International Trade Political Economy

The Political Economy of International Trade

• International trade involves the exchange of capital, goods, and services across international borders.
• Free trade describes a situation where governments do not restrict what citizens can buy from or sell to other countries.
• Mercantilism (16th-18th centuries) prioritized state wealth, with a focus on exporting more than importing, acquiring precious metals, and using the state to protect and boost domestic monopolies.
• Liberalism (19th century onward) emphasizes market development, individual interests, and minimal government intervention in the economy. Focus is on absolute and comparative advantage, specialization, and overall gains in wealth.
• Marxism (19th-20th centuries) critiques capitalism, highlighting class conflict and exploitation. It views economics as driving politics, with a focus on class struggle and the power dynamics between the "haves" (e.g., MNCs, elites) and the "have-nots" (e.g., labor, proletariat).
• The goal of economic liberal thinking was to create a free trade system to facilitate trade between countries of differing economic standings.
• Economic organizations, such as the World Trade Organization, were formed to address international trade interactions.
• Mercantilist leaders often want to protect domestic markets for various reasons.
• Many nations are nominally committed to free trade but sometimes intervene to protect politically important groups.

Evolution of the IPE

• The era from the late Middle Ages to the 18th century, the Age of Discovery, saw new frontiers opened in the Americas, Asia, and Africa. The exchange of goods and people connected colonies to home states.
• Key factors that influenced this era include mercantilism, ownership of precious metals, navigation, and colonization.
• Industrialization was a major shift towards mass production, assembly lines, and electric power.
• Industry 2.0 (1870) saw mass production, assembly lines, and electric energy becoming prevalent and increasing economic growth.
• Industry 3.0 (1969) was dominated by automation, computers, and electronics, further boosting globalization and efficiency.
• Industry 4.0 (Present) features cyber-physical systems, the internet of things, and networking. These advancements have led to greater global interconnectivity and automation.

Gross Domestic Product (GDP)

• GDP is the most common measure of economic size, calculated for countries, regions, or groups of countries.
• GDP represents the total value added of goods and services in an economy.
• Value added is calculated by subtracting the value of intermediate consumption (resources needed to make goods) from the total value of produced goods.
• There are 5 components making up the GDP. Private consumption, Investment, Government spending, Exports (X) and Imports (M).

Why Countries Intervene in International Trade

• Countries intervene in international trade due to political reasons (protecting jobs, national security, retaliating to unfair competition, protecting consumers, or advancing foreign policy aims) and economic reasons (generating revenue, manipulating trade flows, and nurturing infant industries).

Instruments of Trade Policy

• Tariffs
• Subsidies
• Import quotas
• Voluntary export restraints
• Local content requirements
• Antidumping policies
• Administrative policies (technical barriers)

New Trade Theory (NTT)

• It explains why countries trade similar products, emphasizing monopolistic competition, economies of scale (unit cost reductions due to large-scale output), network effects, and first-mover advantages.
• This theory supports government policies to promote growth of key industries.
• New trade theorists believe that government intervention, such as supporting the growth of industries, is justified. However, classic trade theorists disagree, often stating that government intervention may not always benefit the country as a whole.

WTO (World Trade Organization)

• The WTO is an umbrella organization for global trade governance managing the international system via the promotion of trade liberalization, dispute resolution, and safeguards.
• The WTO facilitates trade deals, conducts periodic trade policy reviews of member states and resolves trade disputes.
• The WTO has a dispute resolution body which is more powerful than other economic dispute resolution arrangements.

The Political Economy of Trade and the WTO

• The WTO has experience with several trade rounds, including significant tariff reductions and negotiations to reform issues like telecommunications, financial services, and more. These are aimed at reducing trade barriers and liberalizing trade practices.
• The WTO faces challenges, notably protectionism (using tariffs and subsidies, often to protect domestic industries), and maintaining world trade balances and stability.