GOVT 102 Lecture 44: International Politics Notes Part 2

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23 Jun 2016
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Week 8: International Political Economy and International Trade
The Nature of Political Economy (Gilpin)
International society is increasingly rent between economic and political
Economic and technological forces are creating a highly interdependent world
economy, thus diminishing the traditional significance of national boundaries, but
the nation-state continues to command man’s loyalties and to be the basic unit of
political decision making.
The conflict of the era is between ethnocentric nationalism and geocentric
Politics largely determine the framework of economic activity and chennels it in
directions intended to serve the interests of dominant groups, but the economic
process tends to redistribute power and wealth, transforming the power
relationships among groups.
Politics and economics can be seen as two different ways to allocate scarce
resources- politics through a market mechanism and economics through a budget.
Wealth- anything that can generate future income (capital, land, labor), and power
is the necessary means to achieve objectives pursued by nation states, including
welfare, security, prestige, and even wealth.
Three different theories on political economy-
1. Liberalism: The nature of international economic relations is estentially
harmonious. According to Adam Smith, international economy can
become a positive-sum game although the distribution of the gain may not
be equal (winners and losers). They say there is a basic harmony between
true national interest and cosmopolitan economic interest. Liberal argue
that the state should not interfere with economic transactions across
national boundaries; free exchange should create long term benefit to
efficient use of the world’s scarce resources.
2. Mercantilism: Essence of economic relations is conflictual; no underlying
harmony. Economics is a zero-sum game. The actors are nation-states who
want to maximize their national interest. They believe that politics shapes
economics and that the shift in economic tides is in changes of the
distribution of power.
3. Marxism: Essence of economic relations is conflictual; no underlying
harmony. Economics is a zero-sum game. The actors are economic classes
who want to maximize their own interest; they find that economics
determines politics and that to change the system there is always a
tendency towards disequilibrium that changes the distribution of power
and wealth.
An interdependent world economy is the normal state of affairs for a liberal
economist, but in Marxism and mercantilism the belief is that every
interdependent international economy is essentially an imperial or hierarchal
system with unharmonious agendas.
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The Domestic Sources of Foreign Economic Policies (Hiscox)
Each government must make their own choices about how best to manage the
way its own economy is linked to the global economy; to best understand the
domestic origins of foreign economic policy-
Trade- The dramatic growth in trade over the last few decades has intensified
domestic political debate on the costs and benefits of free trade internationally.
There has been a lot of backlash towards acts like the North American Trade
Agreement and the Common Agricultural Policy as well as attempts to disrupt the
World Trade Organization (WTO). Yet there is proof that trade provides mutual
gains for all parties involved when countries exchange goods and services that
allow for each country to specialize in goods and services that they have a
comparative advantage which improves world welfare.
Hecksher-Olin model of trade: each nation’s comparative advantage is traced to
its particular endowments of different forms of production (basic inputs such as
land, labor, and capital) that are used in different proportions of different goods
and services.
Stolper-Samuelson theorem: trade benefits those who own the factors of
production with which the economy is relatively well endowed and trade hurts
owners of scarce factors- accounts for why trade is such a divisive political issue.
Specific factors model: the real incomes of different individuals are tied very
closely to the fortunes of the particular industries in which they make their living.
Foreign investment: financial transactions between citizens of different nations
that transfers ownership rights over assets.
The Trading System (Gilpin)
Economists of every persuasion say that free trade is superior to trade protection-
if other countries resort to trade protection, the economy that remains open will
gain more from cheaper imports than it would lost in denied export markets.
The classic era of free trade ran from the repeal of the Corn Laws (1846) to the
1870’s when protectionist tariffs increased; after this trade protection grew
steadily but following WWII the world experienced another era or trade
liberalization and expansion. In today’s economy, the tree trade regime is
threatened by intellectual, economic, and political developments.
The shift from “comparative” to “competitive” advantage as the basis of trade, the
implications of the new strategic trade theory, and other arguments have
threatened the theory and intellectual backing of free trade.
Adam Smith and David Ricardo argued that removing the impediments to the free
movement of goods would permit national specialization and facilitate optima
utilization of the world’s scarce resources, allowing for comparative
Benefits of trade liberalization-
1. Trade liberalization increases competition n domestic markets, and
thereby undermines anticompetitive practices, lowers prices, increases
consumer choice, and increases national efficiency.
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2. Increases both national and global wealth by enabling countries to
specialize and to export those goods and services in which they have a
comparative advantage.
3. Encourages the international spread of technology and know-how around
the globe and thus provides developing economies with the opportunity to
catch up in come and productivity with more advanced economies.
4. Free trade and the international cooperation that it entails increases the
prospect of world peace.
Trade protectionism has a negative impact on income distribution- a tariff or other
restrictive measure creates economic or monopoly rents and shifts income from
consumers and nonprotected sectors to the protected sectors of the economy.
The one important exception to the superiority of free trade is in the protection of
infant industries- if an infant industry is protected from international competition
it will become sufficiently strong and competitive to enable it to survive when
protection is eventually removed.
At the beginning of the 21st century, many protectionist advocates promoted
through national policies of high tech and certain other favored sectors in order to
build the nation’s industrial strength and increase its competitiveness. They also
promote creating more manufacturing-oriented industries.
Disputes to trade protectionism’s benefits-
1. Reduces both national and international economic efficiency by preventing
countries from exporting those goods and services in which they have a
comparative advantage and from importing those goods and services in which
they lack comparative advantage.
2. It decreases the incentive of firms to innovate and thus climb the technological
3. It discourages shifting national resources to their most profitable use.
Hume: protectionism decrease exports over the long term- trade barriers improve
exports temporarily, it causes the value of currency to rise, undercutting
competition, and can increase the cost of inputs, decreasing competition in the
long term.
Trade protectionism still persists and its advo ates often succeed in their agenda.
The logic is that the political process generally favors special interests desiring
protection over general consumer interest.
Heckscher-Olin model-
1. A country will export those products that are intensive in abumdant factor
2. Trade will benefit the owners of locally abundant factors and harm owners of
the scarce factors. While all countries will benefit, the distribution will not be
equal (Stopler-Samuelson theory)
3. Trade in factors (capital or labor) and trade in goods will have the same effect
and can fully substitute for one another (Mundell equivilancy)
4. Under certain circumstances, trade in goods will over time equalize the return
(wages to labor and profits to capital) for each factor of production (Factor-
Price Equalization Theory)
The problem with H-O modle is that actual trading patterns frequently differ from
what the theory predicts.
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