Cross-Border Trade: History and Growth

• Cross-border trade (international trade) has existed for centuries and is an essential part of modern economies.
• Historically, trade was central to state revenue and power in ancient civilizations like Athens, Egypt, Venice, Florence, Genoa, and the Hanseatic League.
• The Silk Road was established around 2000 BCE, connecting Asia, the Middle East, North Africa, and Europe through economic and cultural exchange.
• The Silk Road extended 4,000 miles by land and sea. It facilitates trade between China, India, the Middle East, and Europe.

Growth of Cross-Border Trade

• Modern international trade is at an unprecedented scale.
• Trade grew at an average rate of 3.8% per year from 1850-1913.
• Trade grew at an average rate of 6.2% per year from 1950-2007, and 8.2% from 1950-1973.
• Trade value increased from $84 billion in 1953 to $13.6 trillion in 2007.
• Merchandise trade (imports + exports) grew from 18% of world GDP in 1960 to over 50% in 2008.
• The 2008 global recession caused a significant but short-lived decline.
• After the 2008 global recession, trade continued growing.

Tensions and Disputes in Trade

• Historical trade disputes have persisted despite trade's benefits.
• Over the past century, these tensions have fluctuated but never disappeared.
• Trade has driven economic growth and prosperity worldwide.
• Liberal economists and many social scientists argue that trade is beneficial both for individual national economies and the global economy.
• Most people acknowledge that the alternative to trade, autarky (complete economic self-sufficiency) is unrealistic and self-defeating in modern times.

Debates on Trade

• The ongoing debate over cross-border trade revolves around: who benefits and who is harmed by trade.
• Practical political issues (distribution of gains and losses among nations and industries).
• Theoretical disagreements regarding trade's overall impact.
• The chapter will analyze these debates and their implications for trade policies.

Political and Institutional Framework of Trade

• The link between politics and economics is crucial for trade expansion.
• The chapter will focus on developments since post-World War II, when liberal trade rules became embedded in the international system.
• Key questions include: How, why, and when did liberal trade policies emerge?
• How have institutions shaped global trade?
• How have political and economic forces constructed (or deconstructed) the trade framework?

Understanding Trade

• Trade is the exchange of goods or services.
• Barter trade involves direct exchange of goods/services (e.g., trading a laptop for an iPad).
• Modern trade involves money as a medium of exchange.
• Domestic trade takes place within a single economy.
• Cross-border trade (International trade) Involves at least two national governments with distinct interests, policies, and border controls.

Free Trade and Government Intervention

• Free trade is defined as the unrestricted exchange of goods/services without tariffs, duties, or quotas.
• Even in a globalized world, completely free trade does not exist.
• Tariffs on manufactured goods have dropped (2010 mean tariff rate: 2.7%).
• Agricultural tariffs remain high (e.g., global average tariff on agricultural products was 62% in early 2000s).

Case Study: NAFTA (North American Free Trade Agreement)

• Established in 1994 between the U.S., Canada, and Mexico.
• Mexico eliminated import licensing but replaced them with tariffs/quota restrictions.
• Tariffs were fully eliminated by 2008, but safeguard measures allowed domestic industries to be protected.
• Countries retain rights to impose safety standards and consumer protections, restricting trade.
• Free trade remains an abstraction, even without tariffs, regulations limit the flow of goods/ services.

Role of Governments in Trade

• States determine the extent of market openness.
• Historically, mercantilism and protectionism were dominant policies.
• Protectionism aims to maintain a positive trade balance (exports > imports).

Protectionist tools

• Tariffs: Taxes are imposed on imported goods.
• Import bans prohibit entry of specific foreign goods.
• Import quotas limit the quantity of certain imports.
• Non-Tariff Barriers (NTBs): Regulations restrict trade, like health, safety, and technical standards.

Non-Tariff Barriers (NTBs)

• Became more important than tariffs post-1980s.
• Countries use NTBs to discreetly protect markets.
• Example: Poitiers Case (France, 1980s)
• France routed all Japanese VCR imports through a small customs facility with only eight inspectors.
• This caused extreme delays and was quickly abandoned due to backlash.

Japan's NTBs

• Strict vehicle inspection policies hindered foreign car sales.
• Imposed questionable restrictions (e.g., banning foreign skis due to "different snow" and restricting foreign beef based on "different intestines").

Protectionism and Industrial Policies

• Subsidies Government financial aid to domestic producers make their products cheaper globally.
• Subsidies include tax credits, low-interest loans, infrastructure support, and currency devaluation.
• Dumping: Selling goods below domestic price or cost of production to dominate foreign markets.
• Dumping can drive foreign competitors out of business.
• WTO considers dumping illegal only if it causes "material injury."
• Industrial Policy: Aimed at developing strategic industries (e.g., Japan, South Korea, Taiwan, and China used these policies post-WWII).
• Industrial policy helps countries build comparative advantage.

Domestic Politics and Trade Debates

• A primary reason for ongoing debates is the domestic impact of international economic competition.
• Trade creates both winners and losers.
• Losers (e.g., workers in import-competing industries) seek protection from competition.
• Winners (e.g., dominant market players) may also seek protection to maintain their advantage.
• Both groups influence trade policy through political channels, shaping domestic economies differently.

The Stolper-Samuelson Model

• Free trade lowers real wages for the scarce factor of production (e.g., American labor) while benefiting others.
• Protectionism (e.g., tariffs) raises wages in protected industries but harms consumers and other sectors.
• Example: U.S.-China trade China's labor abundance makes American labor the "scarce factor," leading to wage reductions in certain U.S. industries under free trade.

Two-Level Games and Trade Policy

• Trade policy reflects both international and domestic political dynamics.
• International factors influence domestic politics, but internal political processes shape policy outcomes.
• Example: The Cold War influenced domestic politics globally.
• Debates over cross-border trade persist due to its uneven domestic effects.

Infant-Industry Protection

• Infant-industry protection suggests that late-industrializing countries must protect their domestic industries to avoid being permanently disadvantaged in global economic and political competition.
• Powerful, advanced economies dominate international trade due to their well-developed industries and competitive markets
• These countries, including the United States, often engage in protectionism despite advocating free trade.
• The U.S. heavily subsidizes its agriculture sector, providing billions in subsidies to farmers while also compensating foreign competitors like Brazil to maintain its own subsidies.
• Weaker economies must use protectionist measures to develop competitive industries and prevent being overwhelmed by established foreign competitors.

Historical Examples

• Post-WWII Japan had no domestic automobile production between 1945-1947.
• To develop its industry, Japan implemented high tariffs, strict quotas, and government incentives.
• By 1960, Japan produced over 165,000 cars; by 1970, over 3 million.
• The protected market allowed Japanese automakers to grow and eventually compete internationally.
• A similar strategy was later adopted by South Korea (Hyundai) and China (steel, aviation, automobiles).

Neo-Mercantilist Perspective

• Infant-industry protection is crucial for economic growth in developing nations.
• Governments must actively intervene to provide Subsidized loans, protective tariffs and quotas, support for research and development, and currency management to boost exports and control imports.
• Without these measures, new industries cannot survive against foreign competition.

Economic Theories on Infant-Industry Protection

• Economist Paul Krugman challenged classical comparative advantage theory.
• Consumers prefer diverse products, and production benefits from economies of scale.
• This explains why similar countries trade similar goods (e.g., different brands of cars).
• NTT supports some level of protectionism to help domestic industries establish themselves.

Heckscher-Ohlin Model

• Countries trade based on factor endowments (labor, capital, land).
• Economies with abundant capital should focus on manufacturing, while labor-rich countries should focus on labor-intensive industries.
• However, real-world trade patterns do not always follow this model, justifying strategic protectionism.

Long-Term Justification for Protectionism

• Temporary protectionist measures can help industries become globally competitive.
• Japan and South Korea initially had higher consumer costs due to protectionism, but eventually, their auto industries became world leaders.
• Economists argue that initial costs of protection can be offset by long-term industrial success.
• While some debate remains, infant-industry protection is widely recognized as a valid justification for temporary trade barriers.

The National-Security Argument

• Countries must protect themselves from potential threats by limiting trade in goods and technologies that could be used for military purposes.
• Key Points: Trade Restrictions for Security.

Trade Restrictions for Security

• Countries avoid selling goods or technology that could be weaponized to potential enemies.
• For example, restricting the sale of materials for nuclear weapons is widely accepted.
• However, some cases are controversial, such as France labeling the yogurt maker Danone as a "strategic industry" to prevent foreign takeover, showing that national pride can also play a role in trade restrictions.

Food Security as National Security

• Some nations, like Japan, restrict food imports (e.g., rice) to ensure they can feed their population in a crisis.
• This strategy prevents dependency on foreign suppliers, reducing the risk of food shortages due to international conflicts.

Technology and National Security

• Modern warfare relies on information technology, making high-tech industries critical for security.
• Countries prioritize domestic development in key areas such as aerospace, petroleum, heavy equipment, steel, and armaments.
• China's "indigenous innovation" initiative (since 2006) includes 16 megaprojects in high-tech sectors, focusing on dual-use technologies (military and civilian applications).
• A classified example is China's Beidou Satellite Navigation System, designed to reduce reliance on U.S. GPS and Russia's GLONASS, which could be disabled during a conflict.

Defense Procurement Policies

• Some argue that military purchases should be made from the global market to get the best quality at the lowest cost.
• The U.S. Department of Defense (DoD) often buys military microchips from overseas vendors for cost-efficiency.
• However, the U.S. Congress supports a "Buy American" policy to ensure domestic production of military equipment.
• The Buy American Act (BAA) of 1933 requires government purchases to be at least 50% American-made and gives local businesses a price advantage.

Unequal Exchange and the Fallacy of Comparative Advantage

• The concept of unequal exchange challenges traditional economic theories, particularly Ricardo's theory of comparative advantage.
• Unequal exchange occurs when certain commodities, assets, or labor are systematically undervalued or overvalued.

Origins and Theoretical Foundations

• The term was first coined by Arghiri Emmanuel in 1962 and gained popularity in 1972.
• Emmanuel argued that developing countries do not benefit from cross-border trade because wages in poorer countries are artificially low.
• His theory challenged Ricardo's assumption that both labor and capital are immobile.
• In reality, capital is highly mobile, while labor remains largely immobile.
• This leads to capital seeking the lowest-cost labor globally, worsening inequality and poverty.

Labor Immobility and Economic Divisions

• Even in regions like the European Union (EU), where labor mobility is legally allowed, practical barriers remain.
• Cultural factors such as language differences play a role, but government policies are a bigger obstacle.
• Migration often results in loss of welfare benefits, pensions, tax advantages, and housing benefits
• Core (wealthier) and peripheral (poorer) states exists perpetuating unequal exchange.

Expansion of the Theory by Amir Samin

• Samin expanded Emmanuel's argument, focusing on global economic structures.
• The world economy is divided into core (rich) and periphery (poor) countries: Poor countries supply cheap labor, land, and resources.
• Rich countries dominate production, technology, and economic decision-making.
• This division stems from historical colonialism and modern monopoly capitalism (Monopoly capitalism centralizes economic power among a few corporations).
• It ensures that global trade benefits the core over the periphery.

Challenges and Exceptions to the Theory

• Some developing countries experience economic success by deliberately violating free trade rules.
• Neo-mercantilist policies align with Marxist arguments that strategic government intervention can promote development.
• The data on trade liberalization is mixed.
• Some statistics show trade benefits all countries and reduces poverty.
• Other data suggest trade liberalization increases debt burdens for developing nations.

Case Studies China, India, and Brazil

• China has lifted over 600 million people out of poverty since the late 1980s through controlled trade policies.
• Brazil has reduced severe poverty for 11 million people but remains highly unequal.
• India saw a decline in poverty percentage, but the actual number of poor people increased by 40 million.
• Inequality rose in China and India, while Brazil saw a slight decrease.
• The debate over cross-border trade and its impact remains unresolved.

Cross-Border Trade, Negative Externalities, and the Global Environment

• International trade has resulted in significant environmental degradation
• Environmental damage is a negative externality, meaning its costs are borne by third parties rather than the economic actors responsible.
• Common negative externalities include pollution of air, water, and land, as well as resource depletion.

The Problem of Ownership and Regulation

• Environmental resources like air and oceans are not owned by any single entity, making pollution a rational business decision in the absence of regulation.
• In domestic settings, governments can address negative externalities through laws and regulations , but at a global level, there is no authoritative body to enforce environmental policies effectively.

Exporting Environmental Problems

• Wealthy core economies outsource production to poorer peripheral countries, shifting environmental costs away from themselves.
• Many developing countries lack the resources or political will to regulate environmental damage effectively.
• China has taken the role, leading the world in pollution and environmental destruction.
• China overtook the U.S. in aggregate CO2 emissions in 2007, and by 2009, China was the world's largest energy consumer.
• Historically industrialized economies have followed a similar path of environmental degradation.

Public Response and Government Action in China

• China's government has had to respond to public concern over environmental issues.
• Social media platforms like Weibo have amplified citizen voices, pressuring the government to take action.
• Example: Public outcry led the Chinese government release real-time air quality data.

The Social Construction of Free Trade

• The less government regulation in trade, the more likely negative externalities (such as environmental and social costs) will remain unaddressed.
• True free trade lacks government oversight over economic processes and transactions, meaning some negative effects may never be solved.
• A possible solution is not to eliminate trade but to regulate and re-regulate cross-border trade to ensure fairness.

Constructivist Perspective on Trade

• Constructivist theory suggests that different economic systems are possible but must be intentionally built.
• The current neoliberal economic framework is deeply ingrained, making alternatives difficult to see or imagine.
• The idea of "free trade” has been socially constructed as both an ideal and a practice
• Social structures require ideology to shape people's beliefs and actions, influencing how trade is conducted and perceived.
• The post-WWII international trade system was strategically designed, with major influence from the U.S.

Early U.S. Trade Policy (Pre-1930s)

• The US had protectionist trade policies until the mid-1930s.
• Although there were occasional moves toward open trade starting in the late 1890s.
• Theodore Roosevelt strongly opposed free trade because it was harmful to national integrity.
• Republicans supported protectionism, while Democrats backed free trade
• The Smoot-Hawley Tariff Act (1930) and Fordney-McCumber Tariff Act are key examples of strong U.S. protectionist policies.

U.S. as a Rising Hegemon

• The U.S. was transitioning from equal standing with European powers to a position of dominance in global trade and politics.
• Britain, the previous economic hegemon, was in decline.
• Hegemonic Stability Theory suggests that during such transitions, global instability and protectionism are common.

The Open Door Policy in China

• A key early U.S. effort at "free" trade, aimed at equal trading rights in China among global powers (U.S., Britain, Germany, France, Japan, and Russia).
• The policy originated from Britain's treaties with China but weakened as global powers claimed exclusive trade privileges in different regions of China.
• America's first step toward global economic leadership occured because the U.S. attempted to keep China's markets open

Inconsistent U.S. Trade Policies

• Key trade bills in the early 1900s: Payne-Aldrich Act (1909; aimed to lower tariffs but remained protectionist), Underwood Tariff Act (1913, which reduced tariffs significantly, marking a shift toward liberalization).
• Fordney-McCumber (1922) & Smoot-Hawley (1930) Acts increased tariffs and reinforced protectionism.
• Bargaining Tariffs were a strategy to extend the Open Door policy, but failed.

The Great Depression, RTAA, and the Rise of U.S. Hegemony

• The Smoot-Hawley Tariff Act (1930) increased U.S. tariff rates, prompting global retaliation and a sharp rise in worldwide trade barriers.
• The Act forced a major rethinking of U.S. trade policy, leading to a broader move away from protectionist policies, eventually leading to international institutions like GATT, WTO, and the promotion of free trade.

Reciprocal Trade Agreements Act RTAA of 1934

• The RTAA marked a turning point in U.S. trade policy, encouraging bilateral trade agreements that reduced tariffs, and benefitted the industrialized world.
• World War II temporarily interrupted this process, but ultimately accelerated it reshaping global trade dynamics.

World War II and U.S. Economic Dominance

• Led to a permanent shift toward trade liberalization because it boosted demand for exports.
• Unlike war-torn industrialized nations, the U.S. economy remained intact and expanded.
• Leaving the US as the undisputed leader in the capital world.

Theoretical Perspectives on U.S. Hegemony and Trade Liberalization

• HST argues that a dominant state maintains global economic stability, integrating Realism, Liberalism, and Marxism.
• It views hegemony as a state's economic, political, financial, military, dominance.
• It leads the US expand capitalism across the globe.
• While both emphasise hegemony, WST focuses on class dynamics instead of state driver national interest.
• This structure is used to control wealth.

The Importance of Hegemony in Trade Liberalization

• Hegemony is a useful concept in various theoretical approaches, showing its usefulness in explaining the emergence of the U.S.-led global trade system.
• However, one major criticism of HST occurs because hegemony is often a short-term phenomenon
• HST is a useful alternative perseptive.

The Rise of Free Trade in the 20th Century

• Part II: The Role of Hegemony in Trade Liberalization
• Free trade did not emerge spontaneously.
• Pre WWII prevented a stable system of free trade, influencing global instability.
• Post War the US started Bretton Wood System to stabalise.

The Havana Charter & The Failed ITO

• Havana Charter (1948) was the International Trade Organization (ITO), which faced US congress opposition, threatening trade.

The General Agreement on Tariffs and Trade (GATT)

• Created as a temporary alternative to the ITO, focusing strictly on trade policy, with 3 key principles: Nondiscrimination, commitment to tariff concessions and prohibition of quantitative restriction
• Key negotiations occurred, and trade expansion due to expansion of GATT participation, making arguments harder.

Hegemonic Stability & U.S. Trade Strategy

• A dominant power enforces global economic stability, such as interventions of Vietnam, and U.S. feared domino effect.
• Institutionalization occurred, therefore GATT became the World Trade Organization (WTO), solidifying trade policies.

The Birth, Significance, and Challenges of the WTO

• GATT became ineffective due to nature and overlapping.
• The U.S. opposed the idea of a new international trade organization, and instead a political trade occurred.

The Significance of the WTO

• Contributed to:
  • Single Undertaking Principle – Member countries must accept and implement all WTO agreements
• Elimination of Grandfathering Rights – Countries could no longer be exempted from agreements
• Stronger Dispute Settlement Mechanism
• Negative Consent Principle – Rulings could only be rejected if all members unanimously agreed
• Prohibition of Unilateral Measures – Countries must settle disputes through the WTO rather than acting unilaterally
• The complexities of Challenges and the Doha Round made agreement hard.

The Impact of the WTO

• WTO is not relevant due to stalled disagreements as it is political.
• The trade organisations divisions are caused by developed and developing countries differences.
• To gain negotiatiating power developing countries made baraining countries to enforce trade regulations by unifiying.

Impact of Coalitions on WTO Negotiations

• Negotiations became more complex, while coalitions supported WTO, balancing interests. -
• Influenced by state actors (corporate), NGO's also shaped trade agreements.
• Example occurred with TRIPS, resulting in access to safer medicines.

Regional Trade Agreements (RTAs) and Their Impact on Global Trade

• RTA's, known as trade agreements, are reciprocal trade agreements.

Rapid Growth of RTA's

• The 1995 period saw the growth, with rapid increase to >4.5 times after.
• Increasing due to Frustration with the WTO, a manageable approach, countries prefer smaller trade agreements that grow later.
• RTA's undermined multipolar trade.
• RTA show politics impact trade policies.

The RTA-WTO Tension and Its Consequences

• Lead to Divertment of trade, Raise regulatory costs, creating competition and tension.

The Global Financial System

• After WWII, United States and Great Britain with significant control shaping Liberal policies.
• The global is made of Currency Issues and Credit Issues, leading to collapsed due to lack of management by other countries.
• Key Dynamics of the Global Financial System required to access the relationship between:
  • Politics
  • Power
  • Financial Forces

Global Finance

• The world finances can be seen in:
  • monetary
• International - what relates - how values work
• Credit - what rules - how to invest
• How trade affects
• To achieve a high level world analysis.

World Economy

• Value rates are expensive due to trades.
• High imports.

Power

• Cheap exports that sell more due to prices.
• Exchange rates are affected by value rates.
• Economic trading is determined by supply and demand.
• There is no best choice regarding how to apply economics, but depends on countries values.

Balance

• balance payments effect payments in businesses.

Payments of Balance of Pay

- Credits & Debits
- Money leaving and entering

World Balance

• Inflow, out flow, foreign aid.

• Value records include loans etc.

• A net creditor means that account is profitable, which leads to a better economy.

Example

• China is consistent with balance in accounts.

• 2011, China gained $3.3 billion in foreign reserves to strengthen positions.

• Understanding means good relationships with balance from countries.

• The U.S. and British controlled during that period.

• The balance was managed to fix values and create institutions.

Creation of Major Financial Institutions:

• IMF
• World Bank
• U.S. played a leading role ensuring domestic and international decisions.

American Power, Bretton Woods, and the Postwar Global Financial System

• To balance stability, global exchange occurs in Bretton, this lead to a system collapse.

The Role of the IMF

Was established to stabilize global finances, however this has been a controversial role due to being with westerners.

• This caused problems to balance, there were limits.

• To ensure countries were meeting requirements.

• The Marshal Plan was used to distribute, helped European Economies, and was distributed.

• With opposition, there were several concerns.

• The Marshall Plan made it clear the new system was product America which benefited partners.

• IMF was for increasing financial governance

• The shift changed from 1980s to domestic changes.

  • These measures were seen as important for economy.

• However, the global effect of the global finances and power can be shown during economical decline.

• During this period, the IMF saw this with European negotiations.

  • This period lead to decline of hegemony.

• Also in this period, there are many issues

• The U.S. and Reagan increased Military Funding however This lead to lower tax.

• It also lead to buy American campaigns in industries.

• All these changes lead to volatility, speculation which has created multiple issues since.

• All led to this rise of political change and shifts.

• Then entered neoliberalism which traces back and shows how economy struggles

• Resulting in an economic crisis and changes to capitalism.

• Deregulations increased problems.

• However the states will not give up their interests which leads them to a mess over time.

• Ultimately, the relationships power and economic issues create a constant mess.