International Political Economy: Trade

1. International Political Economy: Trade PO 325: International Politics

2. International Trade • Focuses on Economic Transactions • Different Than Security Concerns • Mutual Benefit Underlies Transactions (Though Conflicts of Interest Still Occur) • Thus, Military Leverage Probably Less Germane • Realist Concept of Short-Term Self Interest Seems Less Applicable Than Liberal Concept of Mutual Benefits Via Long Term Cooperation

3. International Trade • However, Both Relative and Absolute Gains Still Important • Each Transaction Characterized By Important Relative and Absolute Components, Especially in Anarchy

4. Trade Strategies • Autarky: No International Trade; Strive for Complete Self-Sufficiency • Benefits: Avoids Dependence on Others; Immunizes Economies to External Shocks • Drawbacks: Very Little Wealth Generated; Isolationism; “Reinventing Wheel”

5. Trade Strategies • Protectionism: Manipulate International Trade to Strengthen/Shelter a Particular Domestic Industry (Tariffs, Subsidies) • Benefits: Political Capital Gained in Particular Sectors; Protect Industries from Market Shifts; Maintain Security • Drawbacks: Forgoes Economic Efficiency to Be Had By Free Trade (Absolute Gains)

6. Trade Strategies • Free Trade: No Barriers to Trade Between States • Benefit: Allows for Economic Efficiency (Goods-Specific) • Drawback: Can Decrease State Security (Security Externalities)

7. Theories/Ideologies in IPE • Mercantilism: • Realism-Based • Focused on Relative Gains: States Must Protect Interests Relative to Others (Economics Serves Politics) • Emphasizes Attainment of Most Favorable Wealth Distribution (Benefits May be Greater Absolutely, But They Differ Between Parties)

8. Theories/Ideologies in IPE • Mercantilism (continued) • Trade Generates Security Externalities, Which are Most Important to Mercantilists – States Must Control Trade • As Such, Advocates Autarky or Protectionism • Ex: Great Britain in 18th Century – Involved in Extensive Trade Not to Increase Absolute Gains For All, But to Use Trade Surplus to Increase Power Relative to Others

9. Theories/Ideologies in IPE • Liberalism (Different from IR Theory): • Focused on Absolute Gains: Traders Gain Collectively, and Shouldn’t Be Prevented from Doing so By Governments (Politics Serves Economics) • “Invisible Hand” (Price) Equitably Governs Economic Transactions

10. Theories/Ideologies in IPE • Liberalism (continued) • In Matters of State Economics, States Should Focus On Utilizing their Comparative Advantage Concerning a Particular Good, and Not Compete With Others Over the Production of the Same Good • Maximizing Absolute Gains Can Reduce Conflicts Over Economic Interests in Long Run, Minimizing Mercantilists’ Concerns • As Such, Advocates Free Trade

11. The Concept of Comparative Advantage • Rests on Idea that Trade Promotes Mutual Gain (Liberalism) • As Long as Two States Differ in Terms of Relative Productivity Concerning At Least Two Different Items: • We Should Have an Idea About Which States Specialize In Which Items • It Makes Sense For States To Specialize in a Particular Item and Trade It For Those They Don’t Specialize In

12. The Concept of Comparative Advantage • Key Concepts: Production in One Good Precludes Production in Others (Efficiency and Opportunity Costs); Relative Prices Dictate Terms of Trade

13. The Case for Comparative Advantage

14. Key Points Concerning Trade • Generally, Even if Absolute Gains Necessarily Result, Many Consider Relative Component More Important • Domestic and International Incentives to Both Protect and Trade Freely – Involves Tradeoff • Global Free Trade is a Precarious Collective Good

15. Key Points Concerning Trade • Trade Regimes (e.g., WTO, Cartels Like OPEC) Established to Maximize Absolute Gain; But Incentives to Defect Can Harm These Collective Efforts if Effective Punishment Mechanism Not Instituted