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Chapter

POL208Y1 Chapter Notes -International Political Economy


Department
Political Science
Course Code
POL208Y1
Professor
Lilach Gilady

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POL208Y1: Introduction to International Relations January 17th, 2012.
State Power and the Structure of International Trade
Krasner, Stephen D. 2000. “State Power and the Structure of International Trade.” In
Jeffery A. Frieden and David A. Lake, eds. International Political Economy:
Perspectives on Global Power and Wealth. Boston: Bedford/St. Martin’s. pp. 19-36
State economic structure may range from complete autarky (if all states prevent
movements across their borders), to complete openness (if no restrictions exist)
The structure of international trade: the degree of openness for the movement
of goods as opposed to capital, labour, technology, or other factors of production
Since beginning 19th century structure has undergone changes, explained by state-
power theory: an approach that begins w/ the assumption that the structure of
international trade is determined by the interests and power of states acting to
maximize national goals
4 basic states interests: aggregate national income, social stability, political
power, and economic growth
Potential economic power is operationalized in terms of the relative size and level
of economic development of the state
Hegemonic distribution of potential economic power is likely to result in an open
trading structure
2 major organizers of structure of trade since beginning of 19th century, Great
Britain and the US, have both been prevented from making policy amendments in
line w/ states interests by particular societal groups whose power has been
enhanced by earlier state policies
The Casual Argument: State interests, state power, and international trading structures
Neoclassical trade theory based on assumption that states act to maximize their
aggregate economic utility
Maximum global welfare and Pareto optimality are achieved under free trade
Neoclassical theory recognizes that trade regulations can be sued to correct
domestic distortions and to promote infant industries
State Preferences
Neoclassical theory demonstrates that the greater the degree of openness in
international trading system, the greater the level of aggregate economic income
Trade gives small states relatively more welfare benefits than it gives to large
ones
Greater openness implies a higher level of factor movements than in a closed
economy, because domestic production patterns must adjust to changes in
international prices
Thus social instability increases, since there is friction in moving factors,
particularly labour, from one sector to another
Impact will be stronger in smaller states than in large, and in relatively less
developed than more developed ones

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POL208Y1: Introduction to International Relations January 17th, 2012.
Large states less involved in international economy: a smaller percentage of their
total factor endowment is affected by international market at any given level of
openness
More developed states are better able to adjust factors: skilled workers can more
easily be moved form one kind of production to another than can unskilled
labourers or peasants
Thus social stability is , ceteris paribus, inversely related to openness, but the
delirious consequences of exposure to international trading system are mitigated
by larger size and greater economic development
Relationship b/w political power and international trading structure can be
analyzed in terms of relative opportunity costs of closure for trading partners
The higher the relative cost of closure, the weaker the political position of the
state
This cost can be measured in terms of direct income losses and the adjustment
costs of reallocating factors
These will be smaller for large states and for relatively more developed states
Utility costs will be less for large states because they generally have a smaller
proportion of their economy engaged in international economic system
Reallocation costs will be less for more advanced states because their factors are
more mobile
Thus a state that is relatively large and more developed will find its political
power enhanced by an open system because its opportunity costs of closure are
less
Large states can use the threat to alter the system to secure economic or
noneconomic objectives
One important exception to this generalization: the oil exporting state
The level of reserves for some states, e.g. Saudi Arabia, has reduced the economic
opportunity costs of closure to a very low level despite their lack of development
Openness furthers rate of growth for large countries w/ relatively advanced
technologies, because they do not need to protect infant industries and can take
advantage of expanded world markets
However in long run, openness for capital and technology, as well as goods, may
hamper the growth of large, developed countries by diverting resources from the
domestic economy and by providing potential competitors w/ knowledge needed
to develop their own industries
Only by maintaining its technological lead and continually developing new
industries can even a very large state escape the undesired consequences of an
entirely open economic system
Mercantilists argue that an entirely open system can undermine a state’s effort to
develop, and even lead to underdevelopment
Adherents of more conventional neoclassical positions have maintained that
exposure to international competition spurs economic transformation
From State Preferences to International Trading Structures
System of a large number of small, highly developed states
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POL208Y1: Introduction to International Relations January 17th, 2012.
Likely to lead to open international trading structure
Aggregate income and economic growth of each states are increased by open
system
Social instability produced by exposure to international competition is mitigated
by the factor mobility made possible by higher levels of development
There is no loss of political power from openness because the costs of closure are
asymmetrical for all members of the system
System composed of a few very large, but unequally developed states
Such distribution of political economic power is likely to lead to closed structure
Each state could increase income through more open system, but gains would be
modest
Openness would create more social instability in less developed countries
Rate of growth for more backward areas might be frustrated, while more
advanced ones would be enhanced
More open structure would have less developed states in politically more
vulnerable position, because their greater factor rigidity would mean higher
relative cost of closure
Thus large but relatively less developed states are unlikely to accept an open
trading structure
More advanced states cannot, unless they are militarily more powerful, force large
backward countries to accept openness
Hegemonic system
One in which there is single state that is much larger and relatively more
advanced than its trading partners
Cost and benefits are not symmetrical for all members of the system
Hegemonic state will have preference for open structure, which will increase its
aggregate national income and its rate of growth during its ascendancy: when its
relative size and technological lead are increasing
Open structure increases its political power, since the opportunity costs of closure
are least for a large state and developed state
Social instability resulting from exposure to the international system is mitigated
by hegemonic power’s relatively low level of involvement in international
economy and mobility of its factors
Small states in hegemonic system are also likely to opt for openness because the
advantages in terms of aggregate income and growth are so great, and their
political power is bound to be restricted regardless of what they do
Reaction of medium size state depends in part on way in which hegemonic power
utilizes its resources
The potentially dominant state has symbolic, economic, and military capabilities
that can be used to entice or compel others to accept and open structure
At symbolic level: in hegemonic structure, its policies may be emulated, even if
they are inappropriate for other states. Where there are very dramatic
asymmetries, military power can be used to coerce weaker states into open
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