Free Trade Open Markets Winners Losers January 13 2014 1 Grieco Joseph and G John Ikenberry 2003 State Power and World Markets The International Political Economy W W Norton chapter 2 2 McCulloch Rachel 1993 The Optimality of Free Trade Science or Religion American Economic Review 83 2 May 367 371 3 Irwin Douglas A 1997 Against the Tide An Intellectual History of Free Trade Princeton University Press Conclusion 4 Irwin Douglas A 1993 Multilateral and bilateral trade policies in the world trading system an historical perspective In Jaime DeMelo and Arvind Panagariya eds New Dimensions in Regional Integration Cambridge Cambridge University Press Key questions Why do states form regional economic communities Why do states remove trade barriers to some of their trading partners but not others Why do states reduce trade barriers Why trade o Trade benefits both parties if both parties each pursue their comparative advantage o It s about where you would find the good service most cheaply Theoretical Perspectives Mercantilism Realism Liberalism Marxism Realism Key assertions o Power is essential o States are the key actors seek to maximize security and power o International systems are anarchic Security is a function of your own efforts o State is a rational unitary actor Unitary does not matter if it is a democratic or totalitarian state all states are internally the same o Top priorities survival and security o States most concerned with relative not absolute gains o Politics economics Henry Kissinger Nixon Bismarck Machiavelli 1 Examples of Mercantilism Realism in IPE Mercantilism 1500s 1700s o Power depends on amount of gold and silver in the treasury i e Spanish Portuguese empires o Take all necessary steps to increase exports decrease imports National interest focus o Key focus on government as key actor in economic development Economic Nationalism late 1700s early 1800s o Hamilton Report on the Subject of Manufacturers 1791 Emphasize industry agriculture Economic self sufficiency Government intervention Trade protection high tariffs o List The National System of Political Economy 1841 Influenced by Hamilton All of the above plus need for a strong state to promote national unity and develop human capital Advanced human capital requires education National Socialism Germany 1930 1940s Japan focus on role of the state in directing the economy 18th century product of Enlightenment response to mercantilism o Adam Smith Wealth of Nations Invisible hand by pursuing self interest the common welfare will be maximized o David Ricardo Comparative advantage The rise of liberalism advocates a separation between economics and politics o 2 separate disciplines only recently being brought back together Key actors individuals groups states IOs Goals efficiency growth individual welfare Basic long term harmony of interest invisible hand Positive sum game o Focus on absolute not relative gains o Not much concern for distribution or equity Markets arise spontaneously to satisfy human needs o No central decision required Markets tend toward equilibrium Examples of Liberal IPE Liberalism o 2 o Keynes challenged this but still a liberal Central role of the price mechanism supply demand Economic growth is linear gradual and continuous Markets will expand and develop the world progressive view Spread of the market force is a force for peace o Interdependency less likely to experience conflict Markets should be free of political interference Examples of Marxist IPE Key writers o Marks and Engels John Hobson non Marxist theory and imperialism o Lenin Marxist theory of imperialism o Combination of Marxism and Latin American Structuralism o Latin America and other developing states cannot develop in the current capitalist system Alternatives Regional economic ties with other developing states Develop autarky total self sufficiency no trade with other countries Dependency Theory Summary Table of IPE Theories o 3 Reading 1 Grieco Joseph and G John Ikenberry 2003 State Power and World Markets The International Political Economy W W Norton chapter 2 4 Consumption indifference curve Figure a between combinations on the same curve there are preferential indifferences as long as its on the same curve o Moving away from the origin makes you better off i e U0 to U1 Production Possibilities Frontiers PPF Figure b o Constant opportunity costs straight line repeatedly give up the same ratio o Increasing opportunity costs curved line give up more and more to gain less and less Production Consumption Equilibrium in Autarky Figure c o To get to the furthest indifference curve optimal you must find the tangent to the PPF curve Ed In terms of output the US has the absolute advantage in shoes and computers US has comparative advantage in computers Brazil has comparative advantage in shoes 5 The Ricardian Model of Trade 1 factor 2 countries constant returns PPF o Constant PPF unrealistic outcomes Each country uses all of its resources to produce the good for which is has a comparative advantage and nothing more After trade the PPF curves are supposed to have the same slope for each country Second straight line represents agreed upon price for trade E0 optimal point for consumption and production before trade Ct optimal point of consumption after trade Pt optimal point of production after trade Main point after trading each country is able to consume and produce more increasing welfare 6 Production Consumption Production Consumption US Shoes Brazil Autarky January 15 2014 80 30 100 40 Ricardian Model continued Fig 2 3 80 70 Computers 30 3 0 175 0 Computers 50 US exports 10 computers Brazil imports 10 computers Brazil exports 100 shoes US imports 100 shoes Main point both countries are better off after trading increased welfare Unrealistic assumptions of Ricardian model 1 1 type of input labor 2 Complete specialization Ricardian vs Neoclassical Hecksher Ohlin 70 3 75 10 After Trade Shoes Main differences o Factors of production o Opportunity costs o Specialization in production 7 Neoclassical Model H O Autarky After Trade US Shoes Shoes Brazil 70 12 80 16 150 14 160 16 Production Consumption Production Consumption 70 150 Computers 14 12 140 100 6 Computers 26 No complete specialization Straight line represents agreed upon price for trade More realistic model 2x2x2 Model o 2 countries 2 goods 2 factors of production capital K and labor Increased costs change the shape of PPF Factors of production are mobile within countries