Rena Ju

International Relations
Outline-Chapter 8
International Trade
1. Trade involves political issues, not only economic ones
a. International trade crosses defined national borders
b. Pressured by interest groups
c. Controlled by international trade regimes
2. Theories of international trade
a. Mercantilism
i. Ideas overlap with realists assumptions about the
world
ii. Zero-sum game
iii. Not relying on international organizations to work
for mutual gains
iv. Emphasize relative power rather than absolute
amount of wealth a state possesses
v. Believe that outcome of economic negotiations
matter for military power
vi. Money as a fungible form of power
b. Liberalism
i. Believe in the possibility for states to achieve
mutual economic gains through the formation of
international institutions, organizations and norms
ii. Emphasize absolute gains rather than relative
wealth/power
c. International trade always result in both mutual gain
and conflict of interest; even when two sides both
benefits from the negotiation, one side would gain more
than the other
i. Mercantilism: emphasize on balancing distribution
of wealth throughout the international community
ii. Liberalism: achieving total wealth through
development of maximum efficiency (maximum
output, minimum waste)
d. World market
i. Liberals believe in the existence of free market, in
which prices are determined by market
competition
1) Rely less on bilateral relations than state
security does because in an ideal free
market, negotiation between buyers and
sellers should only be governed by prices
and quality considerations and not by
political and/or personal preferences
2) Demand curve: if the prices offered by
sellers are low, more buyers are willing to
buy it; vice versa

3) Supply curve: if the prices offered by buyers

are low, more sellers are willing to sell the
goods to the buyers; vice versa
4) Where the two curves intersect is called the
equilibrium price
5) This system is supposed to create a fairly
uniform price (market price) of one good
throughout the world market
6) Fluctuations in oil prices drive state leaders
to take political actions rather than rely
entirely on world markets
7) Governments play the most important role
of non-interference, except when serving
the efficiency of trade by providing safe and
convenient environment for trade and
regulate market to help it function efficiently
8) Disdain obsession with states borders
because they obstruct free trade across
borders by constraining maximum efficiency
on exchange
9) Economic interdependence promotes peace
ii. For mercantilists, on the contrary, economic
relations must serve the good of political powers
by creating a favorable balance of trade
1) Positive balance: export is greater than
import
2) Negative balance: import is greater than
export
3) States must reconcile a positive balance of
trade even when, in the short term, having
trade deficits
e. Comparative advantage
i. It is much less costly if one state produces what is
best produced in its territory and trade for other
goods that it needs with states that best produce
them than trying to be self-sufficient
ii. States should take advantage of the better quality
goods other states produce rather than divert its
labor and capital to produce them
iii. Increase overall efficiency of production; prices
would be lower overall and more consistent
iv. Long term benefits may incur short term costs,
which may deceive/force the decision makers to
give up long term benefits
1) Benefiting a few greatly, costing many
slightly
2) As a result, governments may have the urge
to enact economic policies

3) Worker or industry interest groups are likely

to form against a concentrated cost (loss of
jobs) even though it benefits the economy
overall; on the contrary, the public is less
likely to form against a diffused cost (an
increase of $20 in price, for instance), which
is not necessarily beneficial to the overall
economy
f. Market imperfection
i. Political interference
1) A monopoly is a situation in which there is
only one supplier for an item that allows the
supplier to set the price very high
2) A oligopoly is a situation in which the only
few suppliers for an item control the price
for that good, either through tacit or explicit
coordination
Ex. OPEC
ii. Corruption the government/state receives less
benefit, but the individual government officials get
increased benefits
iii. Legal framework in international trade is less
easily enforced; it depends on practical reciprocity
iv. Taxation is used to generate revenue for the
government and to regulate economic activities
by incentives
1) Tariffs are a major source of conflict in
international trade
v. Sanctions: prohibition of certain kinds of
economic exchange between specified actors
1) The most explicit form of political
interference in international trade
2) Sanctions are difficult to enforce because it
requires multilateral cooperation in order for
the action to effective
3) It is a collective goods problem; there are
incentives that may drive actors to break
sanctions and still trade through black
markets or other means
4) This difficulty further proves the statement
that power is more diffused in IPE than it is
in international security affairs
vi. Autarky: economic self-reliance to produce
everything on ones own, especially of weaker
states
1) Has been proven ineffective because
a) It is usually extremely costly for states
to produce goods that they do not
have a comparative advantage on

b) As other states achieve mutual gains

through trade, the relative power of an
autarkic state declines
g. Protectionism
i. Motivations
1) Protecting domestic industries from
international competition
2) Governments may provide tax benefits,
subsidies or restriction on competing
imports to industries that negotiate or offer
campaign contributions
3) Governments tend to protect domestic
infant industries by facilitating their growth
until they can compete in world markets
4) Governments might aid industries during
periods of major changes in economic
environment, such as the arrival of a new
competitor or market condition shifts
5) Governments tend to protect industries
considered vital to national security
6) States break up impending monopoly
ii. Tools/actions
1) Tariffs: restrict imports and serve as a
source of state revenue
2) Nontariff barriers:
a) Imports can be limited by a quota;
these are often agreed upon by both
sides
b) Subsidies: tax breaks, loans or
guaranteed prices paid by
governments that allow the prices of
goods to be lower without the
companies losing money
c) Regulations in bureaucracies and
systems or corporate alliances make it
hard for marketing of one good even
when it is imported; so do
environmental and labor regulations,
and nationalization of industries
d) Economic nationalism: buy products
produced by ones own country to
increase its international power
3) Cooperation with the WTO
iii. Positive and negative effects
1) Helping producers but hurting consumers
2) Domestic industries are stagnant in
improvements in efficiency and competence
because they are protected by state
governments

3) Temporary protectionism can have

stabilizing effects
3. Trade regimes
a. The World Trade Organization
i. Monitors, promotes and adjudicates international
trade
ii. Wields some power but still limited
iii. Being feared to interfere with democratically
enacted national laws
iv. Based on the principle of reciprocity: states lower
trade barriers to one another
v. Uses also the most-favorable nation concept,
which states that state economic policies toward
its most favorable trading partners must be
applied to all others states as well, except when
applying Generalized System of Preferences,
which allows tariffs to be lower for the poorer
states
vi. Negotiations often last for very long as
demonstrated in the game of Chicken: there is no
incentive for states or other actors to come to a
deal before the last minute
vii. Even though outcomes of negotiation may be
painful to the states in the short term and states
may try to evade the deals, it is still too costly to
not participate in the organization at all
b. Bilateral agreements
i. Reciprocal treaties to lower trade barriers between
two states, usually very specific
ii. The WTO was designed to reduce/eliminate the
maze of bilateral treaties and preferences in
international trade; it has only been partially
successful
iii. Reduces the collective goods problem in
multilateral negotiations
c. Regional agreements
i. Allows more efficient increases in wealth within
groups
ii. Might undermine the influence of the WTO
iii. States may practice liberalism inwardly in a
trading bloc and mercantilism outwardly to states
outside the bloc
iv. Free trade areas
1) Groups of neighboring states agree to lower
trade barriers among the group members
v. Customs union
1) Impose a common tariffs toward states
outside that group
vi. Common market

1) Member states of an agreement decide to

also coordinate other economic policies such
as monetary exchange
d. Cartels
i. Cartels are associations formed by producers and
consumers to regulate prices
1) Coordinate to limit production to lower the
supply, relative to the demand
Ex. OPEC
2) No need for a monopoly of production to
control the price
3) Creates collective goods/free-rider problems
(members of the supplier group exceeds
production limits while still enjoy the high
price)
ii. Cartels are important in international trade but
market forces are too powerful to be hugely
affected
e. Industries and interest groups
i. Competitive, advanced industries seek freer
international trade policies; weaker industries seek
protection from state governments
ii. Industries and interest groups try to influence
foreign economic policies though lobbying, paying
bribes, or even encouraging coups
iii. Within an industry, despite competition among
individual actors, the members favor a common
foreign economic policy
iv. States form industrial policies that are tailored
for vital industries for the overall economy of the
states
1) Agricultural sectors are the most important
since it relates tightly with vulnerability of a
state
2) Secondly, the textile and garment sector
3) Thirdly, intellectual and property right
problems are controversial and difficult to
resolve because of the anarchic nature of
the international system
4) Fourth, the service sector that include
banking, insurance and telecommunications
creates trade issues because they concern
information sharing
5) Arms industries are often protected by
governments
v. Illicit trade provides goods not available in legal
markets
f. Enforcement of trade rules

i. Large bureaucracies monitor international

economic transactions and develop detailed
policies for cooperation
ii. Complicated by differing interpretation on
fairness; as a result, agreements are formed and
often a third party gets to adjudicate
iii. Trade cooperation is easier to achieve under a
hegemony; it requires a stable framework that
hegemony can provide
4. Economic globalization
a. State economies today often fall somewhere between
extreme market economy and command economy,
which are called mixed economies
b. There present a world market that no country can resist
to join, still, imperfections create crises periodically
5. Resistance to trade
a. A countercurrent of nationalism is fueled by the
globalization of world economies
b. Material dislocations also cause disc ontent from
certain segments of a population
c. Labor unions stand against trades that might
undermine workers rights (wages and/or job
opportunities)
d. Human rights NGOs are pushing for trade agreements
that facilitate improvements in wages, working
conditions, work safety and problems with child labor
e. Environmental groups oppose expansion policies that
allow actions harmful to the environment
f. Unrestricted trade force countries to equalize
regulations in those areas