International
Trade
CHAPTER EIGHT
Dr. Clayton Thyne
PS 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 Mercantilism
2. 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
Supply: amount supplied
at each price
Price (p)
Demand: amount
demanded at each price
Quantity (q)
Supply and Demand:
variation 1—price set too high
Supply: amount supplied
at each price
Price (p)
Demand: amount
demanded at each price
Quantity (q)
Example: government cartel, minimum wage
Return to equilibrium: suppliers have too much inventory, so they’ll lower prices
Supply and Demand:
variation 2—price set too low
Supply: amount supplied
at each price
Price (p)
Demand: amount
demanded at each price
Quantity (q)
Example: government-set prices
Return to equilibrium: consumers compete for small quantities w/ low price, produces raise price to
maximize profits
Supply and Demand:
variation 3—demand shift right (increase)
Supply: amount supplied
at each price
Price (p)
Demand (new)
Demand (old)
Quantity (q)
Example: coffee becomes trendy, summer driving season
More demanded (by definition), so the equilibrium price increases
Supply and Demand:
variation 4—demand shift left (decrease)
Price (p)
Demand (old)
Demand (new)
Quantity (q)
Example: boycott of some state’s goods, product becomes less trendy, end of driving season
Less demanded (by definition), so the equilibrium price decreases
Supply and Demand:
variation 5—supply shift right (increase)
Supply (old)
Supply (new)
Price (p)
Demand: amount
demanded at each price
Quantity (q)
Example: invention  more efficient production (computer industry), oil discovered
More supplied because it (may be) cheaper to produce
Supply and Demand:
variation 6—supply shift left (decrease)
Supply (new)
Supply (old)
Price (p)
Demand: amount
demanded at each price
Quantity (q)
Example: environmental laws make producing less profitable, OPEC cuts production
Less 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:
Comparative Advantage:
The easy example
For 1 unit of resources, each state can produce…
6
5
4
State B
3
2
1
1
2
3
4
State A
5
6
Comparative Advantage:
The easy example
Who should produce apples? Bananas?
6
5
4
State B
3
2
1
1
2
3
4
State A
5
6
Comparative Advantage:
A bit more complicated
For 1 unit of resources, each state can produce…
6
5
4
State B
3
2
1
1
2
3
4
State A
5
6
Comparative Advantage:
A bit more complicated
Who should produce apples? Bananas?
6
5
4
State B
3
2
1
1
2
3
4
State A
5
6
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
–