Pevehouse Ch. 8 - International Trade Theories PDF

**Pevehouse Ch. 8** **8.1 Theories of Trade** International trade constitutes one-sixth of global economic activity, with nearly \$21 trillion worth of goods and services crossing borders annually. This volume far exceeds global military spending. The high level of international trade highlights i...

**Pevehouse Ch. 8** **8.1 Theories of Trade** International trade constitutes one-sixth of global economic activity, with nearly \$21 trillion worth of goods and services crossing borders annually. This volume far exceeds global military spending. The high level of international trade highlights its profitability and the benefits it offers consumers, such as a wider variety of products at lower costs compared to solely domestic goods and services. The role of trade in the economy varies by nation but is equally important in the global South and the industrialized North. The global South accounts for a smaller portion of global trade because its economic activity is about 40 percent of the world total. Trade is both an economic and political issue. It crosses state borders, is regulated by states influenced by interest groups, and occurs within trade regimes maintained and negotiated by states. Scholars of international political economy (IPE) study the politics of international economic activities, focusing on trade, monetary relations, and multinational corporations. Recently, two topics of special interest are the economic integration of Europe and other regions, and the international politics of the global environment. While most IPE scholars focus on industrialized regions, the global South is gaining attention as globalization intensifies its integration into the world economy. These issues, overlapping with international security, primarily involve political bargaining over economic matters, fitting broadly within IPE. The core principles from Chapter 1 and the concepts of power and bargaining from Chapter 2 apply to International Political Economy (IPE). While states are crucial actors in IPE, they are less dominant than in international security. Actors in IPE, like in security affairs, act in their own interests. For example, Brazil\'s foreign minister in 2001 highlighted that both Brazil and the United States negotiated a hemisphere-wide free trade area (FTA) based on the principle of \"What\'s in it for us?\" **Liberalism and Mercantilism** Two major approaches within International Political Economy (IPE) differ in trade views. Mercantilism, like realism, believes that in an anarchic international system, each state must protect its own interests at the expense of others, rather than relying on international organizations for mutual gains. Mercantilists, like realists, emphasize relative power, focusing on a state\'s position relative to rival states rather than its absolute power. **Mercantilism**: An economic theory and a political ideology opposed to free trade; it shares with realism the belief that each state must protect its own interests without seeking mutual gains through international organizations. See also economic liberalism. Mercantilism, like realism, views economic transactions as important due to their military implications. There is a direct relationship between wealth and power, with states concerned about relative wealth and trade as they can be converted into military power. While military power is not typically useful in economic negotiations, mercantilists believe that the outcomes of these negotiations can impact military power and power relations. **Economic liberalism:** In the context of international political economy (IPE), an approach that generally shares the assumption of anarchy (the lack of a world government) but does not see this condition as rejecting extensive cooperation to realize common gains from economic exchange. It emphasizes absolute over relative gains and, in practice, a commitment to free markets, free trade, free capital flows, and an \"open\" world economy. See also mercantilism and neoliberal. Economic liberalism, an alternative approach, shares with liberal internationalism the belief in cooperation for common gains. It advocates minimal government interference in markets and mutual benefits from economic exchange. An open international economy is seen as promoting prosperity and peace. Liberals focus on absolute wealth increase rather than relative gains between states. Liberalism and mercantilism are theoretical approaches to International Political Economy (IPE) and ideologies shaping state policies. Liberalism dominates Western economics, especially in microeconomics (the study of firms and households) than in macroeconomics (the study of national economies). Marxism is a third approach in IPE, focusing on economic class relations and exploitation. Most international economic exchanges and security relationships involve both mutual and conflicting interests, labeled by game theorists as a \"mixed motive\" or \"mixed interest\" game. For example, in the game of Chicken, both drivers want to avoid a collision (shared interest), but one can only be a hero if the other backs down (conflicting interest). Similarly, in international trade, both states may benefit (shared interest), but one will benefit more than the other (conflicting interest). Liberalism focuses on shared interests in economic exchanges, aiming to maximize total wealth and well-being (also referred to as \"welfare\") by promoting efficiency (maximizing output, minimizing waste, and optimizing the allocation of resources). Mercantilism, on the other hand, emphasizes conflicting interests, with the primary goal of creating the most favorable distribution of wealth. Both liberals and mercantilists recognize that economic exchange between countries creates interdependence. The extent of this interdependence depends on factors like the frequency of exchange and the ease of replacing a partner\'s products. Liberals argue that economic interdependence promotes prosperity and peace, as military conflict would disrupt costly economic relationships. Governments and their citizens prefer not to bear those costs. Mercantilists, however, warn that interdependence is rarely symmetrical, with one state often more dependent than the other. These asymmetries can influence power relations, allowing the less dependent state to coerce the more dependent one. Liberal economists emphasize the importance of markets and advocate for minimal government interference in shaping economic outcomes. The terms of an exchange are defined by the price at which goods are traded. The bargaining space-the difference between the lowest price a seller would accept and the highest price a buyer would pay-is quite large. For example, Saudi Arabia might sell oil for as little as \$10 a barrel, while industrialized countries might pay over \$100 a barrel (oil prices have fluctuated in this broad range in recent decades). When there are multiple buyers and sellers of a good (or equivalent goods that can be substituted for it), prices are determined by market competition. Free markets aim to produce stable buying and selling patterns at uniform prices. Sellers know that raising prices drives buyers to other sellers, and buyers know that lowering prices drives sellers to other buyers. Thus, in liberal economics, mutual relations between states are less important than in security affairs. World markets reduce the leverage one state can exert over another, as states can find other partners (making mutual exchange to maintain a specific trade relationship less critical). For example, U.S. sanctions on Iran led Indian companies to fill the void in recent years. In International Political Economy (IPE), power is more diffuse and involves more actors than in international security. Buyers\' willingness to purchase an item varies with its price (such as a barrel of oil), forming the demand curve. If the price rises, fewer buyers are interested; if it drops, more buyers are willing. Similarly, sellers\' willingness to supply an item varies with its price, forming the supply curve. Higher prices attract more sellers, while lower prices deter them. In a free market, the equilibrium price is where the supply and demand curves intersect, meaning sellers supply the same number of units that buyers want to purchase. Prices often reflect future supply and demand expectations. The supply and demand system doesn\'t always produce stability, as seen with oil, a crucial global commodity. Oil prices have fluctuated significantly in recent years. When global economic growth accelerates, oil demand and prices rise. However, high oil prices can lead to stagnation or recession in Western economies due to inflationary pressures and rising interest rates. Recessions reduce demand, causing oil prices to drop. Economic activity may vary by 5-10%, but oil prices can double, triple, and then halve. The two most recent cases of this cycle have occurred in the past 15 years. For example, in 2007, oil prices soared spectacularly to \$140 a barrel, up from around \$70 a barrel, due to new demand from fast-growing Asian economies, then dropped to \$40 a barrel during the subsequent, unprecedented global recession. Between 2008 and 2011, oil prices spiked to nearly \$120 a barrel, then dropped to around \$30 by early 2016. In early 2018, oil prices were about \$60 a barrel, fell to roughly \$40 by mid-2020, and rose to about \$80 three years later. This volatility in oil prices creates economic problems and incentivizes governments to manage instability through political actions rather than relying solely on market forces. Liberalism views individual households and firms as key economic actors and advocates for minimal government interference, except to regulate markets for efficiency and address market failures. Therefore, politics should serve economic efficiency, allowing the \"invisible hand\" of supply and demand to optimize production, exchange, and consumption (through the mechanism of prices). Liberals favor free trade and international cooperation, disdaining realists\' obsession with international borders because borders constrain the maximum efficiency of exchange. They believe that interdependence promotes peace as violence often undermines the pursuit of such wealth. However, some note that extensive interdependence in the early 20th century did not prevent World War I. **free trade**: The flow of goods and services across national boundaries unimpeded by tariffs or other restrictions; in principle (if not always in practice), free trade was a key aspect of Great Britain\'s foreign economic policy after 1846 until World War I and of U.S. policy after 1945. For mercantilists, economics should serve politics, with wealth creation underpinning state power. Trade is desirable only when it benefits one\'s own state over rivals. The terms of exchange influence how states accumulate power and alter power distributions in the international system over time. Mercantilism gained prominence several hundred years ago, with Great Britain using trade to increase its power relative to other states in the 18th century by creating a trade surplus and stockpiling precious metals for military capabilities like mercenaries and weapons (what mercantilism meant at that point). In the 19th century, Britain shifted to free trade, becoming the leading industrial power as it had less to lose from free trade than protectionism. By the middle century, free trade helped British firms increase sales and profits abroad. Mercantilism resurfaced between World War I and World War II due to trade wars. After World War II, a liberal trading system was restored, at least in non-Soviet parts. These developments align with hegemonic stability theory, which attributes international economic stability and liberal trade during the second half of the 19th century and post-World War II to British and American hegemony. Conversely, the Great Depression and the breakdown of liberal trade in the 1930s are linked to the decline of British hegemony and the U.S.\'s reluctance to assume leadership. Observers now question if U.S. hegemony is ending, with China\'s rise potentially ushering in a new era of mercantilism (much of China\'s trade policy has been mercantilist). The Trump administration was overtly mercantilist, and the Biden administration changed little in the trade policy arena. Mercantilists aim to make trade serve a state\'s political interests by generating a favorable balance of trade, even at the cost of some lost wealth from free markets. The balance of trade is the value of a state\'s imports relative to its exports. A positive balance (trade surplus) occurs when exports exceed imports, as seen with China\'s \$850 billion surplus in 2022, which has grown for years. It receives more money for the products it exports than it pays for raw materials and other imported goods. A negative balance (trade deficit) occurs when imports exceed exports. A trade deficit is different from a budget deficit in government spending. Since the late 1990s, the U.S. trade deficit has grown to about \$945 billion in 2022, largely due to trade with China and oil imports. **balance of trade**: The value of a state\'s exports relative to its imports. States must reconcile the balance of trade, tracked through national accounts. Short-term trade deficits can be balanced by future surpluses (The imbalances are carried on the national accounts as a kind of loan), but persistent deficits become problematic. Recently, the U.S. has balanced its trade deficit by exporting currency to countries like China, Japan, and Europe, which use the dollars to buy U.S. assets (e.g., companies, treasury bills, or real estate). Economists worry that if foreign interest in U.S. investments wanes, the U.S. economy could suffer. Thus, mercantilists favor national economic policies that create a trade surplus to ensure a state has funds available for crises or wars, enhancing its potential power. Historically, this meant stockpiling gold from trade surpluses as a form of power. This strategy aligns with realism\'s focus on relative power and the dominance principle, where one state\'s trade surplus implies another\'s deficit. **Comparative Advantage** The success of liberal economics stems from the substantial gains realized through trade, based on the concept of comparative advantage pioneered by Adam Smith and David Ricardo over 200 years ago. States should specialize in producing goods for which they have a comparative advantage and trade for others, maximizing wealth creation. Differences in natural resources, labor, technology, and other factors contribute to these advantages. While transportation and transaction costs must be considered, globalization has reduced these costs, making trade more efficient. **comparative advantage**: The principle that states should specialize in making goods that they produce with the greatest relative efficiency and at the lowest relative cost (relative, that is, to other goods produced by the same state). Oil and cars are two globally important commodities. It\'s cheaper to produce oil in Saudi Arabia and cars in Japan than the reverse. Japan needs oil for its economy and car industry, while Saudi Arabia needs cars for transportation to cover its vast territory (including reaching its remote oil wells). Despite shipping and transaction costs, trading Japanese cars for Saudi oil is much more cost-effective than each country trying to be self-sufficient. A state doesn\'t need an absolute advantage (being the most efficient producer globally) to benefit from specialization. It should focus on producing goods that are relatively lower in cost compared to other goods. For example, if Japan discovered a way to produce synthetic oil using the same mix of labor and capital it uses for cars, and this synthetic oil could be produced slightly cheaper than Saudi Arabia\'s oil, it might seem intuitive for Japan to produce synthetic oil. However, according to the principle of comparative advantage and if that Japan could still produce cars much more cheaply than Saudi Arabia, Japan should continue producing cars, where it has a significant comparative advantage, rather than diverting resources to synthetic oil production, where it has only a slight advantage. The extra profits Japan would make from exporting more cars would more than compensate for the slightly higher price it would pay to import oil. International trade expands the Pareto frontier by increasing production efficiency. Free trade allocates resources to states with the greatest comparative advantage in producing each commodity, resulting in lower and more consistent prices worldwide. Consequently, production is increasingly oriented to the global market. The economic benefits of trade come with political drawbacks. Long-term benefits may incur short-term costs, such as economic disruption when a state imports goods it previously produced domestically. Workers may need to retrain, and capital may be hard to repurpose. State leaders may face political pressure to intervene in economic policy. Additionally, trade benefits and costs are unevenly distributed within a state. Some industries or communities may benefit while others suffer. For example, if a U.S. company moves its factory to Mexico for cheaper labor, U.S. workers lose jobs, but consumers get cheaper goods. The costs impact a small group of workers, while the benefits are spread across many consumers. Similarly, protectionist measures often benefit a few people significantly while costing many others a bit. For example, a 20 percent steel tariff by the George W. Bush administration in 2002-2003 cost consumers \$7 billion and saved 7,300 U.S. jobs, costing \$326,000 per job. Yet those 7,300 workers (and their unions and companies) benefited greatly, whereas the roughly \$20 cost per U.S. citizen went unnoticed. The Trump administration\'s 30 percent tariff on solar panels in 2018 aimed to save manufacturing jobs but led to overall job losses due to higher solar panel costs and lower sales. Regarding the Trump example, this unequal distribution of costs and benefits creates political challenges for free trade, as affected workers or industries are more likely to oppose concentrated costs than consumers are to oppose diffuse losses. **Political Interference in Markets** A free and efficient market needs many buyers and sellers with complete market information. Participants should base their dealings on price and quality, not personal or political preferences. Deviations from these conditions, known as market imperfections, reduce efficiency. Most political intrusions into economic transactions are considered market imperfections. International trade often occurs at world market prices, unlike domestic economic exchange. No world government controls industries, provides subsidies, or regulates prices, but politics still affect world markets. When states are the main actors in international economic affairs, the number of participants is often small. A monopoly, where one supplier dominates, can set abnormally high prices, like South African company De Beers with uncut diamonds (producing one-third of the world supply and controls two-thirds of the world market). It can set diamond prices much higher than if the market was composed of many small producers. An oligopoly, dominated by a few large sellers, can coordinate to increase prices, such as OPEC limiting oil production to keep prices high. Monopolies and oligopolies are more likely when companies align along national lines. Another common market imperfection in international trade is corruption, where individuals receive payoffs to trade at nonmarket prices. This results in the government or company losing some benefits, while the individual government official or company negotiator gains increased benefits. Politics provides a legal framework for markets, ensuring commitments are kept, contracts are binding, buyers pay for goods, counterfeit money isn\'t used, etc. In the international economy, without central authority, rules are harder to enforce. Like in security affairs, these rules can be codified in international treaties, but enforcement relies on practical reciprocity. Taxation is another political influence on markets by generating government revenue and regulating economic activity through incentives. Governments may lower taxes for foreign companies to attract investment. Tariffs, taxes on international trade, often cause international conflicts. **Sanctions** Political interference in free markets is most explicit when governments impose sanctions on certain economic interactions. Political power then prohibits an economic exchange that would otherwise have been mutually beneficial. Sanctions aim to inflict economic damage or express displeasure with a country\'s actions. In 2022, the U.S. imposed sanctions on 24 states for political actions like human rights violations. The U.S. and Western countries also enacted sweeping sanctions on Russia in response to its invasion of Ukraine. Some of these sanctions do not involve markets---for example, travel restrictions on many Russians within Vladimir Putin\'s inner circle. However, most of these sanctions are economic like limitations on Russian access to Western banks, freezing Russian assets in the U.S. and Europe, and bans on technology sales to Russia, especially computer chips with both civilian and military uses. These measures have complicated Russia\'s war efforts and hurt its economy, which relies heavily on energy exports. U.S. and European Union restrictions on imports of Russian coal, natural gas, and oil have been particularly impactful, although Russia has tried to evade the sanctions to minimize their effects. Enforcing sanctions is challenging because participants have financial incentives to bypass them through black markets or other means. Without broad, multilateral support, sanctions often fail. For example, in 2012, India, Iran\'s top oil customer, sent a trade delegation to Iran to exploit opportunities created by Western sanctions. Similarly, with energy sanctions on Russia by the U.S. and Europe, countries like China, India, and Saudi Arabia increased their purchases of Russian oil, attracted by discounts and political interests in resisting U.S.-led initiatives. The difficulty of applying sanctions highlights that power in international political economy (IPE) is more diffused among states than in security affairs. Refusing mutually beneficial trade often harms the sanctioning state more than the target unless nearly all other states participate, making sanctions enforcement a collective goods problem. For example, it took years for the U.S. to get European and other major powers to apply effective sanctions on Iran. A concern with the 2015 nuclear deal was that if Iran cheated (which removed sanctions in exchange for limits on Iran\'s nuclear program), re-imposing sanctions would be difficult due to the challenges of international cooperation. **Autarky** One way for a weak state to avoid dependence on more powerful trading partners is to avoid trading and produce everything it needs itself, a strategy known as self-reliance or autarky. However, this approach is ineffective because no state can produce everything it consumes. Attempting self-reliance incurs high costs for producing goods without a comparative advantage. As other states cooperate to maximize wealth, the relative power of the autarkic state declines in the international system. **Autarky**: A policy of self-reliance, avoiding or minimizing trade and trying to produce everything one needs (or the most vital things) by oneself. States that have relied on autarky have lagged behind others. A notable example is Albania in southeast Europe, which, as a communist state, split from both the Soviet Union and China. For decades, Albania did not participate in world markets and relied on a centrally planned economy for self-sufficiency. Few foreigners could visit, and little trade occurred as Albania pursued autarky to prevent outsiders from gaining power over it. When Albania ended its isolation in 1991, it remained as poor as it had been decades earlier, missing out on the prosperity seen in the rest of Europe. China\'s experience highlights the problems with autarky. In the 1950s and 1960s, China\'s economic isolation, due to an embargo by the U.S. and its allies, worsened during the Cultural Revolution when it broke ties with the Soviet Union and rejected all foreign influences. However, when China opened to the world economy in the 1980s, it experienced rapid economic growth through expanded trade and market-oriented reforms. In contrast, North Korea\'s continued self-reliance and isolation after the Cold War led to mass starvation in the 1990s. **Protectionism** Few states pursue autarky, but many manipulate international trade to protect domestic industries from global competition, a practice known as protectionism. These policies vary but generally aim to distort free markets for the state\'s advantage, are contrary to liberalism and often involve discouraging imports of competing goods or services. **Protectionism**: The protection of domestic industries against international competition, by trade tariffs and other means. A state\'s motivation to protect domestic industry often stems from political demands of key domestic industries and interests, rather than the overall national interest. Industries may lobby or provide campaign contributions to secure special tax breaks, subsidies, or restrictions on competing imports. States often protect infant industries until they can compete globally. For example, South Korea incentivized consumers to buy Korean cars when its automobile industry was new (it was not yet competitive with imported cars). Eventually, the industry grew competitive and profitable in exports. Similarly, many poor states protect their textile sectors, which add value without heavy capital requirements. Protecting infant industries is seen as a legitimate reason for temporary protectionism. Protectionism can also provide domestic industries with time to adapt to changing market conditions or new competitors. The World Trade Organization (WTO) allows member states to temporarily raise trade barriers to protect domestic industries from a surge of imports. Sometimes domestic industry requires time to adapt and can emerge a few years later in a healthy condition. For example, in the 1970s, the U.S. government used import quotas on Japanese cars and loan guarantees to help its auto industry transition to producing smaller, fuel-efficient cars in response to rising gas prices. However, when gas prices rose again in 2008, U.S. auto producers were once more unprepared and required government assistance during the 2008-2009 recession. Governments also protect industries vital to national security. In the 1980s, the U.S. protected its electronics and computer industries from Japanese competition, sponsoring a consortium of U.S. chip companies to boost domestic production. These industries were considered crucial to military production. In 2018, the Trump administration-imposed levied tariffs on imported aluminum and steel for national security reasons. While autarky is generally inefficient, states prioritize self-sufficiency in military goods to reduce wartime vulnerability. Protectionism can also be motivated by a defensive effort to ward off predatory practices by foreign companies or states. Predatory practices aim to capture a large share of world markets unfairly or create near-monopolies, allowing the predator to eventually raise prices without competition. These efforts often involve dumping products in foreign markets at prices below the minimum level necessary to make a profit (or below the average cost of production). While domestic governments can use antitrust laws to break up monopolies, no such mechanism exists in international relations, so governments restrict imports to protect their industries. These restrictions are recognized as legitimate, though there are disagreements about what constitutes predatory or competitive pricing. Conflicts are generally resolved through the WTO. **Dumping**: The sale of products in foreign markets at prices below the minimum level necessary to make a profit (or below the average cost of production). Dumping complaints are usually lodged by industries that feel unfairly harmed by foreign competitors. They must first convince their government of the unfair competition. After tariffs are placed on imports, the foreign government may file a complaint with the WTO. In 2007, the World Trade Organization (WTO) ruled against the United States in a case brought by Japanese manufacturers. These manufacturers claimed they were unfairly accused of dumping industrial goods in the U.S. market. Instead of disputing the dumping itself, the WTO criticized the method the U.S. used to calculate the tariffs on Japanese goods, stating that the tariffs were set too high and did not create a fair competitive environment. This ruling forced the U.S. to reconsider how it handles dumping complaints to ensure fair trade practices. Governments use various tools for protectionism, with tariffs being the simplest and most common. Tariffs are taxes on imported goods, which restrict imports and generate state revenue. International norms favor tariffs because they are straightforward and transparent. Most countries have complex tariff schedules for different goods. While tariffs have generally decreased over the past half-century, this pattern has started to change. The Trump administration raised tariffs in 2018, targeting many countries, especially China. This led to a trade war between the U.S. and China. The Trump administration used tariffs more extensively than any recent U.S. administration, with Trump referring to himself as a \"tariff man.\" **Tariff**: A duty or tax levied on certain types of imports (usually as a percentage of their value) as they enter a country. Another means to discourage imports is nontariff barriers to trade. Imports can be limited by quotas, which set ceilings on the volume of specific goods that can be imported, restricting their growth. An extreme form is a complete ban on certain goods (flat prohibition). In the 1980s, the U.S. used quotas to limit Japanese car imports to protect its struggling auto industry. These quotas were often negotiated voluntarily between Japan and the U.S. **nontariff barriers**: Forms of restricting imports other than tariffs, such as quotas (ceilings on the volume of imports of a particular good). The two most contentious nontariff barriers in the WTO are subsidies and regulation. Subsidies are government payments to domestic industries, allowing them to lower prices without losing money. These subsidies are common in state-owned industries (e.g., an industry struggling to get established or facing strong foreign competition) and include tax breaks, favorable loans, and high guaranteed prices issued by governments. Subsidies to farmers were a major issue in the WTO Doha Round negotiations. In 2010, the U.S. and Brazil settled a WTO case over U.S. subsidies to cotton growers, avoiding nearly \$830 million in Brazilian sanctions. Subsidies often cause U.S.-European conflicts, especially with EU agricultural policies. Subsidies outside agriculture can also be politically sensitive. For example, a European aerospace company receiving EU subsidies bids on U.S. defense projects, making it hard for American manufacturers to compete due to the lower bids enabled by these subsidies. This financial support enables the company to offer lower bids on projects, making it more competitive compared to companies that do not receive such subsidies. This can create an uneven playing field, as the subsidized company can afford to underbid its competitors. Thus, subsidies have become a security issue as well as a trade policy concern. Even if a product is imported, imports can be limited by restrictions and regulations that complicate distribution and marketing. U.S. manufacturers marketing American products to Japan face complex regulations and corporate alliances in Japan. Environmental and labor regulations can also act as nontariff barriers, causing WTO controversies, like Europe\'s ban on U.S.-produced genetically modified crops. Nationalizing industries, such as oil or banking, also shuts out foreign competition. Cultural factors, rather than state actions, can discourage imports. Citizens may follow economic nationalism (with or without government encouragement), believing domestic products are superior. This mercantilist approach is supported by politicians who argue it helps domestic firms and saves jobs. For example, U.S. citizens often \"buy American\" despite the advice of liberal economists to buy the best products at the best price, benefiting U.S. workers but reducing global production efficiency. Protectionism can benefit producers but often harms consumers. For example, U.S. car manufacturers were helped by restrictions on Japanese imports in the 1980s, but U.S. consumers paid higher prices for cars (several hundred dollars more per car by some estimates). Additionally, prolonged protectionism can lead to inefficiency and lack of competitiveness in domestic industries as they may use it to avoid needed improvements. Temporary protectionism can stabilize industries under certain conditions. When Harley-Davidson lost half its U.S. market share in four years, the U.S. government-imposed tariffs on Japanese motorcycles starting at 45% in 1983, decreasing annually for five years and finally eliminated. This enabled Harley to improve efficiency and quality, regain market share, and the tariffs were lifted a year early. By the late 1980s, Harley expanded its market share and began exporting to Japan. This case shows that short-term, straightforward protectionism can be effective. **8.2 Trade Regimes** As technology links the world across space, a global integration process based on free trade is shaping the international economic agenda. The World Trade Organization plays the central role in this process. **The World Trade Organization** The World Trade Organization (WTO) is a global, multilateral intergovernmental organization that promotes, monitors, and adjudicates international trade. It shapes the expectations and practices of states regarding trade, alongside regional and bilateral arrangements. The WTO succeeded the General Agreement on Tariffs and Trade (GATT), established in 1947 to facilitate freer trade. Unlike the WTO, the GATT was a negotiating framework without regulatory trade power and had minimal institutional infrastructure until the mid-1990s, with just a small secretariat headquartered in Geneva, Switzerland (where the WTO remains). Before the GATT, proposals for a stronger institutional agency had been rejected because of U.S. fears that overregulation would stifle free trade. The GATT primarily served as a forum for negotiating and arbitrating trade disputes, helping states clarify and observe trade rules. **World Trade Organization (WTO)**: An organization begun in 1995 that replaced the GATT and expanded its traditional focus on manufactured goods. The WTO created monitoring and enforcement mechanisms. See also General Agreement on Tariffs and Trade (GATT) and Uruguay Round. **General Agreement on Tariffs and Trade (GATT)**: A world organization established in 1947 to work for freer trade on a multilateral basis; the GATT was more of a negotiating framework than an administrative institution. It became the World Trade Organization (WTO) in 1995. In 1995, the GATT became the WTO, incorporating GATT agreements on manufactured goods and expanding to include trade in services and intellectual property. The WTO has some enforcement powers and an international bureaucracy of over 600 people to monitor trade policies and adjudicate disputes among member states. While it has some power over states, like most international institutions, this power is limited. There is public backlash against free trade due to concerns about the WTO\'s influence on national laws. Despite this, the WTO remains the central institution governing international trade, with most countries wanting to participate and develop within it. By 2023, the WTO had grown to 164 member countries, including all major trading states. Russia joined in 2011 after 17 years of negotiations, when neighboring Georgia agreed not to block it. (A consensus among all members is needed.) Afghanistan joined in 2016. Over 20 states, including Iran and Iraq, are seeking admission. China joined in 2001 after more than a decade of negotiations. The U.S. and other countries often require liberalization of trading practices for membership, impacting China\'s economic and political development. The WTO framework is based on reciprocity, where countries lower trade barriers in response to others doing the same. It also relies on nondiscrimination, meaning trade restrictions must be applied equally to all WTO members under the most-favored nation (MFN) treatment. For example, if Australia imposes a 20% tariff on auto parts from France, it cannot impose a higher tariff on the same goods from the U.S. Thus, the WTO does not eliminate barriers to trade, it aims to equalize trade barriers globally, creating a level playing field, while allowing states to protect their industries without favoritism. States can also extend MFN status to non-WTO members, as the U.S. did with China before its WTO membership. **most-favored nation (MFN)**: A principle by which each trade preference granted to any one of a state\'s trade partners must be granted to all its trade partners. See also Generalized System of Preferences (GSP). The Generalized System of Preferences (GSP), established in the 1970s, is an exception to the MFN system. It allows rich states to grant trade concessions to poor ones, fostering their economic development by permitting imports under lower tariffs than those imposed under MFN. **Generalized System of Preferences (GSP)**: A mechanism by which some industrialized states began, in the 1970s, to grant tariff concessions to states in the Global South on certain imports; an exception to the most-favored nation (MFN) principle. See also most-favored nation (MFN). The WTO continues the GATT\'s role as a forum for negotiating multilateral trade agreements to lower trade barriers fairly and reciprocally. These agreements detail commitments to reduce trade barriers on fixed schedules, often incurring domestic political costs as industries lose protection against foreign competition. Even with similar commitments from other states, lowering trade barriers remains challenging for national governments. Negotiations on multilateral agreements are lengthy and challenging, often taking years. Among the five GATT negotiation rounds from 1947 to 1995, the Kennedy Round in the 1960s (so called because it started during the Kennedy administration) focused on European integration, which the U.S. found somewhat threatening. The Tokyo Round (begun in Tokyo) in the 1970s adjusted rules to new global interdependence conditions, such as OPEC raising oil prices and Japan\'s dominance in automobile exports. The Uruguay Round, which began in 1986, struggled to reach closure despite several G7 summit meetings from 1990-1994. As the round dragged on year after year, participants humorously suggested renaming GATT to \"General Agreement to Talk and Talk.\" The round\'s successful conclusion in late 1994 was expected to add over \$100 billion annually to the world economy. But that money was a collective good, to be enjoyed both by states that made concessions in the final negotiations and by states that did not. Agreement was finally reached in late 1994. The U.S. pressured Europe to reduce agricultural subsidies and the global South to protect intellectual property rights, achieving some but not all its goals. For instance, France secured the right to protect its film industry against U.S. films. **Uruguay Round**: A series of negotiations under the General Agreement on Tariffs and Trade (GATT) that began in Uruguay in 1986 and concluded in 1994 with agreement to create the World Trade Organization. The Uruguay Round followed earlier GATT negotiations, such as the Kennedy Round and the Tokyo Round. See also World Trade Organization (WTO). From 1947 onward, the GATT encouraged states to use import tariffs instead of nontariff barriers to protect industries and gradually lower those tariffs. It focused on manufactured goods, successfully reducing average tariffs from 40% to 3% by 2002 under the Uruguay Round agreement. Tariff rates in the global South remain higher, around 15%, reflecting the greater protection needed for their industries. Agricultural trade, more politically sensitive than manufactured goods trade, was addressed only in the Uruguay Round. The WTO now also focuses on trade-in services like banking and insurance, which exceeded 20% of the total value of world trade in 2021. At the 1999 Seattle WTO conference, trade ministers aimed to start new negotiations but faced challenges. Poor countries argued they needed trade to raise incomes and couldn\'t meet industrialized countries\' standards (which, after all, had allowed low wages, harsh working conditions, and environmental destruction when they began industrializing). Environmental and labor activists, along with anarchists, protested, delaying the conference by a day. The meeting ended in failure, highlighting deep divisions and public opposition to the WTO\'s approach. In 2001, after the Seattle failure, trade ministers in Doha, Qatar, launched the Doha Round of trade negotiations. Issues included agriculture, services, industrial products, intellectual property, WTO rules (e.g., how to handle antidumping cases), dispute settlement, and trade and environmental questions. In 2003, at Cancun, Mexico, states from the global South walked out when industrialized countries refused to remove agricultural subsidies, which were harming poor countries\' agricultural exports. In 2005, at Hong Kong, wealthy states agreed to end subsidies, but tough negotiations continued over tariffs on manufactured goods, intellectual property protection, and opening financial sectors. The main obstacle was the industrialized West\'s resistance to cutting agricultural subsidies demanded by the global South. **Doha Round**: A series of negotiations under the World Trade Organization that began in Doha, Qatar, in 2001. It followed the Uruguay Round and focused on agricultural subsidies, intellectual property, and other issues. See also Uruguay Round. Game theorists might compare the difficulty of concluding major trade agreements like the Doha Round to the game of Chicken. In trade disputes, each state prefers to reach a deal, even if it somewhat favors the other state, but ideally wants a deal on its own terms. Similarly, in Chicken, each player wants to avoid a collision, with being a hero or a chicken as secondary considerations. In trade negotiations, states hold out for their terms as long as possible, agreeing only when faced with an imminent deadline. In Chicken, there\'s no incentive to give ground before the last minute. The Doha Round of WTO negotiations, spanning from 2001 to 2015, ended without conclusion and was effectively abandoned by 2015. In 2007, participants attempted to use the expiration of the U.S. Congress\'s fast-track authorization as a key deadline to inspire a final agreement. This authorization allowed the U.S. to approve trade agreements more efficiently, without amendments or prolonged debate. Once it expired, securing U.S. approval for a new WTO agreement would become significantly more challenging, as the process would revert to the standard legislative procedure. However, as each deadline passed without resolution, it became harder to believe in the urgency of subsequent deadlines. The Chicken game analogy helps explain this dynamic, highlighting that while the model doesn\'t predict outcomes due to its inherent instability, it suggests that any agreement would come suddenly before a credible deadline, and failure would be an unpleasant surprise (\"Why didn\'t he swerve?\"). Smaller agreements within the WTO negotiations kept hope alive for a new global trade agreement during the Doha Round. A 2014 deal between the U.S. and India on agricultural subsidies raised hopes, but the Doha Round was officially suspended in 2015. The WTO continues to hold annual ministerial meetings, but deep differences between member states hinder a new multilateral trade agreement. At the 2017 meeting, many states suggested working in smaller \"like-minded\" groups to resolve issues, though how these smaller agreements (if they are made) might form a larger global trade deal remains uncertain. States continue to participate in the WTO because the benefits of global wealth creation outweigh the costs to domestic industries and national economic adjustments. The WTO remains a crucial forum for adjudicating trade disputes. While states may attempt to change or evade rules to their advantage, the overall benefits of membership are too significant to risk by withdrawing. **Bilateral and Regional Agreements** Although the WTO provides an overall framework for multilateral trade in a worldwide market, most international trade also takes place under more specific international political agreements-bilateral trade agreements and regional free-trade areas. **Bilateral Agreements** Bilateral trade agreements are reciprocal arrangements to lower trade barriers between two states, often with specific terms. For instance, one country may reduce its prohibition on imports of product X (which the second country exports at competitive prices) while the second country lowers its tariff on product Y (which the first country exports). Comprehensive agreements, like the 2007 Canada-India deal, include highly detailed provisions for various industries and products. Like most agreements based on the reciprocity principle, these agreements are complex and require constant monitoring. U.S. free-trade deals with South Korea, Panama, and Colombia took effect in 2011 and 2012. The GATT/WTO aimed to simplify trade by reducing bilateral agreements, but these agreements remain important. They help reduce collective goods problems in multilateral negotiations and facilitate reciprocity. When WTO talks stall, bilateral agreements maintain trade momentum. Most states trade primarily with a few partners, so a few bilateral deals can significantly shape trade relations. The number of bilateral agreements has grown substantially in the past decade, far outnumbering other types of agreements. **Free Trade Areas** Regional free-trade areas are significant in world trade, where groups of neighboring states agree to remove most or all trade barriers within their area. Beyond free trade areas, states may adopt a common tariff toward non-members, forming a customs union. If they coordinate other policies like monetary exchange, it becomes a common market. These regional trade agreements enable states to increase their wealth cooperatively without waiting for global consensus. The most important free trade area is in Europe, linked to the European Union but with a larger membership. Europe\'s small, closely situated industrialized states benefit from a single integrated market, gaining economic advantages like those of large states like the U.S. This European free-trade experiment has been highly successful, significantly contributing to Europe\'s wealth accumulation since World War II. The United States, Canada, and Mexico signed the North American Free Trade Agreement (NAFTA) in 1994, following a U.S.-Canadian free-trade agreement in 1988. In NAFTA\'s first decade, U.S. imports from Mexico and Canada more than doubled, then declined after 1999. Canada and Mexico became the largest and third-largest U.S. trading partners, respectively (Japan was second). The Mexican peso fell drastically in value in 1994-1995. U.S. labor unions and environmentalists criticized NAFTA for potentially lowering U.S. labor and environmental standards (e.g., low wages, poor labor laws, and lax environmental laws in Mexico). Environmentalists and saw NAFTA as giving U.S. corporations license to pollute by moving south of the border. Over 25 years, neither the predicted great benefits nor disasters materialized. In 2020, NAFTA was replaced by the USMCA, which has stronger labor standards and stricter conditions for auto manufacturers. **North American Free Trade Agreement (NAFTA)**: A free trade area encompassing the United States, Canada, and Mexico that was established in 1994. **U.S.-Mexico-Canada Agreement (USMCA)**: A free trade area that replaced NAFTA in 2020. Politicians in North and South America have long aimed to create a single free trade area, the FTAA, from Alaska to Argentina. President Clinton sought fast-track legislation in 1997, but Congress, led by Democrats, demanded labor and environmental standards (on which they found NAFTA\'s record wanting), defeating the measure. President Bush had more success winning securing fast-track authority from Congress, and FTAA negotiations began in 2003 with a 2005 target. However, the 2001 recession, post-9/11 security measures, China\'s cheap labor, and left-leaning Latin American governments created pressures against the FTAA. These countries prioritized tariff-free trade, while the U.S. focused on services, intellectual property, and financial openness. FTAA talks are currently stalled, but the U.S. has reached free trade agreements with several Latin American countries. In 2007, the ten South East Asian Nations (ASEAN countries), along with China, Japan, India, Australia, and New Zealand, began negotiating an East Asian free-trade area. This group, unlike some other Asia-Pacific IGOs, excluded the United States, but includes half the world\'s population and some of its most dynamic economies. Successful negotiations between ASEAN states and China led to the establishment of a free trade area in 2010. The ASEAN-China FTA is now the world\'s third-largest free trade area, following the EU and the USMCA. Following the failed FTAA talks, the U.S. explored mega-FTAs, negotiating the Transatlantic Trade and Investment Partnership (T-TIP) with the EU, which would have provided lower tariffs and lower barriers to investment between the United States and the European Union. The United States had negotiated the Trans-Pacific Partnership (TPP) with various countries, which would link economies as diverse as those in Japan, Chile, New Zealand, Vietnam, Canada, Malaysia, Singapore, and other countries. TPP aimed to counter China\'s economic power and was part of the Obama administration\'s \"pivot to Asia.\" TPP negotiations concluded in 2015, but President Trump withdrew the U.S. from TPP and T-TIP. The remaining TPP countries, led by Japan, continued without the U.S., renaming it the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. In 2018, the EU refused to reopen T-TIP talk (led by France) with the Trump Administration due to its withdrawal from the Paris Agreement. During the Cold War, the Soviet Union and its satellites had their own trading bloc. After the Soviet Union collapsed, its members scrambled to join the world economy. The Commonwealth of Independent States (CIS), formed by 12 former Soviet republics, remains economically integrated, though Georgia withdrew after its 2008 war with Russia, and Ukraine withdrew after Russia annexed Crimea in 2014, leaving nine members. Previously, it was a free trade zone with integrated transportation, communication, and infrastructure links. **Public Opinion and International Relations** **International Trade** International trade has been a contentious issue in the U.S. In the 1992 presidential election, Ross Perot warned that NAFTA would relocate U.S. jobs to Mexico due to lower labor costs. More recently, President Trump advocated for economic nationalism, arguing that trade agreements harm the U.S. economy, and that protectionism is needed to save jobs and revitalize industry. Many Democrats agree, and few of Trump\'s trade policies have changed under the Biden administration. However, during most of the post-World War II era, the U.S. has supported reducing trade barriers through the GATT/WTO and various bilateral agreements and free trade areas.  Americans have generally viewed trade favorably, seeing it as an opportunity for economic growth rather than a threat. This perspective shifted during the financial crisis and recession of 2008-2009, but support for trade increased again from 2012 until the COVID-19 pandemic, after which it declined somewhat. Various interest groups in the U.S. still prefer protectionist trade policies, and even trade supporters may not favor trade with all countries, especially economic or political rivals. Overall, the U.S. public has become more pro-trade over the past decade. Latin America\'s path to free trade has been complex. The Southern Cone Common Market (MERCOSUR), formed in 1991 by Brazil, Argentina, Uruguay, and Paraguay, initially opposed Venezuela\'s membership. Paraguay was suspended in 2012 due to its President′s impeachment, allowing Venezuela\'s admission, but Venezuela was suspended in 2016 for human rights violations and breaking trade rules. Chile, Bolivia, Colombia, Ecuador, Guyana, Peru, and Suriname are associate members. MERCOSUR members trade more with the U.S. than with each other but blocked a proposed free trade area of North and South America. In 2002, they allowed free movement and residency for 250 million citizens. A Caribbean common market (CARICOM), created in 1973, has limited impact due to its small size and wealth. The Andean Community of Nations, formed in 1969 by Colombia, Ecuador, Peru, and Bolivia, has had modest success and counts the MERCOSUR members as associate members. In 2008, a single continent-wide Union of South American Nations (UNASUR) began to merge MERCOSUR and the Andean Community of Nations to follow the example of the European Union, officially forming in 2010 with Uruguay\'s ratification. In Asia, China has taken steps to form various free trade areas. Most recently, it concluded the Regional Comprehensive Economic Partnership (RCEP), which went into effect in 2022 and includes most countries in the Asia-Pacific region. Many observers are concerned that China will use agreements like the RCEP to enhance its economic and political power, thereby threatening the United States. If regional free-trade areas gain strength and new ones arise, it may weaken the WTO. States might rely more on bilateral and regional agreements for economic growth and trade, reducing dependence on WTO agreements. Overlapping rules can create confusion, as seen in 2006 when a WTO panel upheld U.S. duties on Canadian softwood lumber, but a NAFTA panel overturned them. Regional agreements could divide the world into three competing trading blocs, each internally integrated but not very open to the others. Regional free-trade areas in Europe, the Americas, and Asia raise the possibility of trading zones practicing liberalism inwardly and mercantilism outwardly. This could lead to protectionist trade wars and the collapse of the liberal international trade system that has existed since the end of World War II. Some worry that the multilateral trade system is already deteriorating. **Cartels** A cartel is an association of producers or consumers, or both, formed to manipulate a product\'s price on the world market. It is an unusual but interesting form of trade regime. Producers usually form cartels because they are fewer in number and can coordinate to keep prices high. The most effective way for cartels to affect prices is by coordinating production limits among members, thereby lowering supply relative to demand. **Cartel**: An association of producers or consumers (or both) of a certain product, formed for the purpose of manipulating its price on the world market. The most prominent cartel in the international economy is the Organization of the Petroleum Exporting Countries (OPEC). Formed in 1960, its 13 member states, mostly from the Middle East and Africa, control hundreds of billions of dollars in oil exports annually and about 37% of the world\'s total oil production, significantly affecting prices. A cartel need not hold a monopoly on production of a good to affect its price. At its peak in the 1970s, OPEC\'s influence was even greater. OPEC, headquartered in Vienna, Austria, holds regular negotiations to set production quotas for each member to maintain oil prices within a target range. Saudi Arabia, the largest oil exporter, holds a unique position in the world economy, despite the United States being the largest oil producer. **Organization of the Petroleum Exporting Countries (OPEC)**: The most prominent cartel in the international economy; its members control about half the world\'s total oil exports, enough to affect the world price of oil significantly. OPEC demonstrates the collective goods problems that cartels can create. Individual members can cheat by exceeding production quotas while still benefiting from still enjoying the collective good of high oil prices. When too many members cheat, the collective good breaks down, causing oil prices to drop. This has happened repeatedly to OPEC. Iraq accused Kuwait of exceeding quotas and driving down oil prices, which contributed to Iraq\'s invasion of Kuwait in 1990. OPEC\'s effectiveness may largely depend on Saudi Arabia, which has enough oil to manipulate global supply and prices. Saudi Arabia plays a hegemonic role within the cartel, adjusting its production (cutting back its own production) to compensate for other members\' cheating and keep prices up. If too many members cheat, Saudi Arabia can flood the market with oil, driving prices down until the other members comply. Consumers usually do not form cartels. However, in response to OPEC, major oil-importing states formed the International Energy Agency (IEA), which partly functions as a cartel. The IEA coordinates energy policies of major industrialized states, such as maintaining oil stockpiles to keep world oil prices low and stable. The largest oil importers are G7 members. Despite the importance of oil and the existence of both producer and consumer cartels, oil prices have been surprisingly unstable, showing the limits of cartels in affecting prices, as there are factors out of their control. For commodities with large price fluctuations, joint producer-consumer cartels have been formed to stabilize prices by coordinating global supply and demand, as they are detrimental to both producers and consumers. To keep prices stable, producing and consuming states use the cartel to coordinate the overall supply and demand globally. These cartels exist for products like coffee and several minerals. NGOs introduced fair trade coffee, chocolate, and other products, guaranteeing farmers a price above production costs through price booms and busts. Over a million farmers in 70 countries benefit from these arrangements. Cartels run counter to liberal economics because they exploit market imperfections and deliberately distort free markets. They are usually less powerful than market forces in determining global prices, as there are too many producers, suppliers, and substitute goods to allow a cartel to dominate the market. **Industries and Interest Groups** Industries and domestic political actors often try to influence a state\'s foreign economic policies. These pressures don\'t always favor protectionism. Advanced and competitive industries push for free trade policies to thrive in a global free-trade system. Conversely, industries lagging behind their global competitors tend to seek protection. Means to influence foreign economic policy include lobbying, forming interest groups, paying bribes, and even encouraging coups. Actors such as industry-sponsored groups, companies, labor unions, and individuals are involved. Within an industry, efforts usually align because all share common interests regarding trade policies, despite internal competition. However, different industries may push in different directions; for example, some U.S. industries supported NAFTA, while others opposed it. In many countries, governments not only respond to industry influence but also actively work with industries to promote growth and tailor trade policies. Such industrial policy is common in states where key industries are crucial to the economy or state-owned. Industrial policy has a long tradition in Europe, East Asia, and Latin America, and has been used in the U.S. at times. Currently, there\'s a debate in the U.S. about re-implementing industrial policy to offset China\'s state-led economic growth and secure critical goods and new technologies. **industrial policy**: The strategies by which a government works actively with industries to promote their growth and tailor trade policy to their needs. Interest groups not organized along industry lines also have specific interests in state trade policies. U.S. environmentalists oppose U.S. companies using the USMCA to avoid pollution controls by relocating to Mexico, where environmental standards are less strict. Also, U.S. labor unions do not want companies to use the USMCA to relocate jobs to Mexico, where wages are lower. However, Mexican American citizens\' groups in the U.S. support the USMCA because it strengthens ties to relatives in Mexico. Certain industries, particularly agriculture, have been crucial in recent trade negotiations. Agriculture has traditionally been protected to ensure food self-sufficiency and reduce national vulnerability, especially during war. Although security concerns have lessened, farmers remain powerful political actors in Europe, the U.S., Japan, and other countries. For example, Japanese farmers argue for self-sufficiency in rice production due to Japan\'s rice-centered culture. Agricultural subsidies were a major issue in the Doha Round of WTO negotiations, causing talks to collapse in 2003 in Cancun, Mexico. The talks were revived in 2004 by U.S. promises to cut farm subsidies by 20%. In the 2005 Hong Kong talks, wealthy countries agreed to end all farm export subsidies by 2013, a goal that was not achieved. In recent years, the textile and garment sector has been a significant focus. In 2005, global textile quotas were dropped due to WTO deals, leading to China\'s dominance in world clothing exports, with whole cities specializing in one type of garment produced for mass export to giant retailers. With cheap and disciplined labor, China threatened U.S. textile producers and gave stiff competition to exporters like Pakistan and Bangladesh, where textiles make up 70 percent of exports. Later in 2005, the EU and the U.S. reached agreements with China to reimpose textile quotas temporarily. Now, countries like Vietnam are taking textile business from China by offering even lower labor costs. Intellectual property rights, which allow creators of books, films, software, and similar products to receive royalties, are a contentious area in trade negotiations. The U.S. faces conflicts with some states over piracy of these products, where it has a strong comparative advantage. Piracy is technically easy and cheap, violating copyright, patent, or trademark laws. Since U.S. laws can\'t be enforced abroad, the U.S. government urges foreign governments to prevent and punish such violations. Countries reportedly pirating large amounts of software and entertainment products include China, Taiwan, India, Thailand, and Brazil. **intellectual property rights**: The legal protection of the original works of inventors, authors, creators, and performers under patent, copyright, and trademark law. Such rights became a contentious area of trade negotiations in the 1990s. Stopping individual piracy activity is challenging, even when widespread. A 2017 survey found that 16% of consumers in Indonesia and Egypt admitted to pirating entertainment content more than once a week. In a 33-country survey including the U.S., 57% of respondents admitted to pirating at least one piece of software. Intellectual property rights infringement is widespread in many third world countries, affecting products like DVDs and prescription drugs. In response, the international community created the World Intellectual Property Organization (WIPO), an IGO with 186 UN member states, to standardize patent and copyright laws across borders. Most states have signed a 1994 patent treaty and a 1996 copyright treaty. The WTO oversees the Trade-Related aspects of Intellectual Property Rights (TRIPS) agreement, the world\'s most important multilateral agreement on intellectual property. Industrialized countries prefer TRIPS rules because they are stronger than WIPO safeguards and can only be relaxed if all WTO members agree, whereas WIPO rules require only a majority vote to change. The 2001 WTO meeting in Doha led to a declaration allowing states to exempt certain drugs from TRIPS rules to address serious health crises like HIV/AIDS or COVID-19. The U.S. supported this move after threatening to take over Cipro production during the post-9/11 anthrax scare. Despite established procedures, only a few developing countries have used these exceptions. These disputes slowed the distribution of medicines to millions of Africans with AIDS for several years, though progress improved after 2004. Controversy over TRIPS exemptions (also known as waivers) arose again with the COVID-19 vaccine. Developing countries requested a waiver to copy the vaccine for their use. The U.S. supported this, but many wealthier countries initially did not. After nearly two years of debate, the WTO issued a waiver for the vaccines but not for diagnostic tests or COVID treatments. Companies protecting intellectual property internationally cannot rely on the same enforcement as in domestic contexts. Instead, they must involve their own governments and use their own resources. Due to state sovereignty in legal matters, private international economic conflicts often become government-to-government issues. A fourth key trade issue is the openness of countries to trade in the service sector, particularly in banking, insurance, and financial services. U.S. companies, and some in Asia, have a comparative advantage in these areas due to their information-processing technologies and financial management experience. As telecommunications become cheaper and more pervasive, services from one country can be efficiently used by consumers in other countries. For example, U.S. consumers calling customer service at U.S. companies may connect to India or another English-speaking developing country, engaging in long-distance trade in services. **service sector**: The part of an economy that concerns services (as opposed to the production of tangible goods); the key focus in international trade negotiations is on banking, insurance, and related financial services. The arms trade is a crucial industry in international trade, operating outside normal commercial transactions due to national security implications. Industrialized countries protect their domestic arms industries to avoid relying on imports for weapons. These industries become stronger by exporting products and supplying their own governments. Governments actively participate in the military-industrial sector, even in countries without industrial policy like the U.S. in other sectors. The U.S., for example, has a global comparative advantage in fighter jets. In the 1990s, the U.S. arms industry, like the tobacco industry, sought new customers overseas to offset declining domestic demand. Currently, the U.S. is the world\'s largest arms exporter, with about 40% of the global market. Russia is the second largest, but its foreign sales have fallen due to its use of arms in the Ukraine conflict. The Middle East is the leading arms-importing region of the global South, with India and China increasing their imports recently. Illicit trade, or smuggling, presents a different problem. Despite government restrictions, individuals often risk punishment to profit from such trade. Illegal goods and legally imported goods sold illegally are often found in black markets, depriving governments of significant revenue. Black markets also exist for foreign currency exchange. The extent of illicit trade varies by country and industry, influenced by profitability and enforcement. Drugs and weapons are the most profitable, with global illegal trade networks for both. International black markets for weapons trade, beyond government controls, are notorious. A state with enough money can buy most kinds of weapons, albeit at premium prices. **Enforcement of Trade Rules** Economic agreements among states rely heavily on the reciprocity principle for enforcement. If one state protects its industries, imposes tariffs, or violates copyrights, other states typically respond with similar measures. The use of reciprocity to enforce equal terms of exchange is crucial in international trade, where states negotiate complex agreements based on this principle. Trade disputes and retaliatory measures are common, with large bureaucracies monitoring transactions (prices relative to world market levels, tariffs, etc.) and developing policies to reciprocate any deviations from cooperation. Enforcing equal terms of trade is complicated by differing interpretations of what is \"fair.\" States decide which practices of other states they consider unfair (often prodded by affected domestic industries) and take (or threaten) retaliatory actions. The U.S. Super 301 provision mandates retaliation against states that restrict access to U.S. goods. If the other state disagrees, retaliatory actions may seem unfair and call for further retaliation. Reciprocity can lead to a downward spiral of conflict, known as a trade war (the economic equivalent of an arms race). To prevent this, states often negotiate agreements on unfair practices, and third-party arbitration can resolve disputes. The WTO currently hears complaints and sets acceptable retaliation levels, and some regional trade agreements have mechanisms to resolve complaints. Retaliation for unfair trade practices usually matches the violation in type and extent. Under WTO rules, a state may impose retaliatory tariffs equivalent to the losses caused by another state\'s unfair trade practices. However, retaliatory measures do not need to stay in the same sector. In 2013, Antigua and Barbuda were allowed to retaliate against the United States for blocking their online gambling sites, which cost the Caribbean country \$21 million annually. The U.S. couldn\'t justify why its citizens needed protection from online gambling when domestic gambling was widely available. As a result, the WTO permitted Antigua and Barbuda to recoup their losses by using \$21 million worth of U.S. intellectual property each year, such as by distributing movies and TV shows online without paying for U.S. copyrights. In cases of dumping, retaliation aims to offset the advantage of goods imported below world market prices by raising the price back to market levels with retaliatory tariffs. In 2001, the weakened U.S. steel industry sought government protection from cheap foreign steel under an antidumping rationale. The International Trade Commission (ITC) ruled that U.S. steelmakers were hurt, leading to 30% tariffs in 2002. However, the WTO ruled against the U.S. in 2003, allowing \$2 billion in retaliatory tariffs. As Europeans targeted swing electoral states with tariffs in 2004, President Bush abolished the steel tariffs (declaring them successful and no longer needed). By making the cost of tariffs higher than the benefits, the WTO effectively changed U.S. policy---an indication of the WTO\'s growing power. This example also shows how closely international trade connects with domestic politics. Trade cooperation is easier under hegemony, as a stable political framework provided by a hegemon supports efficient market operations. Political power can protect economic exchange from violent leverage, unfair trade practices, and currency uncertainties. A hegemon can offer a stable currency, enforce fair trade norms, the use of violence, and threaten to cut off trade ties without military force. For example, to be denied access to U.S. markets today would seriously hurt export industries in many states. U.S. hegemony post-1945 helped establish major international trade norms and institutions. As U.S. hegemony shifts to a more multipolar world, institutions are crucial for the global trading system\'s success. It remains uncertain whether China and Russia will continue participating in U.S.-established trade institutions or create rival ones. **8.3 Economic Globalization** Globalization, introduced in Chapter 1, encompasses various economic aspects beyond trade, including money, business, integration, communication, environmental management, and the economic development of poor countries. The fast pace of today\'s economic activity stems from a long history of world economic expansion, forming the foundation for globalization. **The Evolving World Economy** In 1750, Great Britain, the world\'s most advanced economy at the time, had a per capita GDP of about \$1,200 (in today\'s dollars), less than most of the global South today. Now, Britain produces over ten times that amount per person with a much larger population. This is due to industrialization, which uses energy to drive machinery and accumulate products. The Industrial Revolution began in Britain in the 18th century, supporting its leadership in the world economy and spreading to other advanced economies. **Industrialization**: The use of fossil-fuel energy to drive machinery and the accumulation of such machinery along with the products created by it. By around 1850, larger and faster coal-powered iron steamships replaced wooden sailing ships, and coal-fueled steam engines drove factories producing textiles and other commodities. The railroad industry was also booming. These developments increased world production and trade and economically connected distant locations. For example, a trip across France by railroad took a day, compared to three weeks a century earlier. However, factory conditions were extremely harsh, especially for women and children operating machines. During this period, Great Britain dominated world trade due to its technologically advanced economy, making its products competitive globally. British policy favored free trade, and Britain also served as the financial capital of the world, managing a complex global market in goods and services. The British currency, the pound sterling (silver), became the world standard. International monetary relations were still based on the value of precious metals, like the sixteenth century when Spain used Mexican silver and gold to fund its armies. By the early twentieth century, the United States had surpassed Great Britain as the world\'s largest and most advanced economy. This shift was driven by the industrialization of the U.S. economy throughout the nineteenth century, fueled by territorial expansion and abundant natural resources. The U.S. also attracted large pools of immigrant labor from Europe. Leading the transition from coal to oil and from horse-drawn transportation to motor vehicles, along with new innovations like electricity and airplanes, helped the U.S. achieve a dominant global economic position. In the 1930s, the Great Depression severely impacted the U.S. and world economies. The American Smoot-Hawley Tariff Act of 1930, which imposed tariffs on imports, worsened the depression by provoking retaliation and reducing world trade. The U.S. government adopted Keynesian economics, using deficit spending to stimulate the economy and paying itself back from new wealth generated by recovery. The government\'s role in the economy increased significantly during World War II. Following World War II, the capitalist world economy was restructured under U.S. leadership. This period saw the creation of international economic institutions like the World Bank and the IMF. The GATT was also formed, later replaced by the WTO in 1995. The U.S. provided significant assistance to revive Western European economies through the Marshall Plan and Japanese economies. World trade expanded greatly, and the global market became more integrated through advancements in air transportation and telecommunications. Electronics emerged as a leading sector, and technological progress accelerated throughout the twentieth century. Standing apart from this world capitalist economy, the economies of the Soviet Union and Eastern Europe followed communist principles of central planning and state ownership, where political authorities set prices and quotas for production and consumption according to a long-term plan. International trade occurred at government-controlled prices. Proponents of central planning believed it would make economies more rational and just, guarantee citizens\' basic needs, and mobilize the state for war if necessary. They also hoped that governments\' long-term view of resources would smooth out the \"boom and bust\" cycles of capitalist economies (known as business cycles). **centrally planned economy**: An economy in which political authorities set prices and decide on quotas for production and consumption of each commodity according to a long-term plan. The Soviet economy achieved rapid industrialization in the 1930s, survived the German assault in the 1940s, and developed world-class aerospace and military production in the 1950s and 1960s. The Soviet Union launched the first satellite, Sputnik, in 1957, and in the early 1960s, its leaders claimed communist economies would soon outperform capitalist ones. However, the Soviet bloc economies stagnated due to bureaucracy, ideological rigidity, environmental destruction, corruption, and high military spending, proving centrally planned economies inefficient. The former Soviet republics and Eastern Europe have transitioned to market-based systems and integrated into the world capitalist economy, but this shift has been challenging. In the early 1990s, the region\'s GDP shrank by about 35%, a depression worse than the Great Depression in the U.S. Living standards dropped significantly. During Boris Yeltsin\'s administration (1991-1999), Russia\'s economy struggled with depression, corruption, tax delinquency, and the clash between old communist and new capitalist models. President Vladimir Putin (2000-2008 and 2012-present) brought new energy to economic reform, and high crude oil prices buoyed the economy. However, Putin\'s centralization of political power could hinder capitalist growth, and Western sanctions in response to Russia\'s 2022 invasion of Ukraine are damaging the economy. **transitional economies**: Former Soviet republics and Eastern European countries that have shifted from communist to capitalist economic systems with various degrees of success. China, while maintaining central control by the Communist Party, has significantly shifted toward a market economy. The state still controls major industries, but this transition has dramatically boosted China\'s economic growth since the 1980s. Growth sustained an annual rate of about 10% throughout the 1990s, though it has slowed in recent years. Today\'s global economic activity leans more towards free markets than central planning but often falls between the two extremes. Many governments control domestic prices on certain goods, like subsidizing them for political support. States often own all or part of vital national industries, such as oil production companies or national airlines. The government sector, including military spending, road building, and Social Security, constitutes a significant part of industrialized countries\' economies. These economies, with both government control and private ownership, are known as mixed economies. **state-owned industries**: Industries such as oil companies and airlines that are owned wholly or partly by the state because they are thought to be vital to the national economy. **mixed economies**: Economies such as those in the industrialized West that contain both some government control and some private ownership. In the current era, a single integrated world economy exists, which almost no country can resist joining. However, this economy faces periodic crises and recessions and disparities between the richest and poorest regions. The 2008-2009 global financial crisis, starting with the U.S. subprime mortgage collapse, spread to Europe, causing major banks and investment companies to lose hundreds of billions of dollars. This led to a global slowdown in consumer spending and production, resulting in significant job losses in countries like the U.S., China, and India. The subsequent drop in consumer demand for goods caused a 9% decline in global trade, the largest since World War II. **Resistance to Trade** Globalization has led to growing nationalism in several regions, where people feel their identities and communities are threatened by foreign influences. Material dislocations-disruptions or displacements in the economic structure caused by changes caused by globalization, affect the self-interests of certain population segments, fueling a backlash against globalization. Some observers argue that globalization may be in retreat. Workers in industrialized countries, especially in industries like steel, automobiles, electronics, and clothing, are heavily impacted by competition from low-wage countries in the global South. This competition can harm firms and industries in high-wage countries, depress wages, and lead to job losses if operations move to the global South, where wages are lower. It also pressures countries to relax labor regulations. Thus, labor unions have been strong opponents of unfettered trade and globalization. Although the United States stands at the center of these debates, other industrialized countries face similar issues. These adverse economic effects have created political pressure to roll back policies that facilitated globalization, such as trade liberalization. Human rights NGOs and labor unions advocate for trade agreements that require low-wage countries to improve working conditions, including minimum wages, child labor, and worker safety. The U.S. bans imports of goods (mostly rugs) made by South Asia\'s 17 million slave child laborers. Companies stung by criticism of conditions like Apple have adopted measures to address abuses in their Asian factories after its Chinese supplier Foxconn faced worker protests and media attention over working conditions. According to the International Labor Organization, over 200 million children under 14 work in the global South, with more than half in hazardous labor. In Ivory Coast, the world\'s largest exporter of cocoa, tens of thousands of children work for low wages or as slaves on cocoa plantations. In April 2013, a factory collapse in Bangladesh killed over 1,100 workers and injured over 2,000, highlighting worker safety issues. This disaster, the worst industrial accident in Bangladesh\'s history, prompted NGOs to push for higher labor standards. By 2015, two agreements emerged: one signed by mostly European retailers and another by American retailers. Labor groups criticized the American agreement for lacking strong legal penalties for violations. Environmental groups oppose unrestricted trade expansion, seeing it as undermining environmental laws and promoting harmful practices. For example, U.S. regulations require shrimp boats to use devices to protect sea turtles, leading to a WTO complaint from Indonesia, Malaysia, Thailand, and Pakistan as they do not require the use of such devices. The U.S. lost the WTO ruling in 1998, making sea turtles a symbol of environmental opposition to the WTO. In 2001, the WTO accepted the U.S. law after changes to make them fairer and more impartial. In 1996, Brazil and Venezuela to the WTO and forced the U.S. to change environmental rules on imported gasoline, claiming that regulations under the Clean Air Act were nontariff barriers. Unrestricted trade often pushes countries to equalize regulations in various areas not limited to labor and environmental rules. For instance, the WTO ruled in 1997 that EU regulations excluding U.S. beef with growth hormones were not scientifically justified, allowing the U.S. to retaliate with high tariffs on EU exports like French cheeses when the European Union persisted. Similarly, in 2006, the WTO found European restrictions on U.S. genetically modified food violated trade rules. These examples highlight the backlash against free trade and globalization from labor, environmental, and consumer groups, who view the WTO as a secretive bureaucracy favoring big corporations over ordinary people. Critics distrust corporate-driven globalization, of which the WTO is just one aspect. Recent U.S. surveys show declining belief in trade\'s economic benefits, though most Americans see trade as an \"opportunity.\" Globally, public opinion supports trade, with a 2014 poll showing 81% of respondents in 44 countries view international trade positively, despite concerns about negative cultural and environmental effects, especially in export-dependent economies like Vietnam, Israel, South Korea, and Germany (above 90%). The benefits of free trade are more widespread than the costs. U.S. consumers enjoy lower prices on imported goods from low-wage countries, allowing them to spend more on other products and services, which can create more jobs. Cheap imports also help keep inflation low, benefiting citizens. However, this is little consolation for those who lose their jobs due to free trade.