Trade and Interdependence POL 3: INTRO TO IR

Trade and Interdependence POL 3: INTRO TO IR

I. Interdependent global economy Global economy leads to economic interdependence States are sensitive and vulnerable to each other e.g. 2008 global rice crisis Interdependence cooperation e.g. Arguments for interdependence and peace 1) Economic exchange decreases political conflict 2) Economic exchange increases political conflict 3) Economic exchange is irrelevant for political conflict Many economic flows flatten the world Trade, FDI, currency, foreign aid, migration 300% price increase (Jan May 2008) 2

World GDP 2007 3

World Imports 2002 (and Polity IV regime type) Duke University 4

World Trade 2004 (and Freedom House regime type) Duke University 5

II. Trading for power Economic realism: assumes wealth is zero-sum, thus states must compete Goal build economic wealth to expand power of the state Economic wealth is an instrument of state power 1. Mercantilism (18 th Century) Exports increase wealth, imports decrease wealth Protectionist trade policies Promotes military prowess and autarky 2. Economic nationalism (modern version) International system is dominated by competition for power Politics determines economics States plays role to promote exports over imports (current account surplus) Protectionist trade policies 6

III. Trading for gains Economic liberalism: assumes wealth is positive-sum, thus all states can benefit from trade Goal liberalized (free) markets Absolute advantage: producing more of a good with the same amount of resources Countries can benefit from specializing in their absolute advantage e.g. Mexican avocados Comparative advantage: producing a good with lower opportunity cost than other state(s) Countries can benefit from specializing in their comparative advantage e.g. Bangladeshi textiles 7

Trade Can Make Everyone Better Off Source: Frank and Ernest, August 18, 2005, http://frankandernest.com/cgi/view/display.pl?105-08-18 8

Comparative advantage example With the same inputs each country can produce either fish OR oil in the following amounts Canada 10 fish and 0 oil 5 oil and 0 fish Norway 8 fish and 0 oil 2 oil and 0 fish 9

Fish (million tons) Production And Consumption For Canada 10 8 6 4 2 Production and Consumption without trade 0 1 2 3 4 5 6 8 10 Oil (million barrels) 10

Fish (million tons) Production and Consumption For Norway 10 8 6 4 2 Production and Consumption without trade 0 1.5 2 3 4 5 6 8 10 Oil (million barrels) 11

Calculating Opportunity Costs Try to find each country s opportunity cost for fish and oil. Canada can produce 10 fish or 5 oil 5 oil cost 10 fish Opportunity costs: 1 oil cost 2 fish 1 fish cost ½ oil Norway can produce 8 fish or 2 oil 2 oil cost 8 fish Opportunity costs: 1 oil cost 4 fish 1 fish cost ¼ oil 12

The Opportunity Costs of Oil And Fish Opportunity Cost of (1) Oil (1) Fish Canada 2 Fish ½ Oil Norway 4 Fish ¼ Oil

Specialization And Trade For Canada Fish (million tons) 10 Canada gains 2 fish 8 6 4 2 0 1 Consumption after trade Production and Consumption without trade Production after specialization 2 3 4 5 6 8 10 Oil (million barrels) 14

Specialization And Trade For Norway Fish (million tons) 10 8 6 4 2 Production after specialization Production and Consumption without trade Consumption after trade Norway gains 0.5 oil 0 1.5 2 3 4 5 6 8 10 Oil (million barrels) 15

Free Trade: Friend or Foe Should states open up their markets to foreign trade? With 2-4 others: 1) List 2 benefits to a state arising from free trade 2) List 2 costs to a state arising from free trade 3) Discuss these overall merits/problems associated with free trade 4) Overall, should the U.S. pursue a policy of economic liberalization?

IV. Trade protectionism State may wish to protect the domestic losers of trade liberalization Factoral cleavage: protect the scarce factor of production Sector cleavages: protect the at-risk industry States may wish to reduce economic vulnerabilities Security-based protection Individuals have preferences toward protectionism And domestic features shape state s policies Methods of protection Tariffs (taxes) NTBs e.g. quotas, subsidies, restrictions 17

Complexity and trade salience Subjects response to trade policy based upon the size of the agreement and complexity of the trade instruments (Taylor 2015).

Complexity and trade salience The effect of complexity

Examples of obfuscated protection Regulatory restrictions e.g. French requirements on VCR imports Health and safety standards e.g. EU ban on growth hormone beef

V. International trade regimes World Trade Organization (WTO): IGO aimed at promoting trade liberalization Formed as GATT (1949), evolved into WTO (1994) Provides multilateral negotiating rounds (e.g. Tokyo, Uruguay) Dispute settlement Trade agreements 1) Bilateral agreements 2) Regional agreements Free trade areas; customs unions; common market Cartels: association of producers/consumers of a good aimed to control the price e.g. OPEC (40% of world s oil production) 21

Regional Customs Unions regional customs unions (2014)

Organization of Petroleum Exporting Countries OPEC member states OPEC oil production