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International Trade

International Trade. CHAPTER EIGHT. Dr. Clayton Thyne PS 235-001: World Politics Spring 2009 Goldstein & Pevehouse, International Relations , 8/e Student notes version. Theories of Trade. International trade amounts to a __________ of the total economic activity in the world.

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International Trade

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  1. International Trade CHAPTER EIGHT Dr. Clayton Thyne PS 235-001: World Politics Spring 2009 Goldstein & Pevehouse, International Relations, 8/e Student notes version

  2. Theories of Trade • International trade amounts to a __________ of the total economic activity in the world. • Scholars of international political economy (IPE) study... • Most focus is on the… • Global South is… • States are the most important actors in IPE, but not as important as in… • Actors in IPE tend to act in… • Collective goods problem is important throughout...

  3. Liberalism and Mercantilism • Two major approaches within IPE differ on their views of trade. • Mercantilism • Emphasizes relative power: • Importance of economic transactions lies in their implications for… • Characterized by:

  4. Liberalism and Mercantilism • Mercantilism • Economics should serve... • Creation of wealth underlies… • Achieved prominence... • Declined in… • Favorable balance of trade: positive balance of trade versus negative balance of trade

  5. Figure 8.3

  6. Figure 8.2

  7. US Balance of Trade

  8. Liberalism and Mercantilism 2. Liberalism • Generally shares the assumption of… • Holds that by building international organizations, institutions, and norms, states can… • It matters little to liberals whether… • Individuals and firms are… • Dominant… • Characterized by:

  9. Figure 8.1

  10. Liberalism and Mercantilism • Free market • Bargaining space • Market price • Demand curve • Supply curve • Equilibrium price

  11. Supply and Demand: Basic Curves Supply: amount supplied at each price Price (p) Demand: amount demanded at each price Quantity (q)

  12. Supply and Demand:variation 1—price set too high Supply: amount supplied at each price Price (p) Demand: amount demanded at each price Quantity (q) Example: government cartel, minimum wage Return to equilibrium: suppliers have too much inventory, so they’ll lower prices

  13. Supply and Demand:variation 2—price set too low Supply: amount supplied at each price Price (p) Demand: amount demanded at each price Quantity (q) Example: government-set prices Return to equilibrium: consumers compete for small quantities w/ low price, produces raise price to maximize profits

  14. Supply and Demand:variation 3—demand shift right (increase) Supply: amount supplied at each price Price (p) Demand (new) Demand (old) Quantity (q) Example: coffee becomes trendy, summer driving season More demanded (by definition), so the equilibrium price increases

  15. Supply and Demand:variation 4—demand shift left (decrease) Price (p) Demand (old) Demand (new) Quantity (q) Example: boycott of some state’s goods, product becomes less trendy, end of driving season Less demanded (by definition), so the equilibrium price decreases

  16. Supply and Demand:variation 5—supply shift right (increase) Supply (old) Supply (new) Price (p) Demand: amount demanded at each price Quantity (q) Example: invention  more efficient production (computer industry), oil discovered More supplied because it (may be) cheaper to produce

  17. Supply and Demand:variation 6—supply shift left (decrease) Supply (new) Supply (old) Price (p) Demand: amount demanded at each price Quantity (q) Example: environmental laws make producing less profitable, OPEC cuts production Less supplied because it (may be) more expensive to produce

  18. Comparative Advantage • The overall success of liberal economics is due to… • These gains result from… • Transaction costs • Two commodities of great importance in the world are oil and cars. • Example:

  19. Comparative Advantage:The easy example For 1 unit of resources, each state can produce… State B 6 5 4 3 2 1 6 2 3 4 5 1 State A

  20. Comparative Advantage:The easy example Who should produce apples? Bananas? State B 6 5 4 3 2 1 6 2 3 4 5 1 State A

  21. Comparative Advantage:A bit more complicated For 1 unit of resources, each state can produce… State B 6 5 4 3 2 1 6 2 3 4 5 1 State A

  22. Comparative Advantage: A bit more complicated Who should produce apples? Bananas? State B 6 5 4 3 2 1 6 2 3 4 5 1 State A

  23. Comparative Advantage • International trade generally expands … • Trade is not without drawbacks: • Long-term benefits… • Benefits and costs of trade tend… • Protectionism

  24. Political Interference in Markets • A free and efficient market requires:

  25. Political Interference in Markets • World markets • Monopoly • Oligopoly • Corruption • Movement from… • Politics provides… • Taxation is…

  26. Political Interference in Markets • Sanctions • Governments can apply sanctions… • Very difficult to… • Autarky • Self-reliance –

  27. Protectionism • Definition: When states try to… • Protection of domestic industries… • Infant industry protection… • Protection of industry vital to… • Defense effort to…

  28. Protectionism • Means to discourage imports • Tariff or duties: • Nontariff barriers: • Subsidies to a domestic industry, which allow it to lower its prices without losing money: • Restrictions and regulations • Economic nationalism • Protectionism can have both positive and negative effects on an economy • Problems:

  29. Trade Regimes • Definition: • Two contradictory trends are at work in global trading patterns today:

  30. The World Trade Organization • WTO is a global, multilateral IGO that promotes, monitors, and adjudicates international trade. • Successor organization to • In 2007, WTO had 150 countries (all of the major countries, with the exception of Russia) in membership.

  31. The World Trade Organization

  32. The World Trade Organization • Reciprocity • Basis of… • Most favored nation (MFN) concept: • Exception: • Benefits to belonging to WTO outweigh the costs.

  33. Bilateral and Regional Agreements • Most international trade is governed by more specific international political agreements. • There are generally two types: • Bilateral trade agreements • Regional free-trade areas

  34. Cartels • Definition: • Counter to… • Can use a variety of means to affect prices • Most effective is to coordinate limits on production by each member so as to lower the supply, relative to demand, of the good. • Organization of Petroleum Exporting Countries (OPEC)

  35. Cartels • Consumers do not usually form cartels, but the major oil-importing states formed their own organization – the International Energy Agency (IEA) • Other cartels: • Coffee • minerals

  36. Table 8.1

  37. Industries and Interest Groups • Definition: • Lobbying, forming interest groups, paying bribes, and even encouraging coups • Actors include industry-sponsored groups, companies, labor unions, and individuals. • E.g., U.S. tobacco exports vs. American Cancer Society • Industrial policy • Role of industries in trade negotiations • Agriculture

  38. Industries and Interest Groups • Intellectual property rights • Service sector of the economy

  39. Industries and Interest Groups • Arms Trade • Smuggling

  40. Enforcement of Trade Rules • Economic agreements between states depend strongly on… • Enforcement of equal terms of trade is…

  41. Enforcement of Trade Rules • Retaliation • Dumping: • Retaliatory tariffs… • International Trade Commission (U.S. agency) • Trade cooperation easier to achieve under… • Post WWII: • Now:

  42. Economic Globalization • Def: • Globalization is transforming not only trade, but…

  43. The Evolving World Economy • 1750, Britain had the world’s most advanced economy • Today, the largest and most advanced economy belongs to the United States.

  44. The Evolving World Economy • Technological innovation • Great Depression and resultant protectionist policy • Keynesian economics • WWII • Soviet bloc - centrally planned economy • Today there is a single integrated world economy that almost no country can resist joining.

  45. Figure 8.4

  46. Resistance to Trade • Globalization of the world economy has … • Growing nationalism • Competition from low-wage countries in the global South • Human rights • Environmental issues

  47. Resistance to Trade • Benefits of free trade more diffuse than the costs • Lower prices on goods… • Consumers may spend… • Cheap imports help keep…

  48. Interdependence • Definition: • This is a… • Mutually dependent on each other’s… • In IPE, interdependence refers less often to a bilateral mutual dependence than to a multilateral dependence in which…

  49. Interdependence • Short-term dependence versus long-term dependence • Over time, as the world economy develops and technology advances… • Impact on… • Integration through… • Arises from… • Inherently… • Drawbacks of interdependence

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