THE POLITICAL ECONOMY OF TRADE
LECTURE 3 – BMGT26
APPROACHES TO THE POLITICAL
ECONOMY OF TRADE
Research on the political economy of trade
provides a framework of a market for protection
that draws our attention to supply-side and
demand-side factors in this market.
The supply of protection is provided by national
governments, and we have two country based
approaches in the field of international relations
and political science that offer alternative
perspectives of this side of the protection
markets. These are the perspectives of realism
and institutionalism.
Realism views trade through the lens of power,
emphasizing the security and technology aspects
of trade and the need to harness these to
promote national “strength.” In the realm of the
political economy of trade, institutional analysis
emphasizes the importance of certain key
aspects of national governments in supplying
protection.
Institutionalism is associated with most
branches of the social sciences and focuses on
the “rules of the game” within a particular
sociopolitical or socioeconomic system. The
distribution of decision-making power within a
national government apparatus can be important,
as well as the relationship of executive and
legislative branches with regard to trade policy.
TRADE AND FACTORS OF PRODUCTION
A country exports the good whose production is
intensive in its abundant factor. It imports the
good whose production is intensive in its scarce
factor.
PROTECTIONISM
 International business executives
understand the reality that this is a world
of tariffs, quotas, and nontariff barriers
designed to protect a country’s markets
from intrusion by foreign companies.
 Although the World Trade Organization
has been effective in reducing tariffs,
countries still resort to measures of
protectionism. It is the nation’s utilize
legal barriers, exchange barriers, and
psychological barriers to restrain the
entry of unwanted goods.
 In economics, protectionism is the
economic policy of restraining trades
between states or countries through
methods such as tariffs on imported
goods, restrictive quotas and a variety of
other government regulations.
Government Restriction on Trade espoused
by Protectionism
 Countless reasons to maintain
government restrictions on trade are
espoused by protectionists, but
essentially all arguments can be
classified as follows:
(1) protection of an infant industry,
(2) protection of the home market,
(3) need to keep money at home,
(4) encouragement of capital accumulation,
(5) maintenance of the standard of living and
real wages,
(6) conservation of natural resources,
(7) industrialization of a low-wage nation,
(8) Maintenance of employment and reduction
of unemployment,
(9) national defense,
(10) increase of business size, and
(11) retaliation and bargaining.
Another Examples of Barriers to International
Markets
 Import Duties: Fees and duties paid to
do business in a country.
 Customs: Problems with a foreign
customs office's documentation and
requirements.
 Trade Barriers: Restrictions on the
amount a foreign business can sell in a
country.
 Advertising: Restrictions on what can
be portrayed or claimed in advertising.
consumption, trade, welfare, and
employment.
TRADE POLICY MEASURES
When a country seeks to grant import
protection to a sector of its economy, it can
choose among a number of measures that can be
broadly classified as either tariffs or nontariff
measures.
A tariff is a tax on imports. It is a very
common trade policy used by almost all
countries. There are two primary kinds of tariffs.
A specific tariff is a fixed tax per physical unit of
the import, and an ad valorem tariff is a
percentage tax applied to the value of the import.
Governments in the world trading system employ
both types of tariffs.
The second category of trade policy
measures we need to consider is the inclusive
and large collection of nontariff measures
An import quota is a quantitative
restriction on imports and one important type of
NTM.

 Taxation: Various value-added taxes,

sales taxes, employee taxes, and tax
rates.

 Intellectual Property: Illegal

infringement of patents, trademarks, or
copyrights.

 Money Transfer: Restrictions on the

transfer of money in and out of a country.

 Foreign Investment: Restrictions or

regulations on foreign investments.

Trade Policy Analysis

In order to help protect the losers of

increased international trade, most countries
of the world engage in trade policies. The
supply and demand analysis of the absolute
advantage model allows us to discover the
effects of these trade policies on production,
Organization in World Trade
The Omnibus Trade and
Competitiveness Act
 The Omnibus Trade and
Competitiveness Act of 1988 is many
faceted, focusing on assisting
businesses to be more competitive in
world markets as well as on correcting
perceived injustice in trade practices.
The trade act was designed to deal with
trade deficits, protectionism, and the
overall fairness of our trading partners.
International Trade Organization
 In the aftermath of World War II, the then-
big powers negotiated the setting up of
an International Trade Organization
(ITO), with the objective of ensuring free
trade among nations through negotiated
lowering of trade barriers. ITO would
have been an international organization
operating under the umbrella of the
United Nations with statutory powers to
enforce agreements.
General Agreement on Tariffs and Trade
(GATT)
 The United States and 22 other countries
signed the General Agreement on
Tariffs and Trade (GATT) shortly after
World War II.
 The original agreement provided a
process to reduce tariffs and created an
agency to serve as watchdog over world
trade.
 In general, the agreement covers these
basic elements:
(1) trade shall be conducted on a
nondiscriminatory basis;
(2) protection shall be afforded domestic
industries through customs tariffs, not through
such commercial measures as import quotas;
and
(3) consultation shall be the primary method used
to solve global trade problems.
World Trade Organization (WTO)
 At the signing of the Uruguay Round
trade agreement in Marrakech, Morocco,
in April 1994, U.S. representatives
pushed for an enormous expansion of
the definition of trade issues. The result
was the creation of the World Trade
Organization (WTO) , which
encompasses the current General
Agreements on Tariffs and Trade (GATT)
structure and extends it to new areas not
adequately covered in the past.
 The WTO is an institution, not an
agreement as was General Agreements
on Tariffs and Trade (GATT). It sets
many rules governing trade among its
148 members, provides a panel of
experts to hear and rule on trade
disputes among members, and, unlike
GATT, issues binding decisions.
Skirting the Spirit of GATT and WTO
 China was asked to become a member
of the WTO, but to be accepted it had to
show good faith in reducing tariffs and
other restrictions on trade. To fulfill the
requirements to join the WTO, China
reduced tariffs on 5,000 product lines and
eliminated a range of traditional nontariff
barriers to trade, including quotas,
licenses, and foreign exchange controls.
The International Monetary Fund and
World Bank Group
 The International Monetary Fund (IMF)
and the World Bank Group are two
global institutions created to assist
nations in becoming and remaining
economically viable.
 Each plays an important role in the
environment of international trade by
helping maintain stability in the financial
markets and by assisting countries that
are seeking economic development and
restructuring.
International Monetary Fund (IMF)
 To overcome these particular market
barriers that plagued international trading
 before World War II, the International (5) promoting increased flows of
Monetary Fund (IMF) was formed. international investment by providing
Originally 29 countries signed the facilities for the conciliation and
agreement; now 184 countries are arbitration of disputes between
members. governments and foreign investors.

 Among the objectives of the IMF are the REGIONAL GROUPINGS AND THEIR
stabilization of foreign exchange rates NATIONS
and the establishment of freely
convertible currencies to facilitate the  AFTA (ASEAN Free Trade Area):
expansion and balanced growth of ASEAN members.
international trade.  Andean Group (the Cartagena
 The IMF also lends money to members Agreement): Bolivia, Colombia,
having trouble meeting financial Ecuador, Peru, and Venezuela.
obligations to other members.  ANZCERTA (Australia–New Zealand
World Bank Group (WBG) Closer Economic Relations Trade
Agreement): Australia and New
 The World Bank Group is a separate Zealand.
institution that has as its goal the
reduction of poverty and the  APEC (Asia Pacific Economic
improvement of living standards by Cooperation): Australia, Brunei,
promoting sustainable growth and Canada, Chile, China, Hong Kong,
investment in people. The bank provides Indonesia, Japan, Korea, Malaysia,
loans, technical assistance, and policy Mexico, New Zealand, Papua New
guidance to developing country Guinea, the Philippines, Singapore,
members to achieve its objectives. Chinese Taipei (Taiwan),Thailand, and
the USA.
The World Bank Group has five institutions,
each of which performs the following services:  Arab/Middle East Arab Common
Market: Iraq, Jordan, Sudan, Syria,
(1) lending money to the governments of United Arab Republic, and Yemen.
developing countries to finance
development projects in education,  ASEAN (Association of Southeast
health, and infrastructure; Asian Nations): Brunei, Indonesia,
Malaysia, the Philippines, Singapore,
(2) providing assistance to governments for Thailand, and Vietnam.
developmental projects to the poorest
developing countries  Benelux Customs Union: Belgium, the
Netherlands, and Luxembourg.
(3) lending directly to the private sector to
help strengthen the private sector in  CAEMC (Central African Economic
developing countries with long-term and Monetary Community): Cameroon,
loans, equity investments, and other the Central African Republic, Chad, the
financial assistance; Republic of Congo, Equatorial Guinea,
and Gabon.
(4) providing investors with investment
guarantees against “noncommercial  CARICOM (Caribbean Common
risk,” such as expropriation and war, to Market): Antigua and Barbuda,
create an environment in developing Bahamas, Barbados, Belize, Dominica,
countries that will attract foreign Grenada, Guyana, Jamaica, Montserrat,
investment; and Saint Christopher-Nevis, Saint Lucia,
Saint Vincent and the Grenadines, and
Trinidad and Tobago.
 Central American Community (CAC):  NAFTA (North American Free Trade
Costa Rica, El Salvador, Guatemala, Agreement): Canada, Mexico, and the
Honduras, Nicaragua, and Panama. USA.

 CIS (Commonwealth of Independent

States): Armenia, Azerbaijan, Belarus,
Georgia, Kazakhstan, Kirgizstan,  OECD (Organization for Economic
Moldova, Russia, Tajikistan, Cooperation and Development):
Turkmenistan, Ukraine, and Uzbekistan. Australia, Canada, Iceland, Japan, New
Zealand, Norway, Switzerland, Turkey,
 ECOWAS (Economic Community of the USA, and EU members.
West African States): Benin, Cape
Verde, Dahomey, Gambia, Ghana,  RCD (Regional Cooperation for
Guinea, Guinea-Bissau, Ivory Coast, Development): Iran, Pakistan, and
Liberia, Mali, Mauritania, Niger, Nigeria, Turkey.
Senegal, Sierra Leone, Togo, and Upper  SICA: El Salvador, Guatemala,
Volta. Honduras, and Nicaragua.
 EEA (European Economic Area):  WAEMU: (West African Economic and
Iceland, Norway, and EU members. Monetary Union): Benin, Burkina Faso,
 EFTA (European Free Trade Ivory Coast, Guinea-Bissau, Mali, Niger,
Association): Austria, Finland, Iceland, Senegal, and Togo.
Liechtenstein, Norway, Sweden, and 
Switzerland.

 EU (European Union): Austria,

Belgium, Denmark, Finland, France,
Germany, Greece, Ireland, Italy,
Luxembourg, the Netherlands, Portugal,
Spain, Sweden, and the UK (plus ten
new members).

 GCC (Cooperation Council of the Arab

States of the Gulf): Bahrain, Kuwait,
Oman, Qatar, Saudi Arabia, and the
United Arab Emirates.

 Group of Three: Colombia, Mexico, and

Venezuela.

 LAIA (Latin American Integration

Association): Argentina, Bolivia, Brazil,
Chile, Colombia, Ecuador, Mexico,
Paraguay, Peru, Uruguay, and
Venezuela.

 Mahgreb Economic Community:

Algeria, Libya, Tunisia, and Morocco.

 Mercosur (Southern Common

Market): Argentina, Brazil, Paraguay,
and Uruguay.