IPE Lecture Notes PDF

LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY LECTURE 1 - STUDYING INTERNATIONAL POLITICAL ECONOMY IN EXTRAORDINARY TIMES INTRODUCTION: general considerations on the impact of the pandemic in globalization (we...

LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY LECTURE 1 - STUDYING INTERNATIONAL POLITICAL ECONOMY IN EXTRAORDINARY TIMES INTRODUCTION: general considerations on the impact of the pandemic in globalization (we will study this at the end of the course). IPE studies “how politics shape the global economy and how the global economy shapes politics”. This includes: - The politics of international economic transactions. They can be causes or consequences of domestic or international politics. - Political battles between the winners and losers of global economic exchange. Accordingly, we will study a brief history of international political battles since globalization. - How political negotiations in the international sphere affect people’s lives. - A complex web of actors (international organizations, etc.) that are interconnected through multiple networks, dynamics and risks. According to Oatley, IPE can be divided into 4 areas: - International trade system: a) Centered upon the WTO: elimination of barriers. b) All members of the WTO have access to other members markets. c) Challenge: rise of regional markets. d) Focus of study: how political battles shape the WTO. - International monetary system a) It enables people living in different countries to conduct economic transactions with each other. b) Focus of study: how politics shapes this system. - Multinational corporations: particularly, how politics shapes the MNCs.  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY - Economic development: a) How politics shape policies that governments adopt in issue areas. b) How politics shape societal decisions about how to allocate available resources. c) Consequences of the choices that societies make about resource allocation: evaluative studies on the consequences on the welfare state and on distribution. Our focus in IPE includes: - Interacting interests, institutions and ideas between different international actors. These include: a) Interests regarding foreign economic policies are those which raise the income. Mechanisms that explain this: - Material interests - Ideas b) Interests are transformed into policies through the institutions. Political institutions establish: - the rules governing the political process - which groups are empowered to make choices - the rules to take decisions - enforce collective decisions - Transforming global and domestic economies and the way they are governed. - Global integration and dis-integration. The present backlashes of globalization regarding: a) Individuals and collective actors. b) International, regional and supranational organizations. c) State-market relations and their evolution since the 19th century. Example of a backlash of globalization President Trump declared in 2018 that the “if the WTO does not shape up”, he would pull the U.S. out. The concept Pax Americana reflects the American Hegemony regarding international organizations. In the current global economy, tensions actually started earlier: they have been fostering for years. There is increasing distrust in multilateral institutions, which are challenged by: - Their founding states. - New-comers: persuaded by hegemonic powers like the U.S. - People and NGO’s. Example: WTO dispute settlements. In 1991 there was a protest in Seattle which claimed that democracy was incompatible to the WTO.  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY The US is increasingly more hesitant to back up multilateralism. Main example: WHO. Also, the GATT (predecessor of the WTO) legitimacy had been challenged. OLD AND CURRENT CONTESTATIONS AND AT THE CROSSWORD The COVID-19 crisis and its future impact makes this all even more challenging, which could intensify economic tensions and trade wars (even physical wars according to some): - Increasing competition and superpower rivalry, particularly featuring the U.S. and China but also many other countries. - In the context of increasing rivalry, we have a diminishing will for cooperation. - Economic nationalism is also being enhanced by this crisis. - Power shifts: a) North-South conflict (not purely geographical divide, but rather development divide). b) US - China. How would different theories see all this? Questions that interest us: - What do you see when you look at the world economy and interactions between actors? a) Cooperation or conflict? b) A web of equal players or hegemony? Not equal in economic power, but in contribution in making the rules of the game and economic institutions. - Does politics drive economics? Or does economics drive it all? THEORETICAL PERSPECTIVES IN IPE 1. Mercantilism, which drives from realism. Realism - International context is marked by conflicts, hence, anarchical (Hobbes in Leviathan). "No arts; no letters; no society; and which is worst of all, continual fear, and danger of violent death: and the life of man, solitary, poor, nasty, brutish and short“ (Leviathan, 1651). - The States are the major actors, they allocate the resources since state’s interests are larger than the ones of individuals. States are very rational and maximize their own interests (selfishly). The interaction between states is a zero-sum game (based on a continuous conflict where one part wins and the other loses. No cooperation) Mercantilism: an offspring from realism Theory from the 16th - 17th century, theorized in Europe but then extended its influence to the US, back to Europe and then Asia (Japan and China). Main assumptions:  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY a) Mercantilism links national power to economic wealth. Acquiring wealth ⇨ power. Then, international trade has a very important role because it is an instrument for acquiring wealth at a national level which ultimately contributes to national power. Note: only exports, which provide wealth from abroad, contribute to national power. b) States are central actors and they should allocate the resources. As a whole, State interests are larger than individual interests so that State’s allocation of resources contributes to national power. c) Economic nationalism instruments are adopted to again maximize wealth and power. For instance, prioritizing domestic companies (this can be connected to the current context). d) Some economic activities are more “valuable” than others. According to Frederich List, German journalist and mercantilist thinker, “A nation that exchanges agricultural products for foreign manufactured goods is an individual with one arm which is supported by a foreign arm” (1841). In other words, manufacture is much more valuable than agriculture and hence States should support it. - What to do to max. power? In order to maximize power, a state must have a positive balance of trade, meaning that exports should outbalance the imports. a) Thomas Mun (16-17th century) said that as a “means to enrich a kingdom”, states should ensure that exports exceed imports. b) Jean Baptiste Colbert (17th century): developed the theory of “Colbertism” linked to state interventionism. - Also, states should “protect in order to industrialize”: a) Alexander Hamilton (18th century) was the 1st Secretary of the US Treasury. His mercantilist ideas shaped the economic policies in the US. Hamiltonian ideas were adopted by following administrations and, though contested, they were dominant for years. b) Friedrich List (1789-1846): “neo-mercantilism”. He got jailed in Germany and then fled to the U.S. There, he admired Hamilton’s ideas and the US economy. He published his ideas in German which were very influential in the German economy recovery. - Hamilton’s ideas became dominant so that they were finally known as the “American system”. His Report on the Subject of Manufactures (1791) was presented in the American Congress and it became the foundation of mercantilist thought. - The infant industry paradigm consisted of protecting domestic new industries until they achieve economies of scale and hence compete with foreign countries. Example: American new industries were vulnerable at first against old British  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY centuries, so they should be protected until they “grow” and can compete internationally. - In other words, the US is conceived as an “infant nation”, since it was newly independent. Then, the manufacturing industry needed to be protected and supported. a) In order to embrace domestic industries, Hamilton suggested the use of - Tariffs (i.e. taxes on imported items) - Subsidies or bounties for domestic industries, made possible by tariff revenues. - Promotion of technology and science: governmental investment on it in order to guarantee progress. All these policies would attract immigration. At this point, he diverged from the rest of the rest of administrations who were fearful of it. But at that time, the U.S. could benefit in the labour force that could come from immigration. b) George Washington (1790) promoted a kind of self-sufficiency: - “A free people ought not only to be armed, but disciplined; to which end a uniform and well-digested plan is requisite; and their safety and interest require that they should promote such manufactories as tend to render them independent of others for essential, particularly military, supplies” (George Washington, The State of the Union address, 1790). - Then, he signed a tariff for encouragement and protection of manufactures as one of the acts of Congress. - President Ulysees Grant predicted that just as England adopted protectionism when it first industrialized and then liberalized, in the US mercantilism would also be abandoned for liberalism in the future. 2. Liberalism It appeared as a reaction to mercantilism. - Reaction to mercantilism: Countries did not get rich by means of trade surpluses. On the contrary, countries became rich by enriching its individuals. Countries gain from trade regardless of whether the balance of trade is positive or negative. - Purposes: Then, the purpose should not be increasing state power, but utility-maximizing by individuals. - State should get out of allocation of resources, because if they intervened they would mess it up. a) Instead, the “invisible hand” of the market would allocate the resources efficiently.  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY b) The minimum state does not intervene in the market but it sets the rules of the game, that is, the rule of law: property rights, contractual rights and supervising individuals. c) “Laissez faire” (let the market allow individuals to maximize their utility) “laissez passer” (free trade, no borders). - Absolute gains and positive-sum game: all countries can benefit from free trade. Also, trade surpluses do not necessarily lead to an enrichment of the country: countries can benefit from trade regardless of the stat of their balance (as we previously said) - In The Wealth of Nations (1776), Adam Smith (protagonist of liberalism) challenged the promises of mercantilism (there were precedents, but this was a very important cornerstone). a) Theory of absolute advantage: “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.” (Wealth of Nations, 1776). b) Also, if states protect their domestic industries, foreign states will not afford to buy their exports: “If foreigners are hindered from coming to sell, they cannot always afford to come to buy”. Liberalism and Freer Trade: David Ricardo followed with an International Trade Theory that was based on the Comparative Advantage Theory. He defined it as a positive sum game where the aggregate social welfare increases with free trade. Countries are made wealthier by making products that they can produce at a relatively low cost at home and trading them for goods that can be produced at home only at a relatively high cost. Example: Portugal exporting wine and England exporting textiles. 3. Dependency, which drives from Marxism. Marxism Marx and Engels are the founding fathers of Marxism. Marx published Das Kapital in 1867 in the context of the Industrial Revolution. - They understood that capitalism was the most efficient system but it created exploitative dynamics between the owners of the means of production and the proletariat. Such exploitation is unavoidable by the very dynamics by which the capitalist system is based on. - Communist Manifesto (1848): “the history of human beings if the history of class struggle”. - Economic determinism: the economic structure drive politics.  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY - Conflict: capitalism creates pervasive exploitation a) At a domestic level, class struggle must ultimately result in a revolution b) At an international level, the struggle is between industrialized vs. developing countries. Dependency school: International trade is at the root of exploitation and global inequalities. Again, this is inevitably created by the system. By means of engaging in international transactions, countries are exploited, so international trade is not a positive sum game but a very negative one. There is a divide between industrialized and non-industrialized countries which stems from international trade. “Development of underdevelopment” refers to developing countries locked in a situation of perpetual underdevelopment, which can never catch up to developed countries and compete at their level. As far as they are integrated into the global economy, they are in the long-run doomed to stay this way unless the rules of the game change (e.g. protectionism). Even if developed and developing countries have different interests, they do interact. There exists a dichotomy between the core countries (metropolis) who export industrial goods and the periphery countries (satellites) who export food and raw materials. This creates a sticky structure of transactions that cannot be changed unless you change the rules of the game. - Some of its founders are R. Prebisch, A.G: Frank and E. Wallerstein. A lot of governments after the 50s-70s were very influenced by them, as well as international organizations. a) Prebish thesis: The terms of trade deteriorate against the exports of developing countries. Meaning, peripheral countries are worse off over time and they can never catch up with the core unless they protect. b) “ECLA Doctrine”: Economic Commission for Latin America (U.N.). After the 60s, the Prebish thesis was very prevalent especially after decolonization in the peripheral countries. Then, the dependency school ideas were very influential.  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY TRANSFORMATION OF THE WORLD ECONOMY. HISTORICIZING INTERNATIONAL TRANSACTIONS - See graphs on international trade: The largest trade surplus belongs to China (also Germany) and the largest deficit corresponds to the US, which contradicts mercantilism. - The first phase of global integration began before WWI. According to Keynes, a London inhabitant in 1914 was born into global integration. - But actually, after the WII trade openness (share of imports and exports as a share of GDP) fell (see graph): a) the UK is the most important example, which was the highest point in the early 19th century but in the 1870s went up to almost 70%; then, after the WWI it went down a lot. b) Spain is a lagger and there is no data until the 1900s. It started high but after the dictatorship it went down to almost a closed economy. - Concerning people's mobility, there is a very big difference between the first phase of globalization and today’s globalization. Many Europeans immigrated to the US until the 1930s, then declined and after all kinds of immigrants started to move. - The Industrial Revolution led to the expansion of the manufacturing industry. Power, railroads and steam engines were essential inventions for this. Britain was the pioneer, which made a unilateral move towards/pushing others for freer trade, turning against mercantilist policies. This was not easy due to domestic conflict of societal interests.. Due to having a first mover’s advantage by pushing, convincing and/or coercing the others to open up. Yet, it was a “passive hegemon”, which is interesting to compare to the American hegemony after WWII.  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY LECTURE 2 - HISTORICAL BACKGROUND AND POSTWAR ECONOMIC ORDER Summary - Historical background of global integration - The international monetary system and its evolution since the 19th century. - Postwar international economy: the establishment institutionalized interdependence. We will mainly focus on the Western bloc and its institutions. Interaction between politics, power and economic transaction. - Political underpinnings of interdependence a) The belief in cooperation and multilateral institutions. b) The rise of the US hegemony: Pax Americana. A PRIMER ON FOREIGN EXCHANGE Nota: este epígrafe es del texto, no lo explicó ella en clase pero me parece importante - Foreign and currency exchange: a) Affect the value of everything a nation buys/sells on international markets. b) Impinges on 1) the cost of credit and debt 2) the value of foreign currencies. - Travelers and investors are exposed to currency exchanges when deciding how much of their national currency it will cost to buy or invest in another country: e.g. when a traveler withdraws money from an ATM, a currency exchange is calculated. - Changes in currency exchanges are particularly important for banks and investors: they can mean huge gains or losses. Then, states are concerned with the short- and long-term shifts in the values of their currencies to one another. - Before ATMs, tourists did mathematical calculations in order to convert one currency into one another. - Countries can have hard or soft currencies: a) Hard currency: - Issued by large countries with reliable and predictably stable political economies. - Wealthy and powerful industrialized developed nations: the U.S., Canada, UK, Switzerland and the Eurozone. - They can directly exchange their currency for other hard currencies (as well as foreign goods and services); the yen, euro or U.S. dollar are easily accepted for international payments. b) Soft currency: - Not as widely accepted, usually limited to its home country or region.  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY - Reasons: 1) uncertain value 2) low volume of transactions based on insufficient trade or 3) conditions that raise suspicions of unstable political economy. - Less developed countries (LDC’s): small or unstable economies. - They must usually acquire hard currency in order to purchase foregin goods and services. International lenders are also generally unwilling to accept payments in soft currencies; then, their debt is expressed in hard currencies and must be paid as such. In sum, hard currencies get most of the international use and as such, the authors focus on those in this chapter. - Exchange rates are a way of converting the value of a country's unit of measurement into another’s; hence, it does not matter what unit is used, but rather: a) The acceptability of the measurement to the actors: banks, tourists, investors and state officials in different countries. b) How much values change over time. - Political and economic factors affect exchange rate shifts, including: a) Currency appreciation (i.e. a currency becomes more valuable relative to others) and depreciation (i.e. a currency becomes less valuable relative to others). b) Currency-rate manipulation. c) Whether one’s currency is fixed to the value of another currency. d) Interest rates and inflation. e) Speculation - Shifts in currency exchange have political and social consequences: there are always winners and losers. Example: if a nation’s currency appreciates, a) Losers: exporters, because their goods and services become less competitive in international markets. b) Winners: importers (in the nation), because the imports are cheaper. - Exchange rates are often set by market forces. However, states sometimes secretly intervene in order to purposefully manipulate them. Examples: a) Central banks buy (demand) and sell (supply) their currency in order to alter its value. b) If the demand for a country’s currency declines, central banks use foreign reserves to buy (demand) its own currency and push up its value.  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY - States sometimes favour undervalued currency in order to discourage imports and increase exports. Problems of undervaluation: a) If essential goods (i.e. good or oil) must be imported, they will cost more. b) Reduced living standards, retard economic growth and inflation. “The Tangled Web of China’s Currency Manipulation” case: they have mostly benefited rather than lost from undervaluation. - LDCs sometimes overvalue their currency in order to import cheaper goods (e.g. technology, arms, manufactures, food and oil); however, this makes their exports less competitive abroad. In practise, these countries rarely benefit from overvaluation because their currencies are soft and hence not used in international markets. They have still tried, which have led them to choking domestic production and making them dependent on importation or foreign lenders (particularly problematic in the agriculture sector). - As the USD started to increase since the 1990s, countries decided to peg (fix) their currencies to the US dollar: then, if the US dollar depreciated relative to the euro, so did the Chinese yuan. Consequences: a) Weaker currencies gained stability b) U.S. economy evolution transferred into developing nations, depriving them some flexibility in currency exchange rates. - Inflation: all else being equal, a nation’s currency tends to depreciate when it experiences higher inflation than other countries. Inflation means that the currency has less real purchasing power within its home country, so that it becomes less attractive to foreign buyers and hence depreciates on foreign exchange market. - Interest rates and investment: if interest rates decline inside a country, foreign investment decreases and hence the currency depreciates. The opposite is also true. - Speculation implies betting that the value of a currency or market price for a certain item or service will rise and earn the owner a profit when it is sold. Then, if investors believe (based on their understandment on foreign markets) that a currency will appreciate in the future, they will want to buy it in order to profit in the future; then, the demand can make its price rise just due to the investors’ speculation, creating a gap (bubble) between the normal market value and the new one. Actually, real estate agents consider the higher market value is the real one, because it is the price that investors are willing to pay. - Bubbles can form when hot money (foreign investment in stocks and bonds not regulated by the state) moves quickly into a country, and bubbles can burst when investors rapidly pull their money out in anticipation that market prices will fall. While bubbles in the past caused hardship for many people, the severity of the current global financial crisis has  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY caused many to question whether states and the IMF should not do more to regulate global capital movements. THE THREE PHASES OF EXCHANGE RATE SYSTEMS Nota: esto es un resumen de los tres sistemas explicados, más adelante están explicados los dos primeros más a fondo pero me pareció más claro tenerlo primero aquí 1. The Gold Standard (1879-1934) - 1st globalization wave: high mobility of everything. - British hegemony (which lasted until 1914). Britain had the largest gold reserves and the British pound was the hegemonic currency. - Currencies were fixed to an amount of gold. - Benefits: a) Very low inflation and fluctuations. b) Stability and predictability in the system. - Consequence: flourishing international transactions. 2. Fixed ERS or Bretton Woods System (1947-1971) 1944: the Bretton Woods Agreements. During the war, transactions were very constrained. - US was the new hegemon. The rest of currencies (members of the IMF) were fixed to the US dollar and the US dollar was fixed to gold. Also called “the dollar standard”. Major countries that were out of the Bretton Woods: the USSR was at the table but after the negotiations they did not want to be part of the system and established their own; also, China also left (it became a member of the IMF in 1980). - Creators of the system: Keynes (Britain) and Dexter White (US). - IMF surveillance: supervisor of the system. - K controls: limited capital flows. - In 1971, the US decided that they did not want to bear the cost of being a hegemon anymore: they had to redeem their dollars to gold, and this conversion was very expensive. Also, an expensive currency might become very costly due to less exportation. Export competitiveness is very dependent on the value of a currency: e.g. the euro is more expensive than the US dollar, which is bad for European exporters. Now, who in Spain benefits from having a strong currency? For instance, travelers, the financial sectors, capital investors in foreign countries.  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY - Some small movement of exchange rates were allowed. For some countries more than others: LDCs run instabilities so that they were allowed more space instead of being constantly fixed. 3. Floating ERS (1973-now) Nota: esto mezcla lo del texto + lo que explicó ella en una reducida In 1973 major powers authorized the IMF to widen the trading bands so that currency values could depend more on market forces. This system was meant to be less constraining. a) In the early ages of the Bretton Woods system, funds could not easily move across- borders due to capital controls and fixed exchange rates. But the widespread use of U.S. dollars and currency convertibility pressured states to reduce such controls. b) Flexible exchange-rates complemented the former, adding liquidity to the system and increasing international investment. c) This flexibility reflects other influential political and economic developments, such as the growing influence of Japan and West European countries, the rise of the OPEC and the shift to a multipolar security structure managed by the U.S., the EU, Japan and (later) China. The rise of the OPEC and the tremendous shifts in the oil price in 73 and 78 transformed the system into a global one, since billions of dollars moved through new financial channels as the OPEC states demanded them as payment for oil. - This increased the demand for U.S. dollars and kept it as the top currency. - Western banks recycled their “petrodollars” in the form of loans to developing countries that were seen as good investments due to their increasing demand of consumer goods and natural resources. - However, between 1973-1979 the debt of developing countries increased from $100 billion to $600 billion, generating a debt crisis. Stagflation: slow economic growth accompanied by rising prices (inflation). It was caused in 1980 by trade imbalances in the developed countries. - Oil prices were going down, and so was the U.S. dollar value. - U.S. officials tried to stop their domestic inflation by rising interest rates to tighten the money supply, but it slowed down its economy and caused an international recession. This was accompanied by a change in philosophy in the U.S. and Britain, as Keynes' ideas were swept away and replaced with classical liberal ideas of Adam Smith and Milton Friedman.  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY - Thatcher and Reagan privatized national industries, deregulated financial and currency exchange markets, cut taxes and liberalized trade policy. These measures were supposed to increase savings and investments to stimulate economic growth. - In 1983 economic recovery did begin in the U.S. due to higher rates of consumption, less restrictive monetary policy and attention to inflation; however, many experts argue that this recovery was primarily caused by a decrease in oil prices. - Reagan’s defense budget was the biggest since WWII. This expenditure and a strong dollar increased prices for U.S. exports and lowered import prices, which resulted in record trade deficits. - In order to shrink said deficit, the U.S. pressured Japan and other states to revalue their currencies. - Paradoxically, this situation also benefited the U.S. as it attracted foreign investment in business and real estate. This contributed to correct the deficit and maintain the value of the dollar and its hegemony against the Soviet Union. Although many allies did not agree with these policies and pursued a different path. - By 1985 the U.S. was the world’s largest debtor and the dollar was overvalued. Rapid capital flows were contributing to volatile exchange rates, which interfered with international trade. - Reagan met with the G5 powers (Britain, West Germany, France and Japan) and they agreed to intervene in currency markets to collectively manage exchange rates so that the dollar would depreciate in value against other currencies, raising interest rates in the other economies. Finally, the US unilaterally abolished the previous system. Countries gradually got on board during the 1970s. a) Increasing investment in Europe and financial capital: banks were interested in capital flows. Then, the fixed ERS was unsustainable. b) The US and the UK were pioneers in developing their capital flows. - On paper, there was no hegemonic currency. However, the US dollar remained the global hegemon, even though it presently has some competitors: many experts thought that the euro would challenge it when it appeared but it now constitutes only 20% of reserves. - The reserves are in reliable and hard currencies: British pounds, the Japanese yen (since 1985, because before it was intentionally weak as it happens now with the Chinese yen). - The system is based on market forces determining the exchange rates: the demand and supply of a currency determine its market price. Then, exchange rates fluctuate constantly. Now, does it really work this way?  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY a) Actually, central banks intervene. Then, the system is not completely free, but rather managed (also called dirty float). b) Most countries now are part of the managed float system where the CBs are independent. Since the 1980s there is a major trend that the CBs should be independent of the government. Reason: governments are responsible for fiscal policy, and they could be tempted to print money to finance it, creating inflation. - The IMF did not dismantle: it is still in charge of international monetary stability. Then, it does check-ups on domestic economies, among other functions. - The Impossible or Unholy Trinity: Mundell-Fleming Dilemma: - Countries cannot sustain three of the following, only two of them: A. Free capital mobility. B. Monetary autonomy: decisions over domestic monetary systems. C. Exchange-rate management. - Example: a) Bretton-Woods system requires C and B. Then, you cannot have A (capital mobility) because the demand of currencies would change and hence its price, so that it could not be fixed. This is why Keynes was completely against it. b) Gold standard was based on A and C: capital could move freely but currency was fixed to gold, there was no monetary intervention. c) Fluctuating system has A and B: capital can move freely and central banks conduct monetary policy, but the exchange rate is not fixed (market forces).  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY 19TH CENTURY: THE GOLDEN AGE OF LIBERALISM Nota aquí empieza la magistral This period gradually developed during the 19th century under the hegemony of Great Britain, which prevailed until the start of WWI. a) Great Britain had been the leader and pioneer in the Industrial Revolution. b) Then, the pound-sterling was the hegemonic currency. c) As a hegemon, Great Britain was the largest creditor in the world up until 1914; after WWI, this position was challenged by the US and became the largest creditor. d) The Gold Standard was the name of the game. It was used by the major powers until 1914 although revived partially in the 1920s. e) During this time, multilateral transactions increased enormously: migration, commodity trade and capital flows. All those kinds of mobility particularly expanded in the second half of the 19th century. Then, liberal flows were spreading and Britain was pushing the others to join. f) Multilateral organizations were absent. The Gold Standard determines Phase I of the modern Exchange Rate System. a) Currencies who committed to the gold standard fixed themselves on gold as a fixed exchange rate. b) This system prevailed between 1979 and 1934 with some breaks: - 1914-1918: gold standard collapses. - 1920s-1934: partial resurrection. - 1931: Great Britain abandons it due to the Great Depression. c) The Gold Standard provided stability to the international monetary order. d) During its working time, it was a self-regulated international monetary order which provided: - Trust and stability of price levels. - The inflation levels between 1880-1914 was on average 0,1%, which is essential because it provides predictability (if inflation levels are higher the trust would be in danger) - Convertibility between different currencies, hence lowering transnational costs. Accordingly, this promoted international trade and capital flows. Prevailing liberal economic theory led to a self-regulating international monetary order: corrections occurred almost automatically via wage and price adjustments.  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY a) If a country had a trade deficit, their gold would be sold to earn money to cover it. b) Result: tight monetary conditions, limited money printing, rise in interest rates (supposed to attract investment) and cut in government spending. c) Domestic and fiscal policy were oriented to the goal of maintaining the convertibility of the national currency into gold. In the 19th centuries we observed a gradual liberalization of trade. However, it did not happen multilaterally: it started unilaterally and later created multilateral agreements. a) Britain unilaterally liberalized, meaning that it did not need the other powers to follow their rules. b) This took place due to conflict of interests between actors within Britain, which gave birth to different policies. - In 1815, the Corn Laws that governed the grain trade were reformed. This created an open debate between protectionism and free trade. By this time, Adam Smith’s ideas were very prevalent, although some mercantilist ideas remained. - Between 1841-45 the Anti-Corn Law League was composed by the manufacturers defending free trade against protectionism: “We must make this country a cheap country for living”. Agricultural producers wanted protectionism while manufactured industries wanted to liberalize the market. The argument is that free trade would lower the prices and the consumers would benefit from this. - In 1846, the Anti-Corn Law League won over the protectionist interests of the agricultural producers. These laws were cancelled and Britain was able to liberalize. c) Britain pushed others to liberalize and open their borders to free trade. Problem: who would be willing to compete with Britain? - The US? It was as an independent nation had been born into mercantilist and protectionist ideas (Hamilton’s idea of infant industries). The industries were infant, they needed protection. - By that time, protectionist lobbies were very influential in the U.S. The manufacturing vs. agricultural disputes remained: the first were protectionist because they were late-comers so they did not want to compete with Britain, but the agriculture sector was very competitive so that they wanted free trade. Note that this is the opposite to what was happening in Great Britain.  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY d) In the second half of the 19th century international politics witnessed many bilateral (note: no multilateral) agreements for trade liberalizations. Those agreements gave rise to partial liberalization in the late-comers to industrialization, like the US and Germany. For all of the above, 1870s-1914 is considered the first phase of globalization. There was high mobility of goods, capital and people; notice that people’s mobility is relatively restrictive now. Episode of the collapse of the liberal orders: a) 1914-1918: WWI. International economic consequence: the fall of the British hegemony in the world and the US emergence as a major power. Britain became a debtor and the US, a creditor. At this point, the gold standard, transactions and international trade as a whole collapsed. b) During the Roaring Twenties there was a partial recovery, but then in 1929 another major collapse took place: The Great Depression. The impact of this crisis was very long term (many experts are comparing the COVID economic crisis to the GD, whose economic impact can be as high as the present one). c) 1939-1945: WWII. The gold standard disappeared before the end of WWI (although momentarily resurrected in the 1930s due to the Great Depression). Britain became a debtor nation and the U.S. dollar became the strongest currency. Reasons: a) U.S. acting according to its interests, failing to meet the international responsibility of their hegemony. b) Public policy started to reflect the growing influence of labour unions or foreign investors who were contrary to the classic economic liberals. Governments started to intervene: - Purposeful depreciation of currencies in order to generate trade. - Capital controls: limiting flows of money across countries. - Keynes: “let finance be primarily national”. - States found that the economic liberal ideas of self-regulation did not work anymore: negative effects of capitalism led to an increased demand for protection (i.e. capitalist failure evidenced during the Great Depression). - The point is: was the liberal order questioned or longed for? (question for debate)  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY THE GREAT DEPRESSION The GD started with the Wall Street Crash in NYC in October, 29th 1929. Terrible outcomes: a) Major unemployment (e.g. 25% in the U.S., also the UK and other countries in Europe like Germany with 44%). Example: some historians explain Hitler’s rise to power by the economic impact of the GD. b) Also, prices plumbed, the demand went down drastically: finally, oversupply and inadequate demand became the main problem. The GD became international very quickly because many counties imported from the US and many transactions were lost. Example: Brazilians threw their coffee on the ocean (oversupply). During the Great Depression, the international mon. and fin. structure was in shambles: a) National interest above international ones policies: highest trade tariffs in history. b) Non-convertibility of currency due to increasing hostility among European powers (ultimately led to WWII). At this time, there weren't any multilateral organizations which could help the countries harmed by the GD or create new rules for collective action. Then, the international economy was in chaos and some major players moved to autarchy (again, comparison to the COVID crisis). This lack moved the post WWII mindset: whenever such a crisis happened, countries realized they needed to have international cooperation institutions. - Policy responses to the GD a) Competitive protectionism. - In 1929, President Hubert had been recently elected. Though he was a liberal, he was persuaded by lobbies to implement the Smoot-Hawley Tariff Act in 1930, the most drastic Tariff Act in US Act. - This move was mimicked everywhere, and it was even harder in some European countries. - International trade volume contracted a lot. b) Paradox: protectionism did not last in the US and it started to Reciprocal Bilateral Agreements in ‘34. Between 1934 and 1939, the US had already signed 20 agreements of that sort: it had begun to liberalize. However, the tariff acts remained intact in many countries.  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY c) Roosevelt was very critical of Hurbert’s administration. When he was elected President, he implemented the The New Deal, which represented a revolution that included: - Recovery by fiscal stimulus. Governments would create jobs (for anything), which generate earnings and push consumption and demand. Demand was considered very important for the US recovery, which happened fairly quickly. - Regulation of the finances: financial institutions were regulated with strict measures. Many banks were closed down after inspections for not complying with such regulation. - Social security measures were adopted, which were very new in the US (they already existed in some European countries). Social security and employment: not as generous as in Europe. US Social Security Act of 1935 Roosevelt became a “hero” of the 1930s for many, in particular the unemployed or people who suffered in any way from the country. Cuomo, governor of NY (the same job that Roosevelt had before being president), expresses the same criticism for the central government that Roosevelt, and he advocates for the same intervention policies. Keynesianism (Keynes’ ideas): “It is an outstanding character of the economic system in which we live that, whilst it is subject to severe fluctuations in respect of output and employment, it is not violently unstable-the evidence indicates that full, or even approximately full, employment is of rare and short-lived occurrence.” (Keynes, 1936: 249-50) He contradicted the assumptions of classical liberalism. For example: in reality, full employment is an exception, rather than long term prevalent. He also underlined that capitalism was very efficient in its good times but it could get in spirals of inadequate balance and unemployment, so that state intervention is necessary for capitalist recovery. In particular, states must manage demand using fiscal policy tools: taxes and government spending. This is not socialism, just recognizing some failures of capitalism and thus the necessity of state intervention. The Roosevelt administration had started measures of the sort even before the publication of his ideas, but they later became prevalent for almost 5 decades. Of course, in some countries or  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY moments, they were more questioned than others (e.g. 1970s) but especially in the 1930s, most countries applied these ideas. Accordingly, state intervention replaced the “invisible hand” from liberalism, seeing that the markets were not recovering on their own. *Some liberals still argued that they could have recovered on their own in the long term, but interventionist policies came too quickly. This new mindset implied: a) “The state should do something to save capitalism” from its own failures. b) States should regulate the market and create jobs. c) States should create social safety nets: social security. Political outcomes: polarization a) Both extreme right and extreme right gained electoral popularity in different countries. b) Authoritarianism and populism emerged. WORLD WAR-II - In terms of international trade, WWII was an episode of collapse for the domestic economies that took part. - Before the war ended, the Bretton Woods Conference took place: a meeting where a new international and monetary system was decided. a) Goal: European recovery and the creation of an international monetary and trade system. b) International money and finance was supposed to be connected to peace and prosperity. This connection will be present in the mindset of the postwar consensus. There was an overarching spirit of cooperation to overcome consequences of the GD (competitive currency devaluations, unemployment, etc.). Keynes, representative of GB, thought that individual competitive efforts rather than cooperation would hurt them all. c) This agreement reached complex matters in an unprecedented way in history. d) The “Bretton Woods Trio” was created: - The International Monetary Fund (IMF) - The Bank for Reconstruction and Development (World Bank) - The General Agreement on Tariffs and Trade (GATT).  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY e) At the table of negotiations - US delegation: Harry Dexter White. The US wanted stability but they were not willing to invest very generously. They were the largest creditor and a political hegemon, but a very cautious one. - British delegation: Keynes. He thought that the rich countries had to participate in international problems and take responsibility when it came to financing. f) Aims: - Maintain prosperity and peace. - Avoiding another war and a depression: recent memory of GD and WWII. They thought that collaboration was essential to avoid them. - Fostering economic growth. - Creating cooperation among the Western Bloc: containing communism. g) Problem: who should bear the cost? Debtors (Dexter White) or creditors (Keynes)? THE POST-WAR ECONOMIC ORDER Embedded liberalism - A multinational order was formed in 1944 (Bretton Woods). a) This will be based on an institutionalized cooperation: there are certain rules of the game. b) The hegemony of the US (Pax Americana) prevails. At an international level, resetting the liberal order meant: a) Intertwined association between prosperity and peace. - Recovered belief in the benefits of freer trade. - Yet, there was one distinction with 19th century free trade: capital controls (for example, Keynes was very conservative on this). - Keynesian compromise: a collectively managed financial system, while keeping domestic autonomy. b) Institutionalized cooperation based on the US hegemony but also a new multilateral order: multilateral actors (e.g. IMF, GATT) tied states’ hands by setting the rules of the game. At a domestic level: a) Internalized fear of unfettered markets: no trust on the invisible hand  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY - State interventionism - Keynesianism to varying degrees b) Establishment of social safety nets: social welfare states. c) This was all marked by the collective memory of the interwar period as a whole, including: WWI, GD, competitive protectionism and WWII. As a pack, this constituted the postwar consensus: - Free trade (except for capital flows) - State interventionism: welfare - International organizations: multilateralism.  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY LECTURE 3 - POST-WAR CONSENSUS: INSTITUTIONALIZED COOPERATION, THE BRETTON WOODS TRIO AND THE INTERNATIONAL TRADE REGIME The postwar consensus was very based on the “Bretton Woods Trio”: a) The Bank for Reconstruction and Development: it is the World Bank now. b) The International Monetary Fund: still exists. c) The General Agreement on Tariff and Trade: predecessor of the WTO. All three have evolved in time. With the start of the Cold War, the postwar world was a bipolar order. In this context, the mission of the Bretton Woods trio was: a) Maintaining prosperity and peace: avoiding another war and a depression. The collective memory of the chaos from the war and the GD determined the idea of establishing certain rules of the game. b) Fostering economic growth as a consequence of peace and prosperity. c) Attaining cooperation and interdependence within the Western bloc. Within the Eastern bloc led by the USSR, different institutions existed (with similar goals). Pressured by the U.S., the IMF modified the gold standard for the fixed-exchange-rate system a) Characteristics of the fixed ERS: - Open to market forces but not divorced from politics. - Fixed rate: one ounce of gold - $35. - Other currencies fluctuate against the dollar according to supply and demand. - States can intervene to keep the currency values within 1% above or below par value (this is the fixed exchange rate). b) The IMF defined trading bands within which the currencies could fluctuate; if their value increased or decreased outside those limits, the central banks were to intervene buying or selling their currency with the dollar in order to reestablish a supply-demand equilibrium. Countries (U.S. included) could also buy and sell gold to settle their accounts. In sum, it was a quasi-self-adjusting mechanism.  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY c) Confidence and stability: dollars could be converted to gold as a set price, and after WWII, the U.sS. had the largest amount of gold backing. Economic and political stability led to Western European and Japanese recovery; at the beginning of the Cold War, the U.S. dominated a liberal-capitalist system and aimed to divide it from the Soviet-dominated Eastern Bloc, where capital movements were very limited. d) The U.S. dollar became the top currency: it was very demanded for international trade in all Western Europe, which provided many privileges to the U.S. It also became the reserve currency that was held in central banks. The making of the Bretton Woods system (fixed ERS) solidified the US hegemony: “Pax Americana”. a) The US was an active but cautious and reluctant hegemon. It pushed the others to comply with the rules of the game but it was reluctant to set them very tight because they did not want to restrict themselves too much. b) Their role was to guarantee certain collective goods: - Collective security: in a bipolar world order (Cold War tensions), this collective good was very vinculated to the goal of containing communism. This goal led to the establishment of NATO. - Liberal (relatively) international trade. When it comes to liberalization of markets, it's not all or nothing: however, at Bretton Woods it was decided to go towards “freer” international trade. - A smoothly-functioning international monetary system: the fixed ERS or dollar standard as a very important pillar. c) Problem: the chaos of not having a “lender of last resort”: Britain had lost the title of largest creditor and in the interwar period it had been the US. Finally, it was decided that the “lender of last resort” should be the IMF. d) Now, to what extent was it a “benevolent hegemon”? - Their aid to European post-war recovery played a very important role in its legitimization as a hegemon. The main instance of this was the Marshall Plan: Western European countries were aided to different degrees (first UK, then France, Western Germany, Greece and Turkey).  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY - For the US, the European recovery was very important. Their growing economy really depended on reliable capitalistic markets for international trade and foreign investment. Then, the Marshall Plan was not purely “benevolent”: it was in the direct interest of the US, as General Marshall justified before the US Congress. The International Bank for Reconstruction and Development: today “The World Bank/the Bank”. a) In the Bretton Woods Conference, it was created to aid European postwar recovery. b) After de-colonialism, it became oriented to new developing countries. c) Bretton Woods Conference document quotes: - “The Conference has agreed that expanded international investment is essential to provide a portion of the capital necessary for reconstruction and development”. - “The nations should cooperate to increase the volume of foreign investment for these purposes, made through normal business channels. It is especially important that the nations should cooperate to share the risks of such foreign investment, since the benefits are general” d) In other words, the nations should establish a permanent international body to perform these functions, to be called the International Bank for Reconstruction and Development: later, the World Bank/the Bank. The International Monetary Fund a) It operates to facilitate the smooth functioning of monetary transactions and the international financial and monetary system as a whole. b) Bretton Woods Conference document quotes - “Because these monetary transactions are international exchanges, the nations must agree on the basic rules which govern the exchanges if the system is to work smoothly.” - “... When they do not agree,… the result is instability, a reduced volume of foreign trade, and damage to national economies. This course of action is likely to lead to economic warfare and to endanger the world's peace. The Conference has therefore agreed that broad int’l action is necessary to maintain an international monetary system which will promote foreign trade...[the nations] should assist each other to overcome short-term exchange difficulties.”  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY c) The IMF promotes international cooperation and stability based on: - Expansion of international trade: it happened drastically after the war. - Maintaining a stable exchange rate system. d) A functioning, low-cost and credible ERS was considered a requirement not only for economic prosperity, but in order to guarantee peace. The, IMF would be the supervisor, providing: - Surveillance and technical assistance to member states. - Temporary financial assistance to members to ease balance-of-payments difficulties. e) Ultimately, the IMF should help maintain prosperity and peace. As the lender of last resort, the IMF has been providing financial assistance and debt service relief to members. a) Right now, it is very active trying to alleviate the economic impact of the COVID-19. Even in pre-pandemic normality, the IMF does provide assistance to countries with current account deficits. b) However, there are many critics: - South Korea (1997-1998): after a successful economic development in the 80s, in the 90s it had a deep economic crisis as a consequence of a financial crisis in Taiwan. Many protesters contested the IMF: even there, the IMF still provided financial assistance. Anxiety over losing sovereignty due to this assistance: “ask the Korean people first”. - Argentina: “No al FMI”. In the whole Latin America, the IMF is awfully unpopular. Argentina is one of the leaders of receiving assistance, but the people protested a lot. c) If they are as generous, why do they protest? - Belief that the US controls the IMF: threat on sovereignty. - Assistance comes from conditions that must be accepted: countries that ask for this help must comply with the conditions set by the IMF, which are supposed to help the country recover. - Then, there is an imposition of economic policies that the countries’ governments did not choose.  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY A majority of 85% is needed to make changes in the IMF. If we take a look at the IMF voting shares a) US: 16,73%. It helds a veto right. b) Japan 6%. c) Germany: 5%... This is very much contested, not only by the protesting people from before, but a lot of important countries themselves: India, Russian Federation, etc. The power distribution in other institutions (e.g. the WTO) is very different, because all countries are (on paper) equal (see next lecure). After the Post-war consensus was agreed upon, the following huge economic growth was named “the Golden Age” (1950-1973). a) Outstanding growth until 1973. After 1973, growth slowed (due to the oil crisis). b) World trade also increased continuously more than four times until the oil crisis. The ITO and the GATT. a) In 1947, at Bretton Woods it was agreed that the International Trade Organization (ITO) would be created as a third institution. - It would be much more comprehensive than the nature of the GATT: an actual multilateral institution with detailed rules, decision-making mechanisms and intrusive instruments for intervening in the domestic sphere (e.g. competition policy…).  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY - As a reluctant hegemon, not wanting to tie its own hands, the US Congress did not ratify it in the Congress. Without the hegemon as a party, the ITO did not make sense anymore, and hence it was not put into practise. b) The GATT was conceived as a temporary agreement, but after the ITO failure it turned into the sole multilateral instrument in trade from 1948 to 1995. Consequently, it became a negotiating forum for reducing tariffs and other barriers, even though it was not really a proper organization but rather just an agreement. - In 1948, it had 23 founding contracting parties. The first Session was held in Havana, Cuba. After their respective revolutions, China and Cuba would withdraw. Now, the WTO has 164 members. - Goal: correcting the legacy of protectionist measures. Its base entailed fears of war, the Great Depression, etc. Free trade was thought to be connected to war. a) Memory of the spread of protectionism and preferential treaties in the 1930s: “the beggar-thy-neighbor policies” were considered very risky. b) Also, the widespread use of discrimination in trade in 1930s was to be avoided, meaning that no advantages could be given to preferred trade partners. c) Protectionist legacies that remained: - Britain: Imperial Preference System. “Home producers first, empire producers second, and foreign producers last”. - France: preferential system with colonies. - Germany: preferential trade agreements with Eastern Europe. - US: two contradictory moves a) Smoot-Hawley Tariff Act (1930). b) Bilateral agreements (1934-40): opening up again thanks to the Roosevelt Administration. c) The Reciprocal Trade Agreements Act (RTAAs): re- liberalization (to some extent) of trade. This Act changed the decision-making institutions and it implied delegating more authority to the president to lower tariffs, in case of reciprocal reductions. - GATT commonly accepted principles. a) Overarching norm: multilateral negotiation and free trade.  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY b) The most-favoured nation: all advantages and concessions for the most favoured nations would be extended for all member countries. c) National treatment: all imports will be treated as domestic products in the domestic market, concerning taxes, rules, etc. This prohibited governments from using measures (e.g. subsidies, taxes, etc.) to provide advantages for domestic firms at the expense of foreign products. d) Reciprocity: governments should extend similar concessions to each other when they make an agreement. *Note: these principles can be costly and countries often contradicted them; also, there were important exemptions under the GATT rules. - How did the GATT operate? It is not an organization per se (no board or Secretariat) but a negotiating platform. Modus operandi: a) Ministerial conferences b) Rounds of discussions, negotiations, etc. aiming for freer trade. c) The forum was based on “shared” norms and principles: however, these rules of governance were weak and ambiguous. - On paper, GATT decision making was: a) Member-driven and consensus based: there was no board of directors and the members stranded on equal foot. b) Single Undertaking Principle: “nothing is agreed until everything is agreed”. c) Flexible rules and exit options prevailed for the decades, even contradicting the very spirit of the GATT which was liberalization. - New protection instruments were justified for retaliation. - Many exemptions were adopted, challenging the GATT founding principles.  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY LECTURE 4 - THE EVOLUTION OF THE INTERNATIONAL TRADE REGIME. WTO: DESIGN AND OPERATION. POLITICS OF A QUASI-JUDICIAL TRADE REGIME Summary - The IMF and the Bank: brief clarification - The evolution of the trade regime a) From the GATT to the WTO. b) Design and operation of the WTO. - The politics of a quasi-judicial trade regime a) “Legalization” and its diverse consequences. b) Dispute settlement and its operation. BRIEF EXPLANATION OF THE FUND AND THE BANK Nota de la autora (de estos apuntes): esto es para clarificar conceptos de la clase anterior, os lo dejo por si acaso pero estrictamente lo podéis pasar - The IMF or “the Fund”: a) It is a cooperative institution. It was created as the supervisor of the Bretton Woods system and more broadly, it was funded as a supervisor of a smoothly functioning international monetary system. b) The members would cooperate to maintain an orderly system of payments and resceptis between nations so that any crisis emanating from the balance of payments does not result in an international system c) In order to do so, besides surveillance it would provide technical and (temporary) financial assistance (particularly for countries with problems in its balance of payments). The assistance would be linked to certain conditionalities set by the IMF, which have been difficult to comply for the member countries. This is one reason why the IMF has been criticized and has a lot of detractors. d) It also aims to foster growth and employment, creating a healthy global economic environment. e) Rather than a Bank, it is more a “credit union” of pulled resources where the members pay quotas in order to gain voting rights, causing contentions in the world economy. Non-disguised inequality between members - No principle of one member-one vote. - Also, the US has a veto power. - The World Bank a) It is an actual bank which finances projects worldwide. b) It fulfills the functions of an investment bank: rather than providing the money themselves, it mostly acts as an intermediary between investors and projects. It guarantees good rates to ensure beneficial investments for both parts.  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY c) As a development bank, one of its major goals is to alleviate poverty worldwide. d) Structural adjustment: in the last decades, the IMF and the Bank started working together to assist countries which were going through financial crises. Then, funds that came from the Bank and distributed by the Fund and entailed conditionalities. This is why they are perceived as intermingled institutions. THE EVOLUTION OF THE TRADE REGIME 1. SUSTAINED PRINCIPLES: from the GATT to the WTO. The GATT was not an institution but rather an agreement, which ultimately became the only negotiation platform until the WTO was founded. - Major principles (see previous lecture): a) Overarching norm: economic liberalism, particularly free trade. b) Most-favoured nation: against discriminatory practices. c) National treatment: imports treated as domestic products. The GATT prohibits governments from using measures to provide advantages for domestic firms at the expense of foreign products. Conversely, treatment of domestic and foreign products versions of the same products, known as “like products” should be similar after they enter the domestic market. *Note: important for Biden vs. Trump. They both support protecting their manufacturer industries (through subsidies), which is against the WTO. d) Reciprocity: extend similar concessions to each other. - Class debate. Multilateralism vs. Regionalism: Building or stumbling blocs? a) The “spaghetti bowls” is a concept from political science that refers to the current chaos of preferential regional trade agreements. See in the chapter.  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY b) Inevitably, some of these preferential agreements entail conflicts: besides their membership in the WTO, they are “discriminating” against other countries. - Preferential or Regional Trade Agreements (RTAs can be understood as a subtype of PTAs) can be bilateral or plurilateral. Also, they can include: a) FTAs (free trade agreements): members eliminate tariffs on trade with each other but retain autonomy in determining their tariffs with non-members. b) Customs Union: a group of countries that eliminate all tariffs (depending on the agreement, they could eliminate non-tariff barriers too) among themselves but maintain a common external tariff with third parties. Example: the EU has eliminated both tariff and non-tariff barriers (Single Market) and it has a Common External Tariff (CET) for external parties. This represents quite a blunt descrimination that contradicts the GATT principles. MERCASUR: as a response to NAFTA. Also, a free trade agreement of the whole of America which has never been fulfilled. c) In the Cold War context, the customs unions became tolerated and incorporated as an exception. Some examples from the graph: - EUCU: The Custom Unions Agreements includes non-EU countries like Turkey and Andorra. - EACU: the EuroAsian Customs Unions is mainly run by the Russian Federation (old Soviet countries). - GCC: Gold Cooperation Custom - EAC: EasternAfrica Custom. - CEMAC: Economic and Monetary Community of Central America  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY d) The next map is from 2018, which illustrates the complex nature of the EU trade in particular. The EU is an actor on its own at the level of the WTO but, despite its own members being members of the WTO, is has signed a lot of free trade and preferential agreements (e.g. North-African countries, the agreement with Mexico which is being modernized now, etc.). - Then, dispute the non-discrimination principle has been defied. a) This started as a geopolitical strategy against the Eastern Bloc during the Cold War, so that the US tolerated. b) Then, the US had to confront a very important contester: the EU. - Also, other major exemptions to the GATT principles: a) The Generalized System of Preferences (GSPs) allows the advanced industrialized countries to apply lower tariffs to imports from developing countries than those from advanced countries. Example: India was a main lobby for this exemption, which benefited from lower tariffs on exports to developed countries but then could maintain such high tariffs when importing from them. b) Then, developing countries did not have to reciprocate. c) The “Harberler Report” (1957) was commissioned by the GATT to undertake a study on relative terms of trade for primary commodities and manufactured goods. They found that the terms of trade (relative price of exports/imports) for primary producers in developing countries would be adversely affected if they continued to  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY free trade agreements on equal footing. This was a turning point that led to the establishment of the GSPs. d) The WTO provides a list that includes the countries that qualify to be benefit from GSPs. - How did the GATT operate? a) Intergovernmental bargaining platform. - Member driven: a) No board and no quotas. b) Consensus-based. No veto power of any member. - Modus operandi: ministerial meetings (still in the WTO). b) Forum based on shared norms and principles. - Yet, their rules were quite flexible: GATT had no real enforcement power. Some members complied but others (quite commonly) did not. - Also, a lot of exemptions deviated from its original spirit. c) Both the GATT and the WTO have been considered the most “democratic” of all Bretton Woods institutions: everyone enters on equal footing (on paper). d) New instruments of protection and “retaliation” (represalias): if there is a complaint against protectionism, they can also protect their markets by means of retaliation. - The Rounds of discussions and negotiations aiming for freer trade became the common practise. - The name of each Round comes from the date and place from where the negotiations started: there were others following which could happen in other places. An exception would be Kennedy round, which was not named after a place but rather in the memory of JFK after he died, because he was a very firm believer in free trade.  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY GATT/WTO ROUNDS Nota: ella en clase solo explicó la de Uruguay; el resto son del texto - Annecy (1949), Torquay (1951), Geneva (1956) and Dillon Round (1960-1): important institutional matters but not much progress towards liberalizing trade. Reasons: a) Slow European recovery after the war. b) European currencies were not made fully convertible until 1958: low international competition. c) The US was the preponderant actor, who offered most of the tariff concessions. - Kennedy Round of 1963-7: first significant GATT negotiation since 1947. a) First negotiation where the European Community participated as a single unit. b) First major transatlantic negotiation between America and Europe on an apparent basis of equality and reciprocity. c) New topics were introduced: - Agriculture: very intervened until then. Problem: disagreement between the US and the EU limited this progress. - Special treatment for developing countries: a) Significant cuts in industrial goods in developed countries; food aid. b) Anti-dumping code to standardize national policies and prevent unfair competition c) Agreements on established price ranges. First negotiation to explicitly address developing countries concerns, culminating in the formal endorsement of the principle of non-reciprocity for developing countries. - Non-tariff measures: a) Initially unsuccessful until the 1970s international monetary chaos. b) Response to Japan and newly industrializing economies (NIEs) which resurrected fears of trade protectionism and convinced national governments to begin a new negotiation in the GATT. - Tokyo Round (1973-9): most comprehensive and far-reaching results since 1947. Three categories: - Non-Tariff Measures: most important part. a) They covered: customs valuation procedures, import licensing, technical standards for products, subsidies and countervailing duty measures, government procurement and anti-dumping duty procedures. b) Failed negotiations on safeguards.  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY c) Goal: constitutional reform of GATT law to improve openness, certainty and non-arbitrariness. - Tariff reductions a) Main issue in the previous multilateral negotiations, so that they were not the focus of the Tokyo Round. b) Yet, these reductions reached the same levels that the Kennedy Round had. c) Agriculture was again intractable: the US and the EC agreed to remove it from the negotiating table halfway. - Revisions of GATT articles in the interest of developing countries a) Brazil initiated these negotiations intending to clarify the GATT obligations and ease them for developing countries. b) The revised articles were the named “framework” agreements which covered: safeguard actions for development purposes, trade measures taken to correct payments deficit, export controls and deviations from MFN. c) Major outcome: “Enabling Clause”, which allowed GATT signatories to accord differential and favourable treatment to developing countries (not extensible to the other countries) d) Developing countries were still disappointed after the Tokyo Round because it did not recognize the non-tariff measures that developed countries used to protect their markets. Tokyo Round as a turning point: - Large number of developing countries negotiating: unprecedented in GATT, set the scene for the Uruguay round. - Extent of multilateralism for managing the international trade system. - Not limited to reduction of tariffs: rule-making exercise of major proportions. - Its agreements constituted legal rules that reached further into the nation state, deeply impacting domestic regulations. - Uruguay Round: most contested round (before Doha): foundation of the WTO. A lot of backsliding happened a) Fights between Australia and the US regarding subsidies for agriculture. b) Similarly, the EU and the US did not want to let go of their agricultural policy independence.  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY c) Major change: textile and agriculture, which had not been included in the GATT, were included in the WTO. - Doha Development Round: this round did not “really end”, or rather, it did without producing any result. a) Aim: implementation of some agreements adopted by the WTO which had not been implemented yet. b) Priority of sustainable development goals and particularly the market access of developing countries for northern ones: e.g. agriculture, recently incorporated to free trade. c) In 2007, negotiation broke down as neither the EU nor the US were willing to provide developing countries with subsidies or concessions on agricultural subsidies. This led to a profound malaise among developed countries. d) After this failure, comments about a crisis in the hotbed of the WTO arose. To tackle this crisi, WTO organized a new meeting in 2013, which get to some solutions. This was known as the Bali Package. The Bali package included a new Trade Facilitation Agreement, a decision on LDCs and a decision on agriculture. e) The 2015 Nairobi Conference led to the elimination of export subsidies in Agriculture. However, the success of this conference was at the cost of accepting the lack of consensus in the Doha Conference, since many countries did not ratify it. f) The greatest immediate challenge for the WTO is the potential demise of its negotiation function. Disagreement over market access for agricultural goods, manufactures and services has been at the heart of deadlock in the Doha round. Now, why establish an international institution which would tie states hands? a) Prisoner dilemma (example) Note protecting is a dominant strategy and then the equilibrium would be at P/P; however, both countries would be better off under the outcome L/L.  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY b) Then, in order to resolve a cooperation problem between states given a hypothetical anarchic environment in the international arena, the creation of an institution was deemed essential to resolve such problems of enforcement, monitoring and sanctioning. c) The WTO was established in this spirit. However, we will see to what extent it has been able to fulfill this role. - The Hegemonic Stability Theory explains how to sustain an open trade regime: a) An open international trade regime is considered as a public good. This faces a free rider problem: since by definition, it is a non-excludable and nonrival good, it is in everybody’s interest to benefit from it but no one would pay the cost. b) According to this theory, it is in the hegemon’s interest to invest in building and sustaining and international trade regime: - Strong interests in the stability of the trade regime: after the fall of the USSR, the US should be interested in cooperation with other countries to maintain this new, stable system. - Historical data supports this theory: the US did invest in protecting the regime. Present question: what happens with the Chinese rivalry and the defy of the WTO? From GATT to the WTO: what is new? a) Specially, the widening of the trade regime has incorporated more players (164). Today, most countries are members of the WTO. New players brought great diversity which entailed challenges: - New members had different markets, institutions, interests and power constellations. - Interests and priorities started to conflict: coinciding with N-S conflict. Example: TRIPs, Agriculture, Access to the North, etc. For example, this cartoon represents rich nations colliding with MNCs under the WTO at the expense of the poor nations.  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY b) Deepening of the trade regime - New sectors: agriculture (untouchable until then) and textiles (exported by developing countries). - Institutionalization and formalization: binding rules, transparency and more information. - Institutional harmonization: a) Competition policy (domestic) b) TRIPS: Trade-Related Intellectual Property Rights c) TRIMS: Trade-Related Investment Measures d) GATS : General Agreement on Trade on Services - Legalization: according to Oatley, “the WTO brings the rule of law to bear in international trade relations”. Actually, this is an exaggeration to the extent that the rule of law implies an enforcement power that the WTO does not have; however, the Dispute Settlement Understanding (legal document that regulates the WTO dispute settlement process) was started to be written. DISPUTE SETTLEMENT UNDERSTANDING: The process proceeds as follows: a) One member requests consultation with another member over alleged violations of WTO law. b) If consultations fail to produce results within 60 days, a panel is established and a legal process of adjudication begins. c) Once the panel is established, the members may submit an appeal on legal questions before the panel report is adopted by the DSB d) If a member is found to have violated WTO law, it is expected to bring its domestic trade policy regime in line with its WTO obligation e) If it doesn’t, it has to enter in negotiations with the competing country so as to find a plausible solution. f) If these negotiations fail within 20 days, the complaining members may request authorization to suspend the application of the Member concerned of concessions or other obligations under the covered agreements  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY - Quasi-judiciary status: to secure a “positive solution” to the dispute (art. 3.6 DSU). However, the DSB is prohibited from engaging in judicial lawmaking , as concessions and trade rules can only be made by members - The WTO’s rules-based system depends on the members’ acceptance of legitimacy of the DSM. Also, the system of complaint and consultation was established with the idea that the preferred outcome would be to reach a mutually agreed solution. If that did not happen, the DSU procedures would be applied. - Problem: since December 2019, the appeal is blocked due to the US. CHALLENGES TO MULTILATERAL TRADE - Regional Free Trade Agreement is coming as a potential challenge to the worldwide multilateral trade regime WTO has tried to established since 1995 - The bargain at 21st century regional trade agreement is foreign factories in exchange for domestic reforms, not exchange of market access - The emergence of twenty-first century regionalism entails a number of potential risks, including the erosion of global trade rules and the return to a fragmented pre-Second WW system of trade governance dominated by the great powers. - This is problematic because most challenges must be solved through multilateral agreements and not regional ones (e.g Climate Change) - To tackle this issue, many experts have said that to revive the WTO’s rule-making system, more flexible approaches to decision-making allowing groups of members to move forward their agendas inside the use of plurilateral agreements, should be established, as done in the Tokyo Round - However, there is a concern among developing countries that a plurilateral approach would lessen the possibilities for trade-offs within the WTO.  LAURA HERNÁNDEZ GIL INTERNATIONAL POLITICAL ECONOMY LECTURE 5 – CHALLENGES AND CONTESTATIONS ABOUT THE WTO Summary: evolution of the WTO - Legalization and outcomes: DSB a) Presentations b) Stakeholders - The N-S Conflict: the Doha Round. Trade wars and ongoing crisis a) Deadlock in the trade regime. b) The end of the WTO? Example: How come the Peruvian sardines overcame the trade barriers whereas the Vietnamese cattish could not? Davis text: Dispute Peru vs. EU: the EU had a barrier against Peruvian sardines through label regulations, but the WTO ruled in favour of Peru. This is how Peruvian sardines entered the European Communities. However, the catfish from Vietnam could not enter the American markets. Davis’ article argues that both products were subject to food labelling domestic regulations, which was used as an instrument for NTB (non-tariff barrier), providing a kind of disguised protectionism. Then, what is different between the Vietnamese catfish and the Peruvian sardine? They are similar countries economically, but Vietnam was not a WTO member. - Articles cited: Most Favoured Nations, Technical Barriers to Trade and Anti-dumping. According to Davis, the DSU of the WTO is very beneficial because it provides them bargaining leverage. Also, they have the possibility of legal bandwagoning: becoming a third party supporting powerful countries. - Legal adjudication: according to Davis, developing countries gain better outcomes, overturn protectionist measures in the EU and US through 4 distinct mechanisms: a) Guarantees for the right to negotiate: this is a right that Peru had and Vietnam did not. b) A common stand