PS 203 Lecture Outline 11 18 13 Free Trade and Globalization Part I Learning Goals by the end of this lecture you should be able to 1 Describe how liberals realists and Marxists view the relationship between politics and economics 2 Describe whether liberals realists and Marxists focus on absolute gains or relative gains and why 3 Describe whether liberals realists and Marxists see economic transactions as positive sum or zero sum and why 4 Describe the effect of trade on war and peace for liberals realists and Marxists 5 Describe whether liberals realists and Marxists see comparative advantage as beneficial and why 6 Define the following key concepts and illustrate with an example where appropriate absolute gains relative gains positive sum game zero sum game comparative advantage strategic trade race to the bottom corporate blackmail outsourcing Free Trade and Globalization I Background How important is free trade to WA a 1 3 jobs in WA state are tied with international trade in some way b In per capita basis WA is the biggest exporter in USA i of new jobs are linked with international trade c The biggest importer of goods from Washington is China i Total WA state exports last year 76 billion II Liberalism and Free Trade a How do liberals understand wealth and power i Politics and economics should be separate 1 Do not interfere in the market ii Focus on 1 Absolute gains a Let the market work independently i Maybe have a little government regulation in order to have competitiveness and to break up monopolies b But you do not want government to interfere with the trade a Gains for the individual without reference to the gains that others b are making If you re concerned with absolute gains the question is not Am I better off than the other side in this agreement but rather Am I better off c Any economic exchange is a good thing i Even if others benefit more than others from the exchange 1 Not everyone benefits equally in the short run 2 Engage in an exchange where there is an absolute gain then in the end it tends to equal out and everyone gains about the same a Let markets function without government interference 2 Positive sum game a An interaction where when you gain I also gain iii Trade promotes peace 1 Mutual interest a Generates enormous economic benefits for both partners so you don t want to go to war because it disrupts the economics of it b How do liberals view comparative advantage 1 Comparative advantage a Theory that individuals can gain from economic interactions trade if in the absence of economic interaction they would have different relative costs for producing the same good b Underlies international trade and unpins the purpose of the international trade organization 2 Adam Smith a We are all better if we trade the things we need rather than try to produce things for themselves i Absolute advantage b This idea turned out to be suboptimal i The problem with absolute advantage is that if one person is best at producing everything then that person should produce everything and there isn t any trade ii Specialization is optimal generates mutual gains 1 A person should whatever she can produce more efficiently than others a People should specialize i Don t want to divide your time between lots of different economic specializations b Two states in the world Britain and Portugal i Only make two product wine and cloth ii It takes the British one hour to make one unit of cloth 3 hours to make a bottle of wine absolute advantage should make cloth comparative advantage iii Takes the Portuguese four hours to make one unit of cloth 4 hours to make a bottle of win wine comparative advantage iii Tariffs and subsidies are costly distort markets 1 Corn laws a Tariff on British corn i Had the effect of subsidized British corn 1 Imported British corn to pump up the British corn industry Suboptimal economy 2 3 Britain should not produce corn if they are not as efficient at producing corn as the French clearly are 2 3 Subsidies and tariffs hike up prices and generate wastes in a market Just let market work according to comparative advantage a US government pays 20 billion a year to American farmers b Brazil said that America subsidies hurt Brazil s economy i Brazil relies on agriculture industry c Countries get priced out of the US market 4 Makes firms in these others countries more efficient in the short term because they have to compete with USA a In long term these countries change from producing basic products to something much more complex 5 Free trade keeps the price of everything down III Realism and Free Trade a How do realists understand wealth and power i Argue that the state should and does subordinate economic interests to the national interests 1 Politics should determine economics ii Wealth ties into the security of the state iii Politics determines economics iv Focus on 1 Relative gains Do I gain more than the other side from this trade a b Only accept economic exchanges where you stand to gain more than your trading partners i Trade is kind of hard to do if both sides think this way 2 Zero sum game a A gain for me is a loss for you v Trade can cause war 1 Disputes over relative gains in economic exchange can actually tug states in the direction of war b How do realists view comparative advantage i Fear dependence of other 1 Comparative advantage generates dependence 2 Realists value sovereignty a All about preserving the national interests b You do not want to be dependent other states for things that are c important If you become dependent on something that is vital to your national security and you get your access cut off then you re in major trouble i State actually needs to intervene in the market sometimes especially regarding items vital to national and economic security ii Advocate strategic trade 1 The use of domestic subsidies and foreign tariffs to create a comparative 2 advantage for your own domestic industries in the global market Comparative advantage is just a gift of nature a Whether producing wine cloth or oil i All about luck b Realists say that today what creates comparative advantage is things like investments technological developments well education workforce and technical expertise i Things a government can decide to invest in or not to invest in 1 Comparative advantage is not just a given a Not just luck 2 You can create a comparative advantage ii Let national interest determine economic interests c Boeing i US first country to produce