overproduction, underconsumption, and
diminishing profits would undermine capitalism’s
foundation
Marxism
• Members of the constantly growing and thoroughly
exploited proletariat would come to view the forcible
overthrow of the existing system as their only alternative
• The socialist revolution would result in a “dictatorship of
the proletariat,” which would abolish private property and
destroy the capitalist order
• After the revolution, the state would wither away
– Coercive institutions would disappear since there would no
longer be any exploitation of the working class
• Socialism would lead to a fair, just, and egalitarian
society infinitely more humane than capitalism
Marxism Example: Land Reform in
China
• After World War II, civil
war in China resumed
between nationalist and
communist forces
• The communist forces of
Mao Zedong emerged
victorious and Mao
proclaimed the
establishment of the
People’s Republic of
China on Oct 1, 1949
• He then set out to
establish a new order in
China
Mao Zedong
Marxism Example: Land Reform in
China
• During the civil war, Mao’s base
of support had been built on the
disaffected rural peasant
population that were abused
and exploited by callous
landlords
• One of Mao’s most important
tasks after coming to power
was to effect land reform
• Mao dispatched land reform
teams to mobilize the peasants
to confront and humiliate the
landlords and seize their land
and money for redistribution to
the poor peasants
“Destroy the Old World”
Marxism Example: Land Reform in
China
• Mao said the process was “not a dinner party”
– Between one and two million landlords were killed
• The ancient landlord class that had long
dominated China was destroyed and millions of
peasants were politicized
• The communists argued that the process not
only affected social justice; it also expanded
agricultural production and lay the foundation for
China’s industrialization
Characteristics of the Post-1990
Global Economy
•
•
•
•
•
Expansion of trade between countries
Privatization of former state enterprises
Unfettered movement of capital
Growth of foreign investments
Deregulation that undermined the control
that national governments once exercised
over economic activity
• Emergence of a new brand of corporations
Corporations
• International corporations sought to
extend business activities across borders
in pursuit of specific activities such as
importation, exportation, and the extraction
of raw materials
• Multinational corporations conducted
business in several countries but had to
operate within the confines of specific laws
and customs of a given society
Corporations
• Global corporations rely on a small
headquarters staff while dispersing all
other corporate functions across the globe
in search of the lowest possible operating
costs
– Treat the world as a single market and act as
if the nation-state no longer exists
– Some 50,000 global corporations exist,
including General Motors, Siemens AG, and
Nestle
Impact of Global Corporations
• In the past, corporations had to operate
under the constraints of a social compact
with their employees and their
communities
– Collective bargaining agreements, tax laws,
and environmental regulations forced the
companies to contribute to the welfare of their
communities
Impact of Global Corporations
• Now, highly mobile global
corporations have escaped
these obligations
– Have moved jobs from
high-wage facilities to
foreign locations where
wages are low and
environmental laws are
weak or non-existent
– US federal tax receipts
from corporations have
dropped from 30% to
12%
Trading Blocs
• Since no single economic power can fully
control global trade and commerce,
groups of nations have entered into
economic alliances designed to gain
advantages for the members
– EU
– OPEC
– NAFTA
– ASEAN
European Union (EU)
• Began when six European
nations agreed in 1957 to
dismantle tariffs and other
barriers to free trade among
themselves
• Subsequent treaties created
political institutions
• Now the EU has 15
members who have
subordinated much of their
national sovereignty to the
EU
– 12 nations have adopted
a common currency
Organization of Petroleum
Exporting Countries (OPEC)
• Established in 1960 by
Iran, Iraq, Kuwait, Saudi
Arabia, and Venezuela
and later joined by eight
others
• Cartel proved to be a
political as well as an
economic power during
the Arab-Israeli War of
1973
– Ordered an embargo on oil
shipments to the US
(Israel’s ally) and the price
of oil in the US quadrupled
between 1973 and 1975
North American Free Trade
Agreement (NAFTA)
• Went into effect with the
US, Canada, and Mexico
in 1994
• Constitutes the world’s
second largest free trade
zone but lacks the
economic coordination of
the EU
– Ross Perot (1992 third
party presidential candidate
would complain NAFTA
would produce “a giant
sucking sound” of jobs
leaving the US for Mexico)
Association of Southeast Asian
Nations (ASEAN)
• Established in 1967 by Thailand, Malaysia,
Singapore, Indonesia, and the Philippines
• Originally conceived as a bulwark against
the spread of communism
• Economic focus became sharper with
agreements with Japan in 1977 and the
European Community in 1980
• Established a free trade zone in 1992
Case Study
Meiji Reforms in Japan
Relations with Foreigners Under
the Tokugawa Shogunate
• In order to prevent European influences from
destabilizing Japan, the Tokugawa shoguns that
had unified Japan in the 16th Century closely
controlled relations with Japan and the outside
world
– Forbade Japanese from going abroad (punishable by
death)
– Prohibited construction of large ships
– Expelled Europeans from Japan
– Prohibited foreign merchants from trading in
Japanese ports
– Forbade the import of foreign books
Relations with Foreigners Under
the Tokugawa Shogunate
• Trade with Asian
lands was
carefully controlled
• Small numbers of
Chinese and
Dutch merchants
were allowed to
trade under tight
restrictions at
Nagasaki
Dutch ship, ca 1800
Relations with Foreigners Under
the Tokugawa Shogunate
• The Tokugawa were able to maintain
internal stability and prosperity and control
foreign interaction until the early 19th
Century
• Beginning in 1844, British, French, and US
ships visited Japan to establish relations
– The US in particular wanted ports where its
Pacific whaling and merchant fleets could
stop for fuel and provisions
Relations with Foreigners Under
the Tokugawa Shogunate
• The Tokugawas
refused all requests
and stuck to their
policy of limiting
European and
American visitors to
a small number of
Dutch at Nagasaki
• In the late 1840s the
Japanese began
making military
preparations in case
of attack
The artificial island Dejima in
Nagasaki Bay where the
Dutch were allowed to trade
Commodore Perry
• In 1853, Commodore
Matthew Perry led a US
naval squadron into
Tokyo Bay and
demanded that the
shogun open Japan to
diplomatic and
commercial relations and
sign a treaty of friendship
• The shogun had no good
alternative and
acquiesced to Perry’s
demands
Commodore Matthew Perry
The Opening of Japan
• Representatives of
Britain, the Netherlands,
and Russia soon won
similar rights
• The Japanese were
subjected to a series of
unequal treaties which
opened Japanese ports
to foreign commerce,
deprived the government
of control over tariffs, and
granted foreigners
extraterritorial rights
End of Tokugawa Rule
• The sudden intrusion of foreign
powers in Japan resulted in the
collapse of the Tokugawa and
the restoration of imperial rule
• The dissident slogan was
“Revere the emperor, expel the
barbarians.”
• On Jan 3, 1868, the boy
emperor Mutsuhito took power
– He later became known as
Meiji (“Enlightened Rule”)
Meiji Reforms
• The Meiji government strived to gain parity
with foreign powers behind the motto “rich
country, strong army”
• It looked to the industrial lands of the
United States and Europe to obtain
knowledge and expertise to strengthen
Japan and win revisions of the unequal
treaties
Study Abroad
• The Meiji sent many
students and officials
abroad to learn
everything from
technology to
construction and hired
foreign experts to
facilitate economic
development and
indigenous expertise
Fukuzawa Yukichi made four
trips abroad and made
useful observations about
governments, constitutions,
and educational systems
Reforms
• The Meiji transformed Japan by:
– abolishing the feudal order and therefore centralizing
political power,
– revamping the tax system to put the regime on a firm
financial footing
– creating a constitution which gave the emperor
effective power and the parliament the ability to
advise but not control him
– creating a modern transportation, communications,
and educational infrastructure
Rise in Power
• By the early 20th Century, Japan
had joined the ranks of the world’s
major industrial powers
• From 1894-1895 Japan defeated
China in a war over Korea which
showed how modern and powerful
Japan had become and how
weakened China had become
• In 1899 Japan was able to end
extraterritoriality
• In 1902 Japan concluded an
alliance with Britain as an equal
power
• In 1904-1905, Japan shocked the
world by defeating Russia in the
Russo-Japanese War
Toyoda Type-G
Automatic Loom
invented in 1924
Meiji Reforms in Japan
• Discuss the Unequal Treaties and the Meiji
Reforms as examples of “malevolent” and
“benign” nationalism
Practical Exercise
Product Safety in China
Product Safety in China
• Between 1994 and 2005, China’s exports to the
US have grown 600%. But…
• In March 2007 the US Food and Drug
Administration issued warnings and recalls on
pet foods produced in China that caused
sickness and death in many animals
• In May 2007 the FDA issued warnings that some
Chinese toothpaste contained poisonous
chemicals
• In June 2007 a series of recalls was issued
involving Chinese-made toys that contained lead
Product Safety in China
• Hypothetical Situation
– Faulty Chinese-made aviation tires are
determined to be the cause of an airplane
crash during a landing at Atlanta’s HartsfieldJackson International Airport in which 18
people are killed and 46 injured
– Further investigation reveals widespread
products with Chinese aviation products
provided to US manufacturers
Product Safety in China
• Role play
– Chinese exporter
– US importer
– US Consumer Product Safety Commission
– Chinese Minister of Commerce
– US Secretary of Commerce
• Argue your organization’s position on the
future of US-China trade based on this
latest incident
Next
• Globalization and Interdependence