Lecture 8: Internationa l Trade April 29, 2008 Professor Timothy C. Lim Cal State Los Angeles...

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Lecture 8:

International

TradeApril 29, 2008

Professor Timothy C. LimCal State Los [email protected]

POLS/ECON 426 International Political Economy



International Trade: Opening Remarks“Trade across borders inflames passions and creates controversies that are absent in discussions of trade within countries”

This tells us that international trade, as opposed to trade in general, requires special attention

To understand international trade, moreover, requires that we examine it dispassionately and analytically, that is, as students of IPE/GPE and not as proponents or opponents

Dynamics of the World Economy

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International Trade: Opening Remarks

International trade is important: not only is it an integral part of all our lives, but the process of international trade can have a materially profound effect on our lives and the lives of others

No doubt all of you rely on imported products; in fact, it’s likely that most of what you own is the product of trade: your clothes, your cell phones, your computer, your cars, your TVs and DVD players, and so on


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International Trade: Opening Remarks International trade--and specifically free

trade--can therefore easily be seen as primarily beneficial: after all, you’re all benefiting right now from imported products, both directly and indirectly

But is this necessarily the case?

By buying so many foreign products, for example, aren’t there fewer jobs for Americans? By buying so many imported products, aren’t we indirectly reducing our own wages? By relying of foreign technology or resources, is the country becoming more

dependent on others?


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We will address the benefits or harm of free trade shortly, but first, we need to be clear about basic

terms of international trade

We will address the benefits or harm of free trade shortly, but first, we need to be clear about basic

terms of international trade

International Trade: Some Definitions Trade: The exchange of one commodity for another

International Trade: Exchange conducted across national borders

In international trade, the existence of national borders have added significance in so far as different national authorities may attempt to control the activities of their citizens in making transactions across borders: such control in typically exercised through a variety of means collectively labeled “protectionism”

Protectionism: Refers to (gov’t) policies designed to restrict the import of goods and services or otherwise make imported goods “less competitive” relative to domestically manufactured goods


International Trade


International TradeAs I just suggested, we also

need to understand that “international trade” and

“free trade” are not synonymous



International Trade: Some Definitions

Tariffs

Quotas

Subsidies

Currency Controls

Administrative Regulations (a non-tariff barrier or NTB)

Voluntary Export Restraints (VERs)


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A tax on the price of imports, which raises their price

A quantitative restriction against goods and services

A payment to domestic firms to make them more competitive

Limits currency for purchase of foreign goods

Bureaucratic procedures specifically designed to limit imports

Bilateral agreements whereby a country “voluntarily” agrees to limit imports


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Average Tariffs, WTO Estimates 2006

International Trade: Some Questions

Is trade beneficial or harmful? More specifically, free trade beneficial or harmful?

Are restrictions on trade ever justified? If so, when and under what conditions?

Is the only choice between free trade and “unfree” trade?


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Before discussing these questions, we will first watch a video on that addresses just these questions. Watch.

Listen. Be ready to discuss.

Before discussing these questions, we will first watch a video on that addresses just these questions. Watch.

Listen. Be ready to discuss.



International Trade: The DebateWhat is the liberal perspective on international

trade?

Trade is a positive-sum activity: by engaging in trade, everyone benefits because trade increases efficiency and raises productivity

We already know that is is based largely on the concept of _________________________. But another important concept come from two economists, Heckscher and Ohlin: _______________________ theory


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NOTE: You should all be able to answer this question on your own … but let’s

review quickl

NOTE: You should all be able to answer this question on your own … but let’s

review quickl

comparative advantage

factor endowment



International Trade: The DebateFactor Endowment Theory Ricardo assumed that differences in labor

productivity were the sole determinants of comparative advantage, but other economists argued that this was too limiting

In particular, Herkscher and Ohlin argued that other factors of production—e.g., land, technology, and capital—also needed to be considered (the video and book provide examples)

Key point: Despite modifications and refinements, liberal economic theory shows, time and time again,

that free trade is beneficial to everyone!


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International Trade: The DebateInternational Trade: Static and Dynamic

Benefits It’s important to understand that trade has

both static and dynamic benefits

The static benefit is the “one-time” benefit from an exchange of goods/services itself: both parties get something they want, and at lower prices than if they produced everything themselves

The dynamic benefit is perhaps even more important: What are dynamic benefit flows from increased trade?


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Simple Answer: Trade generates faster, more productive economic growth and development

over time

Simple Answer: Trade generates faster, more productive economic growth and development

over time



International Trade: The DebateInternational Trade: Dynamic Benefits

What liberal economists tell us is that trade is a basic “engine of growth” and that it generates a number of dynamic, educative effects

These include, most importantly, the diffusion of knowledge of production and organizational techniques, which will make a national economy much strongerover time


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international trade

International Trade: For DiscussionSo, is the liberal argument for “international trade” utterly persuasive?

Are they any holes or flaws in the argument? Or should we all just embrace the liberal idea?

Does the answer change when weadjust the parameters and ask aboutfree trade specifically?


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International Trade: The DebateWhat is the mercantilist perspective on trade?

Must begin with an understanding that the IPE is shaped by power, and specifically by an unequal distribution of power

States, by their very nature, use power to enhance and promote their own interests first and foremost; this is true for “liberal” and “illiberal” states

One implication: Even the most “liberal” states--including the U.S. today--are protectionist when it serves their interests


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International Trade: The Debate“Liberals can’t handle the Truth!”

What is the “Truth” Col. Jessup (Jack Nicholson) is talking about?

How does this “truth”help us understand thelimitations of the liberalperspective?

International Trade: The Debate“Liberals can’t handle the Truth!”

What is the “Truth” Col. Jessup (Jack Nicholson) is talking about?

How does this “truth”help us understand thelimitations of the liberalperspective?


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International Trade: The DebateRecognizing “The Facts of Life”

Liberal theory is well and fine if power and inequality are ignored; but, when we recognize these aspects of the real world, we understand that states must … Nurture and protect their own domestic manufacturers, often through infant industry policies

Put national security needs above the principles of free trade, which means ensuring a manufacturing base, maintaining access to critical resources (including food) and technology, etc.

International Trade: The DebateRecognizing “The Facts of Life”

Liberal theory is well and fine if power and inequality are ignored; but, when we recognize these aspects of the real world, we understand that states must … Nurture and protect their own domestic manufacturers, often through infant industry policies

Put national security needs above the principles of free trade, which means ensuring a manufacturing base, maintaining access to critical resources (including food) and technology, etc.


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International Trade: The DebateInfant Industry Protection: The Rationale/Truth

Countries that don’t have a manufacturing base, that don’t have the capacity to produce in cutting-edge industries, will also be weak and subservient

Countries that don’t have competitive industries will never achieve strong, independent economic growth

Countries that don’t protect and nurture vital industries will always be second- or third-rate powers; they will always be dependent on others and on the ebbs and flows of larger economic forces

International Trade: The DebateInfant Industry Protection: The Rationale/Truth

Countries that don’t have a manufacturing base, that don’t have the capacity to produce in cutting-edge industries, will also be weak and subservient

Countries that don’t have competitive industries will never achieve strong, independent economic growth

Countries that don’t protect and nurture vital industries will always be second- or third-rate powers; they will always be dependent on others and on the ebbs and flows of larger economic forces


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International Trade: The DebateNational Security: The Ultimate Truth Economic power (e.g., manufacturing

capacity, control of resources, capital, technology) is a weapon

In a war, would your rather have steel or coffee? Would you rather have “ownership” of a vital resource, such as oil, or would rather have the manufacturing and technological capacity to take what you need, when you need it?


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International Trade

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International Trade: The DebateThe Marxist Perspective As we already know, Marxists share many of

the same general criticisms as mercantilists, albeit for different reasons

One shared concern is with power: Marxists are skepticalof free trade because it reflectsthe interests of the capitalistclass, and specifically, of thethe most dominant players: transnational corporations


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International Trade: The DebateThe Marxist Perspective: Basic Points TNCs benefit disproportionately from free trade,

and since the leading TNCs are based or have significant operations in Western states, workers in those countries generally do well, too (but not always or necessarily)

More generally, richer countries dominate the international trading system: they write the rules and control the framework within which all trade is conducted; with this control, they are able to bias the system in their favor


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International Trade: The DebateThe Marxist Perspective: Basic Points When it suits their interests, TNCs and their states

ignore the rules of free trade

Case in point: Income support for American dairy farmers

In 2002, Congress added an income support program for dairy farmers, which distributes cash payments whenever prices fall below target levels ….To enforce artificially high prices, the government imposes import barriers on milk, butter, cheese, and other products. Without those barriers, consumers could simply purchase lower-priced foreign goods. Imports of cheese, butter, and dried milk are limited to about 5 percent or less of U.S. consumption.

An important consequence (besides higher prices for American consumers): Poor countries cannot compete against American producers, even in their home markets, since surplus American goods often flood foreign markets


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International Trade: The DebateTo Marxists, the logic of comparative advantage not only locks poorer countries into permanently subservient positions, but can be extraordinarily perverse

Consider the following example,a memo written by LawrenceSummers, Chief Economistfor the World Bank (and laterPresident of Harvard) …


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International TradeMemorandum (Conf

idential)

From: Lawrence

Summers

Chief Economist,

World Bank

Health-impairing

pollution shoul

d be

done in the coun

try with the low

est

cost, which will

be the countrie

s

with the lowest

wages

Just between you

and me, shouldn

’t

the World Bank b

e encouraging mo

re

migration of the

dirty industrie

s to

the [Third World

]?

If toxic waste o

r pollutants cau

se

cancer in later

life, why not se

nd

that material to

countries where

people don’t liv

e so long?

The economic log

ic behind dumpin

g a

load of toxic wa

ste in the lowes

t-

wage country is

impeccable and w

e

should face up t

o that.Cheers,

Larry

Memorandum (Conf

idential)

From: Lawrence

Summers

Chief Economist,

World Bank

Health-impairing

pollution shoul

d be

done in the coun

try with the low

est

cost, which will

be the countrie

s

with the lowest

wages

Just between you

and me, shouldn

’t

the World Bank b

e encouraging mo

re

migration of the

dirty industrie

s to

the [Third World

]?

If toxic waste o

r pollutants cau

se

cancer in later

life, why not se

nd

that material to

countries where

people don’t liv

e so long?

The economic log

ic behind dumpin

g a

load of toxic wa

ste in the lowes

t-

wage country is

impeccable and w

e

should face up t

o that.Cheers,

Larry

International Trade: The DebateThe Marxist Perspective


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This video on the WTO reflects some

of the key criticisms

Marxists (or radicals) have

toward free trade

Pay particular attention to whom

the video identifies as the power behind the WTO (hint: it’s

not governments)

Video intentionally removed See Coursesite

International Trade: Summing Up Despite what liberals say, the debate about free

trade is far from settled: to a certain extent, both mercantilists and radicals make powerful counter-arguments; at the same time, liberal views cannot be easily discarded either

In the debate, we must also be careful to distinguish arguments about international trade and free trade

Consider the distinction: How might it be important?


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An example: Japan, Taiwan, and South Korea’s emergence as major trading countries was not the product of free trade, but of a “trading system” created by the United States, which allowed all three countries to export freely to the U.S. while keeping their own markets relatively closed

An example: Japan, Taiwan, and South Korea’s emergence as major trading countries was not the product of free trade, but of a “trading system” created by the United States, which allowed all three countries to export freely to the U.S. while keeping their own markets relatively closed

Another Perspective: Free trade versus “Fair Trade” • Fair trade suggests that non-market forces are

explicitly allowed to play a role in the exchange of goods in order to ensure that the exchange of goods

benefits as many individuals as possible

Another Perspective: Free trade versus “Fair Trade” • Fair trade suggests that non-market forces are

explicitly allowed to play a role in the exchange of goods in order to ensure that the exchange of goods

benefits as many individuals as possible

International Trade: Fair TradeThe concept of “Fair Trade” also radical critiques of free trade that focus on environmental protection and the protection of human and gender rights

This video on the flowerindustry in Ecuador helpsto illustrate key aspects ofthe fair trade argument


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Video intentionally removed See Coursesite

International Trade: Managed TradeOne of last points in our discussion underscores a critical, but often, overlooked aspect of international trade in the post-war period: it is not a laissez-faire system of free trade, but a system of managed trade

The system of managed trade is based on four key principles

___________________________________

___________________________________

___________________________________

___________________________________


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non-discrimination

reciprocitytransparency

multilateralism

Taken together, the 4 principles tell us that international trade takes place within an agreed upon framework, or regime, that requires cooperation, rule-making, and (implicitly) coercion

Taken together, the 4 principles tell us that international trade takes place within an agreed upon framework, or regime, that requires cooperation, rule-making, and (implicitly) coercion



International Trade: Managed Trade The rule-based framework of contemporary

international trade is represented in the World Trade Organization (WTO), which is the successor to the …

____________________________________________

The book provides basic backgroundinformation on GATT: You should all be familiar with this information already (or, if not, you should review it on your own later)

We will focus on the WTO


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General Agreement on Tariffs and Trade (GATT)





International Trade: The WTOWhat is the WTO? What does it do? Simply put: the WTO deals with the rules of

trade between nations at a global or international level, but it’s also a number of other things …

It’s an organization for liberalizing trade

It’s a forum for governments to negotiate trade agreements

It’s a place to settle trade disputes

It operates a system of trade rules


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International Trade: The WTOThe WTO is transforming the management of world trade. Among a range of actions, it has …

engineered a shift from trade liberalization based on tariff concessions to discussions of domestic policies, institutional practices and regulations

radically expanded agenda for “trade issues”: everything from services, to intellectual property rights, copyright protection, and even non-trade policies

initiated a movement toward “harmonization,” which means that the WTO is creating a framework that may ultimately force all countries to adopt the same basic laws, regulations and institutions at the domestic level: this is a monumental change


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International Trade: The WTO In sum, the WTO has become the “key institutional

node of the [contemporary] trade regime”

It, therefore, behooves all of us to pay close attention to the activities of the WTO

Again, though, our interpretation of the what the WTO does, and whether its activities are good, bad or something else, depends a great deal on theoretical lens through which we view it

Should we embrace or fear the WTO?


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International Trade: The WTOClassical liberals are ambivalent about

the WTO On the one hand, the WTO does promote freer,

less restrictive trade

At the same time, the WTO, by its very existence, contradicts the ideal of laissez faire; here is how one liberal critic of the WTO voices his objection:


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Clearly, the goal [of the WTO] is not worldwide free trade based on the division of labor, but rather of a worldwide welfare state based on the faith that bureaucrats know best how to run businesses in which they themselves have no stake.

From “Why Managed Trade Is Not Free Trade,” by Robert Batemarco

Clearly, the goal [of the WTO] is not worldwide free trade based on the division of labor, but rather of a worldwide welfare state based on the faith that bureaucrats know best how to run businesses in which they themselves have no stake.

From “Why Managed Trade Is Not Free Trade,” by Robert Batemarco





International Trade: The WTO Classical liberals also understand that policies

are not always determined by what is “best” or most economically efficient, but by the “interests” of various actors pursuing their own self-serving goals

In large international organizations such as the WTO, then, competing interest groups--representing importers, exporters, manufacturers, agriculture, declining industries, rising industries, labor, environmentalists, and so on--may use the political processes of the WTO to protect their own interests at the expense of free trade


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This view is referred to as pluralism

This view is referred to as pluralism





International Trade: The WTO Mercantilists are suspicious of the WTO,

but view it as potentially useful

In the most powerful countries, the WTO would be seen as essentially good: it protects and promotes the interests of the richest states, while providing a veneer of legitimacy

In weaker states, the WTO is problematic, but not necessarily so: when they act collectively within the framework of the WTO, it is possible for weaker states to achieve some limited goals


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This helps to explain why there are so many sub-groups and coalitions in the WTO, such as the LMG, G-20, G-22, G-90, Cairns Group,

the ACP

This helps to explain why there are so many sub-groups and coalitions in the WTO, such as the LMG, G-20, G-22, G-90, Cairns Group,

the ACP





International Trade: The WTO Radicals are the most skeptical and even

hostile toward the WTO

One of their biggest objections is that the WTO is fundamentally undemocratic, and makes decisions that reflect only the interests of powerful corporate actors, while ignoring the voice of the people

We can see this viewillustrated in this video


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Video intentionally removed

See Coursesite

Lecture 8: Internationa l Trade April 29, 2008 Professor Timothy C. Lim Cal State Los Angeles...

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