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International Production and Trade
Lecture Outline
• International Production and Trade
• Theoretical Perspectives toward International
Trade
• Mercantilism
• Liberalism
• Marxism
• Historical Development of International Trade
Structure
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GATT
Increasing Protectionism
The Uruguay Rounds and WTO
The Doha Development Round
• Policy Controversies over International Trade
International Production and Trade
• International production and trade structure is
the set of relationships between states,
international organizations (IOs), international
businesses, and nongovernmental
organizations (NGOs) who together influence
and manage international rules and norms
related to what is produced, where, by
whom, how, for whom, and at what price.
International Production
• The recent shift of production from developed
to developing nations
– Outsourcing
– Increasing foreign direct investment in developing
countries
– This has a positive impact on the volume of
international trade
International Trade
• Comparative Advantage: The limitations of scarce resources
mean that no nation can produce as much as it wants of all
goods and services; opportunity cost must therefore be
considered.
• Opportunity cost is the value of the best alternative when a
choice is made.
• The theory of comparative advantage holds that a nation
should produce those goods that have a lower opportunity
cost than the same goods produced in other countries.
Rationale for Free Trade: Mercantilism,
Liberalism, Marxism
MERCANTILISTS
International Trade 
Wealth and power
Sometimes Good Sometimes Bad
LIBERALS
Comparative Advantage
 International Trade
Always Good
(NEO)MERCANTILISTS
•Comparative advantage is a
relative term. States can
change advantages through
strategic trade policies
•States should protect society
MARXISTS
Global Inequalities
International Trade 
Maintenance of Global
Inequalities
Generally Bad
Post-WWII International Trade Structure
1. Bretton Woods System and GATT (1947-1979)
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The GATT grew out of an agreement reached in Bretton Woods, New
Hampshire (1944) to create an international institution that would
promote free trade.
The failure of the International Trade Organization (ITO)
1947 the General Agreement on Tariffs and Trade (GATT) was instituted
based on the principle of reciprocity and
nondiscrimination,
(the most favored nation)
GATT negotiating “rounds” were successful in lowering trade
barriers on manufactured goods, but not on some goods (especially
agriculture)
Post-WWII International Trade Structure
2. Increasing Protectionism (1980-1993)
Increasing trade deficits in the U.S
The rise of Europe and Japan
Strategic trade policies grew in importance,
especially in the 1980s and 1990s.
–The idea of strategic trade policy is that comparative
advantage is not fixed, but is dynamic.
–Effective state policies can create comparative advantage.
Post-WWII International Trade Structure
3. The Uruguay Round and the WTO
In 1986, GATT members began new negotiations to reduce tariffs– the
Uruguay Round. The talks focused on several areas.
The problematic areas have been
Services and Intellectual Property
Agriculture
Uruguay Round established the WTO to implement
enforcement mechanisms for more effective the global
trade rules
Post-WWII International Trade Structure
The WTO
–The WTO took over the GATT’s role in 1995.
• GATT
• GATS (the General Agreement on Trade in Services)
• TRIPS (the Agreement on Trade Related Aspects of Intellectual
Property Rights)
–WTO has enforcement power through its Dispute Settlement Panel
•to interpret WTO agreements and
•authorize sanctions on member-states that violate trade rules.
–The WTO became the new target for anti-globalization movements
Post-WWII International Trade Structure
4. The Doha Development Round
• The Problems of between North and South
• The WTO launched a new round of talks at Doha, Qatar in
2001. The round has not been completed yet.
• The agenda includes
–cutting tariffs on industrial goods and services,
–phasing out subsidies to agricultural producers,
–reducing barriers to cross-border investment, and
–limiting the use of anti-dumping laws
http://www.youtube.com/watch?v=f7eDiXaIXm8
•DISCUSS: Why is agriculture the elephant in the room?
The Growth of World Trade and
Wealth, 1950–2010
Copyright © 2009 Cengage
Learning. All rights reserved.
12
The Volume of Trade Flows Between Major
Regions, 2005-2008
Copyright © 2009 Cengage
Learning. All rights reserved.
13
Controversies over Trade Policies
Why do governments intervene in international trade?
Political Arguments
• protecting jobs
• protecting industries related to
security
• foreign policy purposes
• protecting the human rights
Economic Arguments
•Protecting infant industries
•Strategic trade policy
Tools of Trade Policy
•Tariffs
• Subsidies
• Quotas (Export and Import)
• Currency Devaluations
• Nontariff barriers
• Dumping and Antidumping policies
Critiques of WTO
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Impairing State Sovereignty
Serving the Interests of the Great Powers
Being Undemocratic in its Decisions
Ignoring Issues of Development, Human Rights and
Environment
CLASS DISCUSSION
Do you think the WTO should consider
human rights when managing
international trade relations? Is not it in
the end an organization to manage trade
relations?
Financial Globalization and
International Trade
The classical liberal political
economy of England and Scotland:
• In the long run, it is beneficial to all if markets are
allowed to operate freely with each other.
Why is the market good?
• As the most efficient means of organizing
human production and exchange (an ‘invisible
hand’ guiding and coordinating economic activity).
Some of the advantages of
international markets over national
markets:
– trade across national borders, which in turn generates
wealth and brings about prosperity;
– opportunities for economic co-operation that brings
about interdependence among states;
– International capital markets, allocate money more
efficiently than local ones.
The argument in favor of free
markets speaks:
– against protectionism, which, from a liberal
perspective, is a consequence of states acting
according to short-sighted and perverse conceptions of
the ‘national interest’.
– against mercantilism (the dominant trade practice at in
the early 1800s).
Two important limitations of
markets:
• Built-in inequality of participants.
• Periods of irrational behavior and speculative
excess (market inefficiencies particularly in
financial markets).
The great depression: led to the
economic collapse of 1929-1934:
There are important similarities with the current
crisis:
• The banking crises so crippled credit markets that lending
virtually stopped.
• Depositors would not keep money in banks fearing that
banks would close. So a run on the banks developed at the
first sign of difficulties.
•
The US federal government
dramatically increased its role
during the New Deal:
It imposed significant controls on trade.
• There was a decreased reliance on markets and more on
state regulation and state-induced consumption (large
public projects, etc.)
• Regulated economy.
• Demand-side economics (associated with British economist
John Maynard Keynes)
Markets are imperfect
• International economic order is imperfect.
• All markets operate within a political framework.
• To the extent to which international power structures are
supportive of global markets, global markets are likely to be
sustained.
• But international power structures are fragile and prone to
instability, which often undermines the stability of markets.
In order to have international trade you
need to have stable monetary
relations:
• The Gold standard (the period of classical
liberalism, the first attempt to expand
international trade; roughly between 1860s and
1914) Created a system of fixed exchange rates
(and helped both investment and trade).
The Bretton Woods System after
WW2
• created the IMF, the World and the GATT (the set or
rules, norms and values);
• system created the gold-dollar regime (fixed
exchange rate system).
International Monetary Fund
• Its primary role was to prevent the global economic crisis that
engulfed the world during and after the Great Depression of the 1930s:
• 1. Monitor a new system for valuing national currencies, the dollargold standard.
• 2. Make short-term loans to countries experiencing balance-of-payments
problems;
• 3. Compile an annual report on each member country's economy.
Originally, the IMF was:
• 1. based on a recognition that markets often did not work
well – that they could result in massive unemployment and
might fail to make needed funds available.
• 2. founded on the belief that there is a need for international
pressure on countries to have more economic policies that
promote expansion.
The triumph of the Keynesian
(“demand-side economics)…
• over the laissez faire economics (both
domestically and internationally).
IMF:
• 1. Monitor a new system for valuing national
currencies, the dollar-gold standard.
• 2. Make short-term loans to countries experiencing
balance-of-payments problems;
• 3. Compile an annual report on each member
country's economy.
International monetary relations stabilized,
international trade was liberalized:
• The liberalization of world trade was the most important
achievement of the Bretton Woods system.
• After six months of negotiations, the original GATT members
signed over a 100 agreements, affecting more than 45 thousand
tariffs that covered about half of world trade.
• This was a shift in the direction of global liberalization of
trade.
The Bretton Woods system
delivered the goods:
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economic growth,
low unemployment (Unemployment averaged just 3 percent
in the main OECD countries, compared to 5 percent during
the gold standard and 8 percent in the interwar years).
stable prices.
relatively free trade,
stable currency values,
and high levels of international investment (but mostly
across the Atlantic).
Postwar (1950-1973) economic
growth was extraordinary
everywhere:
• The advanced capitalist nations as a whole grew three
times as fast as in the interwar years and twice as fast as
before World War One.
• In the glory years of classical liberalism before 1914 world trade
volume doubled every 20 to 25 years.
• After 1950 world trade volume doubled every 10 years.
This was a political arrangement.
• It was a compromise dictated by the needs of the day.
• Back then the US was dominant and there was a common
threat around which to unite. (Even with those conditions, it took
the US almost four full years from the end of World War II until
Marshall Plan money really started making its way into Europe).
• It took a depression, the Second World War, and the
beginning of the Cold War to motivate real rather than
symbolic actions concerning the creation of a functioning
international community, at least the western branch of such
a community.
Some examples of the political
arrangements involved:
• In monetary relations, European countries tightly controlled
their currencies, strictly limiting the degree to which private
citizens could convert national money into gold or dollars.
• The US removed most of its trade barriers but accepted
European and Japanese protection.
• The US provided significant funds through the Marshal
plan.
Post WW2 alternative models of
economic development:
• 1. Import Substitution Industrialization (ISI): government
involvement (like that in W. Europe and North America in the
19th century) relied on trade barriers to stimulate national
industry -- in response to the first limitation of free markets,
namely, inequality of participants)
• 2. More radical: state intervention but also redistribution of
wealth and virtual elimination of private ownership -- largely
addressing the second limitation of free markets, excesses
in financial markets).
Two trends, undermined the Bretton
Woods system:
• 1. the restoration of international finance in the
course of the 1960s;
• 2. the increasing pressure on the American
dollar.
The push for the New Economic
International Order
• international economic regimes that would REGULATE
rather than entirely ABOLISH national interventions;
• greater access to OECD markets.
• for aid similar to what the US had given to Europe;
• higher prices for exports.
The end of the Breton Woods
system:
• The Breton Woods System eventually broke down because of a
decline in the power and influence of the US.
• The end of the B-W system marked the end of the rules dear to
the US and opened up the room for the reconstruction of the
economic order.
• This decline led to the switch to a regime of floating exchange
rates from 1971.
What happened to alternative
models?
1. The typical ISI economy went through periodic balance of
payments crises.The government restricted imports but
there was an ongoing need for imported goods. Spending
chronically outpaced government revenue, and these
budgets deficits were usually covered by printing money.
2. The communist world also faced increased difficulties:
Economic growth in the centrally planned economies
slowed continually over the late 1960s and early 1970s.
The push for the New Economic
International Order:
• The U.S. imagined postwar international economic institutions as
progressively abolishing national restrictions.
• States that had been wealthy before the War (colonial powers) went
along because the US gave the previously rich market states the
opportunity to reconstruct their economies (through the Marshall
Plan).
• Latin American and the independent and colonial areas in Asia and
Africa accepted the system, because they had no choice (and were
not politically organized at the time).
• Third World governments felt cheated out of the trade-induced
growth that the rich nations enjoyed in the 1950s and the1960s.
Group 77
• It pressed for changes in the rules of the international economic system to
make it easier for poor countries to participate).
• Third world countries such as Argentina, Brazil, India, and Lebanon argued for:
international economic regimes that would REGULATE rather than ABOLISH
national interventions;
greater access to OECD markets;
for aid similar to what the US had given to Europe.
• This set of proposals (put forth over the 1970s) came to be known as the New
International Economic Order (NIEO).
Things were getting complicated for
the US…
• On top of this political pressure from the Third World countries…
• Individual oil producers and, later OPEC as a whole, jumped on
the industrial West’s growing oil dependence.
• The problem was political.
Two important material changes:
• First: the rise of the high-tech companies (Hewlett Packard,
Microsoft, ATT) increasingly interested in global markets.
• Second: there was growing popular concern about high
unemployment, slow growth, and inflation, which left voters and
others open to new policies.
The rise of “the supply-side”
economics:
• All of these factors combined pushed a pendulum away from
Keynesian economics and towards freer markets.
• Milton Friedman and his followers: Their approach came to
be called "market fundamentalism," since it saw "freer"
markets as the solution for every economic problem.
• You jump-start the economy by privatizing (UK), cutting taxes,
and deregulating.
Reagan came into office in 1981 with
several objectives:
• Domestic level: antiinflationary policy.
• International level: the push in the direction of regional trade
agreements. The larger blocs: made exports cheaper to
produce, allowed firms to grow, made it easier to attract foreign
investment, and encouraged the consolidation of banks and
corporations. Regional integration (the EU, NAFTA,
Mercosur) in the 1990s became an important component
part of the overall process of economic globalization.
The Reagan administration tried to:
• 1. undermine the Third World alliance;
• 2. undermine the UN system;
• 3. privilege institutions that encourage market
discipline on Third World development policies.
During the 1990s the issue was decided in
favor of supporters of global integration.
• From an economic point of view N. America and W. Europe
defined the world’s course (1/10 of the population but half
the world economy and 2/3 of world trade).
• There was hardly universal agreement on free trade, but official
policy came to accept it as a matter of course.
The Washington consensus:
• the use of international financial institutions (the IMF
and the World bank) to promote free markets and
the supply side economics.
International financial institutions
• promoted economic liberalization in the developing
world (things such as trade and capital markets)
with a corresponding deregulation of all aspects
of the economy.
•
IMF (and the WB) structural
adjustment programs required
governments
to:
1. eliminate uncompetitive nationalized industries;
• 2. cut subsidies to consumers and eliminate
services (essential food-stuffs, steep reductions in
spending on health, education, and other social
services).
• 3. lift restrictions on capital movement.
The direction of financial
globalization will change in three
important ways:
• First, Western finance is going to be regulated.
• Second, the balance between state and market is
going to change in other economic areas.
• Third, the US is likely to lose its economic clout and
intellectual authority.
International trade negotiations:
• The advanced industrial countries push the opening of the
markets in the developing countries to their industrial
products.
• At the same time, they continue to keep their markets closed
to the products of the developing countries, such as textile and
agriculture.
• While they preach that developing countries should not
subsidize their industries, they continue to provide billions in
subsidies to their own farmers.
Official trade negotiations:
• The last time official trade negotiations were successful was in
1994 the year when the World Trade Organization was created:
125 nations agreed to a significant drop in trade barriers.
• In 1999, the attempt to launch a new round of trade negotiations
crashed in Seattle.
• In 2001, the trade ministers met again in Doha, Qatar, and
decided to initiate a new round that, they agreed, would be
concluded in four years.
Regionalism and Global Trade:
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The Asia-Pacific Economic Co-operation forum;
The Association of South-East Asian Nations
EU,
NAFTA
Mercosur
A surge in trade despite the failure
of WTO negotiations for two
reasons:
• Technological innovations—from the Internet to
cargo containers—lowered the costs of trading.
• Political environment more tolerant of
openness.