lecture 8: internationa l trade april 29, 2008 professor timothy c. lim cal state los angeles...
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Lecture 8:
International
TradeApril 29, 2008
Professor Timothy C. LimCal State Los [email protected]
POLS/ECON 426 International Political Economy
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International Trade: Opening Remarks“Trade across borders inflames passions and creates controversies that are absent in discussions of trade within countries”
This tells us that international trade, as opposed to trade in general, requires special attention
To understand international trade, moreover, requires that we examine it dispassionately and analytically, that is, as students of IPE/GPE and not as proponents or opponents
Dynamics of the World Economy
International Trade
Dynamics of the World Economy
International Trade
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International Trade: Opening Remarks
International trade is important: not only is it an integral part of all our lives, but the process of international trade can have a materially profound effect on our lives and the lives of others
No doubt all of you rely on imported products; in fact, it’s likely that most of what you own is the product of trade: your clothes, your cell phones, your computer, your cars, your TVs and DVD players, and so on
Dynamics of the World Economy
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Dynamics of the World Economy
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International Trade: Opening Remarks International trade--and specifically free
trade--can therefore easily be seen as primarily beneficial: after all, you’re all benefiting right now from imported products, both directly and indirectly
But is this necessarily the case?
By buying so many foreign products, for example, aren’t there fewer jobs for Americans? By buying so many imported products, aren’t we indirectly reducing our own wages? By relying of foreign technology or resources, is the country becoming more
dependent on others?
Dynamics of the World Economy
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Dynamics of the World Economy
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We will address the benefits or harm of free trade shortly, but first, we need to be clear about basic
terms of international trade
We will address the benefits or harm of free trade shortly, but first, we need to be clear about basic
terms of international trade
International Trade: Some Definitions Trade: The exchange of one commodity for another
International Trade: Exchange conducted across national borders
In international trade, the existence of national borders have added significance in so far as different national authorities may attempt to control the activities of their citizens in making transactions across borders: such control in typically exercised through a variety of means collectively labeled “protectionism”
Protectionism: Refers to (gov’t) policies designed to restrict the import of goods and services or otherwise make imported goods “less competitive” relative to domestically manufactured goods
Dynamics of the World Economy
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Dynamics of the World Economy
International TradeAs I just suggested, we also
need to understand that “international trade” and
“free trade” are not synonymous
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International Trade: Some Definitions
Tariffs
Quotas
Subsidies
Currency Controls
Administrative Regulations (a non-tariff barrier or NTB)
Voluntary Export Restraints (VERs)
Dynamics of the World Economy
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Dynamics of the World Economy
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A tax on the price of imports, which raises their price
A quantitative restriction against goods and services
A payment to domestic firms to make them more competitive
Limits currency for purchase of foreign goods
Bureaucratic procedures specifically designed to limit imports
Bilateral agreements whereby a country “voluntarily” agrees to limit imports
Dynamics of the World Economy
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Dynamics of the World Economy
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Average Tariffs, WTO Estimates 2006
International Trade: Some Questions
Is trade beneficial or harmful? More specifically, free trade beneficial or harmful?
Are restrictions on trade ever justified? If so, when and under what conditions?
Is the only choice between free trade and “unfree” trade?
Dynamics of the World Economy
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Dynamics of the World Economy
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Before discussing these questions, we will first watch a video on that addresses just these questions. Watch.
Listen. Be ready to discuss.
Before discussing these questions, we will first watch a video on that addresses just these questions. Watch.
Listen. Be ready to discuss.
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International Trade: The DebateWhat is the liberal perspective on international
trade?
Trade is a positive-sum activity: by engaging in trade, everyone benefits because trade increases efficiency and raises productivity
We already know that is is based largely on the concept of _________________________. But another important concept come from two economists, Heckscher and Ohlin: _______________________ theory
Dynamics of the World Economy
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Dynamics of the World Economy
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NOTE: You should all be able to answer this question on your own … but let’s
review quickl
NOTE: You should all be able to answer this question on your own … but let’s
review quickl
comparative advantage
factor endowment
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International Trade: The DebateFactor Endowment Theory Ricardo assumed that differences in labor
productivity were the sole determinants of comparative advantage, but other economists argued that this was too limiting
In particular, Herkscher and Ohlin argued that other factors of production—e.g., land, technology, and capital—also needed to be considered (the video and book provide examples)
Key point: Despite modifications and refinements, liberal economic theory shows, time and time again,
that free trade is beneficial to everyone!
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Dynamics of the World Economy
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International Trade: The DebateInternational Trade: Static and Dynamic
Benefits It’s important to understand that trade has
both static and dynamic benefits
The static benefit is the “one-time” benefit from an exchange of goods/services itself: both parties get something they want, and at lower prices than if they produced everything themselves
The dynamic benefit is perhaps even more important: What are dynamic benefit flows from increased trade?
Dynamics of the World Economy
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Dynamics of the World Economy
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Simple Answer: Trade generates faster, more productive economic growth and development
over time
Simple Answer: Trade generates faster, more productive economic growth and development
over time
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International Trade: The DebateInternational Trade: Dynamic Benefits
What liberal economists tell us is that trade is a basic “engine of growth” and that it generates a number of dynamic, educative effects
These include, most importantly, the diffusion of knowledge of production and organizational techniques, which will make a national economy much strongerover time
Dynamics of the World Economy
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Dynamics of the World Economy
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international trade
International Trade: For DiscussionSo, is the liberal argument for “international trade” utterly persuasive?
Are they any holes or flaws in the argument? Or should we all just embrace the liberal idea?
Does the answer change when weadjust the parameters and ask aboutfree trade specifically?
Dynamics of the World Economy
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Dynamics of the World Economy
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International Trade: The DebateWhat is the mercantilist perspective on trade?
Must begin with an understanding that the IPE is shaped by power, and specifically by an unequal distribution of power
States, by their very nature, use power to enhance and promote their own interests first and foremost; this is true for “liberal” and “illiberal” states
One implication: Even the most “liberal” states--including the U.S. today--are protectionist when it serves their interests
Dynamics of the World Economy
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Dynamics of the World Economy
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International Trade: The Debate“Liberals can’t handle the Truth!”
What is the “Truth” Col. Jessup (Jack Nicholson) is talking about?
How does this “truth”help us understand thelimitations of the liberalperspective?
International Trade: The Debate“Liberals can’t handle the Truth!”
What is the “Truth” Col. Jessup (Jack Nicholson) is talking about?
How does this “truth”help us understand thelimitations of the liberalperspective?
Dynamics of the World Economy
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Dynamics of the World Economy
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International Trade: The DebateRecognizing “The Facts of Life”
Liberal theory is well and fine if power and inequality are ignored; but, when we recognize these aspects of the real world, we understand that states must … Nurture and protect their own domestic manufacturers, often through infant industry policies
Put national security needs above the principles of free trade, which means ensuring a manufacturing base, maintaining access to critical resources (including food) and technology, etc.
International Trade: The DebateRecognizing “The Facts of Life”
Liberal theory is well and fine if power and inequality are ignored; but, when we recognize these aspects of the real world, we understand that states must … Nurture and protect their own domestic manufacturers, often through infant industry policies
Put national security needs above the principles of free trade, which means ensuring a manufacturing base, maintaining access to critical resources (including food) and technology, etc.
Dynamics of the World Economy
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Dynamics of the World Economy
International Trade
International Trade: The DebateInfant Industry Protection: The Rationale/Truth
Countries that don’t have a manufacturing base, that don’t have the capacity to produce in cutting-edge industries, will also be weak and subservient
Countries that don’t have competitive industries will never achieve strong, independent economic growth
Countries that don’t protect and nurture vital industries will always be second- or third-rate powers; they will always be dependent on others and on the ebbs and flows of larger economic forces
International Trade: The DebateInfant Industry Protection: The Rationale/Truth
Countries that don’t have a manufacturing base, that don’t have the capacity to produce in cutting-edge industries, will also be weak and subservient
Countries that don’t have competitive industries will never achieve strong, independent economic growth
Countries that don’t protect and nurture vital industries will always be second- or third-rate powers; they will always be dependent on others and on the ebbs and flows of larger economic forces
Dynamics of the World Economy
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Dynamics of the World Economy
International Trade
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International Trade: The DebateNational Security: The Ultimate Truth Economic power (e.g., manufacturing
capacity, control of resources, capital, technology) is a weapon
In a war, would your rather have steel or coffee? Would you rather have “ownership” of a vital resource, such as oil, or would rather have the manufacturing and technological capacity to take what you need, when you need it?
Dynamics of the World Economy
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Dynamics of the World Economy
International Trade
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International Trade: The DebateThe Marxist Perspective As we already know, Marxists share many of
the same general criticisms as mercantilists, albeit for different reasons
One shared concern is with power: Marxists are skepticalof free trade because it reflectsthe interests of the capitalistclass, and specifically, of thethe most dominant players: transnational corporations
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Dynamics of the World Economy
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International Trade: The DebateThe Marxist Perspective: Basic Points TNCs benefit disproportionately from free trade,
and since the leading TNCs are based or have significant operations in Western states, workers in those countries generally do well, too (but not always or necessarily)
More generally, richer countries dominate the international trading system: they write the rules and control the framework within which all trade is conducted; with this control, they are able to bias the system in their favor
Dynamics of the World Economy
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Dynamics of the World Economy
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International Trade: The DebateThe Marxist Perspective: Basic Points When it suits their interests, TNCs and their states
ignore the rules of free trade
Case in point: Income support for American dairy farmers
In 2002, Congress added an income support program for dairy farmers, which distributes cash payments whenever prices fall below target levels ….To enforce artificially high prices, the government imposes import barriers on milk, butter, cheese, and other products. Without those barriers, consumers could simply purchase lower-priced foreign goods. Imports of cheese, butter, and dried milk are limited to about 5 percent or less of U.S. consumption.
An important consequence (besides higher prices for American consumers): Poor countries cannot compete against American producers, even in their home markets, since surplus American goods often flood foreign markets
Dynamics of the World Economy
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Dynamics of the World Economy
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International Trade: The DebateTo Marxists, the logic of comparative advantage not only locks poorer countries into permanently subservient positions, but can be extraordinarily perverse
Consider the following example,a memo written by LawrenceSummers, Chief Economistfor the World Bank (and laterPresident of Harvard) …
Dynamics of the World Economy
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Dynamics of the World Economy
International TradeMemorandum (Conf
idential)
From: Lawrence
Summers
Chief Economist,
World Bank
Health-impairing
pollution shoul
d be
done in the coun
try with the low
est
cost, which will
be the countrie
s
with the lowest
wages
Just between you
and me, shouldn
’t
the World Bank b
e encouraging mo
re
migration of the
dirty industrie
s to
the [Third World
]?
If toxic waste o
r pollutants cau
se
cancer in later
life, why not se
nd
that material to
countries where
people don’t liv
e so long?
The economic log
ic behind dumpin
g a
load of toxic wa
ste in the lowes
t-
wage country is
impeccable and w
e
should face up t
o that.Cheers,
Larry
Memorandum (Conf
idential)
From: Lawrence
Summers
Chief Economist,
World Bank
Health-impairing
pollution shoul
d be
done in the coun
try with the low
est
cost, which will
be the countrie
s
with the lowest
wages
Just between you
and me, shouldn
’t
the World Bank b
e encouraging mo
re
migration of the
dirty industrie
s to
the [Third World
]?
If toxic waste o
r pollutants cau
se
cancer in later
life, why not se
nd
that material to
countries where
people don’t liv
e so long?
The economic log
ic behind dumpin
g a
load of toxic wa
ste in the lowes
t-
wage country is
impeccable and w
e
should face up t
o that.Cheers,
Larry
International Trade: The DebateThe Marxist Perspective
Dynamics of the World Economy
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Dynamics of the World Economy
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This video on the WTO reflects some
of the key criticisms
Marxists (or radicals) have
toward free trade
Pay particular attention to whom
the video identifies as the power behind the WTO (hint: it’s
not governments)
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International Trade: Summing Up Despite what liberals say, the debate about free
trade is far from settled: to a certain extent, both mercantilists and radicals make powerful counter-arguments; at the same time, liberal views cannot be easily discarded either
In the debate, we must also be careful to distinguish arguments about international trade and free trade
Consider the distinction: How might it be important?
Dynamics of the World Economy
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Dynamics of the World Economy
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An example: Japan, Taiwan, and South Korea’s emergence as major trading countries was not the product of free trade, but of a “trading system” created by the United States, which allowed all three countries to export freely to the U.S. while keeping their own markets relatively closed
An example: Japan, Taiwan, and South Korea’s emergence as major trading countries was not the product of free trade, but of a “trading system” created by the United States, which allowed all three countries to export freely to the U.S. while keeping their own markets relatively closed
Another Perspective: Free trade versus “Fair Trade” • Fair trade suggests that non-market forces are
explicitly allowed to play a role in the exchange of goods in order to ensure that the exchange of goods
benefits as many individuals as possible
Another Perspective: Free trade versus “Fair Trade” • Fair trade suggests that non-market forces are
explicitly allowed to play a role in the exchange of goods in order to ensure that the exchange of goods
benefits as many individuals as possible
International Trade: Fair TradeThe concept of “Fair Trade” also radical critiques of free trade that focus on environmental protection and the protection of human and gender rights
This video on the flowerindustry in Ecuador helpsto illustrate key aspects ofthe fair trade argument
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Dynamics of the World Economy
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International Trade: Managed TradeOne of last points in our discussion underscores a critical, but often, overlooked aspect of international trade in the post-war period: it is not a laissez-faire system of free trade, but a system of managed trade
The system of managed trade is based on four key principles
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Dynamics of the World Economy
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non-discrimination
reciprocitytransparency
multilateralism
Taken together, the 4 principles tell us that international trade takes place within an agreed upon framework, or regime, that requires cooperation, rule-making, and (implicitly) coercion
Taken together, the 4 principles tell us that international trade takes place within an agreed upon framework, or regime, that requires cooperation, rule-making, and (implicitly) coercion
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International Trade: Managed Trade The rule-based framework of contemporary
international trade is represented in the World Trade Organization (WTO), which is the successor to the …
____________________________________________
The book provides basic backgroundinformation on GATT: You should all be familiar with this information already (or, if not, you should review it on your own later)
We will focus on the WTO
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Dynamics of the World Economy
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General Agreement on Tariffs and Trade (GATT)
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International Trade: The WTOWhat is the WTO? What does it do? Simply put: the WTO deals with the rules of
trade between nations at a global or international level, but it’s also a number of other things …
It’s an organization for liberalizing trade
It’s a forum for governments to negotiate trade agreements
It’s a place to settle trade disputes
It operates a system of trade rules
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Dynamics of the World Economy
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International Trade: The WTOThe WTO is transforming the management of world trade. Among a range of actions, it has …
engineered a shift from trade liberalization based on tariff concessions to discussions of domestic policies, institutional practices and regulations
radically expanded agenda for “trade issues”: everything from services, to intellectual property rights, copyright protection, and even non-trade policies
initiated a movement toward “harmonization,” which means that the WTO is creating a framework that may ultimately force all countries to adopt the same basic laws, regulations and institutions at the domestic level: this is a monumental change
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Dynamics of the World Economy
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International Trade: The WTO In sum, the WTO has become the “key institutional
node of the [contemporary] trade regime”
It, therefore, behooves all of us to pay close attention to the activities of the WTO
Again, though, our interpretation of the what the WTO does, and whether its activities are good, bad or something else, depends a great deal on theoretical lens through which we view it
Should we embrace or fear the WTO?
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Dynamics of the World Economy
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International Trade: The WTOClassical liberals are ambivalent about
the WTO On the one hand, the WTO does promote freer,
less restrictive trade
At the same time, the WTO, by its very existence, contradicts the ideal of laissez faire; here is how one liberal critic of the WTO voices his objection:
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Dynamics of the World Economy
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Clearly, the goal [of the WTO] is not worldwide free trade based on the division of labor, but rather of a worldwide welfare state based on the faith that bureaucrats know best how to run businesses in which they themselves have no stake.
From “Why Managed Trade Is Not Free Trade,” by Robert Batemarco
Clearly, the goal [of the WTO] is not worldwide free trade based on the division of labor, but rather of a worldwide welfare state based on the faith that bureaucrats know best how to run businesses in which they themselves have no stake.
From “Why Managed Trade Is Not Free Trade,” by Robert Batemarco
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International Trade: The WTO Classical liberals also understand that policies
are not always determined by what is “best” or most economically efficient, but by the “interests” of various actors pursuing their own self-serving goals
In large international organizations such as the WTO, then, competing interest groups--representing importers, exporters, manufacturers, agriculture, declining industries, rising industries, labor, environmentalists, and so on--may use the political processes of the WTO to protect their own interests at the expense of free trade
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Dynamics of the World Economy
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This view is referred to as pluralism
This view is referred to as pluralism
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International Trade: The WTO Mercantilists are suspicious of the WTO,
but view it as potentially useful
In the most powerful countries, the WTO would be seen as essentially good: it protects and promotes the interests of the richest states, while providing a veneer of legitimacy
In weaker states, the WTO is problematic, but not necessarily so: when they act collectively within the framework of the WTO, it is possible for weaker states to achieve some limited goals
Dynamics of the World Economy
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Dynamics of the World Economy
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This helps to explain why there are so many sub-groups and coalitions in the WTO, such as the LMG, G-20, G-22, G-90, Cairns Group,
the ACP
This helps to explain why there are so many sub-groups and coalitions in the WTO, such as the LMG, G-20, G-22, G-90, Cairns Group,
the ACP
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International Trade: The WTO Radicals are the most skeptical and even
hostile toward the WTO
One of their biggest objections is that the WTO is fundamentally undemocratic, and makes decisions that reflect only the interests of powerful corporate actors, while ignoring the voice of the people
We can see this viewillustrated in this video
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Dynamics of the World Economy
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