International Trade

CHAPTER 6
 Overview

International Trade is one of the oldest and most

controversial subjects in IPE.
Trade links nation states furthering their
interdependence.
This link is a benefit as well as a source of tension
between states and different groups within them.
Controversies stem from nation-state’s compulsion
to capture the benefits of trade and limit its negative
economical and political effect on society.
 Overview

Since WW-II the political and economical

importance of international trade has increased
dramatically, intensifying academic and public
debate about its significance.
Liberals view it as mutually beneficial.
Mercantilist view it as a zero-sum game.
Structuralist see it as a means of exploitation and
redistributing income between developed and
developing nations.
 Overview

“ In the absence of a world government, cross border

trade is always subject to rules that must be
politically negotiated among nations that are
sovereign in their own realm but not outside their
borders.”
Robert Kuttner
 Overview

International trade is a result of the production

structure of the international political economy.
It is a set of relationships that determine what is
produced, where, by whom, how, for whom, and at
what price.
International trade is carried out by individual
entrepreneurs and firms.
 Overview

When we use trade among states, we generally refer

to the sum total of trade done by a nation’s
businesses registered as the nation’s trade.
Liberals stress the economic benefits of trade that
stem from a more efficient division of labor and use
of the world’s resources.
Production for Exports – generate jobs – Import
cheaper and better quality products – Achieves
world peace through economic cooperation.
 Overview

Mercantilist stress the politics of trade.

Nation states fear dependence on others for certain
goods.
In order to protect local jobs states restrict imports.
Trade embargoes are also used to punish or hurt
other states.
 Overview

Structuralists emphasize how trade is used by the

industrialized nations to either exploit or
subordinate developing nations.
Trade induces underdevelopment in some cases.
Trade can be also be used to benefit Least Developed
Countries (LDCs).
 Overview

International trade has become very important and

trade can not be separated from its political aspects.
Since 1948, world trade has grown more rapidly than
production.
1975 exports = $876 billion
1980 exports = $1.9 trillion
1990 exports = $3.4 trillion
The motivation of trade: The Theory of Comparative Advantage

Cloth was the first manufactured good to

become an important commodity in
international trade.
Comparative advantage holds that a
nation should buy cloth from abroad when the
cost of import is less then the cost of
producing at home.
Before comparative advantage many people
believed on the principle of absolute
advantage.
 Comparative advantage

It is better to buy or import a good when importing it

requires less sacrifice than producing it at home.
According to economists the issue of who benefits
the most from these efficiencies depends upon
whether the terms of trade favor the importer or the
exporter.
For Mercantilist any number of domestic groups and
industry may appeal to the state for protection and
receive it.
 Brief History of Trade

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.
Adam Smith’s and David Ricardo’s Liberalism ruled
over England for more than one century.
England overturned the Corn Law and started
importing cheaper food products.
 Brief history of Trade

Industrial revolution generated a lot of trade

between Europeans and their colonies.
Britain was Hegemon and the leader in industrial
manufacturing.
Britain was naturally inclined to advocate free trade
as they would benefit the most.
 The Great Depression: Trade Protection abounds

In the 1930s, trade protection spiraled upward while

international trade significantly decreased.
Between 1929 and 1933 trade declined by 54%
because of Smoot-Hawley tariffs in the US and other
onerous trade barriers enacted elsewhere.
Historians argue that the bleak economic conditions
in international economics generated reactions from
ultranationalists such as Mussolini and Hitler.
 The Great Depression: Trade Protection abounds

Structuralist view 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 overproduced and Financiers had extra capital
to invest abroad.
 The Great Depression: Trade Protection abounds

 Colonies served two purposes:

 They were a place to dump these goods.
 They were a place where investments could be made.
 Colonies were a place where cheap labor and abundant natural
resources were available.
 Trade helped the colonial mother countries dominate and
subjugate the undeveloped colonial territories.
 Capitalist countries used trade to spread capitalism into
underdeveloped regions.
 The Great Depression: Trade Protection abounds

 During early years of colonialism, the underdeveloped

countries remained on the sidelines of international trade.
 They provided mother country with raw material and a market
to sell their manufactured products.
 These raw materials were converted to semi-finished and
finished goods and were sold to other powers and back to their
colonies.
 The modern imperialist use the same policies to subjugate the
developing regions of the world.
 The GATT and the Postwar Trade structure

In 1934, US president Franklyn Roosevelt pressed

Congress to pass the Reciprocal Trade Agreement
Act to help US economy recover.
Secretary of State Cordell Hull championed free
trade as a way of overcoming international conflict.
In 1944, during the Bretton Woods conference, the
allied countries tried to create an International Trade
Organization that failed because US backed out of it.
 The GATT and the Postwar Trade structure

In 1948, GATT became the primary organization

responsible for the liberalization of international
trade.
Today GATT has 130 members which also include
ex-Soviet states.
GATT sought to liberalize trade through a series of
multilateral negotiations called GATT rounds.
Most famous of these rounds was the Kennedy round
(1962-1967) where the US agreed to reduce
nonagricultural tariffs by 65%.
 The GATT and the Postwar Trade structure

GATT rounds were based on the principle of

reciprocity.
Most Favored Nation (MFN): One state gives
another state an advantage by lowering its tariffs on
that nation’s goods.
Tokyo round of GATT (1973 -1979) dealt with a
growing number of Non Tariff Barriers (NTB).
Included codes covering export subsidies,
countervailing duties, dumping, Government
purchasing practices etc. etc. on importers.
The industrialized Nations: Protectionism Entrenched

During the 1970s and 1980s, trade grew in numbers

but it also created problems for the industrialized
countries.
In spite of Tokyo rounds, the use and variety of trade
protectionist policies increased, making
international trade appear more (neo)mercantilist in
nature than ever.
There were three interrelated factors that
contributed to the rise in protectionist policies in the
1970s and 1980s.
The industrialized Nations: Protectionism Entrenched

The US was reluctant to assume the cost of hegemonic

leadership associated with keeping international trade
system open.
US political and economic hegemony declined in
relation to increase in political and economic influence
by it Western European partners, Japan, and the newly
industrialized countries.
Increased expectation by groups that either benefited
or were hurt by trade and the state that come under
pressure to manage trade in conjunction with other
parts of the economy.
 Strategic Trade

By mid 1970s Japan’s policies had started to pay off.

MITI (Ministry of International Trade and Industry)
helped pick corporate winners it and other
government officers felt would prosper in the
international economy from state assistance.
Strategic trade policies became synonymous
with state effort to make their international economy
more receptive to certain businesses or block the
access of competitive firms to domestic market.
 Strategic Trade

Strategic practices uses threats, promises, and other

bargaining techniques in order to alter the trading
regimes in ways that improve the market position
and increase the profits of national corporations.
The Omnibus Trade and Competitiveness Act of
1988 produced “Super 301,” legislation that required
trade officials to list “priority” countries that unfairly
threatened U.S. exports.
Comparative advantages are no longer fixed but can
be manufactured by states and firms.
 Strategic Trade

Today trade is controlled by multinationals.

Corporations have been able to develop the capacity
to minimize taxes, skirt trade barriers, and take
advantage of global shifts in comparative advantage.
Politically, in this environment fair trade replaced
free trade as a foreign economic policy objective of
many states.
The U.S. accuses Japan of not playing fair when it
comes to its trade practices, and intentionally
avoiding reform of its economy.
 Strategic Trade

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

Japan accounted for as much as 37% of that deficit.
After many years of bilateral negotiations, Japan
finally agreed to make some reforms and to import
more U.S. goods.
In 1986, U.S. pressed the Europeans to import more
U.S. agricultural products and to reform some of
their Common Market trade discrimination practices.
The U.S. threatened EU with a trade war and
retaliatory practices of its own.
 Strategic Trade

Multilateral trade talks are another forum that have

been used to solve trade disputes among the
industrialized nations.
One of these systems is GATT.
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

The U.S. and a number of other countries pushed for a

new round of GATT negotiations on trade.
The 8th GATT round – the Uruguay round – got
underway in 1986 in Punta del Este, Uruguay and was
completed on December 15, 1993.
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.
 Involvement of developing nations in the international trade system
and in the trade negotiation process. The Developing nations made
demands for more access to developed markets.
 The GATT Uruguay Round and birth of the WTO

The final agreement included measures to protect trade-

related intellectual property rights (TRIPS) covering such
items as copyrights, patents, and trademarks.
Trade related Investment Measures (TRIMS) was also
agreed upon in the Uruguay Round.
World Trade Organization (WTO) was also established in
the round.
WTO’s job was to act as a forum for negotiating new trade
deals to implement the new GATT agreement.
WTO had the power to use trade sanctions to enforce
judgments.
 LDCs and International Trade

Trade played a major role in the development

models LDCs were to choose from in the 1950s and
1960s.
LDCs should practice ISI (Import Substitution
Industrialization) until such time that the nation was
strong enough to trade on a more equal footing with
the industrialized nations.