Gpe .International Trade

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C H A P T E R 6

International Trade



Ov er v iew

y International Trade is one of the oldest and mostcontro v ersial subjects in IPE.

y Trade links nation states furthering their

interdependence.y This link is a benefit as well as a source of tension

between states and different groups within them.

y Contro v ersies stem from nation-state¶s compulsionto capture the benefits of trade and limit its negati v eeconomical and political effect on society.



Ov er v iew

y Since WW-II the political and economicalimportance of international trade has increaseddramatically, intensifying academic and public

debate about its significance.y Liberals v iew it as mutually beneficial.

y Mercantilist v iew it as a zero-sum game.

y Structuralist see it as a means of exploitation andredistributing income between de v eloped andde v eloping nations.



Ov er v iew

³ In the absence of a world go v ernment, cross bordertrade is always subject to rules that must be

politically negotiated among nations that areso v ereign in their own realm but not outside their

borders.´

Robert Kuttner



Ov er v iew

y International trade is a result of the productionstructure of the international political economy.

y It is a set of relationships that determine what is

produced, where, by whom, how, for whom, and at what price.

y International trade is carried out by indi v idualentrepreneurs and firms.



Ov er v iew

y When we use trade among states, we generally referto the sum total of trade done by a nation¶s

businesses registered as the nation¶s trade.

y Liberals stress the economic benefits of trade thatstem from a more efficient di v ision of labor and useof the world¶s resources.

y Production for Exports ± generate jobs ± Import

cheaper and better quality products ± Achie v es world peace through economic cooperation.



Ov er v iew

y Mercantilist stress the politics of trade.

y Nation states fear dependence on others for certaingoods.

y In order to protect local jobs states restrict imports.

y Trade embargoes are also used to punish or hurtother states.



Ov er v iew

y Structuralists emphasize how trade is used by theindustrialized nations to either exploit orsubordinate de v eloping nations.

y Trade induces underde v elopment in some cases.y Trade can be also be used to benefit Least De v eloped

Countries (LDCs).



Ov er v iew

y International trade has become v ery important andtrade can not be separated from its political aspects.

y Since 1948, world trade has grown more rapidly than

production.y 1975 exports = $876 billion

y 1980 exports = $1.9 trillion

y 1990 exports = $3.4 trillion



The moti v ation of trade: The Theory of Comparati v e Ad v antage

y Cloth was the first manufactured good to become an important commodity ininternational trade.

y Comparative advantage holds that anation should buy cloth from abroad whenthe cost of import is less then the cost of

producing at home.y Before comparati v e ad v antage many people belie v ed on the principle of absolute

advantage.



Comparati v e ad v antage

y It is better to buy or import a good when importing itrequires less sacrifice than producing it at home.

y According to economists the issue of who benefits

the most from these efficiencies depends upon whether the terms of trade fa v or the importer or theexporter.

y For Mercantilist any number of domestic groups and

industry may appeal to the state for protection andrecei v e it.



Brief History of Trade

y For mercantilist trade is one among many instruments the state tries to use to enhance its

wealth and thus add to its power and prestige in

relation to the power and prestige of other states.y Adam Smith¶s and Da v id Ricardo¶s Liberalism ruled

o v er England for more than one century.

y England o v erturned the Corn Law and started

importing cheaper food products.



Brief history of Trade

y Industrial re v olution generated a lot of trade between Europeans and their colonies.

y Britain was Hegemon and the leader in industrial

manufacturing.y Britain was naturally inclined to ad v ocate free trade

as they would benefit the most.



The Great Depression: Trade Protection abounds

y In the 1930s, trade protection spiraled upward whileinternational trade significantly decreased.

y Between 1929 and 1933 trade declined by 54%

because of Smoot-Hawley tariffs in the US and otheronerous trade barriers enacted elsewhere.

y Historians argue that the bleak economic conditionsin international economics generated reactions from

ultranationalists such as Mussolini and Hitler.




y Structuralist v iew of this mercantilist period:

Labeled this period as Classical Imperialism.

Imperialism of major European powers originated in their own

economies. Export oriented policies were necessary when capitalist

societies experienced economic depression.

Manufacturers o v erproduced and Financiers had extra capitalto in v est abroad.




Colonies ser v ed two purposes:

Ù They were a place to dump these goods.

Ù They were a place where in v estments could be made.

Colonies were a place where cheap labor and abundant natural

resources were a v ailable.

Trade helped the colonial mother countries dominate andsubjugate the unde v eloped colonial territories.

Capitalist countries used trade to spread capitalism into

underde v

eloped regions.




During early years of colonialism, the underde v elopedcountries remained on the sidelines of international trade.

They pro v ided mother country with raw material and a marketto sell their manufactured products.

These raw materials were con v erted to semi-finished andfinished goods and were sold to other powers and back to theircolonies.

The modern imperialist use the same policies to subjugate thede v eloping regions of the world.



The GATT and the Postwar Trade structure

y In 1934, US president Franklyn Roose v elt pressedCongress to pass the Reciprocal Trade Agreement

Act to help US economy reco v er.

y Secretary of State Cordell Hull championed freetrade as a way of o v ercoming international conflict.

y In 1944, during the Bretton Woods conference, theallied countries tried to create an International Trade

Organization that failed because US backed out of it.




y In 1948, GATT became the primary organizationresponsible for the liberalization of internationaltrade.

y Today GATT has 130 members which also includeex-So v iet states.

y GATT sought to liberalize trade through a series of multilateral negotiations called GATT rounds.

y Most famous of these rounds was the Kennedy round(1962-1967) where the US agreed to reducenonagricultural tariffs by 65%.




y GATT rounds were based on the principle of reciprocity.

y Most Fa v ored Nation (MFN): One state gi v es

another state an ad v antage by lowering its tariffs onthat nation¶s goods.

y Tokyo round of GATT (1973 -1979) dealt with agrowing number of Non Tariff Barriers (NTB).

y Included codes co v ering export subsidies,counter v ailing duties, dumping, Go v ernmentpurchasing practices etc. etc. on importers.



The industrialized Nations: ProtectionismEntrenched

y During the 1970s and 1980s, trade grew in numbers but it also created problems for the industrializedcountries.

y In spite of Tokyo rounds, the use and v ariety of tradeprotectionist policies increased, makinginternational trade appear more (neo)mercantilist innature than e v er.

y There were three interrelated factors thatcontributed to the rise in protectionist policies in the1970s and 1980s.



The industrialized Nations: ProtectionismEntrenched

y The US was reluctant to assume the cost of hegemonic leadership associated with keepinginternational trade system open.

y US political and economic hegemony declined inrelation to increase in political and economicinfluence by it Western European partners, Japan,and the newly industrialized countries.

y Increased expectation by groups that either benefited

or were hurt by trade and the state that come underpressure to manage trade in conjunction with otherparts of the economy.



Strategic Trade

y B y mid 1970s Japan¶s policies had started to pay off.

y MITI (Ministry of International Trade and Industry)helped pick corporate winners it and other

go v ernment officers felt would prosper in theinternational economy from state assistance.

y S trategic trade policies became synonymous with state effort to make their international economy

more recepti v e to certain businesses or block theaccess of competiti v e firms to domestic market.



Strategic Trade

y Strategic practices uses threats, promises, and other bargaining techniques in order to alter the tradingregimes in ways that impro v e the market position

and increase the profits of national corporations.y The Omnibus Trade and Competiti v eness Act of

1988 produced ³Super 301,´ legislation that requiredtrade officials to list ³priority´ countries that unfairly

threatened U.S. exports.y Comparati v e ad v antages are no longer fixed but can

be manufactured by states and firms.



Strategic Trade

y Today trade is controlled by multinationals.

y Corporations ha v e been able to de v elop the capacity to minimize taxes, skirt trade barriers, and take

ad v antage of global shifts in comparati v e ad v antage.y Politically, in this en v ironment fair trade replaced

free trade as a foreign economic policy objecti v e of many states.

y The U.S. accuses Japan of not playing fair when itcomes to its trade practices, and intentionally a v oiding reform of its economy.



Strategic Trade

y During 1980s U.S. trade deficit reached $160 billion.

y Japan accounted for as much as 37% of that deficit.

y After many years of bilateral negotiations, Japan

finally agreed to make some reforms and to importmore U.S. goods.

y In 1986, U.S. pressed the Europeans to import moreU.S. agricultural products and to reform some of their Common Market trade discriminationpractices.

y The U.S. threatened EU with a trade war andretaliatory practices of its own.



Strategic Trade

y Multilateral trade talks are another forum that ha v e been used to sol v e trade disputes among theindustrialized nations.

y One of these systems is GATT.y Another one is G-7, which includes U.S., Japan,

Great Britain, France, Germany, Italy, and Canada.



The GATT Uruguay Round and birth of the WTO

y The U.S. and a number of other countries pushed fora new round of GATT negotiations on trade.

y The 8th GATT round ± the Uruguay round ± gotunderway in 1986 in Punta del Este, Uruguay and

was completed on December 15, 1993.

y The Uruguay round was famous for three things. It attempted to deal with a number of trade issues that

reflected increasing economic interdependence.

Trade reforms of agricultural products. In v ol v ement of de v eloping nations in the international trade

system and in the trade negotiation process. The De v elopingnations made demands for more access to de v eloped markets.



The GATT Uruguay Round and birth of the WTO

y The final agreement included measures to protect trade-related intellectual property rights (TRIPS) co v ering suchitems as copyrights, patents, and trademarks.

y Trade related In v estment Measures (TRIMS) was also

agreed upon in the Uruguay Round.y World Trade Organization (WTO) was also established in

the round.

y WTO¶s job was to act as a forum for negotiating new

trade deals to implement the new GATT agreement.y WTO had the power to use trade sanctions to enforce

judgments.



LDCs and International Trade

y Trade played a major role in the de v elopmentmodels LDCs were to choose from in the 1950s and1960s.

y LDCs should practice ISI (Import SubstitutionIndustrialization) until such time that the nation wasstrong enough to trade on a more equal footing withthe industrialized nations.

Gpe .International Trade

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