Chapter 5: Trade and Finance.pdf

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University of British Columbia
Political Science
POLI 260
Robert Farkasch

Saturday, March 22, 2014 Chapter 5: Trade and Finance ▯ Theories of Trade • International trade amounts to about a sixth of the total economic activity in the world. Although the global South accounts for a relatively small part of all trade in the world economy, this is because its economic activity itself is only 40% of the world total. International political economy — IPE, the study of politics of international economic • activities. Most frequently studied are trade, monetary relations, and multinational corporations. • Two major approaches within IPE: Liberalism and mercantilism • Mercantilism — belief that each state must protect its own interests at the expense of others — not relying on international organizations to create a framework for mutual gains; what matters is not so much a state’s absolute amount of wealth as its position relative to rival states. 
 Mercantilists believe that the outcome of economic negotiations matters for military power. • Economic liberalism — belief in the possibility of cooperation to realize common gains. By building international organizations, institutions, and norms, states can mutually benefit from economic exchanges. 
 It matters whether the state’s wealth is increasing in absolute terms. • Marxism is a third theoretical/ideological approach to IPE. Economic exploitation as a force that shapes political relations. Most international economic exchanges include some element of mutual interests and some • element of conflicting interests = mixed interests. • For liberals, the most important goal of economic policy is to create a maximum of total wealth by achieving optimal efficiency (maximizing output, minimizing waste). For mercantilists, the most important goal is to create the most favourable possible distribution of wealth. • Liberalism sees individual households and firms as they key actors of the economy, and government’s most useful role as one of noninterference in economics except to regulate markets in order to help their efficient functioning, or free trade. 
 Liberal economists are interests in maximizing the overall (joint) benefits from exchange, rather than how total benefits are distributed among the parties. • Interdependence — two or more states are simultaneously dependent on each other. States that trade become mutually dependent on each other’s political cooperation in order to realize economic gains through trade. 
 Trade-based wealth depends on international political cooperation. Liberals argue that interdependence inherently promotes peace. • Mercantilists prefer making trade serve a state’s political interests — favourable balance of trade. The balance of trade is the value of a state’s imports relative to its exports. A state that imports more than it exports has a negative balance of trade (trade deficit). 
 In recent years, to balance its tare deficit, the US has “exported” currency to China, Japan, Europe, and other countries, which use the dollars to buy such things as shares of American companies, US Treasury bills, or US real estate.
 For one state to have a trade surplus, another must have a deficit. Comparative advantage — different states enjoy producing different goods (a concept • pioneered by Adam Smith and David Ricardo). States differ in their abilities to produce certain ▯1 Saturday, March 22, 2014 goods because of differences in natural resources, labour force characteristics, technology, and etc. To maximize the overall create not wealth, each state should specialize in producing the goods for which it has a comparative advantage and then trade for goods that another state produces best. 
 Costs of transportation and of processing the information in the trade (transaction costs) must be in the costs of producing an item. • International trade allocates global resources to states that have the greatest comparative advantage in producing each kind of commodity. As a result, prices are both lower overall and more consistent worldwide. Increasingly, production is oriented to the world market. Economic benefits of trade come with some drawbacks: • • Long-term benefits may incur short-term costs • The benefits and costs tend to be unevenly distributed within a state. Some industries may benefit at the expense of others. • Market imperfections reduce efficiency. • Monopoly — when there is just one supplier of an item. Oligopoly — a monopoly shared by just a few large sellers. • Politics provides a legal framework for markets. Rules can be codified in international treaties, but enforcement depends on practical reciprocity. • Taxatioo nn markets generates revenue for the government and regulates economic activity by incentives. 
 Taxes applied to international trade itself are called tariffs, and are a frequent source of international conflict. Tariffs not only restrict imports but also can be an important source of state revenues. • Sanctions — political power prohibits an economic exchange that would otherwise have been mutually beneficial. Enforcing sanctions is difficult because participants have a financial incentive to break the sanctions through black markets or other means. • Autarky — to avoid trading and instead try to produce everything a state needs by itself. The theory of comparative advantage suggests this theory is ineffective. • Protectionism — protection of domestic industries from international competition. Protectionist trade policies are contrary to liberalism in that they seek to distort free markets to gain an advantage for the state generally by discouraging imports of competing goods or services. 
 Governments also protect industries considered vital to national security. Predatory practices — efforts to unfairly capture a large share of world markets, or even a near- • monopoly, so that eventually the predator can raise prices without fearing competition. Most often these efforts entail dumping products in foreign markets at prices below the minimum necessary to make a profit. 
 These conflicts now generally are resolved through the WTO. • Non-tariff barriers: Imports can be limited by a quota. Quotas are imposed to restrict the growth of such imports. • • Subsidies are payments to a domestic industry that allow it to lower its prices without losing money. Such subsidies are extensive in state-owned industries. 
 Subsidies include tax breaks, loans (or guaranteed private loans) or high guaranteed prices paid by governments. • Regulations make it hard to distribute and market a product even when it can be imported. 
 Environmental and labour regulations can function as non-tariff barriers as well. ▯2 Saturday, March 22, 2014 • When a state nationalizes an entire industry, such as oil production or banking, foreign competition is shut out. • Economic nationalism — use of economics to influence international power and relative standing in the international system (a form of mercantilism) ▯ Trade Regimes World Trade Organization (WTO) a global, multinational IGO (inter-governmental • organization) that promotes, monitors, and adjudicates international trade. The WTO shapes the overall expectations and practices of stats regarding international trade. • The WTO is the successor organization to the General Agreement on Tariffs and Trade (GATT) created in 1947 to facilitate freer trade on a multilateral basis. In 1995, the GATT became the WTO, which incorporated the GATT agreements on manufactured goods and extended the agenda to include trade in services and intellectual property. The WTO has an international bureaucracy of about 600 people that monitors trade policies • and practices in each member state and adjudicates disputes among members. • By 2012, 155 countries — including all the world’s major trading states — had joined the WTO. • The WTO framework rests on the principle of reciprocity— matching states’ lowering of trade barriers to one another. Uses the concept of nondiscrimination in the most-favoured nation (MFN) concept which says that trade restrictions imposed by a WTO member on its most-favoured trading partner must be applied equally to all WTO members. If Australia applies a 20% tariff on auto parts imported from France, it must not apply a 40% tariff on parts imported from the US. The WTO equalized barriers in a global framework to create a level playing field for all members. • Generalized System of Preferences (GSP) by which rich states give trade concessions to poor ones to help their economic development. • Agricultural trade is politically more sensitive than trade in manufactured goods. • In 2001, trade ministers meeting in Doha, Qatar, agreed to launch a new round of trade negotiations, the Doha Round. • The main obstacle remains the resistance of the industrial West to cut agricultural subsidies as demanded by countries in the global south. • Bilateral agreements covering trade are reciprocal agreements to trade between two states. • Part of the idea behind GATT/WTO was to strip away the maze of bilateral agreements on trade and simplify the system of tariffs and preferences. They have reduced the collective goods problem inherent in multilateral negotiations and facilitated reciprocity as a means to achieve cooperation. Regional free trade areas are groups of neighbouring states that agree to remove most or • all trade barriers within their area. Beyond free trade areas, states may reduce trade barriers and adopt a custom tariff toward states that are not members of the agreement. This is known as a customs union. • The Unites States, Canada, and Mexico signed the North American Free Trade Agreement (NAFTA) in 1994, following a Us-Canadian free trade agreement in 1988. Initially Mexico’s currency dropped drastically relative to the dollar in 1994-1995. • In 2007 the ten ASEAN countries met with China, Japan, India, Australia, and New Zealand to begin negotiating an East Asian free trade area. The negotiations between ASEAN states and China were successful, and in 2010, a free trade area went into effect between these ▯3 Saturday, March 22, 2014 countries. The ASEAN-China FTA is the world’s third largest free trade area, after the EU and NAFTA. • The Southern Cone Common Market (Mercosur) began in the early 1990s with Brazil, Argentina, Uruguay, and Paraguay. Venezuela later joined. Chile, Bolivia, Columbia, Ecuador, and Peru have joined as associate members. In 2002, the counties agreed to allow their 250 million citizens free movement and residency across countries. • The more states meet ht apolitical requirements of economic growth through bilateral and regional agreements, the less they may depend on the worldwide agreements developed through the WTO. • Cartel — an association of producers or consumers, or both, of a certain product — forced to manipulate its price on
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