Exam 1 Study Guide

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19 Mar 2014
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Grieco, Joseph and G. John Ikenberry. 2003. State Power and World
Markets: The International & Political Economy. W.W. Norton. Ch. 2
PPFs and ICs: Indifference curves graphically represent the different combinations of
market baskets (let’s say shoes and computers) that provide the individual with a constant
level of satisfaction. Trade is a way for countries to improve their overall levels of
consumption and thereby to move to higher indifference curves, signifying higher levels
of overall societal satisfaction. Production possibilities frontier are built on two
premises: 1) constant opportunity costs 2) increasing opportunity costs
Neoclassical Model: Not likely to lead to full specialization in any country. We find that
even partial specialization, when combined with trade, produces a consumption outcome
that is superior to what is optimally possible in autarky.
Comparison of the two models (41): They both differ in their view of opportunity costs
and specialization. Both assume 2 countries, 2 goods, technology is similar across
countries, & there are no transportation costs. However, the Neoclassical model assumes
2 factors of production whereas the Ricardian model assumes 1. NC also assumes
increasing opportunity costs and Ricardian model assumes constant. Ricardian says the
result is full specialization and NC says partial. Both agree on improved consumption.
Irwin, Douglas A. 1993. "Multilateral and bilateral trade policies in the
world trading system: an historical perspective." In Jaime DeMelo and
Arvind Panagariya, eds. New Dimensions in Regional Integration.
Cambridge: Cambridge University Press.
Origins of European trade liberalization: Started off with mercantilist policies that
aimed at the inflow of specie via a balance of trade surplus or a large market share in the
world. England and Scotland united under a single monarch in 1603, but could not reach
an attempt on commercial union until the Act of Union in 1707. Collapse of colonial
trade routes in 1770s was the first real momentum toward liberalizing European trade
(Britain and France lost their North American colonies). Adam Smith saw this as
opportune.
British attempts at bilateral negotiations: . Anglo-French accord of 1783 (b/c collapse
of colonies) involved the elimination of prohibitions and a modest reduction of duties on
bilateral trade to eliminate smuggling and raise tariff revenues for both governments
ranks among the first significant modern action on mutually advantageous trade
liberalization. It lasted less than 6 years. There was a lack of progress and failure because
Britain refused to repeal the highly protectionist Corn Law of 1815. It set the stage for
unilateral tariff reforms in the early 1840s.
Unilateral: Repeal of the Corn Laws (1846): Britains failure with to come to an
agreement w/ Prussia due to their corn laws, help set the stage for the repeal of it in 1846.
Prime Minister Robert Peel “applying its tariff without discrimination, enacting tariff
reforms on its own timetable, and leaving other countries free to determine their own
tariff policies.” Treaties of commerce were no longer desirable. Hoped that other
countries would see the benefit of unilateral trade and follow in their footsteps.
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The inter-war trade policy experience: Bilateral treaty regime ended abruptly with the
outbreak of WWI in 1914. Barriers were put up again in Europe to protect industries
associated w/ national security. Allies, Britain, France, and Italy hinted at creating trade
preferences for Allied countries by ruling out the extension of the MFN treatment to
Germany & other wartime opponents. U.S opposed such discrimination. All were hesitant
& ill equipped to return to prewar trade agreements. Countries were raising tariffs higher
than before the war. U.S failure to join League of Nations. France readopted MFN clause
when signing a trade agreement with Germany in 1927. Any hopes of progress on trade
liberalization was then dashed with the onset of the Great Depression. The stance of a
country’s commercial policy was so crucially related to its position in the international
monetary system.
Role of the hegemon in trade liberalization: The world works better when there is a
hegemonic power because one finds it in its own self-interest to see that various
international collective goods are provided.
Irwin, Douglas A. 1997. Against the Tide: An Intellectual History of Free
Trade. Princeton University Press. Conclusion.
Dominance of the free trade doctrine in economics: Largely as a result of Adam
Smith’s Wealth of the Nations and is derived from a fundamental precept of economics
just as individuals can gain from the voluntary exchange of goods between them,
countries can also gain from the exchange of goods across borders. Gains of trade are
derived from division of labor & specialization of individuals or countries in the
production of certain goods. Comparative advantage is the bedrock on which the case for
which free trade stands on today.
Explore the limits of free trade: Weakness in the analogy between individual and a
country when it comes to free trade. Analogy ignores the fact that countries are made up
of different individuals, not all whom may reap the same benefit from free trade. May
help maximize economic wealth, but not everyone will benefit income distribution.
“Theoretical attractiveness” of free trade: Theory of comparative costs seemed to
raise it to an unprecedented position of scientific verity.
Quote by Krugman: The contemporary case for free trade is “not the old argument that
free trade is optimal because markets are efficient, but rather it is a sadder but wiser
argument for free trade as a rule of thumb in a world whose politics are as imperfect as its
markets…to abandon free trade principle in pursuit of the gains from sophisticated
intervention could therefore open the door to adverse political consequences that would
outweigh the potential gains”
Three lines of defense against calls for protection: 1) Circumstances concede that there
may be a theoretical case for protection on certain grounds, but that such protection
would be inappropriate to the particular circumstances, under consideration, or that the
case does not apply under current conditions.
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