POSC 2200 – International Political Economy Russell Alan Williams Department of Political Science

Unit Six: International Political Economy "Trade" Required Reading: Globalization of World Politics, Chapters 16 and 27. Globalization of World Politics, Chapters 16 and 27.Outline: 1. Introduction - IPE, Globalization & Inequality 2. Trade Theory 3. Institutions & Organizations

1) Introduction -IPE, Globalisation & Inequality : "International Political Economy": Study of interrelationship between politics and economics/states and markets Increased interest since 1970s - why? Increased interest since 1970s - why? 1) Citizen expectations of prosperity? 2) Politics...-Triumph of economic liberalism -Success of international economic orgs. -NGO's have politicized debates about economic relations

3) Growth in “ interdependence ” : People are increasingly impacted by decisions in other jurisdictions.... E.g. “ Financial Crisis (2008) ”  US “ Mortgage Backed Securities ” / “ Toxic Assets ” devastated public finances around the world.... Mismanagement costs USD $11.9 Trillion (!) Mismanagement costs USD $11.9 Trillion (!) Highlights interconnectedness of economic problems – need for cooperation, institutions and governance Highlights interconnectedness of economic problems – need for cooperation, institutions and governance

Analytical concerns: Analytical concerns: 1) The decline of the state.... How do we provide economic regulation in the 21 st Century? How do we provide economic regulation in the 21 st Century? 2) Disparity and inequality.... Is the world becoming more economically unequal? Is the world becoming more economically unequal?

2) Trade Theory: Two major theories of trade: Two major theories of trade: Economic Liberalism = “ Liberal Tradition ” = “ Free Trade ” = “ Liberalization ” Economic Liberalism = “ Liberal Tradition ” = “ Free Trade ” = “ Liberalization ” Or... “ Mercantilism ” = Protectionism and realism “ Mercantilism ” = Protectionism and realism

Liberal Tradition: Rational individuals, expressing their demands through global free markets leads to the most efficient distribution of resources Liberal Tradition: Rational individuals, expressing their demands through global free markets leads to the most efficient distribution of resources Modern variant = often called “ Neo-liberalism ” Modern variant = often called “ Neo-liberalism ” = Support for “ Free Trade ” = Support for free investment E.g. “ Comparative Advantage ” : States should produce what they are most efficient at and trade surplus production for other needs Everyone will be made better off = “ Absolute Gains ” Everyone will be made better off = “ Absolute Gains ” Powerful “ proof ” of the benefits of free trade Powerful “ proof ” of the benefits of free trade

Comparative Advantage & Free Trade Example: Portugal & England (30 labour units each) Portugal & England (30 labour units each) Portugal requires less labour to produce both wine and cloth Portugal requires less labour to produce both wine and cloth Needs 2 units of labour to make 1 wine unit Needs 2 units of labour to make 1 wine unit Needs 4 units of labour to make 1 cloth unit Needs 4 units of labour to make 1 cloth unit More “ efficient ” at both More “ efficient ” at both Why should Portugal trade with England?

Without trade: Wine Cloth Portugal(18)/2=9(12)/4=3 England(15)/5=3(15)/5=3 Total =12 Wine6 Cloth

With trade & specialization: Wine Cloth Portugal(30)/2=15(0)/4=0 England(0)/5=0(30)/5=6 Total =15 Wine(+3)6 Cloth Total output higher = absolute gains Total output higher = absolute gains

Problems? Is there some advantage to specializing in one activity over another? E.g. Why did England become a great power?

“ Mercantilism ” : “ Mercantilism ” : More Realist approach to economics More Realist approach to economics States concerned about “relative gains” and the distribution of benefits from trade etc. States concerned about “relative gains” and the distribution of benefits from trade etc. Makes free trade less likely.... Makes free trade less likely.... Key modern goals? Key modern goals? Maintain positive “ balance of trade ” Maintain positive “ balance of trade ” Promote industrial development – key to military power and state survival Promote industrial development – key to military power and state survival Source: Friedrich List Source: Friedrich List

Friedrich List – Mercantilism & Economic Nationalism: “Free trade” benefits the “Free trade” benefits thestrong Weak states rely on commodities Weak states rely on commodities Marxists and Dependency Theorists: natural resource dependency = poverty Marxists and Dependency Theorists: natural resource dependency = poverty States challenging status quo should: States challenging status quo should: Adopt high tariffs (protectionism) and support national industries Adopt high tariffs (protectionism) and support national industries Examples? Examples? German Industrial Development? German Industrial Development? Canadian National Policy? Canadian National Policy? Modern Chinese economic policy? Modern Chinese economic policy?

Friedrich List – Mercantilism & Economic Nationalism: Problems? Collective action = rational for all states to be closed to imports Collective action = rational for all states to be closed to imports =No trade and specialization =Inefficiency! For small states in particular

3) Institutions and Organizations: Rationality(?) of “mercantilism” & collective action problems mean free trade must be pursued through institutions and treaties Rationality(?) of “mercantilism” & collective action problems mean free trade must be pursued through institutions and treaties Despite what liberals in economics say, states don ’ t unilaterally engage in free trade.... Despite what liberals in economics say, states don ’ t unilaterally engage in free trade.... Since WWII - complex web of agreements promoting free trade – focused on the emergence of a global trade “ regime ” Since WWII - complex web of agreements promoting free trade – focused on the emergence of a global trade “ regime ”

The Global Trade Regime: “ General Agreement on Tariffs and Trade (GATT) ” 1947: Promote free trade in goods Promote free trade in goods Principles: Principles: “ Nondiscrimination ” “ Nondiscrimination ” “ Most Favored Nation (MFN) ” “ Most Favored Nation (MFN) ” Organization: Organization: 8 Rounds of multilateral talks - Each resulted in tariff cuts 8 Rounds of multilateral talks - Each resulted in tariff cuts Problems? Need for more effective organization Problems? Need for more effective organization Free riding - Role of US Free riding - Role of US Enforcement - Role of US Enforcement - Role of US New issues - Role of US New issues - Role of US

“ World Trade Organization ” (WTO) 1995: Very few non-members Very few non-members Based on GATT Based on GATT Includes system of enforcement/dispute resolution Includes system of enforcement/dispute resolution Covers new areas protecting investment and interests of MNC ’ s Covers new areas protecting investment and interests of MNC ’ s Provisions: Provisions: GATT GATT General Agreement on Trade in Services (GATS) General Agreement on Trade in Services (GATS) Trade Related “ Intellectual Property Rights ” (TRIPS) Trade Related “ Intellectual Property Rights ” (TRIPS) Key Point: WTO involves major limitations on states ’ sovereignty Obey rules or leave = “ Single Undertaking ” Obey rules or leave = “ Single Undertaking ”

The WTO and Sovereignty? – Canada/US Magazine Dispute 1995 Split Run Magazines: US magazines with limited Canadian content produced for Canadian market. Split Run Magazines: US magazines with limited Canadian content produced for Canadian market – Canada implemented a tax (80%) on advertising revenue of split runs 1995 – Canada implemented a tax (80%) on advertising revenue of split runs US WTO Complaint: US WTO Complaint: Canada: Advertising covered by GATS = Canada had not committed to liberalize Canada: Advertising covered by GATS = Canada had not committed to liberalize WTO: WTO: Magazines were “ goods ”, covered by GATT Magazines were “ goods ”, covered by GATT National Treatment = Canada in violation National Treatment = Canada in violation

The WTO and Sovereignty? – Canada/US Magazine Dispute 1995 Canada refused to accept ruling Canada refused to accept ruling US threatened retaliation US threatened retaliation Outside of WTO process Outside of WTO process Result: Negotiated settlement Result: Negotiated settlement favoring US favoring US Implications: Implications: Sovereignty? Sovereignty? Role of power? Role of power? Other examples (food safety, environmental protection!) - right to free trade “ trumps ” national rules Other examples (food safety, environmental protection!) - right to free trade “ trumps ” national rules

Problems facing trade regime? 1. Challenge of the South Benefits of WTO uneven Benefits of WTO uneven E.g. Liberalization of agricultural trade? E.g. Liberalization of agricultural trade? 2. Challenge from NGO ’ s Opposed to end of “sovereignty” Opposed to end of “sovereignty” 3. Decline of the US Who can coordinate trade liberalisation? Who can coordinate trade liberalisation? 4. Regionalism States turning to regional trade agreements because WTO ineffective (E.g. NAFTA and EU) States turning to regional trade agreements because WTO ineffective (E.g. NAFTA and EU)

6) For Next Time... Unit Six: International Political Economy "Finance" Required Reading: Globalization of World Politics, Chapters 16 and 27. Globalization of World Politics, Chapters 16 and 27.