International Relations Study Guide Test 3 Chapter 6 What s So Good About Trade The division of labor permits diverse segments of society to focus on different economic activities in ways that benefit society as a whole Comparative advantage applies the principle of specialization to countries like people they should do what is best Comparative advantage implies that a nation gains most by specializing in producing and exporting what it produces most effi ciently Absolute advantage is the ability of a country or firm to produce more of a par ticular good or service than other countries or firms using the same amount of effort or resources All that is necessary is a comparative advantage Why do countries trade what they do Heckscher Ohlin trade theory characterizes the basic economic characteristics of a country in terms of its factor endowments the material and human resources it possesses Land an essential input into agricultural production Labor typically understood to refer to undifferentiated and unskilled labor Capital for investment which refers to both machinery and equipment with which goods are produced and to the financial assets necessary to employ this machinery and equipment Human Capital which refers to skilled labor so called because the labor has been enhanced by investment in training and education Most North American and Western European nations industries today specialize in sophisticated manufactured goods such as complex machinery construction equip ment and commercial air crafts Regions with abundant labor produce labor intensive goods China and other rapidly developing labor rich nations concentrate on making products that require a great deal of labor such as clothing toys furniture and other simple manufactures This pattern of specialization leads to analogous trade patterns Example Poor countries with little capital import the capital intensive products they need form capital rich industrialized nations Countries that share a currency such as those in the european union that use the Euro are more likely to trade with each other Diplomatic and military relations between nations influence trade patterns Trade restrictions are the rule not the exception Some countries have very high barriers to trade others have much lower ones Protectionism the use of specific measures to shield domestic producers from imports has long been one of the most common government policies worldwide Trade Barriers impediments to the import of foreign goods Tariff a tax on imports levied at the border and paid by the importer A tariff raises the price of the import directly so that a consumer of the imported good has to pay more for it Quantitive Restriction or quota limits the quantity of a foreign good that can be sold domestically There are many other Non Tariff barriers to trade such as regulations targeted at foreign goods or requirements that governments purchase from national producers From the 1860 s to 1914 international trade among the principal industrialized na tions was quite free years of crisis and closure With the outbreak of World War I in 1914 international trade relations entered 30 Why do governments Restrict trade The domestic Political economy of protec tion Winners and Losers in International trade Three groups stand to lose from trade protection Consumer of imported good Exporters Citizens Economic interests and trade policy The Stolper Samuelson Approach The theory that protection benefits the scarce factor of production This view flows from the Heckscher Ohlin approach If a country imports goods that make intensive use of its scarce factor then limiting im ports goods will help that factor So in a labor scarce country labor benefits from pro tection and loses from trade liberalization The Ricardo Viner or Specific Factors Approach A model of trade relations that emphasizes the sector in which factors of production are employed rather than the nature factor itself This differentiates it from the Heckscher Ohlin approach for which the nature of the factor labor land capital is the principle consideration Domestic Institutions and trade policy The logic of collective action implies that smaller groups will be better able to or ganize than larger groups The same principle applies in matters of trade policy This tends to favor support ers of protection over supporters of trade liberalization in fact one simple expectation is that concentrated producers will win over diffuse customers in many circumstances In Western Euro countries most workers are members of a centralized labor fed eration that devises policy for virtually the entire labor movement In the United States labor unions tend to be organized by industry even if there were common trade policy interests among American workers it might be difficult for them to express those interests in a common way Costs benefits and compensation in National trade policies Even if trade liberalization make s a country s economy as a whole better off it can seriously harm groups within the country As the industrialized world substantially reduced trade barriers after world war II its governments implemented sweeping social policies that provide a safety net to workers farmers and others who might be negatively affected by the reopening of world trade The Bretton Woods System permitted even encouraged this compromise and it was quite successful at achieving its goal of an integrated world economy and extensive social welfare policies in the industrialized nations How do countries get what they want The international Political economy of trade Strategic interaction in international trade relations A government that raises tariffs dramatically for example might find other coun tries retaliating with even higher barriers to its exports so that the benefits to domes tic producers sheltered from imports might be cancelled out by costs to exporters frozen out of foreign markets Two or more governments involved in trade policy negotiations are engaged in strategic interaction and must take into account the behavior of other governments in trying to do their best Small numbers make it easier for govt s to monitor each others behavior there is likely to be less free riding among small groups of countries than in the world at large An extreme version of this observation is the theory of hegemonic stability which argues that the existence of a single very powerful nation facilitates the solution of problems of collective action
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