IPE Lectures Trade 2023 Class PDF

James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 International Trade: History, Theory, and Policy I. The Pax Britannica (1815, end of Napoleonic Wars, Congress of Vienna, until The Great Depression of 1878-79 and the outbreak of WWI, 1914) A. What wer...

James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 International Trade: History, Theory, and Policy I. The Pax Britannica (1815, end of Napoleonic Wars, Congress of Vienna, until The Great Depression of 1878-79 and the outbreak of WWI, 1914) A. What were the hallmarks of this first period of global free trade? 1. Gradual reduction of tariffs, during a relatively peaceful period Of global economic order under British hegemony Congress of Vienna ushered in a period of relative peace Establishment of the Zollverein initiated by Prussia in 1818 and Culminating in a formal customs union among the 39 German states in 1834 Golden era of British imperialism, Victorian England, which would span a century (1815 to 1914) Hegemony established by British navy securing the sea lanes The Bank of England as lender of last resort, backing the gold standard, more or less (see second reading by Eichengreen) Some major hiccups, decline of Ottoman Empire, Crimean War (1853-1856), and of course the Franco-Prussian War and the unification of Germany, the Second Reich (1871-1918), more on this below. Where was the United States during this period? On its way to a bloody Civil War, building in the 1850s, ending in 1865, then a bitter period of Reconstruction with a protectionist Republican Party in charge. Democratization in UK & France, Great Reform Acts of 1832 and 1867, defeat of French Empire and establishment of Third 1 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 French Republic (1870/75 until 1940) Repeal of the Corn Laws (1846) and the Cobden-Chevalier Treaty of 1860 ushered in a golden age of free trade Forces of protectionism are in retreat, landed aristocracy in Britain, farmers in France, Junkers in East Prussia, etc. 2. Big economic downturn in the 1870s, a Great Depression begins, falling prices, deflation, etc. Another challenge to understand the reaction to this economic collapse, rising tariffs, although modest. Back to the political economy of trade, diffuse costs, specific benefits, plus Stolper-Samuelson. 3. Gourevitch offers four explanations for the turn towards protectionism. Economic explanations—looking at interest groups and how they lobby for protections, standard political economy, Stolper- Samuelson, etc. Political system or institutional explanations—regime types, institutions matter, how policy is made, inputs, outputs, outcomes. International systemic explanations—what is the distribution or balance of power, and what is a state’s position in the international system, strong, weak, or in-between? Ideological explanations—visions of constructivism, ideas, norms matter, epistemic communities. When trying to understand whether countries are open or closed 2 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 to trade, this is a good check list, and analytical framework. Gourevitch then walks us through four country-cases to test which of these four explanations explains most of the variation in national responses to the crisis of the 1870s. Remember that he wants to explain changes in tariff levels, much like Krasner. Let’s look quickly and briefly at each national case and see what general conclusions we can draw about the history of trade and the rise and decline of the Pax Britannica, before its total collapse during WWI and the Interwar Period. 4. Gourevitch starts with Germany, why? Germany is the rising power. Explain. Like China today. Visions of the ‘Thucydides Trap?’ A rising power threatens the balance of power and the international order. By 1900, Germany would surpass Britain in heavy industry, especially iron & steel, military production, etc. And Germany is in many ways the most interesting and complicated case—all four explanations come into play. Looking at the chart (below) we can see a slow and modest increase in tariffs, starting with the tariff law of 1879. Why this outcome? Gourevitch gives a detailed explanation: Looks at all the interest groups for and against: The Junkers, the small farmers, the big industrialists (Krupp, etc.), small business, the workers… Considers Germany’s vulnerable position in the international 3 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 system, desire to gain a competitive edge with its military, army and navy vis-à-vis Britain, Kaiser and heavy industry support military. Political system of the Second Reich is not democratic, power remains in the hands of the Prussian Landtag and the first minister of Prussia, Otto von Bismarck Fredrich List, German nationalist school of mercantilism (contrast with the Manchester Liberals) Look at chart to see outcomes…you can see distinctly the different periods of trade, raising and lowering of tariffs: 1879 to 1900 (modest closure) 1900 to 1913 (a slight reopening) 1914 to 1918 (collapse of IPE, WWI, no data) 1918 to 1939 (Interwar collapse of IPE, the dark ages) 1940 to 1945 (Again collapse of IPE, WWII, another break in the data) 1945 to 1970s (les trente glorieuses heyday of Bretton Woods and the postwar boom/reconstruction) 1980 to 2007/08 (smooth sailing, with liberal leadership, until financial and banking crisis) 2008 to 2016 (recovery of IPE lowering of tariffs) 2016 to present (reactionary populism, return of America First—slogan of 1920s radical right—and sharp turn towards protectionism) 4 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 0.350 0.300 0.250 0.200 0.150 0.100 0.050 0.000 1865 1890 1915 1940 1965 1990 Bottom line is a combination of interests and the nature of the political system (autocratic) Famous marriage of iron and rye, a classic Stolper-Samuelson outcome Bismarck forms an alliance of landed elite (contrast with British outcome), the Junkers of East Prussia (scarce factor) or RYE who want protection from competition (Russia and France) and heavy industry or IRON in the west, Ruhrgebeit, who want protection from Britain, both relatively scarce factors, but with enormous political leverage/clout 5 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 Joined by banking and financial sector, working hand in glove with heavy industry—note the peculiarities of German capitalism and LATE DEVELOPMENT, need for organized capitalism and clear national strategy for development, heavily mercantilist, like China today or Japan in the 1920s and ‘30s. See Alexander Gerschenkron, cited by Gourevitch Which factor is excluded from this alliance and why? Labor, the abundant factor, which would have preferred free trade, cheaper food and manufactured goods, etc. Labor and the large and growing Sozialdemokratische Partei Deutschlands or SPD is excluded from political power by the Anti-Socialist Law of 1878. This is an outcome that both the industrialists and the Junkers desired. They were afraid of the rising power of labor. Kulturkampf and anti-Catholic movement goes after small farmers, alienated from the political system in Bavaria and the Rhineland, later to become a backbone of support for Hitler and the Nazis We can see how the IPE is closely connected to major political and historical developments. The marriage of iron and rye sets the stage for the rise of a powerful German nationalism, putting Germany on a collision course with its more liberal neighbors to the west, France and Britain, and its authoritarian neighbor to the east, Russia. Despite strong economic interdependence in Europe (see Norman Angell and The Great Illusion), the outcome is total 6 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 war, World War I, utter destruction of European economy, and end of the Pax Britannica. 5. Next Gourevitch looks at France, which also sees a rise in tariffs in the 1870s, why? Again, Gourevitch walks us through the four possible explanations. Move away from Cobden Chevalier (1860) and dramatic shift in France’s position in the international system. Defeat at the hands of Prussia in 1870, collapse of the Second Empire 0.250 0.200 0.150 0.100 0.050 0.000 1865 1890 1915 1940 1965 1990 Establishment of a new (democratic) republic, the Third French Republic (a republic by default), with universal male 7 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 suffrage (contrast with Prussia) returns power to farmers and small shopkeepers (petty bourgeois) who want protection from foreign competition, collapse in prices for agricultural commodities, etc. The scarce factors in this case are industrial and financial capital, France is a late developer too, and they argue strongly for protection. No strong liberal party/forces in France. Labor is politically Weak and vulnerable, also a scarce factor. Ironically the abundant factor is land, but much of agriculture is based with small holders/farms (no agri-business) hit hard by fall in commodity prices Outcome is high tariffs for industrial products, protection for banking and finance (also weak), not so much, at least not initially for agriculture. Bottom line is that democracy, universal male suffrage, empowers small farmers and shopkeepers who want protection from foreign competition. Democracy is often a force for mercantilism and protectionism 6. Next Gourevitch looks at Great Britain, which, not surprisingly, is the only major power during this period that did not raise tariffs on industrial or agricultural products. Why? 8 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 0.400 0.350 0.300 0.250 0.200 0.150 0.100 0.050 0.000 1865 1890 1915 1940 1965 1990 Economic explanations, play of interest groups is fairly Straightforward, see how the old English nobility adapted to industrialization, rise of banking and finance Power of the City (banking and finance, aka the square mile), but what about the old landed elite (the old Tories and some Whigs) and agriculture? If you cannot beat them, join them… landed elite (aristocracy, Sitting in the House of Lords) adapted, became big investors in Lloyds, for example, they had a stake in success of free trade Britain was still king of the hill in the international system, (Pax Britannica Britain still ruled the waves) even though Germany was rising power Liberal ideology (Manchester Liberals) still dominant 9 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 Political system (Tories and Liberals) now favored free trade with repeal of the Corn Laws Labour not yet powerful enough to challenge capital/big Business. Labour Party would be founded only in 1900 7. Finally, Gourevitch turns his attention to the USA, where the outcome is high industrial tariffs, low agricultural tariffs. Same political alignments that we saw from the Civil War Republicans want to protect industry (heavy industry, banks, and textiles) Wall Street v. Main Street Agriculture in south and mid-west want more free trade but they don’t have the political clout to get tariff reductions, at least initially 10 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 0.450 Tariff Rates in USA, 1865-1998 0.400 0.350 0.300 0.250 0.200 0.150 0.100 0.050 0.000 1865 1890 1915 1940 1965 1990 1896 populist breakthrough, William Jennings Bryan, “you shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind on a cross of gold.” Frank Baum… allegorical tale, attack on gold standard… Wizard of Oz American populists are profoundly skeptical of the benefits of the IPE, a recurring theme in US political and economic history America First would be dominant ideology until after WWII. In this sense, Trump has taken us ‘back to the future.’ 8. Narrow but well-placed interests, the economic explanations carry the day, followed closely by political system explanations, then international system, with ideology bringing up the rear. 11 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 Realism prevails, Marxism-Leninism is rejected (no social class explanation), and constructivism looks pretty weak. 9. Overall, Gourevitch finds political economy explanations (focused on organized interests) to be the most powerful factor explaining policy outcomes (protectionism) across his four cases for this time period. II. The Interwar Period (more history), but first let’s go back to trade theory— this is the time (around the turn of the century) when the new field of economics is beginning to emerge, separate from political economy A. Economics is more than a moral or philosophical area of inquiry. 1. Need to formalize concepts of supply and demand, Alfred Marshall stresses the importance of marginal utility, how much satisfaction or utility can be derived from consuming (or producing) an additional unit of a good or service 2. Plus the idea of opportunity costs, potential benefits an individual, investor, or business misses out on when choosing one alternative over another. 3. What is political economy? It is like life, all about trade-offs, costs and benefits, and a rational calculus, not just for individuals, but for nations and societies. MARGINAL UTILITY (and the idea of diminishing returns) At some point markets become saturated 12 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 PRODUCTION POSSIBILITY FRONTIER (Look at different combination of outputs and tradeoffs) 13 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 B. But, before we explore PURE TRADE THEORY, we must revisit Ricardo’s theory of comparative advantage to relax some assumptions 1. We must be able to look at more than 2 products and 2 countries— not a problem, just need more sophisticated models/math 2. Get rid of labor theory of value, also not a problem, we just need other definitions and measures of the cost (inputs) of production 3. Relax the constant-cost assumption, Ricardo did not allow for unit costs of production to vary, but we know that trade brings about economies of scale, which lowers unit costs of production 4. Ricardo made no allowance for transaction costs, like transportation (shipping) of goods, not to mention exchange rates, etc. 5. Ricardo assumed that factors of production (labor & capital) are perfectly mobile internally and perfectly immobile internationally, another problem 6. Ricardo assumed perfect competition in all product and factor markets, also a problem. Markets are ‘sticky’ because of regulations and other distortions, hence they do not always clear. 7. Ricardo did not take account of the effects of trade on the distribution of income and returns to the factors of production (land, labor, and capital), and we know that is a problem (remember Stolper-Samuelson) 8. Ricardo assumed that trade was done by barter, but we know that every international transaction involves the exchange of currencies, so exchange rates must be including in transaction costs. 14 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 9. Ricardo made no provision for technological change, which can affect the costs of production and change comparative advantage 10. In short, Ricardo’s model was far too static, need a more dynamic model of trade. C. The neo-classical, opportunity cost or pure theory of international trade. 1. Why opportunity cost theory? Need to start by looking at a nation’s production possibility frontier (or PPF) 2. Production involves tradeoffs or opportunity costs: if a nation produces more refrigerators, it must produce fewer cars, and vice-versa. 3. In this example, adding refrigerators means sacrificing cars. 4. Looking at the simple PPF we can say that the nation is fully employed, using all available resources, anywhere on the PPF, or solid black line/curve. 15 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 5. And we can see all the possible output combinations and tradeoffs (A, B, C, etc.). 6. And we can see that a nation is not using all of its resources at point X, below the PPF, so something is wrong. The economy is in recession or depression. Lack of demand (liquidity trap, Keynes) Lack of some vital input/resource (not enough capital/credit) How to get the economy moving again? Net National Product (NNP) = C (Consumption) + I (Investment) = G (Government Spending) Basic Macroeconomics. 7. Let’s compare PPF for two countries (home and foreign) for two products, toys and food, and two countries (Home and Foreign, or let’s call them the U.S. and China) 16 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 And we can see the equilibrium outcome for each country in autarky. What is autarky? 8. The PPF tells us about production and supply, but we need also to look at demand, and for this we need an indifference curve, which shows the opportunity costs/tradeoffs in consumption: 17 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 Here you can see consumer preferences (and tradeoffs) for units of y and x, and the level/s of satisfaction To understand national preferences (tradeoffs) we need a set (family) of community indifference curves. How do we know at which level a nation can consume (get maximum satisfaction)? 18 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 It depends on (national) income levels, national wealth, purchasing power, strength of your currency, etc. (remember Krasner’s four goals) The more income you have the easier it is to move out on those indifference curves (I1, I2,I3) To go back to our earlier example, we can see the trade-offs in consumption of toys and food 9. We can combine supply (PPF) and demand (IC) to see the pre- and post-trade terms of trade: What happens when we open the economy to international trade? As previously shown, both home and foreign country will specialize in the production of their comparative advantage good. 19 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 The changes triggered by the movement from autarky to free trade are summarized here. Upon opening to free trade, production will expand and the tradeoffs (between toys and food) will shift for each country. At the same time, prices will change from autarky to free trade levels. For the home country, the relative price of food will increase due to the additional demand from foreign consumers. This increase in the relative price of food is reflected in the home country panel by a new budget line for consumers that is steeper than the old one (the PPF line or budget constraint). Given the new location of their budget constraint, consumers choose a new optimal consumption level, where a new social utility indifference curve (uT) is tangent to the new budget constraint. 20 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 Since the new utility indifference curve is to the right of the old one, the level of utility that consumers can reach with free trade is higher than under autarky. But what about consumers in the foreign country? As the foreign country panel in Figure 8 shows, the foreign country experiences a decline in the price of food (due to imports of cheaper priced food from the home country). This is reflected in an outward shift of the consumers’ budget constraint. To be precise, the foreign budget constraints pivots to the right. The new budget constraint requires a re-optimization of consumption by households. As in the case of the home country, foreign consumers too experience a rise in utility since the free trade utility indifference curve is to the right of the autarky indifference curve. The result that both domestic and foreign consumers experience a welfare gain from trade, by specializing they can produce more (terms of trade have shifted) and consume more (higher indifference curves) Policy conclusion: free trade represents a win-win situation for both countries as long as countries specialize according to their comparative advantage. But be careful in the conclusions that you draw from this liberal exercise. It is not governments that are making these choices (picking winners and losers); firms and individuals 21 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 are making choices in the marketplace, following market signals from the international economy. Laisser-faire is still the order of the day! Contrast laisser-faire with industrial policy… What would Stolper-Samuelson predict in this example? Which factors in each country are likely to engage in rent- seeking, looking for protectionism? D. Two Swedish economists, Heckscher & Ohlin (H-O) put forward (in 1938) a much more dynamic theory of trade. 1. Their idea was that nations will specialize in production of goods and services, not based strictly on comparative advantage. Rather they will specialize in production of goods and services which require large quantities of the most abundant production factor. That (abundant) factor will be cheaper, and therefore it will be less costly to make products that require more of that factor. Their theory made several assumptions/innovations: 2. Need to analyze transport (and other transaction) costs. 3. Look at all three factors of production when calculating the costs of production… land, labor, and capital. 4. Costs of production are defined as total money prices of factor inputs, getting rid of the labor theory of value 5. The international trading system is guided by mutually interdependent product and factor markets and prices; we need 22 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 to get rid of barter as an assumption. It is not a real means of exchange in any modern economy. 6. Trade affects prices paid for use of land, labor, and capital 7. Hence trade will alter the distribution of income. 8. To understand why nations trade, we need to focus on factor prices & intensities With the Ricardian assumption of differences in production technology dispensed, a new assumption was needed to create cost differences in production between countries. Based on casual observance of the world’s countries, Heckscher-Ohlin assumed that countries in their model should differ in their factor endowments. Taking the case of labor and capital as the two inputs, this means that a pair of countries should exhibit different labor-to- capital endowment ratios. The country with the higher labor-to-capital ratio would be considered labor abundant and the one with the higher capital- to-labor ratio capital abundant. If both countries had identical factor-endowment ratios, they would exhibit identical production costs and relative prices in autarky. As a result, no gainful trade between them would be possible. Another important feature of the Heckscher-Ohlin model deals with differences in production between industries within each country. 23 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 For example, an industry is considered relatively labor- intensive if it uses more labor relative to capital than the other industry. In turn, the other industry will be relatively capital-intensive as it uses more capital relative to labor. In other words, the model assumes that one industry’s production technology will be relatively labor-intensive, while the other industry will be relatively capital-intensive in production, a pattern that is the same across countries. 9. One important prediction of H-O theory is that over time, trade will lead to factor-price equalization. The costs of land, labor, and capital will converge across countries over time 10. Compare this prediction with Stolper-Samuelson, tariffs lead to an increase in income for a nation’s scarce factor, hence more rent-seeking behavior 11. Note Leontief’s Paradox, this econometric find was the result of Wassily W. Leontief's attempt to test the Heckscher–Ohlin theory ("H–O theory") empirically. In 1953, Leontief found that the United States—the most capital-abundant country in the world—exported commodities that were more labor-intensive than capital-intensive, contrary to H-O theory. Leontief inferred from this result that the U.S. should adapt its competitive policy to match its economic realities. E. Now let’s go back to history, specifically the Interwar Period, to understand what happened during this period to world trade. 24 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 1. The U.S. seemed to be in the driver’s seat, in terms of power and wealth. Woodrow Wilson understood this, coming off the successful Intervention of the U.S. in the Great War Europe was in shambles and British power was much diminished Wilson put forward the FOURTEEN POINTS, basically a liberal vision for world order, designed to prevent another global conflict You are familiar, I am sure, with many of Wilson’s points. Not well received by the old European powers, Clemenceau, the veteran French premier, mocked Wilson saying that ‘God almighty only had ten points, Mr. President.’ Seemed naive to European leaders for America (a Johnny- come-lately) to promise to make the world safe for democracy. US had not been an imperial power, like the Europeans, giving US some greater credibility with other countries outside of Europe, especially the rising power in Asia, Japan Wilson’s blueprint for peace looked remarkably like Kant’s Liberal idea of Perpetual Peace Internationalist vision, collective security, etc. 2. The U.S. was clearly an economic powerhouse by any measure, BUT As we know, opinion in the U.S. was still heavily 25 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 Isolationist and protectionist (mercantilist) Republicans were dead set against opening up to trade (see graph in Bailey, et al., page 121 of IPE reader) America First was the dominant mercantilist ideology concerning trade Plus, the tariff was still a major source of income for federal Government (more on this in a moment) And the Congress had complete control of tariff policy Republicans regained control of Congress in 1918 and never Lost it until 1932 Republicans were determined to enact new protectionist Measures, once they regained control of Congress and the White House in 1920 Farm prices had collapsed after the WWI and the shift from wartime to peacetime production put a lot of pressure on the federal government to protect both sectors (ag and industry) from foreign competition. To quote the Secretary of Commerce (and later President), Herbert Hoover (in 1920) “No measure… [is] more vital to the American working man and the farmer today than the maintenance of a protective tariff.” The Republicans passed the Fordney-McCumber Tariff Bill in 1921, signed by President Harding in 1922. This bill had something in it for everyone: farmers, industry, and especially the newly powerful labor movement (AFL-CIO) 26 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 US turn to protectionism led to a world-wide trade war, tit-for- tat, as other countries retaliated. Volume of world trade plummeted, and Europe (especially Germany) was struggling economically. Britain’s attempts to stabilize the global economy were Ineffective, and Keynes’s Economic Consequences of the Peace Proved prophetic. Churchill tried as Chancellor of Exchequer to restore the gold standard and value of pound sterling, and consequences for British economy were disastrous. Without a hegemonic power, the IPE was headed for economic train wreck, Depression, rise of fascism, and World War II 3. Cue the financial panic and crash of Wall Street, 1929, and the onset of the Great Depression. Publics around the world demanded that their governments do Something to help (contrast U.S. and Germany…) US Congress would enact the highest tariffs since the Civil War, Smoot-Hawley tariff of 1930 (see 1993 debate over NAFTA in Gore v. Perot). Britain doubled down on the Imperial Preference System France put in place highly protectionist quota system Economic equivalent of a massive coronary, heart attack… What happened? 27 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 4. Barry Eichengreen gives us a ‘political economy’ explanation focusing on the play of organized interests, similar to Gourevitch/Gerschenkron, narrow but well-placed interests The argument in Eichengreen should look familiar to you. It is based on the Stolper-Samuelson theorem. Trade policy is a gigantic logroll (E.E. Schattschneider) What does this mean? You scratch my back, I’ll scratch yours… linking interests together that have nothing in common, bringing together unrelated and opposing interests, to pass a law I will vote for the tariff to protect your industry if you vote for the dam in my district, for example… This dynamic was especially strong in the House of Representatives, where Congressmen are expected to ‘bring home the bacon.’ Pork barrel legislation Senate, less protectionist, but also cutting deals WWI had strengthened the hand of organized labor, why? Power of parties and party line votes Plus, rotten boroughs (explain) Kinds of coalitions that emerged, of narrow but well-placed interests, similar to marriage of iron & rye in 1870s Germany, looks much like 1920s U.S. (Gerschenkron, Bread & Democracy) 28 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 Coalition of big industry (iron) and big ag, landowners (rye) Wall Street (Finance) was flat on its back and unable to object Labor tipped the balance 5. We know that in the U.S. everything would change in 1932 as FDR and the Democrats were swept into power and would remain in control for a generation. Top of the agenda was rolling back the tariffs Reciprocal Trade Agreements Act (RTAA) passed in 1934 Congress delegated authority to President to negotiate reciprocal trade agreements, also made it easier to ratify/pass these agreements in Congress Trade policy became more bi-partisan, eventually, with the growth of trade (US became an export-led economy) in the 1950s and ‘60s. Laying the groundwork for a completely new approach to trade, but that would come only after WWII in the 1950s Leading to explosion of trade, increasing export-led growth Multi-lateral trading system, GATT, etc. 6. What were the lessons to be drawn from the Interwar experience? Economic Consequences of the Peace (Keynes), do not punish your defeated enemies and drive them into the ground. Close association between economic and political collapse 29 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 Harsh reparations payments imposed on Germany contributed to the collapse of the Weimar Republic Failure of collective security/League of Nations Appeasement, failure to confront totalitarian menace Failure of governments to manage their economies (no lenders of last resort, no provision of global public goods) Without a hegemon, the global economy cannot function Outcome is conflict, global war These are the lessons learned by the generation of leaders who would take control after WWII, the last of them in USA was George HW Bush, who as an 18-year-old USN pilot fought in WWII F. Now back to economic theory, let’s explore the effects of protectionism, specifically the effects of a tariff. 1. We have a good idea why countries trade, comparative advantage and H-O, but why do they so often restrict trade? No country is completely closed (autarky) and no country is completely open (pure free trade) Countries fall on a spectrum from one extreme to another, and the reasons for protectionism are many 2. Tariffs provide a source of revenue for governments, they are a tax, a bit like any other, but easier to collect than personal and corporate income taxes, and VAT 30 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 Why? Because you are taxing FOREIGN companies, not your own people or companies Low income countries rely more on tariffs than high income countries 3. Protecting industries and saving jobs, this is a macroeconomic Argument, but the rationale depends on no retaliation by other Countries Retaliation means fall in volume of trade Your export sector will collapse and Domestic production and output will fall, decline in GDP Loss of jobs, etc. 4. Reducing trade deficits, the classic mercantilist rationale Assumes that trade is a zero-sum game Desire to correct an imbalance For example, let us assume that the home country (for example, the U.S.) adheres to the principle of free trade, while one of its major trading partner (for example, China) does not. By imposing trade barriers on U.S. imports, American exports to China are diminished. Alternatively, by making Chinese exports to the U.S. artificially cheap (for example, through currency manipulation such as an undervalued Renminbi), Chinese exports to the U.S. are increased. 31 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 In either case, U.S. net exports to China (net exports = exports minus imports) fall and may even turn negative. Problems with this argument The problem with the trade-deficit argument is that it ignores basic national accounting identities. One of the fundamental relationships in the national balance of payments is the relationship between national savings and investment on the one hand and the current account on the other. The exact equation between these magnitudes is as follows: S-I=CA, where I stands for gross national investment, S for gross national savings, and CA for current account. This is a microeconomics-based approach. In this model, the current account is the result of people's collective optimization behavior under the inter-temporal budget constraint. In a nutshell, the current account is determined by spontaneous lending and borrowing. A current account surplus means that a country is producing more than it spends. It exports more than it imports, so the country is a net lender to the world. Conversely, a current account deficit means that spending exceeds production, imports are greater than exports, and the country is borrowing from the world. This model basically says that these lendings and borrowings are optimal. Unless there is a market failure or distortive 32 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 official intervention, it is assumed that the collective behavior of the nation is rational. If people are rational and information is (reasonably) perfect, and if capital mobility is guaranteed, then production choice and consumption choice across time (today and tomorrow) can be made separately. People lend or borrow in order to smooth consumption. The main component of the current account is the trade balance, defined as exports minus imports. Thus, if a country has a current account surplus, it most likely experiences a trade surplus, and vice versa. In the case of the U.S., gross investment exceeds savings causing the current account and thus net exports to be negative. China, on the other hand, has savings that exceed gross investment causing a positive current account and positive net exports. China’s trade surplus with the U.S. is thus primarily the result of a difference internal macro conditions between the two countries, in particular an extremely high national savings rate in China and a very low national savings rate in the United States. Even if it were true that China uses policies to manipulate its exports and/or imports, implementation of similar policies by the U.S. would do very little to undo the trade imbalance between the two countries. 33 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 To illustrate further the logic of the balance of payment approach, consider other countries that trade heavily with the United States such as Germany, Japan, and Korea. The data show that the U.S. has been running consistent and substantial bilateral trade deficits with these three countries. Unlike China, there is no evidence, however, that these countries manipulate their exports or imports. But a simple look at their balance of payments accounts reveal that all three countries have national savings in excess of national investment, the exact opposite of the U.S. case. 5. Political economy of trade… this argument (Stolper-Samuelson) you know well by now, but let’s review it. This explanation highlights the interaction between special interest groups on one side and policy makers on the other. The task of policy makers is to create laws that maximize the welfare of a country. In terms of trade policy, this would imply the absence of trade barriers in most cases, as the theory of comparative advantage shows. However, if policy makers put a greater weight on personal gains (i.e., their likelihood of winning the next election) than public welfare, they will allow special interest groups – through monetary contributions toward their political campaigns - to skew policies away from free trade and toward protectionism. Two interest groups are at the forefront in terms of lobbying activities with regard to trade policies, trade unions and industry groups (remember the logic of Stolper-Samuelson) 34 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 Labor unions will typically lobby to protect workers in industries that are most vulnerable to foreign competition. In the U.S., such industries include textiles, steel and automobiles. Industry groups may lobby for or against trade barriers. If the industry groups represent firms producing final or intermediate goods that face stiff competition from abroad, the group will lobby for trade barriers. If the group represents final goods producers that rely heavily on (cheap) intermediate goods imports, it will lobby against tariffs on intermediate goods imported from abroad. Empirical studies that have tested the hypothesis of a nexus between lobbying activities by special interest groups and trade restrictions have found strong support of such a link for both the United States and other countries (See readings by Eichengreen and Bailey et al.). 6. Unfair trade practices. The two practices that appear to trigger the strongest reactions are foreign subsidies and foreign dumping. Subsidies come in two forms, either as a production subsidy that applies to all firms that have production facilities in the country regardless of the final destination of their produces, or as export subsidies given to firms that ship their goods or services to another country. 35 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 In both cases, the subsidy lowers the cost of production and thus allows firms to produce and/or export more than they would without government intervention. Similar to import tariffs, production subsidies shield local producers from foreign competitors, while export subsidies increase foreign sales by exporting firms. Frequently, the trading partners of the country that implements them in the first place view both forms of subsidies as violations of the free trade principle and respond by imposing similar measures on their own. Foreign dumping occurs if a firm sells a product in a foreign market at a price that is below the price it charges in the domestic market or below its unit cost of production. The latter case is also known as predatory dumping. In either case, domestic firms affected by foreign dumping often argue that the action by the foreign firm constitutes an unfair trade advantage. To remedy the situation, they ask domestic policy makers to implement trade barriers in the form of tariffs known as anti- dumping duties. 7. Strategic trade policies Usually combined with industrial or incomes policies. Starting in the 1980s, interference with free trade known as strategic trade policies became popular among both trade economists and policy makers. 36 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 These policies relied on market imperfections such as monopolies or oligopolies, either at home or abroad or both. A classic example is the infant industry scenario where a young domestic industry producing with economies of scale competes with mature, foreign constant returns to scale firms. At low volumes of production, typical for young firms, the domestic firm cannot compete and is doomed to exit the market. By imposing a (temporary) trade barrier such as a tariff, the infant industry can grow until its unit costs have fallen below those of its foreign competitors. At that point, the tariff can be safely removed since the domestic firms are able to compete on their own in the international market. With further growth in sales, the domestic firms’ average cost continue to decline allowing them to become exporters to foreign markets. Under the assumption that short-term losses due to the tariff are smaller than long-term gains due to higher production and employment, it is possible that infant industry protection policies lead to net welfare gains for the country. 8. Optimal tariff policies, to alter the terms of trade. Another example of a strategic trade policy is the optimal tariff for large open economies. Since trade polices by sufficiently large economies will have an impact on world market prices, large economies have an 37 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 incentive to manipulate world market prices, known as terms of trade, in their favor. The ratio between a country's export prices and its import prices or how many units of exports are required to purchase a single unit of imports represent a nation's terms of trade. One way to do this is by imposing trade restrictions. Restricting imports will change the terms of trade – the price of exports relative to the price of imports. The relative price of imports will go up in the home country, but fall in the world market due to the lower worldwide demand for the good as a result of the trade barrier. This is bad news for domestic consumers who pay more for the product than with free trade - the associated welfare loss suffered by consumers is known as a deadweight loss. It is also bad news for foreign producers who receive a lower price for their product compared to free trade. Note that part of that loss is transferred to the home country in form of tariff revenues. If the tariff transfer from foreign producers to the home country government exceeds the deadweight loss of domestic consumers, the home country will experience a welfare gain from the tariff imposition. A crucial, yet slightly unrealistic assumption behind the optimal tariff scenario is that the foreign country does not retaliate by imposing a trade barrier against home country exports. In that case, the tariff transfers between the two countries would more or less offset each other, leaving both countries in a state 38 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 of reduced welfare due to consumers having to pay higher prices for imports. 9. Non-economic justifications for tariffs. Finally, we encounter non-economic justifications for trade barriers such as public health issues (Covid-19) and concerns for national security (TikTok). Importing unhealthy products can pose a risk for domestic consumers or firms. The dispute over beef imports and chlorinated chicken between the U.S. and the EU/China centers on the health of consumers in each country/region. And each side uses the health argument to justify the need for a trade barrier. The U.S. ban on Mexican avocados that lasted until 2005 was a trade barrier designed to protect the health of a U.S. crop. A weevil found only in Mexican avocados posed a production risk for American avocado growers that the ban sought to eliminate. There are many instances where national security concerns cause policy makers to impose trade barriers. Committee on Foreign Investments in the United States (CFIUS) must evaluate whether trade (or FDI) somehow threatens the national security of the U.S. In all cases, allowing the import of a foreign product or service is seen as detrimental to the security of the country. 39 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 From a cost-benefit perspective, trade barriers based on health and security concerns are justifiable if the health or security benefits outweigh the cost of protectionism. The problem is that the health and security benefits are controversial from a science perspective and often difficult to quantify, while the cost of trade barriers are very real and easy to measure. 10. Protecting the environment, human rights, etc. Protect the environment Raising standards for labor protections Punishing countries that abuse human rights of their citizens by cutting off trade and investment. G. Effects of a tariff and other instruments of protectionism Ad valorem tariffs specify a percentage change that is added to the world market price. In contrast, specific tariffs define a monetary value (dollar amount) that creates a wedge between domestic and world market price 40 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 1. The equilibrium with free trade in the home economy assumed to be a small open economy. Since the world market price is below the home country’s autarky price, pA, the home country imports the good. At the world market price pT home consumers demands quantity DT while home firms supply quantity ST. Since DT is greater than ST, the difference must be imported from abroad, denoted by MT. The sum of consumer and producer surplus defines the home country’s welfare under free trade. Areas 1 and 2 represent the consumer surplus, while area 3 is equivalent to the producer surplus. 41 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 2. Things change when the home country government imposes an import tariff t on the imported product (see Figure 2). The tariff causes the home country price, ptd, to rise by the amount of the tariff. Since the home country is a small open economy, its trade policy actions cannot affect the world market price. Hence pt = pT. The higher price forces home consumers and producers to adjust their economic decisions. 42 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 Consumers reduce the quantity demanded (Dt < DT), while producers increase their quantity produced (St > ST). Both changes cause the quantity imported to fall: Mt < MT. The home country’s restrictive trade policy has clear welfare implications. Consumer surplus falls to areas 1+2, while producer surplus increases to areas a+3. A new welfare component arises that does not exist with free trade: tariff revenue collected by the government (area c). Since tariff revenue is defined as the tariff rate multiplied by the quantity imported with a tariff (t x Mt), it is given by area c. The import tariff thus leads to welfare gains for producers and government and a welfare loss for consumers. Do these changes offset each other? Not quite, as Figure 2 demonstrates. Areas b and d are neither part of consumer or producer surplus nor tariff revenue. They represent wealth (i.e. money) that used to be part of the home country’s wealth under free trade but is now left uncollected by any of the economic agents of the home country (i.e. consumers, producers, government). The economic literature refers to these triangles as deadweight welfare loss or DWL. The DWL measures the welfare burden (i.e., monetary loss) of the home country’s restrictive trade policy. 43 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 III. The Postwar Period and the Pax Americana (History, 1945 to 2016?) A. The effects of the interwar period and World War II on US foreign Policy 1. Throughout the 1930s until the US entry into WWII, December, 1941, a debate raged between Isolationists, adhering to the doctrine of America First, led by Charles Lindbergh and others, sympathetic to Germany Globalists or liberal internationalists, who saw a close correlation between trade and peace, following the liberal arguments of Immanuel Kant, Woodrow Wilson, et al. Led by FDR, Secretary of the Treasury Hans Morgenthau and Secretary of State Cordell Hull, they sought economic Interdependence But the world was increasingly dangerous with conflicts in Asia and Europe—fear that U.S. would be dragged into these conflicts Congress passed the Neutrality Law of 1935, which required an arms embargo against belligerents—use of trade and economic power to push for cessation of hostilities, Italy’s invasion of Ethiopia, Spanish Civil War, etc. Cash and Carry Policy allowed U.S. to continue to trade with and invest in belligerents, but no arms Policy immediately came into question (1937) when Japan invaded China, and again in 1938 and ’39 in Europe with 44 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 Hitler’s aggressions How to use American economic power to punish aggressors While at the same time helping America’s democratic allies, especially Great Britain, which would find itself isolated and alone in Europe (1940-41), facing the Nazi tyranny Amendments to neutrality laws, 1939, National Defense Act of 1940 gave President power to embargo sale of any goods that would aid the aggressor Britain was in desperate straits in 1940, passage of Lend Lease Act, embargo of oil, metals, etc. imposed on Japan in 1941 2. Bretton Woods (July, 1944) marks the beginning of the Pax Americana, designed with ‘help’ of the British, especially J.M. Keynes Wrestling throughout the war with the British system of Imperial Preferences—an obstacle to free trade After WWII, empires no longer really sustainable, movements toward independence, decolonization, supported by U.S. Note the long-running struggle between Britain and the Indian sub-continent, Mohandas or Mahatma Gandhi Learning the lessons of the Interwar Period Need to stabilize the international financial system Fixed exchange rates advocated by Keynes, with all currencies fixed to US dollar, in turn fixed to gold System would be managed by U.S. and balance of payments 45 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 crises, structural adjustment, etc. by IMF & World Bank (IBRD) International financing of balance of payments provided ‘breathing space’ for European economies to recover Negotiations over free trade proved far more difficult U.S. and UK were reluctant (for different reasons) to open their economics (and the Empire) to free trade—fears of economic downturn following the War Death of FDR in 1945 threw the liberal initiative into a tailspin 3. International Trade Organization (ITO) coincided (1945-46) with creation of the United Nations, beginning of a new process of multilateralism, building of international regimes, creating a system of collective security, set of global public goods. Multilateralism Following the work of John Ruggie (1993, 3–47), we can identify three tenets of multilateralism. The first is indivisibility, which is another way of saying that multilateral regulation should take the form of a public good. Unless it is a hegemon, a single state or even a small group of states cannot provide this good for the international community. The costs and benefits of its provision must be shared relatively equally among states. The second tenet is principles, or norms of conduct, which can alter the behavior of states. The fewer principles or norms there are, the greater the likelihood that states will respect them and change their behavior. The most difficult problem in any 46 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 multilateral regime is to find a single compelling principle (or at least a very small number of interrelated norms or principles) “around which actor expectations can converge.” Third, Ruggie points to diffuse reciprocity, meaning that states must be convinced that everyone will respect the rules of the game, thus making it possible for governments to persuade a skeptical or even hostile public to accept the short-term political and economic costs of establishing the regime in order to reap the long-term gains. International regimes. Set of rules, norms, principles around which actor expectations converge. Must be institutionalized in the form of an intergovernmental organization (IGO). ITO was stillborn for lack of support, move to Havana Charter (1947) as a compromise Also rejected by Republican protectionists in Congress, who feared that the Charter went too far (Senator Taft of Ohio) Delay of Charter, dropped by Harry Truman in 1950 But in the meantime, the beginning of the Cold War, 1947-49, war in Korea, etc. helped to create new coalitions in Congress for moving ahead with free trade regime (Senator Arthur Vandenburg, Republican of Michigan, would help to build a new bi-partisan consensus for free trade). Fear of communism began to dominate foreign economic Policy of the USA 4. General Agreement on Tariffs and Trade (GATT) had been agreed in Geneva in 1947 and would become the basis for 47 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 postwar trading order—a liberal, rules-based, international regime What was the guiding principle? Comparative advantage. How to move states to free trade? Reciprocity and the principles of nondiscrimination and most favored nation (MFN). All member states of GATT would agree to MFN Any advantage, favor, privilege, or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties. The idea is simple: equal treatment of all members. Imported products must be treated the same as domestic products with respect to tax, regulation, transportation, and distribution. The goal is to achieve diffuse reciprocity, to strengthen the hand of free traders and weaken protectionists Baldwin’s juggernaut, win-win outcomes (see his article in IPE reader) And to institutionalize the regime. Developing countries were exempt from reciprocity but not MFN, they were allowed to free ride on the system, but why? 5. Weaknesses and problems with the original GATT. 48 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 Prohibited use of quotas, except for balance of payments problems and for national security—big exemption. A weak mechanism for resolving disputes (would be rectified decades later in Uruguay Round, 1980s and ‘90s) Completely separate regime for agriculture, more on that in a moment—to protect domestic prices (supports) and producers Great concern about food security Also reflected strength of US farmers in process Allowed for export subsidies in Ag, if subsidies did not alter market share Obviously, Ag was exempt from many of the rules that applied to trade in goods U.S. also imposed import quotas on agricultural products Ag would be the biggest stumbling block in future GATT Rounds CAP adopted with creation of EEC would reinforce protection in Ag The US uses a system of ‘price supports’ like a subsidy, why? To support the income of farmers, why? 49 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 EFFECTS OF AGRICULTURAL SUBSIDIES 50 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 The result is that farmers produce more, why? Prices rise, since the government has set a price floor. As a result, society consumes less. Why are consumers so willing to pay more, consume less, to support farmers? No provisions in original GATT for trade in services, commodities, etc. 6. Principles of the GATT regime 51 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 Reciprocity, tariff reductions would be mutual Nondiscrimination MFN (see above) GATT was meant to be a temporary treaty, but it became Permanent, why? B. The Cold War 1. Helped to solidify the western alliance, created new coalitions for a liberal world order, including free trade Threat of communism in Europe In Asia New policies of political, economic, and military containment 2. The Truman Doctrine Urgent need for reconstruction in Europe Newly created institutions, IMF and World Bank did not have Resources US Aid would target all of ‘western’ Europe Carrots and sticks to get Europeans to reduce trade barriers Promote cooperation and integration of western Europe— OEEC became the OECD 1947, launch of the Marshall Plan 52 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 Point 4 of the Truman Doctrine targeted the developing world and newly independent states Encourage open economies for trade and FDI, self reliance Blueprint for winning the cold war Trade would be closely linked to the national security of the U.S. And freer trade would hinge on US leadership 3. US trade policy in the 1950s Top priorities were to check the spread of communism through the policy of containment but also by building strong allies through trade and investment. This means assisting in economic recovery of Western Europe and Japan Europeans, especially the French, were engaged in industrial policy and economic planning Building national champions to give their industries a fighting chance to compete with the great US multi-nationals Meanwhile, after moving to breakup the Zaibatsu in Japan after WWII, the U.S. acquiesced in the recreation of these gigantic Japanese industrial conglomerates, renamed Keiretusu Other East Asian ‘tigers’ or little dragons would follow the Japanese model of the ‘developmental state’ where the state would play a key role in promoting economic restructuring to gain a competitive (and comparative) advantage 53 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 Note the example of the South Korean Chaebol For the sake of fighting the cold war, the U.S. gave its allies many concessions This all began to change in 1958 with the first little cracks in the Bretton-Woods system that began to put pressure on the $$ and the fixed exchange rate This was a result of strong economic recoveries in Western Europe and Japan The USSR created its own alliance (the Warsaw Pact) and spheres of influence (note Cuba, North Korea, North Vietnam, and in the Middle East and Africa 4. Eventual proliferation of regional trading blocs and bilateral agreements would weaken GATT EEC Mercosur ASEAN TPP 5. Success of Uruguay Round, failure of Doha, more on this later C. Offer curves and the equilibrium terms of trade—more theory OFFER CURVES 54 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 1. Offer curves are geometric devices that are used to clarify the interaction of supply and demand between two trading nations (see above). The purpose is to determine the exact terms of trade (line T) that emerge in equilibrium—useful for forecasting 2. The terms of trade (TOT) between two nations is determined not just by supply (PPF, opportunity costs, tradeoffs between producing two goods), but by the inclinations, tastes, circumstances of consumers (demand) on both sides. 3. The idea that the "inclinations and circumstances of consumers on both sides [i.e. in each trading partner]" will determine where 55 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 between the two internal cost ratios the terms of trade will lie is known as reciprocal demand. This principle shows the exact relationship between The desirable quantities of an imported good and The quantities of the home good that a nation is willing to give Up for the imported good I am not going to go through the exercise of showing how to derive a country’s offer curve from its PPF & a family of indifference curves The textbook shows you how to do that, just be aware of this 4. Look at a simple demand curve (below) and assume that price will be paid in terms of a good (let’s say oil) 56 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 Multiply P x Q = total expenditures Put this on a graph and the function takes the form of a skyrocket 57 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 If we look at the slope of this curve you can see at what point Q supplied begins to affect total expenditures, when the market becomes saturated 5. If we internationalize these figures, supposing that all of one Product (X in this example cloth) is imported and paid for by a domestic product (Y in this example cloth) Country G has a comparative advantage in production of X (cloth) while country E has a comparative advantage in production of Y (linen) As countries move out on the offer curve, they will become more reluctant to give up the domestic product to get the imported product TOT become more favorable If demand for imported product increases, the offer curve will shift and TOT become less favorable Need to look at the offer curves of both nations to understand bargaining positions and where will be the equilibrium TOT 58 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 (point E in this diagram) Demand for products is constantly shifting in both countries (reciprocal demand) Of course either country can impose a tariff to alter the TOT, but we know what the consequences will be (tit for tat), lower volume of trade, loss of output, etc. Countries are always searching for the elusive ‘optimal tariff’ D. By far the biggest development in the IPE during this period (1950s 59 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 & 60s) was the creation of the European Economic Community (EEC) AKA the Common Market 1. Not the first attempt in history to unify Europe The idea of European integration dates from ancient Rome Holy Roman Empire (Charlemagne 800, the Frankish Emperor) Not really dissolved until 1806 ! The Germanic regions of Mitteleruopa, Free States, Hanseatic League, etc. Napoleonic Wars, Hitler & Nazi Europe (force of arms) After French Revolution (1789) nationalism became the most powerful political ideology/movement in Europe, right up through WWII Attempts to contain nationalism in the 19th century, Metternich at Congress of Vienna (1815) established the Concert of Europe, delicate balance of power between the Great Powers The Concert of Europe collapsed in 1914 in the Great War and Europe descended into a dark period only emerging in 1945 EEC (brainchild of Jean Monnet, Robert Schuman, Paul Henri Spaak) was first time that a peaceful/voluntary union of Europe was tried 60 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 2. What was the rationale for creating the EEC? Three dynamics: Strategic rationale, to stop the slaughter, to contain Germany and ‘strength in numbers,’ to make Europe once again a player on the world stage. Get some breathing space between the nuclear superpowers (USA and USSR), note the realist or power dynamic. The couple: a Franco-German initiative to build a common market, with a clear division of labour 61 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 France would be the political leader while Germany would become the economic engine/powerhouse of Europe 3. An idealistic project Perpetual Peace! United States of Europe (USE) Ceding and pooling sovereignty Articles of Confederation! How to create a common European home/culture? Overcome centuries of hostility and war 4. A pragmatic and functionalist project Monnetism Baby steps, do not overreach ECSC (1952), WEU (1954), Euratom (1957) Finally, Treaty of Rome (1957), launching Common Market and EEC, original SIX states + CAP 5. EEC or EC or EU is sui generis, unique or original development in IR Unlike anything seen before in international history/world Politics Not a nation-state 62 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 Not an IGO, like UN Neither fish nor fowl Pooled sovereignty, bit like a confederation Looks remarkably like the Zollverein and the HRE 6. A great liberal project Kantian dream of perpetual peace (playbook) Club (goods) of liberal democracies Producing ‘club goods’ that are non-rivalrous, but excludable, in contrast to (global) public goods Market-oriented Peace through trade, interdependence Four freedoms (not Brexit, a la carte) Goods, services, capital, and people Need for common borders/territory Schengen… launched 1985, effective 1995 Les acquis communautaires But start small, move step by step 63 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 7. Three Pillars of European Integration EEC (Rome) to EC (SEA) to EU to EMU (Maastricht), each treaty EMU CFSP JHA Which is more supranational, which more intergovernmental? 8. Institutions and decisionmaking (based in Brussels, Strasbourg, and Luxembourg) 64 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 9. Broadening v. Deepening? L’Europe des patries (de Gaulle wanted a Europe of independent and sovereign nation-states, not a federation) National veto and Luxembourg compromise Two steps forward, one step back Perfidious Albion (Brexit?) Cassis de Dijon Democratic deficit Qualified Majority Voting or QMV Amsterdam to Lisbon, a European constitution? 65 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 Ever deeper political union E. Proliferation of regional and bilateral free trade agreements, building free trade from bottom up, rather than top down—not easy, and in many ways counterproductive (see article by Richard Baldwin in IPE reader) 1. Lowering trade barriers with one or even a subset of regional countries does not necessarily lead to freer trade that is welfare enhancing Danger of building multiple ‘fortresses’ in the global economy, like fortress Europe? What are tradeoffs, pros & cons? If a nation liberalizes trade with only a subset of its trading partners through a bilateral or regional FTA, and if the trading partner with the lowest priced exports is not part of the FTA, then the nation will suffer welfare reducing trade diversion effects. If the negative trade diversion effects more than offset the welfare enhancing trade creation effects of trade liberalization, the nation will suffer a decline in welfare. Trade diversion refers to a situation when imports are diverted away from the lowest cost exporter to a higher priced exporter simply due to the removal of trade barriers on the latter one. Buying imports at a higher price (cost) from a less competitive trading partner hurts the welfare of the nation. Trade creation describes the increase in the volume of imports following the removal of trade barriers. Buying more imports 66 James F. Hollifield | Lecture Outlines | International Political Economy | 9/2020 due to the reduction in price enhances the welfare of the nation. 2. Regional and bilateral FTAs and economic integration. Examples of regional FTAs are NAFTA and MERCOSUR, while the US-Canada and the US-Chile FTAs are examples of bilateral agreements. The main disadvantage of small-scale FTAs are their inefficiency compared to a global FTA and the potential welfare losses for FTA member countries (see above). A major advantage of regional FTAs is the reduced complexity of negotiations as fewer countries are involved and fewer stake holders are interested in asserting political influence through lobbying and other means of interference (common external tariffs, in case of EU, speaking with only one voice, not 27 or 28). Cumulative Number of Regional FTAs in Force: 1957-2020 350 300 250 200 150 100 50 0 2014 2017 1957 1960 1963 1966 1969