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Lecture 8: Internationa l Trade April 29, 2008 Professor Timothy C. Lim Cal State Los Angeles POLS/ECON 426 International.

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Presentation on theme: "Lecture 8: Internationa l Trade April 29, 2008 Professor Timothy C. Lim Cal State Los Angeles POLS/ECON 426 International."— Presentation transcript:

1 Lecture 8: Internationa l Trade April 29, 2008 Professor Timothy C. Lim Cal State Los Angeles POLS/ECON 426 International Political Economy

2 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 International Trade

3 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, its 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 Dynamics of the World Economy International Trade

4 International Trade: Opening Remarks International trade--and specifically free trade--can therefore easily be seen as primarily beneficial: after all, youre 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, arent there fewer jobs for Americans? By buying so many imported products, arent we indirectly reducing our own wages? By relying of foreign technology or resources, is the country becoming more dependent on others? Dynamics of the World Economy 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

5 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 (govt) policies designed to restrict the import of goods and services or otherwise make imported goods less competitive relative to domestically manufactured goods Dynamics of the World Economy International Trade As I just suggested, we also need to understand that international trade and free trade are not synonymous

6 International Trade: Some Definitions Tariffs Quotas Subsidies Currency Controls Administrative Regulations (a non-tariff barrier or NTB) Voluntary Export Restraints (VERs) Dynamics of the World Economy International Trade 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

7 Dynamics of the World Economy International Trade Average Tariffs, WTO Estimates 2006

8 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? Dynamics of the World Economy International Trade Before discussing these questions, we will first watch a video on that addresses just these questions. Watch. Listen. Be ready to discuss.

9 International Trade: The Debate What 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 Dynamics of the World Economy International Trade NOTE: You should all be able to answer this question on your own … but lets review quickl comparative advantage factor endowment

10 International Trade: The Debate Factor 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 productione.g., land, technology, and capitalalso 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! Dynamics of the World Economy International Trade

11 International Trade: The Debate International Trade: Static and Dynamic Benefits Its 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? Dynamics of the World Economy International Trade Simple Answer: Trade generates faster, more productive economic growth and development over time

12 International Trade: The Debate International 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 stronger over time Dynamics of the World Economy International Trade international trade

13 International Trade: For Discussion So, 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 we adjust the parameters and ask about free trade specifically? Dynamics of the World Economy International Trade

14 International Trade: The Debate What 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 Dynamics of the World Economy International Trade

15 International Trade: The Debate Liberals cant handle the Truth! What is the Truth Col. Jessup (Jack Nicholson) is talking about? How does this truth help us understand the limitations of the liberal perspective? International Trade: The Debate Liberals cant handle the Truth! What is the Truth Col. Jessup (Jack Nicholson) is talking about? How does this truth help us understand the limitations of the liberal perspective? Dynamics of the World Economy International Trade

16 International Trade: The Debate Recognizing 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 Debate Recognizing 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. Dynamics of the World Economy International Trade

17 International Trade: The Debate Infant Industry Protection: The Rationale/Truth Countries that dont have a manufacturing base, that dont have the capacity to produce in cutting-edge industries, will also be weak and subservient Countries that dont have competitive industries will never achieve strong, independent economic growth Countries that dont 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 Debate Infant Industry Protection: The Rationale/Truth Countries that dont have a manufacturing base, that dont have the capacity to produce in cutting-edge industries, will also be weak and subservient Countries that dont have competitive industries will never achieve strong, independent economic growth Countries that dont 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 Dynamics of the World Economy International Trade

18 International Trade: The Debate National 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? Dynamics of the World Economy International Trade

19 International Trade: The Debate The 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 skeptical of free trade because it reflects the interests of the capitalist class, and specifically, of the the most dominant players: transnational corporations Dynamics of the World Economy International Trade

20 International Trade: The Debate The 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 Dynamics of the World Economy International Trade

21 International Trade: The Debate The 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 Dynamics of the World Economy International Trade

22 International Trade: The Debate To 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 Lawrence Summers, Chief Economist for the World Bank (and later President of Harvard) … Dynamics of the World Economy International Trade Memorandum (Confidential) From: Lawrence Summers Chief Economist, World Bank Health-impairing pollution should be done in the country with the lowest cost, which will be the countries with the lowest wages Just between you and me, shouldnt the World Bank be encouraging more migration of the dirty industries to the [Third World]? If toxic waste or pollutants cause cancer in later life, why not send that material to countries where people dont live so long? The economic logic behind dumping a load of toxic waste in the lowest-wage country is impeccable and we should face up to that. Cheers, Larry Memorandum (Confidential) From: Lawrence Summers Chief Economist, World Bank Health-impairing pollution should be done in the country with the lowest cost, which will be the countries with the lowest wages Just between you and me, shouldnt the World Bank be encouraging more migration of the dirty industries to the [Third World]? If toxic waste or pollutants cause cancer in later life, why not send that material to countries where people dont live so long? The economic logic behind dumping a load of toxic waste in the lowest-wage country is impeccable and we should face up to that. Cheers, Larry

23 International Trade: The Debate The Marxist Perspective Dynamics of the World Economy International Trade 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: its not governments) Video intentionally removed See Coursesite

24 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? Dynamics of the World Economy International Trade An example: Japan, Taiwan, and South Koreas 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

25 International Trade: Fair Trade The 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 flower industry in Ecuador helps to illustrate key aspects of the fair trade argument Dynamics of the World Economy International Trade Video intentionally removed See Coursesite

26 International Trade: Managed Trade One 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 ___________________________________ Dynamics of the World Economy International Trade non-discrimination reciprocity transparency 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

27 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 background information 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 Dynamics of the World Economy International Trade General Agreement on Tariffs and Trade (GATT)

28 International Trade: The WTO What 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 its also a number of other things … Its an organization for liberalizing trade Its a forum for governments to negotiate trade agreements Its a place to settle trade disputes It operates a system of trade rules Dynamics of the World Economy International Trade

29 International Trade: The WTO The 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 Dynamics of the World Economy International Trade

30 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? Dynamics of the World Economy International Trade

31 International Trade: The WTO Classical 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: Dynamics of the World Economy International Trade 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

32 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 Dynamics of the World Economy International Trade This view is referred to as pluralism

33 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 Dynamics of the World Economy International Trade 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

34 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 view illustrated in this video Dynamics of the World Economy International Trade Video intentionally removed See Coursesite


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