POL208Y1 Study Guide - Final Guide: Protectionism, European Atomic Energy Community, Human Security
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International Political Economy
- Prosperity as a means versus as a goal
- Production possibility frontier
- Total war is not sustainable over time. In cases like the Second World War, it helped
integrate women into the economy. But also lowers morale, casualties.
- Economic warfare: sanctions, embargoes. Mixed success. Can be used as incentives
(WTO membership, concessions, aid) as well. (Krasner and Pakistan)
- Direct and indirect costs of war (ind. includes higher oil prices, healthcare costs). Peace
dividend: during peacetime, demand for guns will go down and butter will increase.
-Liberalism: increased efficiency growth, maximizes welfare. Free markets, economic
interdependence through trade, absolute gains. Main actors are individuals and firms.
-Economic nationalism: mercantilism, IR realism, protectionism. Wealth as a source of
power, econ competition for primacy and imperialism. Industrialization, some
government ownership. Strategic trade but sometimes focused on autarky. Relative
gains. State is the main actor.
-Marxism: capitalists maximizing profit overproduction instability and crisis.
Imperialist aim is to flood colonial markets with goods and make a profit. Wealth and
power in an elite. Unsustainable, irrational. Imperialism helps it stay alive a while longer
by dumping abroad, but that’s it. Main actors are classes (Marx) and capitalist
mercantilist state (Lenin). Here in a stateless world, the entire world is one system of
- Liberalism calls for minimal intervention by state, Marxism for complete control,
Keynesianism and welfare state for some central planning.
- Modern theory of trade:
oTransaction costs – transportation, risk
oOpportunity cost – next best alternative. Amount of some good that could be
produced lost by choosing to obtain one unit of another good.
oRelative prices – barter price.
-Absolute advantage, Adam Smith: one country can produce more of a good or service.
Opp cost of serving good A rather than good B – produce the one with lower opportunity
costs (compared across countries, not within one). If both countries specialise fully,
efficiency is maximized.
-Comparative advantage, David Ricardo: As long as two states differ in relative
productivity of two goods, trade can occur. Trade incentivized when one country has
absolute advantage in both but not comparative.
oGlobal welfare maximized by free trade. Relative gains (Liberalist perspective).
oHecksher-Ohlin theorem: a country has comparative advantage in producing
goods that make use of their intensive factor (in which they are most abundant).
Out of capital, land or labour.
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oStolper-Samuelson theorem: owners of abundant factor benefit from free trade
and scarce factor owners from protectionism.
E.g. free trade raises wages in labour-abundant and lowers them in labour-
scarce countries. Demand will decrease for expensive labour, and price
will go down to reach a long-run equilibrium.
Political implication: protectionism in some countries. Domestic winners
and losers. Generates ‘sectorial’ politics – skilled and unskilled workers,
- Internationally, terms of trade determine winners and losers. Ratio of export to import
prices. Improvement in terms of trade = cheaper exports = beneficial.
- Protectionism: Free trade measured as (X+M)/GDP.
oProtectionist measures include: domestic subsidies, dumping goods abroad,
voluntary export restraints, non-tariff barriers (red-tape, standards), manipulation
of exchange rates.
oWhy? Domestic politics and pro-protectionist coalitions. Tariffs bring revenue.
No interdependence. Strategic implications of trade and problem of relative gains
(i.e. it is a zero-sum game).
- Free trade under anarchy: no guarantee that others will respond.
- Repeal of the corn laws:
oUnilateral adoption of free trade by hegemon (UK). Grains brought into Canada at
no cost from UK, but high tariffs for other countries.
oIndustrial revolution – capital vs land. Urbanisation and more factory workers.
o1832: Great Reform Act – capital better rep in parliament. 1842: intro of income
tax in the UK by Robert Peel lower tariffs. 1846: repeal, first shift towards free
trade. Combination of societal pressure, potato famine, ideology.
oHegemonic action made other countries stop charging tariffs too.
- 1840: growth rate of global trade increases greatly. Reduced transaction costs, growth of
industry and banking, increased pol power of capital over land, Pax Britannica
-Hegemonic stability theory (Krasner): Realist – assumes that states want to avoid
vulnerability and protectionism is costly (for small states, but hegemon can do what it
wants without compromising on stability).
oHegemon decides whether free trade or not. Decline of hegemon coincides with
decline in free trade.
oComparative advantage in favour of hegemon, suggests security and stability, can
use its power to force other states, can prevent beggar thy neighbour. Because it
benefits, it will be okay with paying for collecive goods: policing, enforcement of
oStructural variable (power) econ and pol outcomes (neorealism)
oWorks when applied to 1840-1870 rise of Britain, and some others, but not fully.
After great Depression, laissez-faire was found not to work. Further protectionism
and decline in world trade.
-Bretton Woods conference: 1944, 44 nations. Harry White (US) and Keynes (UK).
oCreates IMF to stabilize exchange rates between countries (including a small bail
out contribution from all), International Bank for Reconstruction and
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Development (post-war, later the World Bank) and General Agreement on Tariffs
and Trade (WTO since 1995)
oAimed to support intl trade: low tariffs, stable exchange rates, IMF as lender of
last resort, rebuild Europe. Capital controls persist. US is key (new gold standard
based on dollar – pulled out in 1971, after which free floating exchange rates).
oWorked to the extent that trade is now 22.5% of world output, was 15 two decades
ago. Manufac goods about half, services becoming important.
- 1971 onwards: floating exchange rate. World Bank helps developing countries. IMF
offering loans to at-risk countries. Increased capital mobility.
- Institutions have persisted from Bretton Woods (Keohane) and US still remains sort of
hegemon so free trade unaffected.
-Globalisation: process by which geography and geographic location become
increasingly irrelevant for economic activities.
oNew combination of goods, capital, labour. Less transaction costs, higher volume.
oComes from states deciding to open up (helps coalition of winners within),
institutions created by states help. Systemic factors include hegemonic interests,
technology, seems reversible.
oFDI: grew by 75% from 1980 to 1991. 90% is between developed countries. Easy
exit option for capital – more pressures from capitalists.
oRace to the bottom: argues that globalisation eventually leads to governments
lowering taxes, having lax labour and environmental laws to incentivize
companies to invest in their countries. E.g. Toyota incentivized to start factories in
US and Canada because of lax labour/environmental laws.
- State and MNC: state not entirely powerless, anti-globalisation movement.
-Rodrik’s trilemma: trilemma of econ integration, mass politics and the nation state. EI
and NS (golden straitjacket) is the race to the bottom, but then there is a democratic
deficit. EI and MP is global federalism. NS and MP is Bretton Woods – limited
integration, lower growth.
-Factor price equalisation theorem (Samuelson): idea that prosperity will bring
prosperity to all. Free trade will eliminate price diffeerences for commodities, and
eventually bring about an equalisation in factor prices (capital and labour) as well.
oApplies to NAFTA – unskilled labour wages up in Mexico, down in US.
oDoes not apply in Africa:
Initially believed to be modernisation theory, which argues that
industrialization urbanization middle class democracy and modernity.
Essentially economic modernization brings about pol and soc
modernization as well. But predicted that Africa would grow like Europe,
which it did not. Liberal model – no govt intervention.
Mod theory did not work because econ policies were not followed,
institutions not implemented, war and climate and geography.
-Import substitution industrialization (ISI): An economic policy that attempts to enable
a developing country to substitute products which it imports, mostly finished goods, with
locally produced substitutes. Less reliance on imports.
oGovt decides which industries. Exports also decline because goods are being
produced for domestic use. Mercantilist, protectionist. Ignores comparative
advantage. Latin America until 1980, India till late 1980s. Inefficient.
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