Chapter 6 outline.docx

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University of California - Los Angeles
Political Science
Leslie Johns

World Politics Chapter 6 – International Trade – Outline I. Introduction a. Economists are virtually unanimous in concluding that international trade brings important benefits to national economies and that barriers to trade hurt economic growth and well-being i. Reducing trade barriers, i.e. trade liberalization, is good for a nation’s economy b. While trade is almost certainly beneficial for a country as a whole, it can harm the interests of groups and individuals in the society i. Trade, as well as trade liberalization, can create both winners and losers c. The nature of a country’s economy determines which groups have an interest in expanding or restricting the country’s trade with the rest of the world i. National political institutions affect the extent to which interest groups that stand to lose from world trade will prevail over those that stand to gain d. The politics of international trade also involves strategic interaction among national governments i. Governments can face difficult problems of bargaining and cooperation, which sometimes lead to trade conflicts among nations e. The institutions of the international trading system can facilitate cooperation among governments as they confront the demands of both their own constituents and their foreign counterparts II. What’s So Good About Trade? a. Trade is driven by the benefits of specialization i. Modern societies are based on specialization and trade among people with different specialties ii. Adam Smith argues for specialization and the division of labor in Wealth of Nations 1. Believed mercantilism and economic independence was foolish iii. Specialization requires access to large markets- where degree of division of labor depends on size of market iv. Comparative advantage – the ability of a country or firm to produce a particular good or service more efficiently than other goods or services, such that its resources are most efficiently employed in this activity 1. The comparison is to the efficiency of other economic activities the actor might undertake, not to the efficiency of other countries or firms 2. Implies that nations gain most by specializing in producing and exporting what it produces most efficiently 3. Implications of benefits from free trade v. Absolute advantage – the ability of a country or firm to produce more of a particular good or service than other countries or firms using the same amount of effort and resources vi. Some believe in simple terms: exports create jobs and imports take away jobs 1. Logic insists the opposite: imports are gains of trade while exports are the costs 2. In order to maximize the amount imports to consume, there is a need to earn more which is best done by producing what is produced by best vii. Protection only serves to raise costs to consumers b. Why Do Countries Trade What They Do? i. Heckscher-Ohlin trade theory 1. Explain national comparative advantage and therefore trading patterns 2. Theory that a country will export goods that make intensive use of factors of production in which it is well endowed; i.e. a labor-rich country will export goods that make intensive use of labor ii. Factors of production 1. Land 2. Labor (reference to unskilled labor) 3. Capital for investment (financial assets, equipment, etc) 4. Human capital (skilled labor that is enhanced by training and education) iii. Countries vary in their endowments which determine national comparative advantage iv. Different products require different mixes of endowments 1. E.g. farm goods require land, unskilled labor, and machinery (capital) v. Flipside of theory: countries will import goods that make intensive use of the resources in which it is scarce vi. Pattern of specialization leads to analogous trade patterns 1. Poor countries (little capital) import capital-intensive products; e.g. poor agricultural nations import machinery 2. Industrial countries are rich in capital and human capital 3. Many developing countries are rich in land, raw materials, or unskilled labor vii. Theory also has implications for domestic politics 1. Diplomatic and military relations influence trade patterns a. Hostile nations tend to trade less b. Why? Trade is riskier and businesses avoid environments where potential hostility can threaten their business c. Trade is suppose to be economically beneficial, so why aid an enemy; e.g. US and allies severing trade relations with USSR during Cold War 2. Some believe trade agreements and alliances have a reciprocal relationship with one another a. Super powers US and USSR in Cold War used trade relations to strengthen their alliances 3. Most influential factor is national trade policies a. Result of addressing interests of corporations, consumers, etc. c. Trade Restrictions are the Rule, Not the Exception i. Protectionism – the imposition of barriers to restrict imports 1. Commonly used devices include tariffs, quantitative restrictions (quotas), and other nontariff barriers ii. Trade barrier – any government limitation on the international exchange of goods 1. Examples include tariffs, quotas, import licenses, requirements that governments only buy domestically produced goods, and health and safety standards that discriminate foreign goods iii. Tariff – a tax imposed on imports; this raises the domestic price of the imported good and may be applied for the purpose of protecting domestic produces from foreign competition iv. Quantitative restriction – quantitative limits placed on the import of particular goods 1. Similar effect to tariff since limited supply increases price v. Nontariff barriers – obstacles to imports other than tariffs 1. Examples include quotas, regulations that favor domestic products, and other measures that discriminate foreign products vi. Movement for trade liberalization in mid 19 century 1. Very free trade up to 1914 2. Barriers still existed but trade grew at a rapid rate vii. World War I diminished trade and the Great Depression soon after did not help 1. Trading blocks: British, French, Italian, Japanese viii. Movement to reduce barriers after World War II 1. Most rich countries were relatively open by the 1980s 2. Trade relatively open since the 1990s 3. In US, trade has been a significant part of the economy since 1960s ix. Different in policies within a country 1. Most developed states are protective of agricultural producers 2. Developing nations protect manufactured products more than farm product 3. Steel is typically protected in developed nations III. Why Do Governments Restrict Trade? The Domestic Political of Protection i. Trade barriers usually reflect domestic concerns ii. Producers are concerned that imports cut into profits 1. Others may complain barriers keep their goods out of foreign markets iii. Most direct cost of production is to the consumers of a protected good iv. Redistributive effect – income is redistributed from domestic consumers to protected domestic industries v. Barriers introduce economic distortions 1. Domestic producers make more goods that they are not particularly good at making 2. Allocation of resources that are not consistent with comparative advantage b. Winners and Losers in International Trade i. Domestic industries protected by trade receive returns above the normal rate ii. Who loses? 1. Consumers of imported goods, including consuming industries a. E.g. 2002 tariffs on steal were protested by automobile industry to reverse policy 2. Exporters because it can result in retaliation in foreign markets 3. Citizens can punish politicians c. Economic Interests and Trade Policy i. Heckscher-Ohlin Approach 1. Trade is good when country exports goods that make intensive use of a factor of production ii. Stolper-Samuelson Approach 1. Protection benefits the scarce factor of production 2. If a country imports goods that make intensive use of its scarce factor, then limiting imports will help that factor a. E.g. a labor-scarce country, labor benefits from protection and loses from trade liberalization 3. Owners of scarce factors be protectionists while owners of abundant factors favoring free trade a. In rich societies (abundant capital and scarce unskilled labor) capitalists should be free traders while unskilled workers should be protectionist 4. Predictions are very broad about groups 5. However, policy making has many demands for protection from specific industries, not just groups of industries organized by intensive factors required a. American steel shows an exception in the Stolper- Samuelson model iii. The Ricardo-Viener or Specific-Factors Approach 1. Emphasizes the sector in which factors of production are employed, rather than the nature of the factor itself 2. Differentiates from Hecksher-Ohlin, for which the nature of the factor is the principle consideration 3. Example: a. Steel manufacturers do not care about the profits of capital in general but rather about the profits only available to steel b. Same with workers or farmers when their skills or land or specific to a particular industry or crop 4. Someone in an industry that faces stiff import competition will be protectionist while someone in an exporting industry will promote free trade iv. Accuracy of these approaches varies among industries and countries over time v. Groups support trade policies because they believe those policies complement or permit other polices they favor d. Domestic Institutions and Trade Policy i. Trade protection tends to help relative narrow and concentrated groups ii. Political institutional forms that are particularly response to those interests will favor protection more iii. The Organization of Interests 1. Small groups can organize better than large groups 2. Concentrated producers will win over diffuse consumers 3. Economic interests vary in different societies a. In Western Europe, there is a very large centralized labor federation that creates a common working class interest b. In US, labor unions are organized by industry 4. Organization reflecting concerns of broad groups is more likely to ignore demands of specific groups iv. The Representation of Interests through Political Institutions 1. Institutions are more likely to favor narrow interests 2. Democratic developing countries are more likely to liberalize trade 3. Variance depending on electoral system a. European countries have many class-based parties with working class voting for socialist parties as oppose to parties affiliated with farming and business b. Affects expression of interests and bias toward special or general interests 4. Politicians with local political constituencies are more response to local interest groups a. Strong executive is more likely to value national policies and free trade 5. President and power to negotiate and present agreement to Congress since 1934 a. President bias favoring free trade (Congress was not as pro trade since members are more responsive to local interests) 6. Partisan effects a. Labor typically supports left-wing b. Leftist governm
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