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Today’s puzzle:
If states benefit from economic co-operation and free trade is expected to maximise
states’ welfare...
o Why do states have trade barriers
o Why is economic co-operation often hard to achieve?
Collective action problem
Today
Understanding the post WWII international economic order
o International trade: key theoretical approaches
o International trade: key concepts
o International trade: key institutions (IMF, WB, WTO)
Motivating example: shifting into a new international economic order?
o China’s Asian Infrastructure Bank and the One Belt Road Initiative
Mercantilism
States are the main actors in the international political economy
Economic relations are inherently conflictual (zero sum game)
Politics drives economics
Trade’s goal is to maximise state power
Liberalism
A focus on individualism households and businesses
The nature of economic relations is harmonious and interests are reconcilable
(positive sum game)
Economics drives politics
Trade’s goal is to maximise global welfare
Marxism
Focus on socio-economic class and social forces (Bourgeoisie owns the means of
production, proletariat are exploited as labourers)
Economic relations is inherently conflictual (zero sum game)
Economics drives politics
Trade’s goal is to maximise class interests
(Socialism: public and not private ownership of property, natural resources and the
means of production as the basis for a state’s economy)
Key concepts
Free Trade
Definition: the free movement of goods between countries as much as possible
unimpeded by government-imposed barriers to import and export of goods (also
called laissez-faire)
Adam Smith on comparative advantage
“if a foreign country can supply us with a commodity cheaper than we ourselves can
make it, better buy it of them with some part of the produce of our own industry,
employed in a way in which we have some advantage.”
o Specialisation and the division of labour
o Leads to efficiency (production of the best quality product for the lowest
price)
Generates comparative advantage determined by:
o A country’s inherent endowments
o The endowments of that country’s trade partners
Absolute vs. comparative advantage
AA- one country is more efficient than another at producing one product
CA- even if a country is not the most efficient at a given product when compared to
other countries, it should specialise in what it does best
o Producing other products less efficiently wastes resources
Factors of production
Land: farming or natural resources
Labor: skilled or unskilled
Capital: human or financial
Hecksher-Ohlin theorem
A country is best off specialising in producing goods that it is comparatively best at
producing and exchanging these goods for those it is comparatively less adept at
producing.
o Focus on relative productivity rather than absolute productivity
Abundant FOP are those inputs that a country possesses in greater proportion than
the world average
Scarce FOP are those possessed in smaller proportion than the world average
o E.g. AUS today is relatively abundant in economic and human capital,
intermediate in land and relatively scarce in unskilled labor
o AUS than exports capital and human capital intensive goods and imports
goods that are relatively intensive in unskilled labor
Stolper-Samuelson theorem
Abundant FOP (and producers who use them) gain from freer trade
Scarce FOP ( and producers who use them intensively) lose from freer trade
As export production expands, demand for the abundant FOP rises relative to
demand for the scarce FOP
Free trade will lead to a contraction of the scarce-factor-intensive industry
International trade interactions: a collective action problem
Everyone wants to have consumers to sell to
No one wants others to have access to their own consumers
Mutual liberalisation resembles a prisoner’s dilemma
And a collective action problem
Domestic tensions are inevitable
All states must balance:
o The desire to have to material benefits of an open economic system
o The pressure to promote or defend state or sector interests
There is a clear collective action problem in managing this tension
o Ideally, governments would compensate trade’s losers with part of the
winner’s trade gains
Protectionism
Definition: a policy of protecting domestic industries against foreign policy
competition by means of tariffs, subsidies, import quotas or other restrictions or
handicaps placed on the imports of foreign competitors
Trade restrictions
Tariffs: taxes on the import or export of a good
Quotas: limits on the volume of values of goods that can be traded
Nontariff barriers: barriers that are not taxes
o Legislated preferences
o Health and safety standards that target foreign products
o Antidumping penalties
Subsidies: government payments to business producing goods and services to export
Prohibitions: some exports are prohibited. Often these are sensitive military
technologies
Tensions between producer and consumer interests
Producers have concentrated interests in protecting their businesses and receive
significant benefits from protection (e.g. profits, jobs)
o Expected to be in favour of some protectionist policies
Consumers have diffuse interests (e.g. lower prices) in free trade
o Generally in favour of free trade
Trade barriers redistribute income
With less competition, domestic producers can charge more for their goods and
services
Due to collective action problems, producers often enjoy greater political influence
than consumers
For domestic producers seeking trade protection, the benefits are concentrated and
high
This helps them overcome collective action problems to mobilise for economic gain
Protectionism is costly for consumers, who have to pay higher prices
Does free trade promote prosperity and opportunity? (Costs and benefits)
YES
o The market is the only reliable means of generating wealth
o Everyone wins (absolute gains). The rich get richer but the poor get less poor
o Economic freedoms promote other freedoms
NO
o Deepens poverty and inequality (relative gains)
o Hollows out politics and democracy
o Corruption of consumerist materialism: cultural and social distinctiveness is
lost
China’s Asian Infrastructure Investment Bank and the One Belt Road Initiative
Asian Infrastructure Investment Bank (AIIB)
Key purpose
o Multilateral development bank
o Aims to support infrastructure development primarily in the Asia-Pacific
region
Grown from 57 founding member-states in 2016 to 84 member-states as of April
2018-04-17
One Belt One Road initiative (OBOR)
What is the OBOR?
o An initiative from China’s president Xi Jingpin to improve China’s land and sea
connectivity with the rest of the world
o First mentioned in speeches by Xi in 2013
o Opens new trade routes that span from China across central Asia to EUR, to
the Mid-East, SE Asia and sea routes connecting CHN ports to EUR and the
South Pacific
o Investment in road and sea infrastructure such as highways, bridges and
waterways
o Joint-goal of developing under-developed regions in CHN, and contributing to
development across the SE and Central Asian region
International support for OBOR
o EIB, Britain etc
Global interconnection, increased cooperation and mutual benefit? Or a bid for
hegemony?