International Trade Lecture Source Sean Erhlich Professor of Intro to International Relations Florida Book Source World Politics Interests Interactions Institutions Second Edition State University What is trade o When one person gives another person something such as money or a good in exchange for something else such as goods or services This occurs both domestically at home and internationally across borders o Prices are set by supply and demand The exact price of a good is set where supply and demand meet If demand exceeds supply competition will drive the price up If supply exceeds demand competition between sellers will bring the price down When the price is out of equilibrium competition will bring the price towards equilibrium The gains from trade o Specialization The division of labor permits diverse segments of society to focus on different economic activities in ways that benefit society as a whole For example A farm family could make its own tractor but is better off expending its energy in farming and using the proceeds to buy or rent a tractor People can make everything they need on their own This is known as autarchy self sufficiency and economic development We could live in an autarchy but our lives would be worse because there are people out there who can do things better o Absolute Advantage The one thing that someone has indisputably over another It is not necessary for a country to have an absolute advantage in producing something for it to be profitable to produce and export it all it needs is a comparative advantage o Comparative Advantage This principle leads to the conclusion that each country will be best off if it produces what it is best at producing and exchanges its products with other countries in return of things it is not so good at producing What do you trade o Heckscher Ohlin Theory The basic economic characteristics of a country in terms of its factor endowments the material and human resources it possesses Such factors include Capital for investment essential to agricultural production refers to undifferentiated and unskilled labor Land Labor produced and the financial assets needed to buy them refers to skilled labor Human capital refers to equipment with which goods are Economic logic on imports and exports Imports are the gains from trade while exports are its costs A country imports goods that it cannot make very well itself which allows the nation to focus its productive energies on making and exporting the goods that it produces best o The factors of production can be associated with different economic actors Unskilled or skilled laborers are the repositories of unskilled and skilled labor respectively o There are other economic noneconomic links among countries that also encourage trade Countries that share a currency Countries that invest heavily in one another s economies Countries that are geographically close together lower costs on transport Countries whose governments are on friendly terms allies o Relates to Factor Price Equalization Trade will tend to make wages profits and other earnings more similar across countries for the prices of factors of production the wages of labor the profits of capital the returns to land tend to become more equal If trade is so good why do we restrict it o Different governments have varying policies to control and contain trade some have very high barriers others have much lower ones o Protectionism The imposition of barriers to restrict imports o Protection creates returns above the normal rate of profit by artificially restricting competition and supply o While trade provides overall benefits those who face more competition may be There are 3 groups of actors that lose from trade protection hurt Consumers Citizens in general Exporters o Types of protectionism individual o Trade is good for the country overall but not for every Tariffs taxes applied to imported goods aka customs Quotas Explicit limits on how much of a good can be imported Regulations and other non tariff barriers o Stolper Samuelson Theorem One predictor of who will support and who will oppose protection theorizes that trade protection benefits the scarce factor of production o We would expect owners of the scarce factors of production in a country to be protectionist and owners of the abundant factors to favor free trade Protection benefits the scarce factor of production but hurts the abundant factor of production Protection hurts all those associated with importing competing industries o Ricardo Viner Theorem Specific Theorem Based on the idea that it s impossible to change trades industry For example if you work in a wine industry you re stuck in a wine industry o Collective action problem as an answer for why there is protection Simply because smaller groups are easier to organize than larger groups An organization is likely to ignore the demands of all workers unless they are divided into narrow groups and their needs are more specific and therefore more manageable The government provides protection even if it is not in the political interest o Domestic institutions and trades International negotiations over trade o Best joint outcome mutual free trade o Most selfish outcome unilateral protection prisoner s dilemma Both sides would be better of cooperating to reduce trade barriers but concern that the other side will cheat leads both sides to act non cooperatively to their common detriment o The public good of a common agreement on the rules of trade Exports are good making Imports are bad giving other countries In 1960 trade made up 10 of the economy currently 30 is The US is less reliant on trade than most European countries The larger you are as a country the less reliant you are on trade If you iterate a model enough times you can build incentives for gains from others countries and earn cooperation o Hegemonic Stability Theory argues that the existence of a single very powerful nation facilitates the solution of problems of collective action and free riding this power is large and strong enough to be both willing and able to solve these problems for the world as a whole Great Britain and The US were such powers in the 1800s and 1900s Coercive Benign o These 2 are based on a central authority actor The World Trade Organization WTO o Grew out of The General Agreement on Taxes and Trade GATT Created in 1947 as one of the original Bretton Woods Institutions Both the goals of the WTO and the GATT are very similar To
View Full Document
Unlocking...