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REVIEW OF CHAPTER TWO & THREE: Oatley, Thomas. 2012. International

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 INTERNATIONAL POLITICAL ECONOMY

REVIEW
OF

CHAPTER ONE, TWO & THREE:

Oatley, Thomas. 2012. International Political Economy. Pearson
Education, Inc. pp 1-68

BY
JULIUS ADAVIZE ADINOYI

FEBRUARY, 2015.
 TABLE OF CONTENT

TABLE OF CONTENT....................................................................................................................................... 0
CHAPER TWO AND THREE: ............................................................................................................................ 1
The World Trade Organization and The World Trade System ...................................................................... 1
Introduction .............................................................................................................................................. 1
What is World Trade Organization (WTO) ................................................................................................ 1
Power and interest in world trading system ............................................................................................. 2
Evolving WTO new directions and new challenges ................................................................................... 3
Regional Trade arrangement (RTA) and WTO ........................................................................................... 4
Economic case for new trade cooperation ............................................................................................... 5
Politics of Trade Cooperation .................................................................................................................... 6
WTO and trade Cooperation ..................................................................................................................... 7
Conclusion ................................................................................................................................................. 8
 CHAPER TWO AND THREE:
The World Trade Organization and The World Trade System
Introduction

There are rising interconnectedness of national economies, this have created a high networking
of producers fusing their contribution –through manufacturing and designs at various product
production stage which are usually not bounded to a certain geolocation but cross border or inter-
boundary production thus also increasing potentials of international consumption; and also
creating globalization consequences –concentration of production specialization of some
products in certain countries and likewise increased concentration of consumption of specific
goods in certain countries. This rapid growth of international trade would not have been realized
without the international political foundation –General Agreement on Trade and Tariffs (GATT)
created after the WW2 for economic resuscitation and subsequently transformed to WTO in
1995.

Cooperation is needed in order to achieve the goals of the World Trade Organization (WTO) but
more often those efforts are undermined by interest to take advantage of the other and the fear of
been exploited unless there are stronger assurance of reciprocated cooperation and this can only
be achieved when WTO members bind on the principles and rule that have been put in place.

What is World Trade Organization (WTO)

WTO is an –intergovernmental organization that emerged from (GATT) –international political

foundation for governments to negotiate, enforce, and revise rules to govern their trade policies.
Additionally it sets trade principles and rules, administer trade agreements that governments
have concluded, and provides trade conflicts resolutions mechanism.

The principle is based on market liberalism –open international trading system that raises world
welfare, and on Nondiscrimination –equality and unbiased international trading system stressing
prohibition of two mechanisms i.e. firstly, prohibition of Most Favoured Nation (MFN) trading
mechanism e.g. Nigeria cannot apply higher tariff to goods imported from China and lower that
same product imported from other WTO members unless (1) if the latter (the exporting
nation)for instance is in a regional trade arrangement with the importing nation, (2) if
Generalized System of Preference (GSP) is applied –highly advanced countries applies higher
tariff for imports from industrialized nations and lower for developing countries. Secondly,
1
prohibition of National treatment –i.e. using tax, regulations, and other domestic policies to
providing an advantage for domestic firms at the expense of foreign firms. The two principles
along with other accompanying rules ensure free market opportunities and equalities of barriers
in the global economy. Those rules emerge from intergovernmental bargaining –rounds of
negotiations by governments‘ representatives in WTO Ministerial Conference, eight of such
rounds (Geneva 1947, Annecy 1949, Torquat 1951, Geneva1956, Dillon1961, Kennedy1967,
Tokyo 1979, and Uruguay 1993) have been concluded as at 2010. The current round Doha 2001
aimed to lower trade barriers around the world, and thus facilitate increased global trade. The
non-conclusion are rooted in the domestic politics of key WTO members on the core mercantilist
items of the Doha agenda—agriculture and manufacturing. While some members—notably the
U.S—are not able to live with a low-ambition deal, others—notably China, India, and Brazil—
cannot commit to elements of a high-ambition deal.1

The WTO‘s dispute settlement mechanism is to ensure compliance as most governments will
always seek to evade rules if there are no authorizing punishments in case of noncompliance.
Also rules emanating from negotiation rounds are binding to member states and generally
obliged to acceptance under the international law.

Power and interest in world trading system

The stability of WTO is a function of power distribution explained by theory of hegemonic

stability which rests on public goods provision (public goods have characteristics of non-
excludability –the benefits enjoyable from goods cannot be prevented once the goods are
supplied and non-rivalry –consumption of product by individual limits not its availability to
others), and most public goods tends to be undersupplied due to societal value placed on them
and due to the consequences of ‗free riding‘. In large group like WTO there are free riders who
want other nations to bear the cost of providing trade rules but such insentives are weaker as
theory of hegemonic stability argues that hegemonic nation rides on privilege group and own
large share of world total outputs thus benefits largely to the extent that it bears the cost of
providing those international trade rules, and therefore eliminating the consequences of free-
riding. This maintains that stability of international trade is dependent on the presence of
hegemon and conversely the decline of hegemon will cause instability of international trade

1
David Kleimann, Joe Guinan , and Petros C. Mavroidis, 2011. The Doha Round: An Obituary. Global
GovernaceProgrammehttp://globalgovernanceprogramme.eui.eu/wp-
content/themes/NewEuitemplate/Documents/Publications/PolicyBriefs/PolicyBrief20111final.pdf
2
system. E.g. the fall of British hegemon lead to the collapse of liberal international trading
system as seen after WW1, and the rise of U.S to the hegemon by providing the cost of stability
of the new international trading system after WW2. Thus there must be a hegemon for ther to be
stability of international trade in the global economy, and the instability of international trade to
bring in hegemonic transition. Lately Chinas‘ economy has topped the world economy and
paradox of whether the world is silently experiencing hegemonic transition. The assertion is that
a nation with power dominates its interest in the processes and outcomes of the international
trading system.

Evolving WTO new directions and new challenges

The core principles of WTO have been stable for about 60 years, but thereafter experiencing
substantive change due to the: Firstly, emergence of powering bloc by the developing nations –
under the leadership of largest emerging economies of Brazil, China and India –within the WTO
as they continue to increase WTO membership tremendously and thus harder consensus among
larger number of governments. This new interests have contrasted to a greater extent the prior
interest of initial ‗rich country club’ GATT –of U.S, the EU and Japan –which neglected the
liberation of interest areas of developing countries. Secondly, is the emergence of powerful force
of the NGOs outside the WTO. This has complicated the decision making processes as evidently
seen in the current inconclusive Doha round 2001.

Changes from outside the WTO have greatly compounded the changes within the WTO. There
were fewer interest group paying attention to GATT than they are today with WTO. E.g. NGOs
have increased concern of WTO safeguarding the health and environmental safety of consumers
and so that tariffs/ trade barriers are not used in disguise of protecting consumer health
risk/environmental safety risk as it rather covertly serves the interest of protective trade, this
concern have pushed the emergence of WTO rule compliance deficit in terms on WTO
Agreement on Sanitary and Phytosanitary Standards and yet a gap still exist in meeting the
interest of the consumers. These have created increasing trends of consumer interest mobilization
by NGOs around the WTO. This new concerns have raised proposal for WTO to adopt a steering
committee –alike of the United Nations Security Council –an open system to NGOs –limiting
governments inclusiveness in decision making and thus rejected by many until a better decision
making alternative is produced and consensually agreed upon to be adopted.

3
Regional Trade arrangement (RTA) and WTO

RTA is trade arrangement between two or more countries –usually located in same region –in
which each country offers preferential market trading system to the other. The RTA takes two
forms: free trade areas –elimination of tariff on members‘ goods/services but members retains
independent tariffs on non-members‘ goods; and custom union –elimination of tariffs on
members‘ goods but imposition of common tariffs on non-members‘ goods. This thus clearly
allows regional trade discrimination –an exception to WTO principles while WTO still
contradictorily encourages nondiscriminatory trade. There are about 190 to 250 RTAs, more than
half of the RTAs are bilateral agreements, Europe and Mediterranean regions accounts for about
70% of current RTAs in operation while North/South America account for 12% while sub-sahara
Africa and Asia-pacific shares the 18%. The region with higher RTAa above can be argued to be
as a result of the collapse of the Soviet bloc. In general, the proliferation of RTAs can be
attributed to one or more of the following: (1) country‘s desire to gain more secureaccess to the
market of a particularly important trading partner (2) need to signal a strong commitmentto
economic reform offered by foreign investors (3) need to increase their –as an RTA group
bargainingpower in multilateral trade negotiations –and also increase consensus boycott of
granting market access to WTO members unwilling to make WTO concessions in the interest of
the RTA group. Thus RTAs can be said to be paradoxical, in the sense that it compliments WTO
through trade liberalization leaving a resultant economic competing consequence termed trade
creation and conversely as a challenger through regional institutionalization of discrimination
within world trade and leaving a resultant economic competing consequences termed trade
diversion. Those two competing consequences are determinant on RTA‘s net trade impact.i.e.
trade liberation is when more trades are created than diverted, and trade protectionism if more
trade is diverted than created. However it is important to note that the RTA‘s net trade position
changes overtime and not constant.

Relatively the effect of RTA exerts some kind of gravitational pressure on non-RTA members
which drives them to join RTA overtime e.g. over the last 40 years EU has expanded from 6 to
25 member countries. By contrast the creation of large RTA in one region could encourage the
formation of protectionist RTA in other region e.g. RTA formations in Southern America in
response of the growing global north RTAs.

4
Economic case for new trade cooperation

Production possibility Frontier (PPF) enables the determination of opportunity costs or

alternative forgone of producing a particular at the expense of another due to the decision to
allocate factors of production to the product produced. Suppose we compare two products ‘A &
B’ production in country Zero as shown in figure 1:The marginal rate of transformation i.eslope
in graph between output A at point ‘a’ and output B at point ‘b’ indicates units of opportunity
forgone between comparing product provided all factors of production were constant.
Assumptions around the nature of the opportunity cost of country Zero is dependent on the
nature of the distribution line or curve of A & B –a Straight line indicates when there is constant
opportunity cost it implies constant return to scale in production i.e. employed production factor
increase in A will have to also increase that commensurably in B, double capital and labour
employed in A will also apply to double capital and labour employed in B. –a curve line indicates
when there is increasing opportunity cost it implies diminishing marginal returns in production
i.e. employed production factor in production increase in product B will have to also decrease
that of A inversely.

PPF also denotes measure for consumer utility, the higher the indifference curve the more utility
consumers are said to be able to benefit from a product as indicated in xyz and opq at P. The
indifference curve can be characterized by (1) downward slope –called marginal rate of
substitution indicating how much consumer is willing to give up goods A to acquire goods B (2)
inwards bend to the origin –diminishing marginal utility consumption indicating how consumer
will be less willing to give up product B for more of product A.

The PPF and indifference curve allow an indication of equilibrium production and consumption
–an occurrence where marginal rate of transformation (slope of PPF) equates marginal rate of
substitution (slope of indifference curve) at point P.

Figure 1 Production possibility frontier (PPF) and Equilibrium free trade

5
Politics of Trade Cooperation
In domestic politics, governments strive to open foreign markets to exports of competitive
domestic industries and continue to protect less competitive industries from imports. Thus
governments lean of favourable bargaining space of status quo more than giving on to the actual
liberation space and therefore leading to some agreement.

What a country trades matters in relation to the country‘s cooperation 2 in bilateral of multilateral
agreements e.g. is in the Doha 2001, where tariffs removal on agriculture and manufacture goods
cannot be reached because of the interest of Global North and Japan3.

The politics of trade cooperation revolves around the fact that governments –even if they realise
that they would benefit from completely complying –will be reluctant to enter into trade
agreements in bilateral or multilateral situations because of the political gap in rule enforcements
–government cannot be certain that other government will comply with the trade agreement that
they conclude thus the ‗prisoners dilemma’ explains why a country and/or group of governments
A (assuming they are G20 –developing nation‘s‘ producing agricultural goods)will make choice
of compliance with ‘othercountry and/or group of countries’ B (assuming they are EU –
developed nation ‗s‘ producing manufactured goods) as shown in table 1.

Table 1 Prisoner Dilemma and Trade Liberation

A
Liberalize Protect
B Liberalize L,L (area a) L,P (area b)
Protect P,L (area d) P,P (area c)
Preference Orders:
A: P,L˃ L,L ˃ P,P ˃ L,P
B:L,P˃ L,L ˃ P,P ˃ P,L

Each can open its market to other‘s export called Liberalization ‘area a’;
They decide to close each other‘s domestic product into their country using tariff called
Protection ‘area c’;

2
Peterson, Timothy M. and Cameron G. Thies. 2011. ―Intra-industry trade, veto players and the formation of preferential trade agreements.‖
Unpublished manuscript.
3
Hanrahan, Charles; Randy Schnepf (2007). "WTO Doha Round: The Agricultural Negotiations" .Congressional Research
Service.http://www.nationalaglawcenter.org/wp-content/uploads/assets/crs/RL33144.pdf

6
B liberates –decrease import tariffs on A but A protects –unchanged import tariffs on B shown in
‗area b‘. This is a situation where A –developed country(s) gains most because open exports and
tight imports.

B protects –unchanged import tariffs from A but A liberates –decreased import tariffs from B
shown in ‗area d‘. This is a situation where B –developing country(s) gains most because of open
exports and tight imports.

Thus A and B payoff order are identical but in reversal positions of their most and least preferred
outcomes. And therefore this explains why government(s) will always want to play
protectionstrategy i.e. developed nation protects their industrial advancement while developing
industry protects their new expanding industry.

If both government(s) decides to play protect game: then Pareto suboptimality is observed i.e. no
one benefits at the expense of the other; also Nash equilibrium is observed i.e. neither of the
government(s) will have a change incentive of their strategy ‗from protection to liberalization‘ in
order not to take the position of the least ‗Preference Order‘.

WTO and trade Cooperation

As seen in previous section, international trade cooperation is impossible in prisoners‘ dilemma

situations but cooperation can only be achieved through: Firstly, liberalized trade strategy is
achieved after government(s) plays repeated protection strategy and decides to liberate
themselves by rationally changing trade strategy in order to receive stream of payoff through
cooperation rather than cheating on agreement; Secondly, government(s) use reciprocal strategy
to enforce liberalization i.e. when one government(s) use liberalization strategy the other also
applies liberalization strategy. Also it can be inform of tit-for-tat game i.e. if one government(s)
cheats by playing protectionist strategy in one round of concluded trade agreement, the other also
pays back –cheats in the next trade agreement round by applying a protectionist strategy instead
of taking a liberalist position, thus enforcing cooperation among government(s); Thirdly,
government(s) weighs –future payoff opportunity cost of playing repeated protectionist strategy
and tit-for-tat strategy in comparison to –larger stream of payoffs by cooperation, and thus
choose the latter as it considers it more favourable in long-run.

Therefore the WTO steps in in the first two strategies above and provides enabling information
that government(s) needs for them to make a reciprocal strategy/ tit-for-tat strategy effectively
7
whether partnering parties are complying or cheating in trade agreements. This is achieved
through WTO rule compliance evaluations and subsequent collection and dissemination of high
quality information on members‘ trade policies. This approach also works out conflict resolution
mechanism –where the WTO‘s Dispute Settlement Mechanism (DSM) initiates Dispute
Settlement Body (DSB) for conflicting-partners-consultations when a government(s) files an
alleged trade rule violation by another government(s), and subsequently an expert panel is
formed –if the DSB cannot resolve the conflict –to investigate the complaint.

For example, the case of U.S subsidizing American cotton farmers which provided them trade
advantage in global markets that harmed the Brazil‘s cotton growers and violated the WTO rules.
The expert panel came up with findings approved by DSB –after DSB was unable to solve the
conflict – that the U.S indeed violated trade rule, the U.S appealed the case but the appellate
panel upheld the findings –findings which was also upheld the second time after U.S modified its
cotton policy to find favour, and consequently the WTO authorized Brazil to retaliate by
adopting increased tariffs on U.S-Brazil imports in cost commensuration ($823 million per year)
to what Brazil had earlier lost but the U.S was able to win its way out by privately returning to a
negotiation table with Brazil, –by offering to pay $147 million per year to develop Brazilian
agribusiness, in exchange that Brazil agrees with the modified U.S cotton policy and not impose
retaliatory tariff even though it still violates the WTO rules.

Thus WTO helps government(s) gain assurance to conclude trade agreements with/without less
fear/fear of been cheated and enables a liberal trade that open up the globe to welfare gains.

Conclusion

Multilateral trade systems are an international political system that regulates governments‘
political/economic influence on cross-border trade. WTO alike of such system reflects to a
greater extent the interest of powerful states. Although the institution seek to promote world
welfare which continually draws the interest of an increasing memberships but saw the
emergence of challenging groups –like G20 which consequently have made decision making
resolutions a greater achieving task.

Despite those challenges, the WTO exists to facilitate international cooperation and enable
solution to welfare consequences, but politics through bargaining power in negotiations make the

8
 realization of these gains difficult, also in compliance to trade there is a problem of enforcement
which in entire WTO and an intergovernmental organization aims to solve.

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