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Lecture

POL208Y1 Lecture Notes - World Trade Organization, Macroeconomics


Department
Political Science
Course Code
POL208Y1
Professor
Lilach Gilady

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12/18/2013
Recap:
Economic Theory: free trade (absolute advantage) benefits all (Smith); comparative advantage (Ricardo) – why would
anyone not want free trade if you just look at economics
Trade creates winners and losers – Political look at free trade
Domestically: Stolper/Samuelson (which owners of factors of production will benefit/not benefit from trade. Helps
identify which sectors in society will lobby for protectionism or free trade).
Internationally: Terms of Trade
Prisoner’s Dilemma: Strong incentive to defect or to exploit the other side. Avoid paying the domestic costs.
Solutions: hegemony, institutions (in presence of hegemon or institutions, we can avoid protectionist measures. We
need to define the conditions when countries are comfortable enough to do free trade.)
History 19th century: the industrial revolution; the repeal of the Corn Laws; a dramatic growth in international trade.
Why would this be the case?
We see a sharp increase in international trade after repeal of corn laws
When we look at history of trade we see periods of rise and periods of decline. 19th century until now, there are two
peaks. Political scientists suggest it has something to do with the structure of the international system. Pax Britannica
and Pax Americana. So structure of international system has some influence over free trade or protectionism we see
in the system.
The decline in trade is a period of war and there is no hegemon. A period of competition and uncertainty which can
lead to war. A decline in trade and a rise in protectionism. There is a connection between political structures and
economic structures.
Hegemonic Stability Theory
Power distribution matters
A lot of theorists suggest that power distribution is important
If we have a hegemon we can have free trade.
If we don’t have a hegemon (or it is in decline) the possibility we have free trade is not impossible but is lower.
Protectionism is likely to increase.
Only one variable we need to know, do we/ will we have a hegemon.
Structural variable (power)  economic/ political outcomes
Hegemon leads to stability, stability leads to trade.

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What kind of theory is this? Realist/ neorealist – focus on the distribution of power, structure of the system and
economic consequence is the consequence.
What is the causal explanation as to why the presence of a hegemon leads to free trade?
Specify how the presence of a hegemon leads to free trade…
Hegemons are “too big to fail” – not much risk in adopting free trade. They do not fear being exploited. They can
become more vulnerable and it is okay.
Hegemon enjoys comparative advantage – would benefit from free trade. – these countries are doing well. Must have
a strong enough economy. They would benefit from free trade. So hegemon is not promoting trade because it is nice
or benevolent, it promotes it because it will be the biggest benefactor from it.
Hegemony suggests stability and security – beneficial for trade. Less war, more peace, more trade.
A hegemon would set trade rules that benefit its interests – can create an environment that is conducive to free trade.
It is serving its own interest. Dealing with cold interest.
A hegemon is also strong enough to use its power to force other countries to open up. They can use sanctions, etc..
but they don’t even have to do that. Take the corn laws. Britain unilaterally adopts free trade. Britain just started to
adopt these policies and countries just followed their example. Some of it had to do with the size of the market at the
time. Any change of Britain would have a far reach.
What areas in the US would be most affected by corn law repeal? The Midwest!
By repealing the corn laws, it opens the British agriculture market. Corn and grain could be exported to Britain for less
money.
So Midwest exporting it to Britain gave Midwest more economic and political power. They want to support more free
trade.
So other countries clearly affected.
The balance between winners and losers, it can change who is pro free trade in other countries like the US.
Britain is big enough that it doesn’t have to use its weapons to force people to adopt free trade, it can just do it and
have massive effects.
A hegemon solves the prisioner’s dilemma. It solves the problem of exploitation because they can punish to those the
defect and give more incentive to those that cooperate. So it makes the outcome of cooperation, cooperation more
likely.
It times of crisis, a hegemon can prevent “beggar they neighbour policies” – they can work against the reflex to
contract economy and close the international markets in favour of domestic ones.
If you sum all of this up, because a hegemon has such a strong incentive to have free trade, a hegemon will be willing
to pay for a collective goods: policing, enforcing rules, providing safety nets, etc… Why? Because it is the biggest
benefactor by keeping it open.
In an anarchic system, someone has to volunteer to do all those collective goods is the hegemon because they have
the most to lose and most to gain.
Graph shows the extent of market penetration. Which countries are most globalized.

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Smaller countries are more vunerable. Only way they can prosper is if they have interdependence and rely on others.
For US, their economic interdependence is the smallest because their market is so small, it is more insulated that
most countries. It can open itself up and have less fear of losing everything.
From Pax Britannica to Pax Americanna: Lessons from WWII
The period between British and American hegemony. Britain is in great decline.
In absolute terms, America was strong enough be the hegemon but refused
Isolationism at the time of the depression
What kind of lessons from World War II
The Great Depression:
Deflation and Laissez-faire didn’t work
More unemployment  social and political turmoil
Cut your budget  contract  close your market  let it fix itself
When that doesn’t work  contract more  unemployment higher
Fewer taxes more contraction  vicious cycle
Government response
Protectionism  made things worse
Less free trade  keep all jobs here  less free trade  less demands for goods  more issues
Rise of extremist political movements
You get war!
To maintain world peace, it has to start with international political economy
After WWII – we want to build this new political economic international system, we want to ensure this will never
happen again.
Since the international, political economic system was ruined in the war, they got to start with a blank slate.
To prevent a war, prevent future depressions.
Charles Kindleberger Spiral
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