IPE Lecture - Introduction to Politics of the WTO PDF

International Political Economy Term 2, AY 2021-22  Guide Questions 1. What is a global economy? What makes an economy “global”? 2. Why do you think our economy is set up this way? What factors explain why the economy is this way? 3. How would you define “internation...

International Political Economy Term 2, AY 2021-22  Guide Questions 1. What is a global economy? What makes an economy “global”? 2. Why do you think our economy is set up this way? What factors explain why the economy is this way? 3. How would you define “international political economy”? How can we explain the global economy through the lens of IPE?  What is IPE? Studies how politics shape developments in the global economy and how the global economy shapes politics Focuses on the political battle between the winners and losers from global economic exchange  Global Politics Economy political battle between the winners and losers from global economic exchange Uneven distribution of gains among individuals – the Y of some and the Y of others. (distributive consequences) generate political competition in national and international arenas: OUTCOME??? WINNERS want deeper links in the global economy; LOSERS try to erect barriers.  Trump’s Economic Policy on Imported Softwood Lumber from Canada (April 2017) U.S. Increased tariffs on imported softwood lumber from Canada. Why? DOMESTIC PLAYERS (U.S.) INTERNATIONAL PLAYERS 1. US lumber mills and timberland 1. Canadian lumber producers owners (US Lumber Coalition) 2. Canadian government 2. US home builders (The National Association of Home Builders) 3. WTO and NAFTA  Key factors to understand the global economy Economic theory Domestic politics International politics International economic organizations  4 Issue Areas of the Global Economy International Trade System International Monetary System Multinational Corporations (MNCs) Economic Development 2 Broad Questions that Shape the Study of IPE 1. How does politics shape the decisions that societies make about how to use the resources that are available to them? 2. What are the consequences of these decisions? 1. How does politics shape the decisions that societies make about how to use the resources that are available to them? Decision to increase of decrease tariffs affect how society’s resources are used Complicated by a) finite resources, and b) competition for finite resources 2.What are the consequences of the choices that societies make about resource allocation? welfare consequences Distributional consequences  Focus of the Course To explain the policy choices made by governments, we focus on the interaction between societal interests and political institutions. 1. Interests or economic policy preferences of groups in society 2. Political institutions - rules  Guide Questions 1. What is the World Trade Organization (WTO)? 2. How can we explain the creation of the WTO from the perspective of global power distribution? 3. What are some of the contemporary challenges facing the WTO?  The WTO and the International Trading System Globalization of production networks (global value chains) definition Example: Toyota and Nutella by Ferrero Brought about by the rapid growth of world trade – average growth rate of 6% What brought about the increase in the growth of world trade?  World Trade Organization (WTO) and its predecessor General Agreements on Tariffs and Trade (GATT) Government decisions have brought about the rules and institutions that govern world trade Aim: 1) broad overview of the WTO; 2) examine how the global distribution of power shapes the creation of international trade systems; and 3) explore contemporary challenges to the WTO.  What is the WTO? located in Geneva, Switzerland, is the hub of an international political system under which governments negotiate, enforce, and revise rules to govern their trade policies. Between 1947 and 1994 the GATT fulfilled the role now played by the WTO. In 1995, governments folded the GATT into the newly established WTO where it continues to provide many of the rules governing international trade relations. Has 164 member countries  Center of the world trade system: the WTO provides a forum for trade negotiations, administers the trade agreements that governments conclude, and provides a mechanism through which governments can resolve trade disputes. As a political system, has 4 distinct components: (1) a set of principles and rules, (2) an intergovernmental bargaining process, and (3) a dispute settlement mechanism.  2 Core Principles of the WTO 1. market liberalism – the economic rationale for the trade system. 2. Nondiscrimination - ensures that each WTO member faces identical opportunities to trade with other WTO members. a. Most-Favored Nation (MFN) - prohibits governments from using trade policies to provide special advantages to some countries and not to others. - 2 exceptions: regional trade arrangements and generalized system of preferences b. National treatment - prohibits governments from using taxes, regulations, and other domestic policies to provide an advantage to domestic firms at the expense of foreign firms.  WTO Rules provide the central legal structure for international trade. rules constrain the policies that governments can use to control the flow of goods, services, and technology into and out of their national economies. 2 types of rules: a. Proscriptive – prohibition against government discrimination. b. Prescriptive – requirements for governments to protect intellectual property. -- constrain the ability of governments to regulate the interaction between the national and the global economies.  How are rules created? Through intergovernmental bargaining -the WTO’s primary decision- making process, and it involves negotiating agreements that directly liberalize trade and indirectly support that goal (reduce and eliminate government- imposed barriers to market access). How does INTERGOVERNMENTAL BARGAINING occur? 1. governments organize negotiations in bargaining rounds (with a beginning and target date for conclusion). Governments at the beginning of each round meet as the WTO Ministerial Conference, the highest level of WTO decision making. Governments establish an agenda detailing issues as focus of negotiation and set a target date for the conclusion of each round.  2. Lower-level national officials conduct detailed negotiations on the topics embodied in the agenda. 3. Once negotiations have produced outlines of a complete agreement, trade ministers meet at a final Ministerial Conference to conclude the round. 4. National governments then ratify the agreement and implement according to an agreed timetable.  Examples of rounds: Table. 2.1 (p. 55) Latest Doha Round – 2001 - 2005? (explore later) RULES established by intergovernmental bargaining provide a framework of law for international trade relations. Provides the rule of law into international trade relations.  A Quick Look at the Doha Round 1. When was it held? 2. What were in the agenda? 3. Main issues that posed as large obstacles? 4. Success or failure?  WTO’s Dispute Settlement Mechanism ensures that governments comply with the rules they establish. WHY? How does it ensure government compliance?  Power Distribution and the ITS Stability of the international trade systems and the WTO – hegemonic stability theory Public goods Free riding  New Directions and Challenges Two changes: a. emergence of developing countries as a powerful bloc b. the emergence of NGOs as a powerful force outside the organization a. Emergence of developing countries as a powerful bloc - Brazil, China, and India - can stymied effort to launch current round of negotiations (e.g. Seattle in 1999) - has transformed bargaining (brings together governments representing countries with different economic structures)  , b. Growing number of NGOs - Mobilized in opposition to what they view as unwelcome constraints  Greatest challenge: RTA The Political Economy of International Trade Cooperation Why does the World Trade Organization (WTO)? Do the world’s governments still need the WTO?  The Economic Case for Trade 1. Production Possibility Frontier (PPF) (Figure 3.1. p. 82 and Figure 3.2 p. 85) 2. Consumption Indifference Curves  How does trade change equilibrium production and consumption in the US and China? - trade changes equilibrium production by causing each country to specialize in the production of one good. US specializes in computer production while China specializes in shirt production - effect on consumption: expanded  Prisoner’s Dilemma Prisoner B Cooperate (stay silent) Defect (betray) Prisoner A Cooperate (stay silent) 1, 1 5, 0 Defect (betray) 0, 5 2, 2 1. Order of Preference: Prisoner A: 0,5 > 1,1 > 2,2 > 5,0 Prisoner B: 5,0 > 1,1 > 2,2 > 0,5 2. Protect (2,2)/(P,P) as the dominant strategy under grounds of narrow self-interest 3. Quadrant (2,2)/(P,P) has two characteristics: Suboptimal outcome – it is possible for at least one actor to improve its position without any actor being made worse off. Nash equilibrium – neither player has an incentive to change strategies unilaterally.  How can cooperation emerge in Prisoner’s Dilemma 1. Iterated PD 2. Reciprocity strategies – tit-for-tat strategy 3. Governments should care about the payoffs from future rounds  How does the WTO Enforce Agreements The WTO helps iterate the game by creating expectations of repeated interaction from membership. Provides information and transparency to use reciprocity strategies and monitory each other’s behavior RULES provide clear standards against which governments’ trade policies can be evaluated Makes it easier for governments to use reciprocity strategies to enforce trade agreements through DSM