World Politics in a New Era World Politics: Trade and Investment

Trade All states engage in trade Overcome different allocations of resources Ricardo’s Model of Trade – Absolute advantage – Comparative advantage – Mutual gains from trade even if one party has an absolute advantage in all goods – Mutual gains will lead to specialization Goods will be less expensive Production will be more efficient for both

Trade Trade barriers – Why do states implement barriers to free trade? To protect domestic businesses Protection of individuals who have lost jobs or declared bankruptcy Individuals and groups may be politically connected Trade barriers are often a result of a conflict of domestic interests – Forms of protectionism Tariffs (Example: Smoot-Hawley) Non-tariff barriers (quotas, VERs, and subsidies)

Trade Balance of Payments – Trade balance – How much money locals earned overseas – The amount of foreign currency invested in the domestic economy – The level of official foreign aid given to other countries – The amount of foreign currency held by the central bank – The current-account balance A positive current-account balance indicates that the country enjoys a trade surplus A negative balance indicates a trade deficit

Trade Exchange rates – Each state has its own currency – A fixed exchange rate system Prevents currency fluctuations Problems during a recession – A floating exchange rate system Accurately reflects a country’s economic health Introduces an element of risk and uncertainty

Capital Markets and Investments Capital markets – Include banks, securities firms, stock markets, and foreign exchange markets – Importance enhanced by floating exchange rate system – The currency market is inherently unstable and unpredictable – Speculation in currency markets – The Tobin tax – States have instituted protection against capital flight – Capital controls are viewed by many as important for developing countries

Capital Markets and Investments Foreign direct investment – Private corporate investment in foreign countries – Developing countries are beginning to amend domestic practices in order to attract more FDI – Good or bad for developing countries? Incentives tends to be costly May be harmful to the domestic economy Corruption Might contribute to xenophobic responses

Economic Power Trade and industry – Gross national income (GNI) – Per capita income Technology – Creates efficiencies and spawns entire new industries – Technological advantages can dissipate quickly – The importance of the ability to move and use information Globalization and fragmentation are capable of stripping ostensible economic power from a country or enhancing it

Economics and Politics Realism – Economic battles are fought with tariffs and subsidies – Relative gains in the economic realm – Reluctant to cooperate with tomorrow’s potential enemy – Economic policy is a tool of power politics – Economic decisions should enhance a state’s level of security and influence

Economics and Politics Liberalism – The free market should function unhindered – Serving the greater good – There are several caveats, however There is no pure free trade There are certain costs Some government oversight is necessary

Economics and Politics Liberalism – Believe in the possibility and benefits of cooperation – Trade is viewed as a positive-sum game The problem is the difficulty of coordination and enforcement of cooperative agreements Options for overcoming the problems of cheating and the issue of relative gains – Reciprocity – International regimes – International law

Economics and Politics Hegemonic stability theory – Guarantor of international economic stability is the existence of a hegemon Sets and enforces the rules of the global economy Promotes trade in its own best interest – Hegemony is ultimately self-defeating – Demand that its allies “share the burden” – Relative stability with the United States as hegemon

Economics and Politics Constructivism – The concept of embedded liberalism – The individual state’s domestic-level beliefs in the value of the system – Even in the absence of a hegemon, these beliefs would persist – A breakdown would lead to a subsequent breakdown of the liberal economic order – Thus, when states lose faith in free trade, it breaks down – When they believe in its benefits, they uphold it