International Political Economy #6

The International Politics of Trade

W. K. Wineco | IPE #6: International Politics of Trade

raf t
William Kindred Wineco
Indiana University Bloomington

September 17, 2013

1/23

The Core and Periphery

Path dependence plus agglomeration also implies increasing inequality over time.

Rich get richer, i.e. capture more of the trade market.

This leads to interesting international trade politics (more later). Also interesting domestic trade politics.

If disadvantaged, encourage immigration. If disadvantaged, try to subsidize locals. If disadvantaged, try to protect locals.

Note that in many respects, this trade is anti-economic.

At least in terms of classical economics.

Develop a comparative advantage; dont just rely on endowments. The importance of technology and catch-up growth.

W. K. Wineco | IPE #6: International Politics of Trade

raf t

2/23

Geography

Transaction costs also matter.

Much world trade is with countries close to each other.

U.S. export more to Canada and Mexico than any other countries. Imports are same, except for China. Intra-Europe trade is very high as well.
Regional integration eorts have grown, in part for these reasons: improve eciency, improve growth.

W. K. Wineco | IPE #6: International Politics of Trade

raf t
3/23

Is Independence a Good Thing?

Domestic politics also emerges in response to dependence. Do we trust others enough to rely on them? Esp in critical sectors (e.g. food, energy)?

Many citizens seem to want independence (i.e. local control) even if its less ecient. Drill baby drill.

W. K. Wineco | IPE #6: International Politics of Trade

raf t

4/23

The Trade Network, Visualized

W. K. Wineco | IPE #6: International Politics of Trade

raf t
5/23

The Trade Network, Visualized Again

W. K. Wineco | IPE #6: International Politics of Trade

raf t
World trade, 1996-2000
ESPON and Project 3.4.1,UMR Gographie-Cits, UMS RIATE, 2006
Bilateral international trade flows 1996-2000 (with EU25 aggregated)
Source: PC-TAS (1996-2000)

Share of world bilateral trade of each state

International flows measured in % of world bilateral trade

1%

4%

16 %

0.1%

0.2%

0.5%

1.0%

2.0%

5.0 %

6/23

From Domestic to International

States have preferences over trade policy, and they bargain in the international arena. States at the core of the trade network have power. States with large economies have power.

W. K. Wineco | IPE #6: International Politics of Trade

raf t
7/23

Constructing Preferences

Remember: trade has diuse benets and concentrated costs.

Politicians want to capture the gains, but domestic interest groups lobby for protection against costs.

Mancur Olson: The Logic of Collective Action

State preferences: open trade in comparatively advantaged goods; closed trade in comparatively disadvantaged goods. This can lead to contentious bargaining.

If we think about trade politics between two countries it might resemble a Prisoners Dilemma.

W. K. Wineco | IPE #6: International Politics of Trade

raf t

8/23

The Trading Game

Row

Payos are simple rankings: higher = better.

Row player receives the rst (bottom-left) payo.

W. K. Wineco | IPE #6: International Politics of Trade

raf t
Column Trade Protect Trade 2 0 3 1 2 3 0 1 Protect
9/23

The Trading Game

Row

Dominant strategy is to defect (esp. during economic downturns).

Nash equilibrium: neither side can improve its payo by unilaterally switching strategies. Tendency is for protection.

W. K. Wineco | IPE #6: International Politics of Trade

raf t
Column Trade Protect Trade 2 0 3 1 2 3 0 Protect 1
10/23

Assumptions of the Prisoners Dilemma

In this game, there are only two players.

In the real world there are others.

In this game, there is only one issue.

In the real world issues can be linked.

In this game, there is no communication.

In the real world states can bargain openly.

In this game, there is no time.

In the real world there is a shadow of the future.

W. K. Wineco | IPE #6: International Politics of Trade

raf t
11/23

Developing a Basic Logic

Despite this, the simple Prisoners Dilemma gives us some insight into why states might pursue protectionism. If one state protects, others are likely to reciprocate. This can lead to a trade war.

That will lead to a loss of the gains from trade.

It can also breed nationalism, and even increase chances of military conict.

W. K. Wineco | IPE #6: International Politics of Trade

raf t

12/23

The Great (Trade) Depression

W. K. Wineco | IPE #6: International Politics of Trade

raf t
13/23

The Great Depression Spiral

W. K. Wineco | IPE #6: International Politics of Trade

raf t
14/23

Lessons from the Interwar Years

Peace depends on the stability of the global economy.

Sec. of State Cordell Hull: Free trade dovetails with peace.

Several ways to overcome Prisoners Dilemma Nash equilibrium:
1 2

Outside intervention by a powerful third party (hierarchy ). Provide forum for diplomacy, plus commitment mechanisms (institutions ). Build a system of inter-linked economies based on reciprocity to facilitate trade over time (interconnectedness ).

U.S. used its postwar power to push for institutionalization that could promote interconnectedness.

W. K. Wineco | IPE #6: International Politics of Trade

raf t

15/23

The International Trade Organization

Intended to be analogous to IMF.

U.S refuses to ratify, because Congress thought it would be giving up sovereignty.

(They were right; that was the whole point.)

But there was another option.

B/c the U.S. wasnt in, the ITO never came into force.

W. K. Wineco | IPE #6: International Politics of Trade

raf t

16/23

The General Agreement on Taris and Trade

Originally negotiated under the auspices of the U.N.

Came into force in 1947. Lasted until 1994 (until replaced by WTO). 23 countries originally signed: essentially U.S. and Western Europe. Original agreement included 45,000 concessions on taris.

Focused on Western interests, esp manufacturing (their comparative advantage). Much less on labor and agriculture.

Over time, more issues were addressed in subsequent bargaining rounds and more countries joined.

W. K. Wineco | IPE #6: International Politics of Trade

raf t

17/23

Taris

W. K. Wineco | IPE #6: International Politics of Trade

raf t
18/23

Members

W. K. Wineco | IPE #6: International Politics of Trade

raf t
19/23

The Rise of PTAs

Other trade institutions were also formed that were multilateral but not global. These are called preferential trade agreements. They are often regional in scope. E.g., European Union, NAFTA.

Easier to negotiate, because fewer countries involved. Do they undermine global eorts?

W. K. Wineco | IPE #6: International Politics of Trade

raf t

20/23

The Increase in PTAs

W. K. Wineco | IPE #6: International Politics of Trade

raf t
21/23

The Distribution of PTAs

W. K. Wineco | IPE #6: International Politics of Trade

raf t
22/23

Summing Up and Looking Forward

The goal was to promote cooperation over conict.

Manage the system through an agreed-upon, open, multilateral, consensus-based process. Build interconnectedness, which would build over time through reciprocity.

But the U.S. was at the core of the system, and would stay there.

The WTO has become key to this system. Well study that next time.

W. K. Wineco | IPE #6: International Politics of Trade

raf t

23/23