ISPOLEC NOTES:

OATLEY Chapter 1:

The global economy thus makes the consumers in us better off

by reducing the prices of the goods and services we buy and
expanding the range of choices we have.

International political economy (IPE) studies how politics shape

developments in the global economy and how the global
economy shapes politics. It focuses most heavily on the enduring
political battle between the winners and losers from global
economic exchange.

Global economic exchange raises the income of some people and

lowers the income of others. The distributive consequences of
global economic exchange generate political competition in
national and international arenas.

The winners seek deeper links with the global economy in order
to extend and consolidate their gains, whereas the losers try to
erect barriers between the global and national economies in
order to minimize or even reverse their losses.

IPE studies the political battle between the winners and losers of
global economic exchange.

Example A. (American Case)

- America tried to impose tariffs on Canada because the

Lumber Mills were in distress. Resulting in the American
Government imposing tariffs to protect the mills from losing
more profit.
 - As a result Canada imposed its own tariffs on America
which hurt American business, which resulted in some
social groups who then pressured to remove the tariffs that
America had already set in motion against Canada.

The story of the U.S. tariff on Canadian lumber thus nicely

illustrates the central focus of international political economy as
a field of study: how the political battle between the winners and
losers of global economic exchange shapes the economic
policies that governments adopt.

Typically, the global economy is broken into four such issue

areas: the international trade system, the international monetary
system, multinational corporations (or MNCs), and economic
development.

The international monetary system exists solely to enable people

living in different countries to engage in economic transactions
with each other.

Connection: Moreover, problems arising in the international

monetary system are intrinsically connected to developments in
international trade and investment.

Summary: All four parts of the Global economy each play an

important role in how global society trades with one another.
Each aspect affects the other in some way or another leading to
chain reactions.

WTO: The international trade system is centered upon the WTO,

to which some 164 countries belong and through which they have
created a nondiscriminatory international trade system.
WTO has enabled governments to progressively eliminate tariffs
and other barriers to the cross-border flow of goods and services.

Regional Trading Agreement: During the last 10 years, however,

regional trading arrangements have arisen to pose a potential
challenge to the WTO-centered trade system.

These regional trade arrangements, such as the NAFTA, are

trading blocs composed of a small number of countries who offer
each other preferential access to their markets.

Summary: Institutions like the WTO help eliminate Tariffs and

improve cooperation between different states. Thus, these
institutions help improve the global economy by making trade
easier for a lot of countries. But there are also other options such
as Regional Trade agreements who are blocs that make their
own rules within a select group of nations where they make
better options for themselves.

International Monetary System: The international monetary

system enables people living in different countries to conduct
economic transactions with each other.

Example: US Citizen wants to buy goods in Japan but they only

have dollars, and so they have to find a way to convert their
dollars into Yen through a medium that helps them.

The international monetary system facilitates international

exchange by performing these functions. When it performs these
functions well, international economic exchange flourishes.
When it doesn’t, the global economy can slow or even collapse.

Summary: IMS helps create exchange markets that allow

countries to trade with one another and have their money traded
despite whatever value they use. Through a certain channel in
the IMS they can make it possible, but when they do a bad job it
becomes harder for the global economy to do well resulting in
collapse or slowing down.

A multinational corporation is a firm that controls production

facilities in at least two countries.

These firms collectively control about 810,000 production plants

and employ about 77 million people across the globe. Together,
they account for about one- quarter of the world’s economic
production and about one-third of the world’s trade.

Example: Corporate managers based in the United States, for

example, make decisions that affect economic conditions in
Mexico and other Latin American countries, in Western Europe,
and in Asia.

Important Question: Why these large firms exist and what

economic impact they have on the countries that host their
operations

Summary: Multi-National Corporations are firms that have one

factory in different countries. An example would be a shoe
factory in China owned by an American corporation. These MNC’s
play a huge impact in another countries domestic economy
because they are profit oriented and play into the economies
market.

Economic Development: Developing-country governments have

adopted explicit development strategies that they believed would
raise incomes by promoting industrialization.
Some countries, such as the Newly Industrializing Countries
(NICs) of East Asia (Taiwan, South Korea, Singapore, and Hong
Kong) have been so successful in promoting industrialization and
raising per capita incomes that they no longer can be considered
developing countries.

Students of the politics of economic development focus on the

specific strategies that developing countries’ governments adopt
and attempt to explain why different governments adopt different
strategies.

IPE scholars emphasize how the political battle generated by the

distributive consequences of the global economy shapes the
development strategies that governments adopt.

Summary: In understanding IPE there are some countries who

apply different strategies when the global society and its market
affect them. Some fail in the process of trying to figure out their
strategies, and some succeed in applying their economic
development plans, resulting in success for their countries
development.

Interconnectedness: The political battle between the winners

and losers of global economic exchange shapes the decisions
that societies make about how to allocate the resources they
have available to them.

1) The foreign economic policies that a government adopts—

its trade policies, its exchange rate policies, and its policies
toward MNCs—affect how that society’s resources are used
2) A decision to raise tariffs, for example, will encourage
business owners to invest and workers to seek employment
in the industry that is protected by the tariff
 3) A decision to lower tariffs will encourage business owners
and workers currently employed in the newly liberalized
industry to seek employment in other industries.
4) Decisions about tariffs, therefore, affect how society’s
resources are used. Foreign economic policies are, in turn, a
product of politics, the process through which societies
make collective decisions.

Summary: Foreign economic policies affect every aspect of a

countries ability to trade, how its societies will be affected by
such decisions and how its resources are distributed.

Complications and Consequences:

On the one hand, all resources are finite. As a result, choices

about how to allocate resources will always be made against a
backdrop of scarcity.

On the other hand, in every society, groups will disagree about

how available resources should be used. Some groups will want
to use the available resources to produce cars and
semiconductors, for example, whereas others will prefer to use
these resources to produce clothing and agricultural products

One of the important goals of IPE as a field of study is to

investigate how such competing demands are aggregated,
reconciled, and transformed into foreign economic policies.

Summary: Oftentimes when it comes to foreign policy decisions,

there are complications. Resources have complications because
of where to allocate them, and on the other hand resource
allocation decisions will be questioned. The goal is to see how
to assess and appease these concerns.
Types of Consequences:

Decisions about resource allocation have welfare consequences

—that is, they determine the level of societal well-being. Some
choices will maximize social welfare—that is, they will make
society as a whole as well-off as possible, given existing
resources. Other choices will cause social welfare to fall below
its potential, in which case different choices about how to use
resources would make society better off.

Decisions about resource allocation also have distributional

consequences—that is, they influence how income is distributed
between groups within countries and between nations in the
international system.

Example: (American Case)

The lumber tariff is a tax on lumber imported into the United

States from Canada. This tax makes it more profitable for
American lumber producers to sell their products, but it also
means that the United States is using resources to produce
lumber when it may not be the most efficient use of those
resources. This results in the United States being poorer overall.
Additionally, the higher price of lumber due to the tariff means
the cost is passed on to consumers who buy homes made with
lumber. This creates a redistribution of income from consumers
to lumber mills. Furthermore, Canadian lumber producers are
hurt, as they have a harder time selling their products in the
American market. This tariff affects both the level and
distribution of income within society.

Summary: Resources can often have consequences sometimes

they benefit the overall welfare of the society, but when limited
to make decisions because there is not enough resources it can
affect one group and benefit another. These decisions also lead
to problems like where to distribute the money and how one can
distribute them. For example, the US tariffs make the lumber
expensive and benefit the seller, but do they help benefit the
consumer. And the same can be said about how these decisions
force countries to use their capital on what may not be
important.

Types of Studies that answer the decision making process:

- One tradition focuses on explanation, and the second

focuses on evaluation. Explanatory studies, which relate
most closely to our first abstract question, are oriented
toward explaining the foreign economic policy choices that
governments make. Such studies most often attempt to
answer “why” questions. For example, why does one
government choose to lower tariffs and open its economy to
trade, whereas another government continues to protect the
domestic market from imports?

(Each of these questions asks us to explain a specific economic

policy choice made by a government or to explain a pattern of
choices within a group of governments. )

- Evaluative studies, which are related most closely to our

second abstract question, are oriented toward assessing
policy outcomes, making judgments about them, and
proposing alternatives when the judgment made about a
particular policy is a negative one
- A welfare evaluation is interested primarily in whether a
particular policy choice raises or lowers social welfare.
More broadly, do current policies encourage society to use
available resources in ways that maximize economic
 welfare, or would alternative policies that encouraged a
different allocation result in higher economic welfare?

Summary: There are different outcomes that happen when

decisions are made. We ask questions and evaluate them, we
ask explanatory studies oriented questions and ask the basic
explanation. Then we have evaluative studies where we make
assessments, make our judgements and provide alternatives.
And lastly we have welfare evaluation, where we ask if the
decisions we make will benefit the overall improvement of
society.

Traditional Schools of International Political Economy :

Mercantilism is rooted in seventeenth- and eighteenth-century

theories about the relationship between economic activity and
state power.

First, the classical mercantilists argued that national power and

wealth are tightly connected. National power in the international
state system is derived in large part from wealth. Wealth, in turn,
is required to accumulate power

Second, the classical mercantilists argued that trade provided

one way for countries to acquire wealth from abroad. Wealth
could be acquired through trade, however, only if the country ran
a positive balance of trade

Third, the classical mercantilists argued that some types of

economic activity are more valuable than others. In particular,
mercantilists argued that manufacturing activities should be
promoted, whereas agriculture and other non- manufacturing
activities should be discouraged.
“Modern” mercantilism applies these three propositions to
contemporary international economic policy:

1. Economic strength is a critical component of national

power.
2. Trade is to be valued for exports, but governments should
discourage imports whenever possible.
3. Some forms of economic activity are more valuable than
others.

The emphasis on wealth as a critical component of national

power, the insistence on maintaining a positive balance of trade,
and the conviction that some types of economic activity are
more valuable than others leads mercantilists to argue that the
state should play a large role in determining how society’s
resources are allocated.

Economic activity is too important to allow decisions about

resource allocation to be made through an uncoordinated
process such as the market. Uncoordinated decisions can result
in an “inappropriate” economic structure.

The only way to ensure that society’s resources are used

appropriately is to have the state play a large role in the
economy.

Summary: For Mercantilism the state plays a huge role in the

nations power and economic growth. It believes that to be
powerful a nation should have wealth and vice versa. The theory
also believes that certain industries and economic activities play
a more significant role in the accumulation of wealth over
agricultural means. And lastly, a positive and balanced trade is
good.
Liberalism: governments should make little effort to influence the
country’s trade balance or to shape the types of goods the
country produces.

First, liberalism attempted to draw a strong line between politics

and economics. In doing so, liberalism argued that the purpose of
economic activity was to enrich individuals, not to enhance the
state’s power.

Second, liberalism argued that countries do not enrich

themselves by running trade surpluses. Instead, countries gain
from trade regardless of whether the balance of trade is positive
or negative.

Finally, countries are not necessarily made wealthier by

producing manufactured goods rather than primary commodities.
Instead, liberalism argued, countries are made wealthier by
making products that they can produce at a relatively low cost at
home and trading them for goods that can be produced at home
only at a relatively high cost.

Liberalism argues that social welfare will be highest when people

are free to make their own decisions about how to use the
resources they possess. Thus, rather than accepting the
mercantilist argument that the state should guide the allocation
of resources, liberals argue that resources should be allocated
through voluntary market-based transactions between
individuals.

Exception: Most liberals also recognize that governments can,

and should, resolve market failures, which are instances in which
voluntary market-based transactions between individuals fail to
allocate resources to socially desirable activities.
Summary: Liberalism focuses on the fact that economic activity
is not meant to make a country wealthy but rather the individual.
For them, trade whether good or bad is still trade and wealth can
still be gained from them. For liberalists trading can be beneficial
when a country makes something cheap in their country and
when selling it outside, they can make it expensive.

Marxism, the third traditional school, originated in the work of

Karl Marx as a critique of capitalism

First, Marx argued that there is a natural tendency toward the

concentration of capital. Economic competition would force
capitalists to increase their efficiency and increase their capital
stock. As a consequence, capital would become increasingly
concentrated in the hands of a small, wealthy elite.

Marx argued that capitalism is associated with a falling rate of

profit. Investment leads to a growing abundance of productive
capital, which in turn reduces the return to capital. As profits
shrink, capitalists are forced to further reduce wages, worsening
the plight of the already impoverished masses.

Finally, capitalism is plagued by an imbalance between the

ability to produce goods and the ability to purchase goods. Large
capital investments continually augment the economy’s ability to
produce goods, whereas falling wages continually reduce the
ability of consumers to purchase the goods being produced

As the three dynamics interact over time, society becomes

increasingly characterized by growing inequality between a small
wealthy capitalist elite and a growing number of impoverished
workers.
The state plays no autonomous role in the capitalist system.
Instead, Marxists argue that the state operates as an agent of
the capitalist class.

This systematic exploitation of the poor by the rich implies that

the global economy does not provide benefits to all countries; all
gains accrue to the capitalist countries at the top of the
international hierarchy.

Summary: Marxism argus against capitalism. Because economic

activity improves capitalists continues to make more profit and
bring more money in. Return of capital reduces because more is
being invested, and in the process employees do not benefit at
all. And the more being produced the more large capital is being
made making it harder for consumer to buy because of low
wages. In the end, the state works for the capitalist elite.

Mercantilists focus on the consequences of resource allocation

for national power. The central question a mercantilist will ask
is: “Is there some alternative allocation of resources that would
enhance the nation’s power in the international system?”

Liberals rely heavily upon economic theory to focus principally

upon the welfare consequences of resource allocation. The
central question a liberal will ask is: “Is there some alternative
allocation of resources that would enable the society to improve
its standard of living?”

Marxists rely heavily upon theories of class conflict to focus on

the distributional consequences of resource allocation. The
central question a Marxist will ask is: “Is there an alternative
political and economic system that will promote a more equitable
distribution of income?”
Mercantilists argue that the IPE is characterized by distributional
conflict when governments compete to attract and maintain
desired industries.

Liberals argue that international economic interactions are

essentially harmonious. Because all countries benefit from
international trade, power has little impact on national welfare,
and international economic conflicts are rare.

Marxists argue that the IPE is characterized by the distributional

conflict between labor and capital within countries and by the
distributional conflict between the advanced industrialized
countries and developing countries within the international
arena.

Summary: For Mercantilists, they focus on how to divert wealth

to power. They also believe that IPE is focused on conflict where
different governments fight to get certain industries to help them
grow their strength. For Liberals, the focus is resources to
welfare, how can we improve the standard of living. They also
believe that IPE is peaceful because all nations want to help one
another and will not harm one another in the interests of
economic benefits. And finally, for Marxists they talk about the
unequal distribution of wealth, for them IPE focus on the
distribution of resources and the fight between those who are
advanced nations, and those who are not.

INTERESTS AND INSTITUTIONS IN INTERNATIONAL POLITICAL

ECONOMY:

First, we need to understand where the interests, or economic

policy preferences, of groups in society come from. Second, we
need to examine how political institutions aggregate, reconcile,
and ultimately transform competing interests into foreign
economic policies and a particular international economic
system.

Interests are the goals or policy objectives that the central

actors in the political system and in the economy—individuals,
firms, labor unions, other interest groups, and governments—
want to use foreign economic policy to achieve.

Types of Interests:

First, people have material interests that arise from their position
in the global economy. The essence of this approach can be
summarized in a simple statement: tell me what you do for work,
and I’ll tell you what your foreign economic policy preferences
are

- Example (American Timber): For some, like the Timber Mill

owners and their workers they liked the idea of having
Tariffs because it benefits them. While in contrast the
owners of homebuilding did not like it because the cost of
timber went up.

In short, one’s position in the economy powerfully shapes one’s

preferences regarding foreign economic policy.

Second, interests are often based on ideas. Ideas are mental

models that provide a coherent set of beliefs about cause-and-
effect relationships. In the context of economic policy, these
mental models typically focus on the relationship between
government policies and economic outcomes.

By providing clear statements about cause-and-effect economic

relationships, economic theories can create an interest in a
particular economic policy
 - Example: The theory of comparative advantage, for
example, claims that reducing tariffs raises aggregate
social welfare. A government that believes this theory might
be inclined to lower tariffs to realize these welfare gains.

In short, ideas about how the economy operates can be a source

of the preferences that groups have for particular economic
policies.

To understand how interests are transformed into policies, we

need to examine political institutions. Political institutions
establish the rules governing the political process.

Political institutions determine which groups are empowered to

make choices and establish the rules these “choosers” will use
when doing so

Political institutions also provide the rules that these groups use
to make decisions. In democratic systems, the usual choice rule
is majority rule, and policies are supposed to reflect the
preferences of a majority of voters or legislators.

Political institutions thus allow groups to make collective

decisions and, in doing so, determine who gets to make these
decisions and how they are to be made

Political institutions also help enforce these collective decisions.

Summary: There are ways of understanding how foreign policy

decisions are made. Some being for example, interests, these are
goals that certain groups want accomplished from foreign policy
decisions. There are types of interests, like material interests
which is basically how I want foreign policy decisions to improve
my job or area that I am in. Second are ideas, which are beliefs
that provide a reason and outcome, theories create interest. How
a certain economic theory can benefit a particular group are how
interests operate. And lastly, political institutions which are tools
that give power to groups and establish how they can choose to
make different choices. These institutions help pick who gets
decide and how they are made.

Conclusion: IPE studies the political battle between the winners

and losers of global economic exchange. It examines how this
political competition shapes the evolution of the international
trade and monetary systems, affects the ability of MNCs to
conduct their operations, and influences the development
strategies governments adopt.

IPE scholars traditionally have studied the global economy

through the lens of three schools of thought.

We look at how different approaches will enable us to develop

models that provide insights into how the global economy
generates winners and losers, how these groups compete to
influence the policies that governments adopt, and how the
policies that governments adopt affect the evolution of the global
economy.

OATLEY Chapter 2:

The fragmentation of production into these global networks (a

development we look at more closely in Chapter 8) has been
made possible by the dramatic liberalization of and associated
rapid growth of world trade flows

Consequently, each year a greater proportion of the goods and

services produced in the world are created in one country and
consumed in another. Indeed, globalization is a consequence of
these differential growth rates.

World trade has grown so rapidly over the last 70 years because
an international political structure, the World Trade Organization
(WTO), and its predecessor, the General Agreement on Tariffs
and Trade (GATT), has supported and encouraged such growth.

What is the WTO?

The WTO (located on the shore of the beautiful Lac Leman in

Geneva, Switzerland) is the hub of an international political
system under which governments negotiate, enforce, and revise
rules to govern their trade policies.

The WTO encourages countries to open their markets to foreign

competition, and to promote the export of their own domestic
goods and services. By regulating trade in this way, the WTO
aims to create more opportunities for businesses, increase
economic growth, and reduce poverty around the world.

Summary: Because of the dividing of production across the

globe, growth rates have been possible because countries are
now willing to diversify their resources, causing more trade to
happen. Because of WTO and the trade support coming with it
more growth for countries is possible.

Two core principles stand at the base of the WTO:

Market liberalism provides the economic rationale for the trade

system. Market liberalism asserts that an open, or liberal,
international trade system raises the world’s standard of living.
Every country—no matter how poor or how rich—enjoys a higher
standard of living with trade than it can achieve without trade.

Nondiscrimination is the second core principle of the multilateral

trade system. Nondiscrimination ensures that each WTO member
faces identical opportunities to trade with other WTO members.

Forms:

1) Most-Favored Nation (MFN), prohibits governments from

using trade policies to provide special advantages to some
countries and not to others. MFN simply requires each WTO
member to treat all WTO members the same

Example:

For example, the United States cannot apply lower tariffs to

goods imported from Brazil (a WTO member) than it applies to
goods imported from other WTO member countries. If the United
States reduces tariffs on goods imported from Brazil, it must
extend these same tariff rates to all other WTO members.

Exception: WTO rules do allow some exceptions to MFN. The

most important exception concerns regional trade arrangements.
Governments are allowed to depart from MFN if they join a free-
trade area or customs union.

Exception: Generalized System of Preferences, the GSP allows

the advanced industrialized countries to apply lower tariffs to
imports from developing countries than they apply to the same
goods coming from other advanced industrialized countries.
These exceptions aside, MFN ensures that all countries trade on
equal terms.
 2) National treatment prohibits governments from using taxes,
regulations, and other domestic policies to provide an
advantage to domestic firms at the expense of foreign firms.

In plainer English, national treatment requires governments to

treat domestic and foreign versions of the same product (“like
products” in GATT terminology) identically once they enter the
domestic market.

Example: For example, the U.S. government cannot establish one

fuel efficiency standard for foreign cars and another for domestic
cars. If the U.S. government wants to advance this environmental
goal, it must apply the same requirement to domestic and foreign
auto producers.

Summary: Because of the theory Market Liberalism, we argue

that the more trade is open and free between countries, the
standard of living becomes higher. The other principle such as
Non- Discrimination, helps re-instate that all countries in the
WTO deserve the same fair treatment. The different forms are
MFN. MFN simply requires each WTO member to treat all WTO
members the same. For example, in America it can’t give special
treatment to one country for lower tariffs, it must apply to all.
The exceptions being, if the country is in Regional trade
agreements with that other country which is also a member they
can both adjust rates between each other. The other exception is
the GSP, which means that if you are an advanced country you
can apply lower tariffs compared to applying same or higher
tariffs to another advanced country. And the other principle is
national treatment, which means that treat another foreign
product the same way you treat a domestic product.

WTO Rules and how they are made:

All WTO rules are created by governments through
intergovernmental bargaining. Intergovernmental bargaining is
the WTO’s primary decision-making process, and it involves
negotiating agreements that directly liberalize trade and
indirectly support that goal.

Tools they utilize to alter policies:

1) Such policies include tariffs, which are taxes that

governments impose on foreign goods entering the country.
2) They also include a wide range of non-tariff barriers such as
health and safety regulations, government purchasing
practices, and many other government regulations.

Intergovernmental bargaining focuses on negotiating

agreements that reduce and eliminate these government-
imposed barriers to market access.

Summary: In order, for governments to cooperate and work

with the WTO. The WTO use polices to help liberalize trade.
They have a process where they negotiate agreements to
make these rules happen. Such as the process known as
intergovernmental bargaining which help liberalize trade.
They use tools such as Tariffs, which place taxes on imported
goods. And they also use non-tariff barriers, which are
government regulations and can affect how certain sectors
within the country will act.

WTO Bargaining Rounds:

1st Step: At the beginning of each round, governments meet as

the WTO Ministerial Conference, the highest level of WTO
decision making.
 - Estb. an agenda.
- Set a date for the end of the round.
- After rounds lower level. national officials conduct detailed
negotiations on the agenda.

Summary: The rules established by intergovernmental bargaining

provide a framework of law for international trade relations.
Participation in the WTO, therefore, requires governments to
accept common rules that constrain their actions. By accepting
these constraints, governments shift international trade relations
from the anarchic international environment in which “might
makes right” into a rule-based system in which governments
have common rights and responsibilities.

Doha Round:

Governments launched the Doha Round at the WTO’s Fourth

Ministerial Conference held in Doha, Qatar, in November 2001.

Governments agreed to

(1) Negotiate additional tariff reductions (with a specific focus on

developing countries’ exports),

(2) incorporate existing negotiations in services into the Doha

Round, and

(3) pursue meaningful liberalization of trade in agricultural

products.

In agriculture, they agreed to reduce barriers to market access,

to eliminate agricultural export subsidies, and to reduce
domestic production subsidies.

Negotiation Problems:
First, developing countries were demanding deeper liberalization
of agriculture than the United States and the European Union
(EU) were willing to accept.

Second, the EU was insisting that negotiations on the Singapore

issues be initiated in 2004, but developing countries were
unwilling to negotiate on new issues until they had achieved
substantial gains in agriculture.

Minor Conclusion:

It took almost a year to put the negotiations back on track.

Finally, on August 1, 2004, governments reached the agreement
that had eluded them in Cancún. The EU and the United States
accepted broad principles concerning the liberalization of trade
in agriculture. In exchange, developing countries agreed to
negotiating one of the Singapore issues: trade facilitation.

Summary: The negotiation for the Doha Trade Deal began with
goals that focused on tariff reduction, especially countries that
were developing nations. And another goal was to liberalize trade
with agriculture goods. However, there were problems, some
countries wanted more liberalization than what the US and EU
had initially set. And second, some countries wanted to start
talks on a new concerns but the developing nations did not want
that until the agriculture liberalization was complete. In the end,
nations agreed to do some of the deals albeit small changes.

The WTO’s dispute settlement mechanism ensures that

governments comply with the rules they establish. Individual
compliance with established rules is not guaranteed.
The dispute settlement mechanism ensures compliance by
helping governments resolve disputes and by authorizing
punishment in the event of noncompliance.

The dispute-settlement mechanism ensures compliance by

providing an independent quasi-judicial tribunal. This tribunal
investigates the facts and the relevant WTO rules whenever a
dispute is initiated and then reaches a finding.

Because compliance with the rules cannot be taken for granted,

governments have established a dispute-settlement mechanism
to help ensure that members comply.

Summary: The dispute settlement mechanism makes

governments accountable for their actions. The dispute
settlement mechanism helps by adding punishments to
governments that do not listen to the rules. They do this by
having a quasi-judicial tribunal investigate the case that is being
reported. Since rules should not be given easy leeway, there are
mechanisms available to make sure everyone listens.

HEGEMONS, PUBLIC GOODS, AND THE WORLD TRADE SYSTEM

Hegemonic stability theory is often advanced to explain why the

system shifts between periods in which it is open and liberal, and
periods in which it is closed and discriminatory. Hegemonic
stability theory rests on the logic of public goods provision.

Public Good has two Characteristics:

1) Non-excludability means that once the good has been

supplied, no one can be prevented from enjoying its
benefits.
 2) Non-rivalry means that consumption by one individual does
not diminish the quantity of the good available to others.

Summary: Hegemonic Stability Theory explains why at certain

periods of time some systems are more open, and at other times
they are discriminatory. The theory is based on public goods.
There are types of available public goods, Non-Excludability for
example is once something is introduced no person is limited to
access it. Non-Rivalry is basically even if it is used by one person
it will always be available for everyone.

Public goods tend to be undersupplied relative to the value

society places upon them. Undersupply is a result of a
phenomenon called free riding. Free riding describes situations in
which individuals rely on others to pay for a public good

More broadly, goods that are non-excludable and non-rivalrous

tend to be undersupplied.

Large groups consist of many individuals, and each individual has

a limited capacity to influence the group's overall performance.
Therefore, they may not feel accountable or responsible for the
success of the group as a whole. As the group size increases, the
individual's contribution becomes relatively smaller, and they
may underestimate the significance of their contribution to the
group's outcomes. As a result, they may assume that their
absence would not impact the group's performance and may feel
less motivated to contribute towards the group's objectives.

International rules and procedures benefit all governments

(though not necessarily all benefit equally). Moreover, it is
difficult (though not impossible) to deny a government these
benefits once an institution has been established. Moreover,
these benefits do not decrease as a function of the number of
governments that belong to the institution.

All governments want global trade rules, but each wants

someone else to bear the cost of providing such rules.

Summary: When it comes to public goods often it is lacking,

because of free riding. Which is basically, when people or
individuals expect someone else to pay. Both non-excludable and
non-rivalrous are undersupplied public goods. For example, when
the group is big people contribute less because there are a lot of
other people who can do the job for them. The reason why
international institutions are important is because regardless of
how many members join the benefits remain the same and it is
open for all. The only downside is that some countries want more
than just the same benefits and have their own interests.

Hegemonic stability theory argues that hegemons act like

privileged groups and thus overcome the free-riding problem. A
hegemon is a country that produces a disproportionately large
share of the world’s total output and that leads in the
development of new technologies.

The benefits that the hegemon gains from trade are so large that
it is willing to bear the full cost of creating international trade
rules.

As a hegemon declines in power, it becomes less willing to bear

the cost of maintaining trade rules, and world trade becomes
less open.

Summary: The hegemonic stability theory basically means that

some groups gain so much influence they can overcome the free-
riding because they can carry the cost. Because they gain so
much trade it is willing to be the standard bearer for creating
rules. The hegemon acknowledges that the provision of services
or resources that benefit the public cannot be achieved without
their contribution. The hegemon understands their responsibility
to contribute towards the common good and recognizes that
their actions (or inaction) can have a significant impact on the
well-being of society. But we also find that without a hegemon to
guide and cover the costs the decline results to countries
becoming more protectionist.

Regionalism is one alternative that has gained particular appeal.

Indeed, many observers believe that regional trade arrangements
pose the single greatest challenge to the multilateral trade
system.

A regional trade arrangement (RTA) is a trade agreement

between two or more countries, usually located in the same
region of the world, in which each country offers preferential
market access to the other.

Different Forms:

In a free- trade area, like the North American Free Trade

Agreement, governments eliminate tariffs on other members’
goods, but each member retains independent tariffs on goods
entering their market from non-members.

In a customs union, like the EU, member governments eliminate

all tariffs on trade between customs union members and impose
a common tariff on goods entering the union from non-members.

RTAs provide tariff-free market access to some countries, but not

to others, they are inherently discriminatory.
Summary: Regionalism remains to be big threat to multiple trade
systems. RTA’s are trade groups between two or more countries,
where in their own sphere they make their own rules. There are
different forms, one being free-trade area which means they can
eliminates fees on both their ends if they are both members, but
for non-members the regular fee remains. And then we have
customs unions, where all members can eliminate fees, but they
all agree to have the same fee apply to all other non-members,
having a uniformed tariff.

Waves:

The first wave began early in the 1950s and extended to the mid-
1970s. This wave began with the construction of the original
European Economic Community in 1958 and the Latin American
Free Trade Area in 1960, and concluded with the formation of the
Economic Community of West African States in 1975.

Wave was motivated in part by a desire to promote deeper

economic cooperation within particular regions in an attempt to
promote peace and achieve more rapid economic development.

mega-regional agreements. The two most prominent of these

mega-regional agreements are the Trans-Pacific Partnership
(TPP), negotiated between the U.S. and the EU, and the
Transatlantic Trade and Investment Partnership (TTIP), which
was negotiated by 13 states in Asia and North and South
America.

In contrast to previous waves, which tended to focus most

heavily on trade liberalization, the mega-regional agreements
seek deeper economic integration among their members. To
achieve this goal, these agreements are both broader in scope
and reach more deeply into domestic arrangements
Summary: The reason why some RTA exist can be attributed to
waves. For example, some countries made RTA’s to expand their
ties and promote peace. Later on, Mega Regional Agreements
happened, which focused on broadening ties all the way to the
domestic level.

Reasons for RTA:

1) Some emphasize a country’s desire to gain more secure

access to the market of a particularly important trading
partner.
2) Other scholars emphasize a government’s need to signal a
strong commitment to economic reform. Governments use
RTAs to convince foreign partners that they will maintain
open markets and investor-friendly policies.

Notice that these arguments actually place less emphasis on

the trade benefits that might result from an RTA and focus
more on the need to attract foreign investment.

3) Other scholars argue that countries enter RTAs to increase

their bargaining power in multilateral trade negotiations. A
small country bargaining individually in the WTO lacks
power because it does not have a large market to offer. By
pooling a group of small countries, the market that can be
offered to trade partners in WTO negotiations increases
substantially.
4) Finally, and clearly relevant to the emergence of the mega-
regional agreements, the impasse in the Doha Round
encouraged states to find other paths along which to pursue
their trade policy goals

Moreover, the growing importance of global value chains has

provided multinational businesses with a strong incentive to
 pressure their governments to negotiate these deeper
agreements in order to better protect their investments, to
harmonize product standards across national markets, and to
make it easier and cheaper to ship goods across national
boundaries.

Summary: Some RTA’s happen to be able to have access to a

certain partners goods. Some enter RTA’s to show an open
economy open for trade. They all focus on foreign investments.
And in some cases, they enter trade to increase their bargaining
strength by joining with other small countries to form a well-
represented group. And they also join RTA’s to create
independent and alternative solutions to trading. Even domestic
pressure from business encourage countries to join certain RTA’s
to accrue certain benefits.

Consequences of RTA’s:

Because the RTA eliminates tariffs on trade between France and

Germany, more Franco-German trade takes place. This is trade
creation.

Because the RTA does not eliminate tariffs on trade between

France and Germany on the one hand, and the United States on
the other, some trade between the United States and Germany is
replaced by trade between France and Germany. This is trade
diversion.

In this optimistic scenario, RTAs lead eventually to global free

trade in which trade creation outweighs trade diversion and
RTAs complement the WTO.
Summary:

Trade creation is a benefit of regional trade agreements (RTAs)

that occurs when tariffs are eliminated between two or more
countries within the RTA. This leads to increased trade between
those countries, as businesses can now produce goods and
services more cheaply and sell them to a larger market.

Trade diversion is a cost of RTAs that occurs when tariffs are

eliminated between countries within the RTA, but not between
those countries and other countries outside the RTA. This can
lead to businesses shifting production to countries within the
RTA, even if those countries are not the most efficient producers.
This can harm consumers in countries outside the RTA, as they
may have to pay higher prices for goods and services.

Conclusion:

In short, the WTO brings the rule of law to bear in international

trade relations. The rapid growth in the number of countries
joining the WTO during that period suggests that most of the
world’s governments believe that they are better off with the
WTO than without it.

OATLEY Chapter 3:

The first is the production possibility frontier (PPF). Countries are

endowed with factors of production in finite amounts.
Consequently, any decision to use factors to produce one good,
necessarily means that these factors are not available to
produce other goods.

For example: A decision to allocate capital and labor to the

production of computers, for example, necessarily requires the
country to forgo the production of some number of shirts. These
forgone shirts are what economists call opportunity costs, and
the production possibility frontier allows us to measure these
opportunity costs quite precisely.

Summary:

Countries have limited resources, so they have to make choices

about what to produce. When a country produces more of one
good, it has to produce less of another good. The production
possibility frontier (PPF) is a graph that shows all the possible
combinations of goods that a country can produce. The PPF can
be used to measure the opportunity cost of producing a good.
The opportunity cost of producing a good is the amount of
another good that has to be given up to produce it.

Here is an example of how the PPF can be used to measure

opportunity cost. Let's say that a country has 100 workers and
100 machines. It can use these resources to produce 100
computers or 100 shirts. If the country decides to produce 100
computers, it will have to forgo the production of 100 shirts. The
opportunity cost of producing a computer is therefore 1 shirt.

The PPF is a useful tool for understanding the concept of

opportunity cost. It can help us to see the tradeoffs that
countries face when they make decisions about what to produce.

--
If we connect A and B with a line, we have defined a production
possibility frontier for the United States.

As we move from A to B, capital and labor are reallocated away

from computer production to shirt production.

The slope of the line, called the marginal rate of transformation,

tells us exactly how many shirts the United States forgoes for
each computer it produces.

Every additional computer always costs three shirts. If we

assume constant opportunity costs, we also implicitly assume
that the United States enjoys constant returns to scale in
production. This means that whenever the factors employed in
shirt production are increased by some factor, we will increase
the number of shirts produced by the same factor.

Double the amount of labor and capital employed in shirt

production and double the number of shirts produced.

Summary:
• The production possibility frontier (PPF) is a graph that
shows all the possible combinations of output that can be
produced by an economy, given the resources available and the
state of technology.

• The slope of the PPF, called the marginal rate of

transformation (MRT), measures the opportunity cost of
producing one good in terms of the other.

• In this case, the MRT between computers and shirts is

constant, meaning that the opportunity cost of producing one
additional computer is always three shirts.
• This suggests that the United States enjoys constant
returns to scale in production, meaning that if we double the
amount of labor and capital employed in shirt production, we will
double the number of shirts produced.

In summary, the given information shows that the United States

is able to produce more computers and shirts by reallocating
resources away from computer production and towards shirt
production. The MRT between computers and shirts is constant,
suggesting that the United States enjoys constant returns to
scale in production. This means that if we double the amount of
labor and capital employed in shirt production, we will double the
number of shirts produced.

Here are some additional points to consider:

• The PPF is a useful tool for understanding the concept of

scarcity. It shows that there is a limit to the amount of goods and
services that an economy can produce, given the available
resources and technology.

• The PPF can also be used to analyze the effects of

economic growth. As an economy grows, the PPF shifts outward,
indicating that the economy is able to produce more goods and
services.

• The PPF is a simplified model of the economy. It does not

take into account a number of factors that can affect production,
such as the distribution of income, the quality of education, and
the level of government regulation.

--
If we assume the United States faces increasing opportunity
costs, we are also implicitly assuming that factors yield
diminishing marginal returns.

This means that the number of additional computers the United

States can produce for each additional worker employed in
computer production will fall as the number of workers employed
in computer production rises.

Our second core concept, consumption indifference curves, helps

us understand the specific combination of computers and shirts
American consumers will purchase. Consumers will acquire
shirts and computers in the combination that maximizes their
collective utility.

If we connect every combination of shirts and computers that

provides our consumer with the same amount of utility with a
curved line such as Ua, we have drawn an indifference curve.

Summary:

• Increasing opportunity costs means that the more of

something we produce, the harder it becomes to produce more of
it. For example, if we want to produce more computers, we might
have to take workers away from producing shirts. This means
that we will be able to produce fewer shirts, even if we have the
same number of workers.

• Diminishing marginal returns means that the more of

something we produce, the less additional benefit we get from
producing each additional unit. For example, if we produce the
first computer, it might be very useful for us. But if we produce
the second computer, it might not be as useful, because we
already have one computer.
• Consumption indifference curves show all the combinations
of goods that give a consumer the same amount of satisfaction.
For example, a consumer might be indifferent between having 10
computers and 20 shirts, or 20 computers and 40 shirts.

• The consumer will acquire shirts and computers in the

combination that maximizes their collective utility. This means
that the consumer will choose the combination of shirts and
computers that makes them the happiest.

• An indifference curve is a curved line that shows all the

combinations of shirts and computers that give a consumer the
same amount of utility. The slope of an indifference curve shows
how much the consumer is willing to give up one good in order to
get more of another good.

In the context of the United States, increasing opportunity costs

and diminishing marginal returns mean that the country can
produce more computers, but only at the expense of producing
fewer shirts. This means that the United States faces a trade-off
between producing computers and producing shirts. The
consumer will choose the combination of computers and shirts
that maximizes their collective utility, and this will depend on
their preferences. For example, if a consumer values computers
more than shirts, they will choose to consume more computers
and fewer shirts.

--

We can draw a second indifference curve that links the

combinations d, e, and f. Each of these combinations yield more
utility than a, b, or c, and are thus said to lie on a higher
indifference curve.

First, indifference curves typically slope downwards. This slope,

called the marginal rate of substitution, tells us how much of one
good the consumer is willing to give up to acquire an additional
unit of the second good.

Second, indifference curves typically bend in toward the origin.

This reflects the assumption of diminishing marginal utility. The
first computer provides a large improvement in utility. Each
successive computer, however, provides a smaller increase of
utility.

Finally, when we focus on production and consumption for an

entire country, we construct community indifference curves
rather than individual indifference curves. Community
indifference curves aggregate utility for all consumers in that
society. In this example, then, our community indifference curves
embody the aggregated preferences of all American consumers.

That is, production and consumption will occur where the PPF
and the indifference curve are tangent.

Summary:

• Indifference curves: Indifference curves are a way of

showing the different combinations of goods that give a
consumer the same amount of satisfaction. For example, a
consumer might be indifferent between having 10 computers and
20 shirts, or 20 computers and 40 shirts. This is because the
consumer gets the same amount of satisfaction from both
combinations.

• Slope of an indifference curve: The slope of an indifference

curve shows how much of one good the consumer is willing to
give up in order to get more of another good. For example, if the
slope of an indifference curve is -2, this means that the consumer
is willing to give up 2 shirts in order to get 1 computer.

• Indifference curves typically slope downwards and bend in

towards the origin: This is because of the principle of diminishing
marginal utility. Diminishing marginal utility means that the more
of something we have, the less additional satisfaction we get
from each additional unit. For example, the first computer might
be very useful for us. But if we produce the second computer, it
might not be as useful, because we already have one computer.

• Community indifference curves: Community indifference

curves are used to show the aggregated preferences of all
consumers in a society. This means that they show the
combinations of goods that make all consumers in a society
equally satisfied.

• Production and consumption will occur where the PPF and

the indifference curve are tangent: This is because the PPF
shows the maximum amount of goods that can be produced, and
the indifference curve shows the combinations of goods that
make consumers the most satisfied. When the PPF and the
indifference curve are tangent, this means that the economy is
producing the maximum amount of goods that can be produced,
and consumers are getting the most satisfaction from the goods
that they are consuming.

--

 Autarky is a situation in which a country produces all of the

goods and services that it consumes.

 Trade is the exchange of goods and services between

countries.

 Specialization is the process of focusing on the production

of a limited number of goods or services.

 Comparative advantage is the ability to produce a good or

service at a lower opportunity cost than another country.

Trade between the United States and China is beneficial for both
countries because it allows each country to specialize in the
production of goods that it is relatively good at producing. This
leads to increased efficiency and lower costs, which allows both
countries to produce more goods and services.

In the example you gave, the United States is relatively good at

producing computers, while China is relatively good at producing
shirts. Under autarky (no trade), each country would produce
both goods, but at a higher cost than if they specialized. For
example, the United States could produce 60 million computers
and 120 million shirts, but it would be more efficient for the
United States to produce only computers and import shirts from
China. Similarly, China could produce 13 million computers and
140 million shirts, but it would be more efficient for China to
produce only shirts and import computers from the United States.

When the United States and China trade, each country can focus
on producing the goods that it is relatively good at producing.
This leads to increased efficiency and lower costs, which allows
both countries to produce more goods and services. In the
example you gave, trade between the United States and China
allows each country to produce 75 million computers and 150
million shirts (the United States) and 25 million computers and
250 million shirts (China). This is more than each country could
produce under autarky, which means that both countries are
better off with trade.

--

This specific example illustrates the broader claim that every

country gains by specializing in goods it produces relatively well
and trading them for the goods it produces relatively less well.
This is the principle of comparative advantage.

What determines which goods a particular country will produce

relatively well and which it will produce relatively less well? The
Hecksher-Ohlin (or H-O) model, (named after the two Swedish
economists, Eli Hecksher and Bertil Ohlin who developed it)
provides the standard answer.

The H-O model argues that comparative advantage arises from

differences in factor endowments.
Factors are the basic tools of production. When firms produce
goods, they employ labor and capital in order to transform raw
materials into finished goods. Labor obviously refers to workers.
Capital encompasses the entire physical plant that is used in
production, including the buildings that house factories and the
machines on the assembly lines inside these factories

A country’s abundant factor will be cheaper to employ than its

scarce factor.

Because countries have different factor endowments and face

different factor prices, countries will hold a comparative
advantage in different goods.

A country will have a comparative advantage in goods produced

using a lot of their abundant factor and a comparative
disadvantage in goods produced using a lot of their scarce
factor.

Thus, in our example, the United States has a comparative

advantage in computers and not in shirts because the United
States is abundantly endowed with physical and human capital
and poorly endowed with low- skilled labor. China has a
comparative advantage in shirts and not in computers because
China is abundantly endowed with labor and poorly endowed with
human and physical capital.

Comparative advantage tells us, therefore, that all countries gain

from trade by specializing in the goods that rely heavily on the
factors of production that they hold in abundance and
exchanging them for goods that make intensive use of the
factors of production that are scarce in their economy.
Summary:

Comparative advantage is the ability of a country to produce a

good or service at a lower opportunity cost than another country.
In other words, a country has a comparative advantage in
producing a good if it can produce that good using fewer
resources than another country.

The Heckscher-Ohlin (H-O) model is a theory of international

trade that explains how countries specialize in the production of
goods based on their factor endowments.

Factor endowments are the resources that a country has

available, such as labor, capital, and land. They are both
important because they explain why countries specialize in the
production of different goods and why trade is beneficial for all
countries involved.

The H-O model predicts that countries will specialize in the

production of goods that use their abundant factors intensively.
For example, a country with a lot of labor will specialize in the
production of labor-intensive goods, such as clothing and
textiles. A country with a lot of capital will specialize in the
production of capital-intensive goods, such as computers and
machinery.

Example: the United States has a comparative advantage in

computers because it has a lot of capital and human capital.
China has a comparative advantage in shirts because it has a lot
of labor. By specializing in the production of computers, the
United States can produce more computers with the same
amount of resources. By specializing in the production of shirts,
China can produce more shirts with the same amount of
resources.

Trade between the United States and China allows both

countries to consume more goods and services than they could if
they were not trading. This is because each country can focus on
producing the goods that it has a comparative advantage in and
then trade for the goods that it does not produce.

--

Trade Bargaining: The model is based on the idea that

governments will try to open foreign markets to the exports of
competitive domestic industries and continue to protect less
competitive industries from imports. This means that
governments will have different ideal points, or preferred
outcomes, in trade negotiations.

In the Doha Round, the two main issues were the reduction of
barriers to trade in agriculture products and the reduction of
barriers to trade in manufactured goods.

The United States and the European Union (EU) are relatively
poorly endowed with land and relatively abundantly endowed
with capital. This means that they have a comparative advantage
in manufactured goods and a comparative disadvantage in
agriculture.
Their ideal outcome would be to reduce barriers to trade in
manufactured goods, while maintaining or even increasing
barriers to trade in agriculture.

The Group of 20 (G20) is abundantly endowed with land and

poorly endowed with capital. This means that they have a
comparative advantage in agriculture and a comparative
disadvantage in manufactured goods. Their ideal outcome would
be to reduce barriers to trade in agriculture, while maintaining or
even increasing barriers to trade in manufactured goods.

The horizontal axis depicts all possible levels of agriculture

protection in the advanced industrialized countries. Protection of
agriculture is zero at the origin and barriers to trade rise as we
move out toward the right. The vertical axis captures all possible
levels of protection of manufactured goods in developing
countries. Again, protection is zero at the origin and increases as
we move up from the origin.

The status quo, or current situation, is characterized by a fairly

high level of protection in both sectors. The bargaining space is a
two-dimensional space, with one axis representing the level of
protection in agriculture and the other axis representing the level
of protection in manufactured goods. The status quo is located in
the northeast quadrant of the bargaining space.
The bargaining process will take place within this bargaining
space. The two sides will try to reach an agreement that is
closer to their ideal points than the status quo. The agreement
will likely involve some compromise, as neither side will get
everything they want.

The trade bargaining model is a useful tool for understanding

how trade negotiations work. It can help us to predict the likely
outcomes of trade negotiations and to identify the factors that
will influence the outcome.
The outcome of the bargaining process can be affected by a
number of factors, including the relative bargaining power of the
two sides, the level of public support for the negotiations, and
the political climate.

Trade bargaining can be a difficult and frustrating process, but it

can also be a rewarding one. When successful, trade bargaining
can lead to increased trade and economic growth, which can
benefit everyone involved.

Governments liberalize comparatively advantaged sectors and

protect disadvantaged sectors.

Summary: Trade Bargaining means that governments will have

different ideal points, or preferred outcomes, in trade
negotiations. In the example, we see that some nations are rich
in Capital while others are not so fortunate. And same goes for
other countries where they are rich in labor but not in capital.
The horizontal line as it moves to the right increase barriers to
trade. The vertical line does the same but for a different
component. The status quo shows a high level of barrier but both
side with trade bargaining could change that. Keep in note that
other factors come into play when countries try to reach an
agreement. And also governments that have products they can
produce well are likely to be liberalized, versus products they
have a disadvantage of.

---

The Problem with Lowering the Barrier:

In this scenario, we have two actors: the United States/EU and

the G-20. Each actor has an ideal point, which is the point at
which they would be most satisfied with the outcome. The
distance between the current outcome and each actor's ideal
point determines their utility.

A unilateral reduction of protectionist barriers on United

States/EU agriculture would shift the outcome to the left. This is
because the United States/EU would be able to export more
agricultural products, which would benefit them. However, this
would also mean that the G-20 would have to import more
agricultural products, which would harm them. As a result, the
United States/EU would gain utility from this unilateral reduction,
while the G-20 would lose utility.

Similarly, a unilateral reduction of tariffs on manufactured goods

would shift the outcome down. This is because the G-20 would be
able to export more manufactured goods, which would benefit
them. However, this would also mean that the United States/EU
would have to import more manufactured goods, which would
harm them. As a result, the G-20 would gain utility from this
unilateral reduction, while the United States/EU would lose
utility.

In both cases, the unilateral reduction of barriers would lead to a

shift in the outcome that is further away from the ideal point of
the other actor. This means that neither actor can realize higher
utility by engaging in unilateral liberalization.

Summary: The United States/EU and the G-20 each have an ideal
point. The closer the outcome is to an actor's ideal point, the
more utility they will receive. A unilateral reduction of barriers
will shift the outcome closer to one actor's ideal point, but
further away from the other actor's ideal point. Therefore, neither
actor can realize higher utility by engaging in unilateral
liberalization.

Solution to the problem through Bargaining:

The United States/EU and the G-20 are both unwilling to

unilaterally reduce protectionist barriers. This is because they
would both lose utility from doing so. However, they are both
willing to reduce protectionist barriers through international
bargaining. This is because they can both gain utility from a
negotiated agreement that is better than the status quo.

The reason why international bargaining can lead to a better

outcome than unilateral liberalization is because it allows each
actor to make concessions in exchange for concessions from the
other actor. For example, the United States/EU might be willing
to reduce agricultural protectionist barriers in exchange for the
G-20 reducing tariff barriers on manufactured goods. This would
lead to an outcome that is better for both actors than if they had
both acted unilaterally.

Summary: Each actor has an ideal outcome. The status quo is an

outcome that neither actor prefers to their ideal outcome.
Through international bargaining, actors can reach an agreement
that is better than the status quo for both actors. This is because
actors can make concessions in exchange for concessions from
the other actor.

--

The contract curve is a set of mutually beneficial agreements

that exhaust available joint gains. This means that any
agreement on the contract curve will make both parties better
off than they were before the agreement. However, the
distribution of the gains will not be equal. Some agreements will
benefit one party more than the other.

The figure you provided shows the contract curve for the United
States/EU and the G-20. The point (m) represents an agreement
that divides the gains evenly. Any point between m and e
benefits the United States/EU more than the G-20. Any point
between m and g benefits the G-20 more than the United
States/EU.

The governments involved in the negotiation will choose an

agreement from the contract curve that they believe is in their
best interests. This will depend on a number of factors, including
the relative bargaining power of the two parties, the preferences
of the domestic population, and the political climate.

Summary: The contract curve is a set of agreements that are

mutually beneficial. The distribution of the gains from an
agreement will not be equal but non the less an agreement will
be made. In the graph, in the middle (m) divides the gains
equally, from m to e or m to g, the deal could benefit one of the
groups. The governments involved in the negotiation will choose
an agreement that they believe is in their best interests.

--

Bargaining power refers to the ability of a party to influence the

outcome of a negotiation. It is not simply a matter of having more
resources or being more powerful in a military sense. It also
depends on factors such as patience, outside options, and the
ability to make credible threats.
Patience is important in negotiations because it allows a party to
wait for a better deal. If one party is more patient than another, it
can use its willingness to wait to extract concessions from the
other party. For example, a government that is more patient may
be willing to wait for a better deal on trade liberalization, even if
it means that its economy suffers in the short term.

Outside options are also important in negotiations. An outside

option is an alternative to reaching an agreement with the other
party. If one party has a better outside option than the other, it
can use this to its advantage in the negotiation. For example, a
government that has a number of other trade partners may be
less willing to make concessions to a particular country.

The ability to make credible threats is also important in

negotiations. A threat is only credible if the party making the
threat is willing to carry it out. For example, a government that
threatens to impose tariffs on imports from another country is
only credible if it is actually willing to do so.

Summary: Bargaining power is determined by a number of

factors, including patience, outside options, and the ability to
make credible threats. These factors can be used by parties to a
negotiation to influence the outcome of the negotiation and to
capture more of the joint gains for themselves.

--

The enforcement problem refers to the fact that governments

cannot be certain that other governments will comply with the
trade agreements that they conclude As a result, governments
will be reluctant to enter into trade agreements, even when they
recognize that they would benefit from doing so.
Pareto optimality is a concept in economics that describes a
situation where it is impossible to make one person better off
without making someone else worse off.

A Pareto suboptimal outcome is one where it is possible to make

at least one person better off without making anyone else worse
off.

In the prisoner's dilemma, the protect/protect outcome is Pareto

suboptimal because both governments could be better off if they
both liberalized trade. However, each government has a
dominant strategy to protect its own industries, even though this
leads to a suboptimal outcome for both countries.

The Group of 20 and the EU are both poorer than they would be if
they liberalized trade. This is because protectionist policies lead
to higher prices for consumers and less economic growth. By
liberalizing trade, these countries could make their citizens
better off without making anyone else worse off.

Summary: The enforcement problem is a problem that explains

that some countries are unwilling to trade because they do not
know the country they are trading with will follow their agreed
plans. Pareto optimality is a concept in economics that
describes a situation where it is impossible to make one person
better off without making someone else worse off. A Pareto
suboptimal outcome is one where it is possible to make at least
one person better off without making anyone else worse off. In
the prisoner's dilemma, the protect/protect outcome is Pareto
suboptimal because both governments could be better off if they
both liberalized trade. The Group of 20 and the EU are both
poorer than they would be if they liberalized trade.
--

In the context of trade, the prisoner's dilemma can be used to

explain why countries often choose to protect their own
industries with tariffs and other barriers to trade. Even though
both countries would benefit from free trade, each country has
an incentive to protect its own industries. If one country lowers
its tariffs while the other country does not, the first country will
lose out to the second country, which will have lower prices. As
a result, both countries are likely to choose to protect their own
industries, even though this leads to a suboptimal outcome for
both countries.

The prisoner's dilemma suggests that it can be difficult to

achieve trade liberalization, even when all countries would
benefit from it. This is because the political dynamics of trade
policy often lead countries to choose protectionist policies, even
when these policies are not in their best interests.

Summary: The Nash equilibrium is the outcome of the game

where neither player has an incentive to change their strategy. In
the context of trade, the prisoner's dilemma can be used to
explain why countries often choose to protect their own
industries with tariffs and other barriers to trade. Even though
both countries would benefit from free trade, each country has
an incentive to protect its own industries. As a result, both
countries are likely to choose to protect their own industries,
even though this leads to a suboptimal outcome for both
countries. The prisoner's dilemma suggests that it can be
difficult to achieve trade liberalization, even when all countries
would benefit from it. Because of protectionist polices.

--
Solving the Problem to the Prisoners Dilemma:

SOLUTION 1: Iterated Gameplay

The game must be iterated. This means that the game is played
repeatedly over time, with the same players. In a one-shot game,
each player has only one chance to cooperate or defect. In an
iterated game, each player has multiple chances to cooperate or
defect, and their choices in the future will be affected by their
choices in the past.

There must be some form of punishment for defection. This could

be a formal punishment, such as a trade war, or it could be an
informal punishment, such as a loss of reputation. If there is no
punishment for defection, then players will have no incentive to
cooperate.

There must be some form of trust between the players. This

means that players believe that the other players will cooperate,
even when they have the opportunity to defect. Without trust,
players will be too afraid to cooperate, for fear of being
exploited.

If these three conditions are met, then cooperation can emerge

in a prisoner's dilemma. This is because players will realize that
they are better off cooperating in the long run, even if it means
giving up some short-term gains.

Summarize: Cooperation in a prisoner's dilemma is not

impossible. Cooperation can emerge if three specific conditions
are met: The game must be iterated. There must be some form of
punishment for defection. There must be some form of trust
between the players.
--

SOLUTION 2: Reciprocity

Reciprocity strategies are used in trade to ensure that both

parties to a trade agreement are fulfilling their obligations. The
most well-known reciprocity strategy is tit-for-tat, in which each
party plays the strategy that the other party played in the
previous round. This means that if one party liberalizes trade, the
other party will also liberalize trade in the next round.

However, if one party protects its domestic market, the other

party will also protect its domestic market in the next round.
Reciprocity strategies can be used to enforce trade agreements
by rewarding countries for cooperating and punishing countries
for cheating.

For example, if one country lowers its tariffs on imports from

another country, the other country is more likely to lower its
tariffs on imports from the first country. This can lead to a
virtuous cycle of trade liberalization, which can benefit both
countries.

However, reciprocity strategies can also lead to a trade war if

one country cheats and the other country retaliates. For
example, if one country lowers its tariffs on imports from another
country, but the other country does not reciprocate, the first
country may raise its tariffs on imports from the second country.
This can lead to a cycle of retaliation, which can damage both
countries' economies.

Summary: Reciprocity strategies are used in trade to ensure that

both parties to a trade agreement are fulfilling their obligations.
The most well-known reciprocity strategy is tit-for-tat, one party
will repeat what the other one did in the last game. Reciprocity
strategies can be used to enforce trade agreements by rewarding
countries for cooperating and punishing countries for cheating.
However, reciprocity strategies can also lead to a trade war if
one country cheats and the other country retaliates.

OATLEY Chapter 4:

To understand the political dynamics of this competition, the

society- centered approach emphasizes the interplay between
organized interests and political institutions. The approach is
based on the recognition that trade has distributional
consequences.

Here we examine two standard models of trade policy

preferences: the factor model and the sector model. The two
models agree that raising and lowering tariffs redistributes
income, and they agree that these income consequences are the
source of trade policy preferences. The two models offer
distinctive conceptions of how trade’s income consequences
divide society

Summarize: Society centered approach focuses on the interplay

between interests and institutions. It makes the claim that
trading can affect a lot of sectors. We look at two models of
trade policy preferences, both agree that raising and lowering
tariffs can change the income of many sectors. And these income
changes and affects are because of the type of trade policy
preference.

--
The factor model is a theory of trade politics that argues that the
interests of different factors of production (such as labor and
capital) are often in conflict with each other, and that this
conflict can lead to different trade policy preferences.

In the example you gave, the United States is relatively capital-

abundant and China is relatively labor-abundant. This means that
the United States will have a comparative advantage in the
production of capital-intensive goods, such as computers, while
China will have a comparative advantage in the production of
labor-intensive goods, such as shirts.

If the United States and China open up trade with each other,
then the United States will export computers to China and import
shirts from China. This will lead to a decline in the price of
computers in the United States and an increase in the price of
shirts in the United States.

The decline in the price of computers will benefit consumers in

the United States, but it will hurt the owners of capital in the
United States. This is because the owners of capital will earn
lower profits from the production of computers.

The increase in the price of shirts will benefit the owners of

capital in the United States, but it will hurt workers in the United
States. This is because workers will earn lower wages from the
production of shirts. Because capital is being used to increase
production and not the wages.

The factor model argues that this conflict of interest between

labor and capital can lead to different trade policy preferences.
Labor will tend to favor trade protectionism, while capital will
tend to favor trade liberalization. This is because labor is more
likely to be hurt by trade liberalization, while capital is more
likely to benefit from it.

For example, countries with relatively abundant labor, such as

China, are more likely to favor trade protectionism, while
countries with relatively abundant capital, such as the United
States, are more likely to favor trade liberalization.

The factor model is a useful tool for understanding the political

economy of trade. It can help us to explain why different
countries have different trade policy preferences, and why trade
can sometimes lead to conflict between different groups of
people.

Summary: Trade liberalization will lead to a redistribution of

income between factors of production. The impact of trade
liberalization on the income of different factors of production will
depend on the factor's relative abundance in the economy. Labor
and capital will have different trade policy preferences. Labor
will tend to favor trade protectionism, while capital will tend to
favor trade liberalization. The factor model can help us to
understand why different countries have different trade policy
preferences, and why trade can sometimes lead to conflict
between different groups of people.

--

Two Cases of Change of Labor and Capital due to Trade :

United States

• When the United States begins to import shirts from China,

demand for American-made shirts falls. This leads to a decline in
the production of shirts in the United States, which in turn leads
to job losses in the shirt industry.
• At the same time, the demand for American computers
increases as a result of trade with China. This leads to an
expansion in the production of computers in the United States,
which creates jobs in the computer industry.
• However, the number of jobs created in the computer
industry is not enough to offset the job losses in the shirt
industry. This leads to an overall decline in employment in the
United States.
• The decline in employment leads to a decline in wages in
the United States. This is because there are now more workers
competing for a limited number of jobs.
• The decline in wages benefits owners of capital, because it
reduces the cost of labor.

China

• When China begins to export shirts to the United States,

demand for Chinese shirts increases. This leads to an expansion
in the production of shirts in China, which creates jobs in the
shirt industry.
• At the same time, the demand for Chinese computers
decreases as a result of trade with the United States. This leads
to a decline in the production of computers in China, which leads
to job losses in the computer industry.
• However, the number of jobs created in the shirt industry is
not enough to offset the job losses in the computer industry. This
leads to an overall decline in employment in China.
• The decline in employment leads to a decline in wages in
China. This is because there are now more workers competing
for a limited number of jobs.
• The decline in wages benefits owners of capital, because it
reduces the cost of labor.

Summary: Trade between the United States and China leads to a

redistribution of income between labor and capital in both
countries. In the United States, wages fall and the return to
capital rises. In China, wages fall and the return to capital rises.
The redistribution of income is due to the fact that trade leads to
a change in the relative prices of goods and services, which in
turn leads to a change in the demand for labor and capital

--

Factor Price Equalization Theory:

The Stolper-Samuelson Theorem or Factor Price Equalization

Theory: is a basic economic theory that states that free trade
between countries will tend to equalize the prices of factors of
production. This means that if one country has an abundance of a
particular factor of production, such as labor, and another
country has a scarcity of that factor, then free trade will tend to
raise the price of that factor in the first country and lower it in
the second country.

In the case of trade between the United States and China, the
United States has an abundance of capital and China has an
abundance of labor. This means that free trade between the two
countries will tend to raise the price of capital in the United
States and lower it in China. It will also tend to raise the price of
labor in China and lower it in the United States.
This can have a number of implications for the distribution of
income within each country. In the United States, for example,
the increased price of capital will benefit capital owners, such as
wealthy individuals and large corporations. The decreased price
of labor will hurt workers, who will see their wages fall. In China,
the increased price of labor will benefit workers, who will see
their wages rise. The decreased price of capital will hurt capital
owners, who will see their profits fall.

The Stolper-Samuelson Theorem is a simple theory, but it has

some important implications for the distribution of income within
countries. It suggests that free trade can lead to winners and
losers, and that the distributional effects of trade can be
significant.

Summary: Free trade or Factor Price Equalization between

countries will tend to equalize the prices of factors of production.
This means that if one country has an abundance of a particular
factor of production, then free trade will tend to raise the price of
that factor in that country. It will also tend to lower the price of
that factor in countries that have a scarcity of that factor. This
can have a number of implications for the distribution of income
within each country.

--

Note: The factor model of trade politics is often called a class-

based model because it argues that trade politics is driven by
conflict between different classes of people. The model suggests
that the interests of workers and capitalists are fundamentally
opposed, and that this opposition will lead to conflict over trade
policy.
Criticism on Factor Model: The factor model of trade politics has
been criticized for being too simplistic. Critics argue that the
model ignores the role of government, institutions, and other
factors in shaping trade policy. They also argue that the model
does not take into account the fact that workers and capitalists
can have different preferences over trade policy, even if their
economic interests are opposed.

--

Sector Model of Trade:

The sector model of trade politics is a theory that explains why

there is often conflict between industries over trade policy. The
model argues that trade can lead to changes in the distribution of
income, with some industries gaining and others losing. The
industries that gain from trade are those that are able to
compete effectively in the global market. The industries that lose
from trade are those that are not able to compete effectively in
the global market.

For example, the U.S. textile industry is not able to compete

effectively with textile producers in other countries. This is
because the U.S. textile industry is labor-intensive, and wages in
the U.S. are relatively high. As a result, textile producers in other
countries can produce textiles at a lower cost than U.S. textile
producers.

Free trade will lead to increased imports of textiles into the U.S.
This will hurt the U.S. textile industry, as it will lead to a
decrease in demand for U.S.-produced textiles. As a result,
workers and capitalists in the U.S. textile industry will lose their
jobs, and their wages will fall.

On the other hand, the U.S. software industry is able to compete

effectively in the global market. This is because the U.S.
software industry is capital-intensive, and wages in the U.S. are
relatively high. As a result, software producers in the U.S. can
produce software at a lower cost than software producers in
other countries.

Free trade will lead to increased exports of software from the

U.S. This will help the U.S. software industry, as it will lead to an
increase in demand for U.S.-produced software. As a result,
workers and capitalists in the U.S. software industry will gain
jobs, and their wages will rise.

Summary: Sector model - Trade can lead to changes in the

distribution of income, with some industries gaining and others
losing. The industries that gain from trade are those that are able
to compete effectively in the global market. The industries that
lose from trade are those that are not able to compete effectively
in the global market. This can lead to conflict between industries
over trade policy.

--

Factor Mobility:

The factor model of trade politics argues that trade divides

society along factor lines, meaning that workers and capitalists
have fundamentally opposed interests. This is because the model
assumes that factors of production, such as labor and capital,
are highly mobile. This means that workers and capitalists can
easily move from one industry to another, depending on where
they can earn the highest return.

For example, if a worker is currently employed in the apparel

industry, but the apparel industry starts to decline due to trade,
the worker can easily move to the computer industry, where
there is more demand for labor. Similarly, if a capitalist is
currently investing in the apparel industry, but the apparel
industry starts to decline due to trade, the capitalist can easily
move their investment to the computer industry, where there is
more potential for profit.

The sector model of trade politics argues that this assumption of

high factor mobility is unrealistic. In reality, factors of production
are often not very mobile. This is because workers and
capitalists may have specialized skills that are not in demand in
other industries. Additionally, workers and capitalists may be
reluctant to move to new industries, due to factors such as
family ties, social networks, or cultural preferences.

When factors of production are not mobile, people's economic

interests are determined by their industry affiliation. This is
because workers and capitalists in a particular industry will be
directly affected by changes in the industry, such as increased
competition from imports or decreased demand for the industry's
products. For example, workers in the apparel industry will be
hurt if the apparel industry starts to decline due to trade, while
workers in the computer industry will be helped if the computer
industry starts to grow due to trade.

The sector model of trade politics suggests that trade politics is

driven by conflict between industries, rather than conflict
between factors of production. This is because industries that
are harmed by trade will lobby for protectionist policies, while
industries that are helped by trade will lobby for free trade
policies. For example, the apparel industry will lobby for tariffs
on imported clothing, while the computer industry will lobby for
free trade in computers.

The sector model of trade politics is a more realistic model than

the factor model of trade politics. It takes into account the fact
that factors of production are often not very mobile, and that this
can lead to conflict between industries over trade policy.

Summary: Factor Model assumes that labor and capital can be

easily mobile. It can move from one industry to another, this
applies for workers and capitalists. However, sector mobility
argues that that it’s not possible since some workers and
capitalist specialize in one area, and that other outside factors
prevent them from moving. In the end, the sector model assumes
that trade is about industry not what’s being made.

--

There are a number of reasons why factors of production may be

specific to a particular sector. First, capital goods, such as
machinery and equipment, are often designed for a specific
purpose. For example, a loom or a spinning machine is designed
for use in the apparel industry. It would be difficult and expensive
to adapt these machines for use in another industry, such as the
computer industry.
Second, workers often have industry-specific skills. For example,
a worker who has spent 15 years maintaining sophisticated
automated looms and spinning machines in an apparel plant
would have difficulty finding a job in the computer industry,
where the skills required are different.

Third, the geography of industry location often means that

workers who want to change industries must also physically
relocate. For example, a worker who wants to move from the
apparel industry to the automobile industry might have to move
from North Carolina to Michigan. This can be a difficult and
expensive proposition, and it may not be possible for everyone to
do so.

Finally, even if workers are able to move to a new location, they

may be reluctant to do so because of social and psychological
factors. For example, they may have a strong attachment to their
community, or they may have family and friends who live in the
area.

The combination of these factors means that factors of

production are often specific to a particular sector. This can lead
to problems, such as unemployment and economic decline, when
a particular sector declines.

Summary: The sector model is a model of urban land use that

assumes that factors of production are not easily moved from
one industry to another. This is because capital goods, workers'
skills, and the geography of industry location often make it
difficult for workers to change industries.

--
The sector model is a trade theory that argues that trade politics
is driven by competition between the import-competing and
export-oriented sectors. The model assumes that factors of
production are not easily moved from one industry to another,
and that labor and capital employed in industries that rely
intensively on society’s abundant factor gain from trade, while
labor and capital employed in industries that rely intensively on
society’s scarce factor lose from trade.

In the advanced industrialized countries, this means that labor

and capital employed in capital-intensive and high-technology
industries, such as computers, pharmaceuticals, and
biotechnology, gain from trade. These industries are referred to
as the export-oriented sector. Conversely, labor and capital
employed in labor-intensive sectors such as apparel and
footwear lose from trade. These industries are commonly
referred to as the import-competing sector.

The sector model argues that the import-competing sector will

lobby for protectionist policies, such as tariffs and quotas, in
order to protect itself from competition from foreign producers.
The export-oriented sector, on the other hand, will lobby for free
trade policies, such as the elimination of tariffs and quotas. The
outcome of this political battle will determine the level of trade
liberalization in a particular country.

Summary: the sector model argues that trade politics is driven by

competition between the import-competing and export-oriented
sectors. The model predicts that the import-competing sector
will lobby for protectionist policies, while the export-oriented
sector will lobby for free trade policies. The outcome of this
political battle will determine the level of trade liberalization in a
particular country.
--

A collective action problem is a situation in which individuals

have a common interest, but they are unable to cooperate to
achieve that interest because it is too costly or difficult to do so.

In the case of consumers and trade policy, the common interest

is free trade. Free trade would benefit all consumers, as it would
lead to lower prices for goods and services. However, it is very
costly for consumers to lobby the government for free trade.
Consumers would have to raise money to hire lobbyists and to
contribute to political campaigns. They would also have to spend
time organizing and fundraising.

Given the high cost of collective action, most consumers will

choose to free ride. Free riding is when individuals benefit from
the actions of others, but do not contribute to those actions
themselves. In the case of consumers and trade policy, free
riders would benefit from free trade, even if they did not
contribute to the lobbying effort.

The incentive to free ride makes it very difficult for consumers to

organize and lobby for free trade. As a result, consumer interests
are often ignored by policymakers.

Here are some additional points to consider:

 The incentive to free ride is not the only factor that prevents
collective action. Other factors, such as differences in
preferences and information, can also make it difficult for
groups to organize.

 Even when groups are able to overcome the incentive to

free ride, they may still face challenges in achieving their
 goals. For example, they may not have enough resources to
compete with other groups that have different interests.

 Despite the challenges, collective action is still important.

When groups are able to organize and act collectively, they
can have a significant impact on society.

Summary: Collection action problem is when everyone has the

same goal, but not everyone is going to do something about it
cause it is to costly. An example, would be to free trade, a lot of
people would do it, but the problem is they won’t. So they opt to
free ride, meaning they can benefit even if they didn’t do
anything. There are other factors that also prevent collective
action, such as differences in preferences.

--

Producers, not consumers, dominate trade politics. This is

because consumers are a large and heterogeneous group, while
producers are a small and homogeneous group. Consumers face
a strong incentive to free ride, meaning that they will not
contribute to an interest group that lobbies for free trade, even
though they would benefit from it. Producers, on the other hand,
have a strong incentive to organize and lobby for protection,
because they will receive a large benefit from it.

Trade politics exhibits a bias toward protectionism. This is

because the benefits of protectionism are concentrated on a
small group of producers, while the costs are spread out over a
large group of consumers. The small group of producers can
easily overcome the collective action problem and lobby for
protection, while the large group of consumers finds it much
more difficult to organize.
Governments rarely liberalize trade unilaterally, but are more
willing to do so through negotiated agreements. This is
because reciprocal trade agreements make it easier for export-
oriented industries to overcome the collective action problem.
Reciprocal trade agreements provide large benefits to export-
oriented industries in the form of access to foreign markets.
These industries are therefore more likely to organize and lobby
for trade liberalization, even though they may face opposition
from import-competing industries.

Summary: The logic of collective action helps us understand why

producers, not consumers, dominate trade politics, this is
because producers can collectively beat free riding since they
stand to gain from the free trade they will lobby for. Why trade
politics exhibits a bias toward protectionism since the small
group of producers can organize quicker. And why governments
rarely liberalize trade unilaterally, since they can benefit from
trading reciprocally and because export oriented industries
encourage it.

--

Reciprocal Trade Agreement Act: (RTAA)

The RTAA gave the president the authority to reduce tariffs in

exchange for equivalent concessions from foreign governments.
This allowed the president to negotiate trade agreements that
were beneficial to export-oriented industries, which were a small
and homogeneous group that could easily organize to lobby for
their interests.

The RTAA also made it easier for export-oriented industries to

overcome the collective action problem. By linking reductions of
American tariffs to the opening of foreign markets to American
exporters, the RTAA created a common interest among export-
oriented industries in lobbying for trade liberalization.

The RTAA's effect on the balance of interest-group pressure

made politicians more willing to liberalize trade. Before the
RTAA, import-competing industries had a disproportionate
amount of influence over trade policy. The RTAA helped to
balance this influence by giving export-oriented industries a
greater voice in the trade policy process.

Summary: the RTAA helped to liberalize trade in the United

States by giving the president the authority to negotiate trade
agreements that were beneficial to export-oriented industries,
making it easier for export-oriented industries to overcome the
collective action problem, and balancing the influence of interest
groups in the trade policy process.

--

Political Institutions and the Supply of Trade Policy:

 Majoritarian electoral systems encourage organization

around sector-based interests. This is because in
majoritarian systems, each electoral district is relatively
small and likely to be dominated by one or two major
industries. As a result, elected officials have a strong
incentive to represent the interests of the owners of and
workers in the industries that dominate their districts. This,
in turn, creates an incentive for industries to organize and
lobby for their own narrow interests, rather than trying to
build broader coalitions.
  Proportional representation (PR) systems encourage
organization around factoral interests. This is because in PR
systems, each party is awarded seats in parliament in
proportion to the number of votes it receives. As a result,
parties have an incentive to appeal to a broad range of
voters, including workers, farmers, and businesses. This, in
turn, creates an incentive for economic actors to organize
and lobby for their interests through political parties.

Summary: Electoral systems can affect trade politics by shaping

how groups organize to pursue their trade policy objectives.
Majoritarian systems encourage organization around sector-
based interests, while PR systems encourage organization
around factoral interests.

OATLEY Chapter 5:

The State Centered Approach:

A state-centered approach argues that national policymakers

intervene in the economy in pursuit of objectives that are
determined independently from domestic interest groups’ narrow
self-interested concerns. Moreover, this approach suggests that
such intervention may (but need not necessarily) raise aggregate
social welfare.

The state-centered approach is a theory of international trade

that argues that governments can and do intervene in the
domestic economy in ways that raise aggregate social welfare.
This approach contrasts sharply with the society-centered
approach, which argues that governments are simply the sum of
the demands of interest groups, and that trade policy is therefore
determined by the balance of power among these groups.

Summary: The state centered approach means that policymakers

get involved in the economy, they are outside of domestic
influence. And because the state is involved it will raise the
social welfare of people.

--

The state-centered approach is based on two central

assumptions:

1. Protectionism can raise social welfare under certain

circumstances. The society-centered approach argues that
protectionism reduces social welfare by depriving society
of the gains from trade and by employing society's
resources in comparatively disadvantaged industries.
However, the state-centered approach argues that under
certain circumstances, protectionism can actually raise
social welfare. For example, protectionism can be used to
protect infant industries, which are new industries that
need time to develop and become competitive.
Protectionism can also be used to protect strategic
industries, such as defense industries.

2. Governments can operate independently of interest group

pressures under specific circumstances. The society-
centered approach argues that national policy reflects the
balance of power among competing interest groups.
However, the state-centered approach argues that under
specific circumstances, governments are relatively
 unconstrained by interest-group demands. For example,
governments may be able to operate independently of
interest-group pressures if they have a strong political
mandate, or if they have access to resources that are not
controlled by interest groups.

Summary: Protectionism by the state means can raise social

welfare, because when the state intervenes it can protect
developing industries from competition. Governments can also
act independently from whatever other social interests might be.
Making them more free to enact different laws to help trade.

--

Infant Industry:

The infant industry argument is a theory in international trade

that states that new industries in developing countries need
protection from foreign competition until they have had time to
mature and become competitive. The argument is based on the
idea that new industries often face higher costs than established
industries, due to factors such as learning curves, economies of
scale, and sunk costs. These higher costs can make it difficult
for new industries to compete with established foreign firms,
even if the new industries have the potential to be more efficient
in the long run.

The infant industry argument is often used to justify protectionist

trade policies, such as tariffs and quotas. These policies can
protect new industries from foreign competition, giving them the
time and space to grow and develop. However, protectionist
policies can also have negative consequences, such as higher
prices for consumers and reduced competition
Summary: New industries in developing countries often face
higher costs than established industries. These higher costs can
make it difficult for new industries to compete with established
foreign firms. The infant industry argument explains that
protectionist trade policies, such as tariffs and quotas, can
protect new industries from foreign competition. However,
protectionist policies can also have negative consequences,
such as higher prices for consumers and reduced competition.

--

There are two reasons why an industry may not be efficient in

the short run, but could be efficient in the long run: economies of
scale and economies of experience

Economies of scale are cost advantages that a firm gains as it

increases its output. These cost advantages can come from a
variety of sources, such as:

 Specialization: As a firm produces more output, it can

specialize its workers and equipment, which can lead to
increased efficiency.

 Spreading fixed costs: Fixed costs are costs that do not

vary with output, such as research and development costs.
As a firm produces more output, it can spread these fixed
costs over a larger number of units, which can lead to lower
unit costs.

 Economies of scope: Economies of scope are cost

advantages that a firm gains when it produces multiple
products. This is because some of the costs of production,
such as marketing and distribution costs, can be shared
across multiple products.
Economies of scale can make it difficult for new firms to
compete with established firms. This is because new firms may
not have the same cost advantages as established firms. For
example, a new firm may not have the same level of
specialization or the same ability to spread fixed costs. As a
result, new firms may have to charge higher prices than
established firms, which can make it difficult for them to
compete.

In some cases, governments may choose to protect new

industries from foreign competition. This can be done through
tariffs, quotas, or other trade barriers. The goal of this protection
is to give new industries time to grow and develop so that they
can eventually compete on their own.

Summary: Economies of scale are special cost advantages that

can help them stabilize prices that a firm gets as it increases
its production. Economies of scale can make it difficult for new
firms to compete with established firms. Governments may
choose to protect new industries from foreign competition.
Protection can have both positive and negative consequences.

--

Economies of experience are cost savings that come from

learning how to produce a good or service more efficiently over
time. This can happen for a number of reasons, such as as
workers become more skilled, managers become more efficient,
and suppliers become more reliable.

In an infant industry, economies of experience can be important

because they can help the industry become competitive in the
global market. For example, when Airbus first started producing
jets, it was not cost competitive with established foreign
producers. However, as Airbus gained experience, it was able to
reduce its costs and become more competitive.

One way to help an infant industry realize economies of

experience is to protect it from foreign competition with a tariff.
A tariff is a tax on imported goods that makes them more
expensive for consumers. This can help the infant industry by
giving it time to grow and become more efficient without having
to compete with foreign producers.

Once the infant industry has become established and

competitive, the tariff can be removed. This will allow the
industry to continue to benefit from economies of experience and
compete in the global market.

Summary: Economies of experience are cost savings that come

from learning how to produce a good or service more efficiently
over time. Economies of experience can be important for infant
industries because they can help the industry become
competitive in the global market. One way to help an infant
industry realize economies of experience is to protect it from
foreign competition with a tariff. Once the infant industry has
become established and competitive, the tariff can be removed.

--

Industrial policy is a set of government policies that are designed

to promote the development of specific industries or sectors of
the economy. These policies can take a variety of forms,
including:

 Tax breaks: Governments can offer tax breaks to

businesses in certain industries, which can help to reduce
their costs and make them more competitive.
  Subsidies: Governments can also provide subsidies to
businesses in certain industries, which can provide them
with additional financial support.

 Protectionism: Governments can use tariffs or other trade

barriers to protect domestic industries from foreign
competition.

 Government procurement: Governments can also use their

purchasing power to give preferential treatment to
businesses in certain industries.

The goal of industrial policy is to help certain industries or

sectors of the economy to grow and develop, which can lead to a
number of benefits for the country as a whole. These benefits
can include:

 Increased economic growth: Industrial policy can help to

boost economic growth by creating new jobs, increasing
investment, and stimulating innovation.

 Improved productivity: Industrial policy can help to improve

productivity by encouraging businesses to adopt new
technologies and methods of production.

 Enhanced international competitiveness: Industrial policy

can help to make domestic industries more competitive by
shielding them from foreign competition and providing them
with financial support.

Summary: Industrial policy is a set of government policies that

are designed to promote the development of specific industries
or sectors of the economy. Industrial policy can take a variety of
forms, including tax breaks, subsidies, protectionism, and
government procurement. The goal of industrial policy is to help
certain industries or sectors of the economy to grow and
develop, which can lead to a number of benefits for the country
as a whole. However, industrial policy can also have some
drawbacks, such as inefficiency, wasteful spending, and
increased government intervention.

--

State strength is the degree to which national policymakers are

insulated from domestic interest-group pressures. Strong states
are those in which policymakers are highly insulated from such
pressure, whereas weak states are those in which policymakers
are fully exposed to such pressures.

There are a number of factors that can contribute to state

strength or strong state, including:

 A strong central government: A strong central government

is one that has the power to make and enforce laws, and to
collect taxes. This gives the government the resources it
needs to implement its policies, and to resist pressure from
interest groups.

 A professional bureaucracy: A professional bureaucracy is

one that is staffed by experts who are committed to the
public interest. This helps to ensure that the government is
able to make decisions based on sound economic and social
policy, rather than on the demands of special interests.

 A strong military: A strong military can help to protect the

country from external threats, and can also be used to
suppress internal dissent. This can help to create a more
stable environment in which the government can implement
its policies.
Weak states are often characterized by:

 A weak central government: A weak central government is

one that lacks the power to make and enforce laws, and to
collect taxes. This makes it difficult for the government to
resist pressure from interest groups, and to implement its
policies.

 A corrupt bureaucracy: A corrupt bureaucracy is one that is

staffed by officials who are more interested in enriching
themselves than in serving the public interest. This can lead
to the government being captured by special interests, and
to the implementation of policies that benefit those
interests at the expense of the general public.

 A divided society: A divided society is one in which there

are deep divisions along ethnic, religious, or political lines.
This can make it difficult for the government to build a
consensus on economic and social policy, and can lead to
instability and conflict.

State strength can have a significant impact on the success of

industrial policy. Strong states are more likely to be able to
implement industrial policies that are effective in promoting
economic growth and development. Weak states, on the other
hand, are more likely to be unable to implement industrial
policies effectively, or to implement policies that are actually
harmful to the economy.

Summary: State strength is the degree to which national

policymakers are insulated from domestic interest-group
pressures. Strong states are more likely to be able to implement
industrial policies that are effective in promoting economic
growth and development. Weak states, on the other hand, are
more likely to be unable to implement industrial policies
effectively, or to implement policies that are actually harmful to
the economy.

--

NOTE: The state-centered approach, therefore, argues that state

policymakers can use industrial policy to improve social welfare.
In contrast to the standard model of trade, this approach argues
that factors may not move automatically from relatively low-
return industries into relatively high- return industries. In such
instances, targeted government intervention, in the form of a
tariff or a production subsidy, can encourage movement into
these industries. Over the long run, the welfare gains generated
by this industry are substantially larger than the welfare losses
incurred during the period of protection.

--

High-technology industries are important to national income

because they tend to earn rents, pay higher wages, and can be
created through industrial policy.

 Rents are a higher-than-normal return on an investment.

High-technology industries often earn rents because they
have exclusive access to new technologies or markets.

 Wages in high-technology industries are typically higher

than in standard manufacturing industries. This is because
high-technology jobs require workers with specialized skills
and knowledge.

 Industrial policy is a government intervention that aims to

promote certain industries or sectors of the economy.
Governments can use industrial policy to create
 internationally competitive domestic high-technology
industries by providing subsidies, tax breaks, or other forms
of assistance.

Summary: high-technology industries are important to national

income because they contribute to economic growth, create
high-paying jobs, and can be created through government
intervention.

--

Strategic-trade theory is a branch of economics that studies how

governments can use trade policy to help domestic firms
compete in international markets. The theory argues that in
some cases, government intervention can help domestic firms
achieve economies of scale and experience, which can give
them a competitive advantage over foreign firms.

Economies of scale are cost savings that a firm can achieve by

increasing its output. These savings can come from a variety of
sources, such as specialized equipment, more efficient
production methods, and lower marketing costs. Experience is
another factor that can give firms a competitive advantage. As
firms produce more output, they learn how to do things more
efficiently. This can lead to lower costs and higher profits.

Oligopolistic competition is a market structure in which there are

a small number of firms that compete with each other. In
oligopolistic markets, firms are aware of each other's actions
and may engage in strategic behavior, such as price wars or
product differentiation.
Strategic-trade theory argues that governments can use trade
policy to help domestic firms in oligopolistic markets. For
example, governments can provide subsidies to domestic firms,
which can help them achieve economies of scale and
experience. Governments can also impose tariffs on imported
goods, which can make it more difficult for foreign firms to
compete with domestic firms.

Summary: Strategic-trade theory is a branch of economics that

studies how governments can use trade policy to help domestic
firms compete in international markets. The theory argues that in
some cases, government intervention can help domestic firms
achieve economies of scale and experience, which can give
them a competitive advantage over foreign firms.

--

Oligopoly:

Oligopolists are firms that operate in an industry where there are

only a small number of competitors. In oligopolistic markets,
firms are aware of each other's actions and may engage in
strategic behavior, such as price wars or product differentiation.

Excess returns are profits that are greater than could be earned
in equally risky investments in other sectors of the economy.
Oligopolists often earn excess returns because they have market
power, which allows them to charge higher prices than they
would be able to charge in a competitive market.

In the context of oligopolistic industries, strategic-trade theory

suggests that governments may want to intervene to help
domestic firms capture the excess returns available in these
industries. This is because the excess returns available in
oligopolistic industries can be a significant source of national
income.

For example, if the United States government were to intervene

to help Boeing, the American aircraft manufacturer, become
more competitive, Boeing might be able to capture a larger share
of the global aircraft market. This would lead to higher profits for
Boeing, which would benefit American workers and investors.

Summary: Oligopoly’s are firms that work in industries that have

little competitors. In this type of market firms know each other’s
moves and can act to diversify what products they might sell.
Oligopolists can earn excess returns because they market
powers which lets them charge bigger prices, in comparison to a
competitive market. Strategic trade theory, would propose that
governments can get these excess returns from oligopolists so
that they can use it for national income. For example, if the US
govt would help Boeing become more competitive, the company
could compete better in the global market and could result in
increasing the profits of US workers and investors, increasing the
US economy.

--

Quick Examples:

Examples of how strategic-trade theory has been used in

practice:
  The Japanese government used strategic-trade theory to
help its semiconductor industry become competitive in the
global market. The government provided subsidies to
Japanese semiconductor firms and imposed tariffs on
imported semiconductors. As a result, the Japanese
semiconductor industry became one of the most
competitive in the world.

 The United States government used strategic-trade theory

to help its aerospace industry become competitive in the
global market. The government provided subsidies to
American aerospace firms and purchased military aircraft
from American firms. As a result, the American aerospace
industry became one of the most competitive in the world.

--

OATLEY Chapter 6:

Explanation: The passage is about the economic structure of

developing countries in the 1950s. It notes that many developing
countries were "monoexporters," meaning that they relied on a
single product for the majority of their export earnings. For
example, Burundi's export earnings came from coffee, Ghana's
export earnings came from cocoa, Brazil's export earnings came
from coffee and cocoa, and Chile's export earnings came from
copper and nitrates.

Summary: The passage highlights the fact that developing

countries are often heavily reliant on natural resources for their
economic growth. This can make them vulnerable to fluctuations
in the global market, as well as to environmental degradation.
--

During the colonial period, Japan, Korea, India, and Africa were
all forced to produce cash crops and raw materials for export to
the colonial powers. This led to the development of enclave
agriculture, in which agricultural producers bought little from
local suppliers and exported most of their production. This had a
number of negative consequences, including:

- It led to the neglect of other sectors of the economy, such

as manufacturing and infrastructure.

- It made these countries dependent on the colonial powers

for manufactured goods.

- It created a class of wealthy landowners who benefited

from the export of cash crops, while the majority of the
population remained poor.

Summary: The colonial powers forced their colonies to produce

cash crops and raw materials for export. This led to the
development of enclave agriculture, which had a number of
negative consequences, including the neglect of other sectors of
the economy, dependence on the colonial powers for
manufactured goods, and the creation of a class of wealthy
landowners.

--

The emergence of manufacturing industries in Latin America in

the postwar period led to the formation of new interest groups,
industry-based associations, and labor unions. These groups
lobbied the government to adopt economic policies that would
benefit them, such as protectionist policies that would shield
them from foreign competition.

The creation of these organized groups created a new political

logic. On the one hand, the groups that benefited from protection
had a strong incentive to see these policies continued. On the
other hand, the emergence of new organized interests and a
growing urban middle class created an opportunity for politicians
to construct new political coalitions based on the support of the
urban sectors.

This new political logic was evident in the rise of Juan Perón in
Argentina and Getúlio Vargas in Brazil. Both Perón and Vargas
were able to build political coalitions that included labor,
industrialists, and the military. These coalitions were based on
the support of the urban sectors, which were the beneficiaries of
protectionist policies.

Summary: The emergence of manufacturing industries in Latin

America in the postwar period led to the formation of new
interest groups that lobbied the government for protectionist
policies. These policies were beneficial to the urban sectors,
which became the base of support for new political leaders, such
as Juan Perón and Getúlio Vargas.

--

Structuralists argue that market imperfections in developing

countries pose serious obstacles to the reallocation of resources
from agriculture to manufacturing industries. These market
imperfections include:
Undeveloped financial markets: In developing countries, financial
markets are often underdeveloped, which makes it difficult for
businesses to obtain the capital they need to invest in new
technologies and production methods.

Low levels of education and skills: In developing countries, the

level of education and skills among the workforce is often low,
which makes it difficult for businesses to find the skilled workers
they need to operate in a modern manufacturing sector.

High levels of inequality: In developing countries, there is often a

high degree of inequality, which means that a small number of
wealthy people control a large share of the country's wealth. This
can make it difficult for governments to raise taxes to finance
investments in infrastructure and education, which are essential
for economic development.

Summary: Structuralists argue that market imperfections in

developing countries make it difficult for these countries to
industrialize and achieve economic development. They argue
that governments need to intervene in the market to correct
these market imperfections and promote economic development.

--

The passage discusses the problem of complementary demand in

the initial transformation from an economy based largely on
subsistence agriculture to a manufacturing economy. In such an
economy, where few people earn a money wage, no single
manufacturing firm would be able to sell its products unless a
large number of other manufacturing industries were started
simultaneously. This is because the only people with money to
buy goods are those who are employed in manufacturing, and
there would not be enough of them to support a single
manufacturing firm. In order for a shoe factory to succeed, for
example, other factories employing other people must be created
at the same time, so that the workers in those factories can buy
the shoes.

The problem of complementary demand can be overcome by

government intervention. The government can provide subsidies
to manufacturing firms, or it can build infrastructure that will
make it easier for firms to start and operate. The government can
also promote exports, so that manufacturing firms can sell their
products to people in other countries.

Summary: The problem of complementary demand arises when

an economy is transitioning from an agricultural economy to a
manufacturing economy. In an agricultural economy, most people
produce goods for their own consumption, and there is little
money in circulation. In a manufacturing economy, people
produce goods for sale, and money is more widely circulated.
However, in the initial stages of industrialization, there may not
be enough people with money to buy the goods that are
produced. This can lead to a vicious cycle, where manufacturing
firms fail because they cannot sell their products, and this leads
to more unemployment, which leads to even fewer people with
money to buy goods.

--

The passage discusses the problem of pecuniary external

economies, which arise from interdependencies among market
processes. The example given is of a steel plant and an
automobile factory. If the steel plant invests to increase its
production, the price of steel will fall. This will benefit the
automobile factory, which uses a lot of steel, because it will
lower the cost of its production. The lower cost of production
could lead to higher profits for the automobile factory, which
could induce it to invest in expanding its own production
capacity. This would lead to a simultaneous expansion of the
steel and automobile industries, which would raise national
income.

However, there is a coordination problem here. The steel plant

will not increase its production unless it is sure that the
automobile industry will increase its production. The automobile
factory will not increase its production unless it is sure that the
steel plant will increase its production. This means that neither
firm will invest to increase its production unless they coordinate
their investment decisions.

The market cannot be expected to solve this coordination

problem. The steel plant and the automobile factory are
interdependent, but they are not in competition with each other.
This means that there is no incentive for either firm to take the
lead in coordinating their investment decisions.

Summary: The problem of pecuniary external economies arises

when two or more firms are interdependent, but not in
competition with each other. This can lead to a coordination
problem, where neither firm is willing to invest to increase its
production unless it is sure that the other firm will also invest.
The market cannot be expected to solve this coordination
problem.

--
The passage discusses the structuralist critique of the market
and its solution to the problem of coordination problems.
Structuralists argued that the market could not be relied on to
bring about industrialization, because of the coordination
problems that arise when firms are interdependent, but not in
competition with each other. The solution, they argued, was for
the state to intervene in the economy and coordinate the
investments of private economic actors. This would allow for a
"big push" towards industrialization, which would overcome the
coordination problems and lead to rapid economic growth.

Summary: The structuralist critique of the market is that it is not

capable of bringing about industrialization, because of the
coordination problems that arise when firms are interdependent,
but not in competition with each other. The solution, they argued,
is for the state to intervene in the economy and coordinate the
investments of private economic actors. This would allow for a
"big push" towards industrialization, which would overcome the
coordination problems and lead to rapid economic growth.

--

The Singer-Prebisch theory is an economic theory that suggests

that the terms of trade (the relative prices of exports and
imports) of developing countries tend to deteriorate over time.
This is because developing countries tend to export primary
products, which have an inelastic demand, while developed
countries tend to import manufactured goods, which have an
elastic demand. This means that a small change in the supply of
primary products can lead to a large change in their price, while
a small change in the supply of manufactured goods can lead to a
small change in their price. As a result, the prices of primary
products tend to fall relative to the prices of manufactured
goods, which in turn leads to a decline in the terms of trade of
developing countries.

The Singer-Prebisch theory has been supported by empirical

evidence. For example, a study by the United Nations Conference
on Trade and Development (UNCTAD) found that the terms of
trade of developing countries have deteriorated by an average of
1% per year since 1950.

The Singer-Prebisch theory has important implications for

development policy. It suggests that developing countries should
not rely on primary exports to generate economic growth.
Instead, they should focus on developing their manufacturing
sectors, which can help to improve their terms of trade.

Here is a summary of the Singer-Prebisch theory: The relative

prices of exports and imports of developing countries tend to
deteriorate over time. This is because developing countries tend
to export primary products, which have an inelastic demand,
while developed countries tend to import manufactured goods,
which have an elastic demand.

--

Income elasticity of demand is a measure of how much the

demand for a good or service changes in response to a change in
income. A positive income elasticity of demand means that
demand increases as income increases, while a negative income
elasticity of demand means that demand decreases as income
increases.

Structuralists argue that the income elasticity of demand for

primary commodities (raw materials) is quite low, while the
income elasticity of demand for manufactured goods is relatively
high. This means that as incomes rise, people will tend to spend
a smaller percentage of their income on primary commodities
and a larger percentage of their income on manufactured goods.

Deteriorating terms of trade occurs when the prices of a

country's exports fall relative to the prices of its imports. This
can happen for a number of reasons, including changes in income
elasticity of demand, changes in supply and demand, or changes
in government policies.

In the context of the structuralist argument, deteriorating terms

of trade can occur as incomes rise in the core countries and fall
in the periphery countries. As incomes rise in the core countries,
people will tend to spend a smaller percentage of their income on
primary commodities, which will cause the prices of primary
commodities to fall. As incomes fall in the periphery countries,
people will tend to spend a larger percentage of their income on
manufactured goods, which will cause the prices of
manufactured goods to rise. This will cause the terms of trade for
the periphery countries to deteriorate.

Summary: Income elasticity of demand is a measure of how much

the demand for a good or service changes in response to a
change in income. Structuralists argue that the income elasticity
of demand for primary commodities is quite low, while the
income elasticity of demand for manufactured goods is relatively
high. Deteriorating terms of trade occurs when the prices of a
country's exports fall relative to the prices of its imports. In the
context of the structuralist argument, deteriorating terms of
trade can occur as incomes rise in the core countries and fall in
the periphery countries.
--

Import substitution industrialization (ISI) is an economic

development strategy that aims to promote industrialization by
substituting domestically produced goods for imported goods. ISI
was first adopted by many developing countries in the 1950s and
1960s. The strategy was based on the idea that by protecting
domestic industries from foreign competition, these countries
could develop their own manufacturing sectors.

ISI was initially successful in some countries, such as Brazil and

South Korea. However, the strategy also had a number of
drawbacks. For example, it often led to high levels of government
intervention in the economy, which could stifle innovation and
efficiency. Additionally, ISI could lead to increased prices for
consumers, as domestic producers were often not as efficient as
foreign producers

Summary: ISI is an economic development strategy that aims to

promote industrialization by substituting domestically produced
goods for imported goods. ISI was first adopted by many
developing countries in the 1950s and 1960s. ISI was initially
successful in some countries, such as Brazil and South Korea. ISI
has a number of drawbacks, including high levels of government
intervention and increased prices for consumers

--

Easy ISI was the first stage of the Import-Substitution

Industrialization (ISI) strategy. It focused on developing domestic
manufacturing of relatively simple consumer goods, such as
soda, beer, apparel, shoes, and furniture. The rationale behind
the focus on simple consumer goods was threefold:
 1. There was a large domestic demand for these goods that
was currently being met by imports.

2. The technology and machines necessary to produce these

goods were relatively mature and could be acquired easily
from advanced industrialized countries.

3. The production of simple consumer goods relies heavily on

low-skilled labor, which allowed developing societies to
draw their populations into manufacturing activities without
making large investments to upgrade their skills.

As a result of Easy ISI, many developing countries were able to

establish a domestic manufacturing base and create jobs for
their growing populations. However, Easy ISI also had some
drawbacks. For example, it led to increased competition with
foreign producers, which could drive down prices and profits.
Additionally, Easy ISI often resulted in the production of low-
quality goods that were not competitive in international markets.

Overall, Easy ISI was a successful strategy for many developing

countries. It helped to create jobs, increase exports, and reduce
dependence on imports. However, it also had some drawbacks
that should be considered when evaluating its overall impact.

Summary: Easy ISI was the first stage of the ISI strategy. It
focused on developing domestic manufacturing of relatively
simple consumer goods. The rationale behind the focus on simple
consumer goods was threefold. Easy ISI had some drawbacks,
but it was overall a successful strategy for many developing
countries.

--
The benefits of easy ISI are twofold:

Increased employment: Easy ISI can lead to increased

employment as the government protects domestic industries and
creates jobs in those industries. This is because the government
is essentially subsidizing the domestic industries, which allows
them to produce goods and services at a lower cost than foreign
companies. This makes the domestic industries more
competitive and allows them to hire more workers.

Increased skills: Easy ISI can also lead to increased skills as

workers in domestic industries gain experience and knowledge in
manufacturing. This is because the domestic industries are
producing goods and services, which requires workers to have a
variety of skills. This increased skill level can then be used in
other industries, which can lead to economic growth.

--

Secondary ISI is a strategy used by developing countries to

promote industrialization. It involves the government protecting
domestic industries from foreign competition by imposing tariffs
and other barriers to trade. This allows domestic industries to
grow and develop without having to compete with foreign
companies.

The goal of secondary ISI is to move beyond the production of

simple consumer goods to the production of more complex
goods, such as consumer durables, intermediate inputs, and
capital goods. These goods require more skilled workers and
more sophisticated technology than simple consumer goods, so
secondary ISI can help to develop the skills and technology of
the workforce.
Secondary ISI can be successful if the government is able to
provide the necessary support to domestic industries. This
includes providing subsidies, tax breaks, and access to credit.
The government also needs to invest in education and training to
develop the skills of the workforce.

However, secondary ISI can also be difficult and expensive. It

can take many years for domestic industries to develop the skills
and technology needed to produce complex goods. The
government also needs to be careful not to provide too much
support to domestic industries, as this can lead to inefficiency
and corruption.

Summary: Secondary ISI can help to develop the skills and

technology of the workforce. Can lead to the production of more
complex goods Can help to reduce dependence on foreign
imports

--

Backward linkages are economic relationships between the

production of an industry and the industries that supply inputs to
it. In the case of the car industry, for example, the production of
cars increases demand for components such as tires, glass, and
steel. This, in turn, increases demand for the industries that
produce these components. As a result, industrialization can
spread backwards from final goods to intermediate inputs to
capital goods as backward linkages multiply.

Summary: Backward linkages are economic relationships

between the production of an industry and the industries that
supply inputs to it. In the case of the car industry, for example,
the production of cars increases demand for components such as
tires, glass, and steel. This, in turn, increases demand for the
industries that produce these components. As a result,
industrialization can spread backwards from final goods to
intermediate inputs to capital goods as backward linkages
multiply.

--

OATLEY Chapter 7:

Postwar Period: Structuralism and import substitution

industrialization (ISI) shaped development strategies during the
first 35 years of the post war period the last 30 yrs have been
dominated by neoliberalism and export oriented industrialization.

Why the shift:

- Economic Imbalances
- A small group of East Asian Economies were outperforming
all other developing countries based what
- Severe economic crisis in the 1980’s for ced governments to
embark on reform.

Import substitution industrialization (ISI) is a development

strategy that encourages domestic production of goods and
services that were previously imported. This is done through
government intervention, such as tariffs, quotas, and subsidies.
ISI was popular in developing countries in the 20th century, but it
has since been largely abandoned due to its negative
consequences, including current-account deficits.
A current-account deficit occurs when a country imports more
goods and services than it exports. This can lead to a number of
problems, including:

 A decline in the value of the country's currency

 A rise in inflation
 A decrease in foreign investment
 A buildup of debt

ISI can lead to current-account deficits because it raises the

demand for imports. When the government protects domestic
industries from foreign competition, it raises the prices of those
goods and services. This makes consumers more likely to buy
imported goods, which increases the country's import bill.

ISI can also reduce a country's ability to export. When the

government subsidizes domestic industries, it raises the cost of
production. This makes it more difficult for those industries to
compete with foreign producers, which reduces exports.

In addition to current-account deficits, ISI has also been blamed

for other problems, such as:

 Increased inequality
 Reduced efficiency
 Slow economic growth

For these reasons, ISI is no longer considered a viable

development strategy. However, it is important to note that ISI
can be successful in some cases, such as when it is used to
develop new industries or to protect industries that are essential
to national security.

Here is a summary of the key points:

  Import substitution industrialization (ISI) is a development
strategy that encourages domestic production of goods and
services that were previously imported.
 ISI can lead to current-account deficits, which can have a
number of negative consequences for a country's economy.
 ISI has also been blamed for other problems, such as
increased inequality, reduced efficiency, and slow economic
growth.
 ISI is no longer considered a viable development strategy,
but it can be successful in some cases.
--

 Inefficiency: The manufacturing industries created through

ISI were not competitive in international markets. This was
because they were not able to realize economies of scale
due to the small domestic market in most developing
countries. Additionally, many of these industries had excess
capacity, which further increased their inefficiency.
 Weakened agriculture: The policies that governments used
to promote industrialization weakened agriculture. This was
because these policies often taxed farmers heavily, which
reduced their incentives to produce. Additionally, the real
value of the payments that farmers received from
government marketing boards often fell, which further
reduced their incentives to produce.
 Overvalued exchange rates: Many governments maintained
overvalued exchange rates under ISI. This made foreign
goods cheaper in the home market than they should have
been, and domestic goods more expensive in foreign
markets. This difference in price created a strong incentive
to import, rather than create the capacity to produce the
goods locally.

Here is a summary of the key points:

  Import substitution industrialization (ISI) can lead to a
decline in exports.
 This is because the manufacturing industries created
through ISI are often not competitive in international
markets.
 Additionally, the policies that governments use to promote
ISI can weaken agriculture, which can also lead to a decline
in exports.
 Overvalued exchange rates can also contribute to a decline
in exports.

It is important to note that ISI can be successful in some cases.

However, it is important to carefully consider the potential risks
and benefits of ISI before implementing it.

--

Rent seeking is an economic concept that occurs when an entity

seeks to gain wealth without any reciprocal contribution of
productivity. In the context of ISI, rent seeking refers to the
efforts of individuals and businesses to use government
intervention to gain an unfair advantage in the market. This can
be done through a variety of means, such as lobbying for
subsidies, tariffs, or other forms of protection from competition.

One of the most common forms of rent seeking under ISI was the
use of import licenses. Governments would restrict the import of
certain goods, which would drive up the price of those goods in
the domestic market. This created an opportunity for businesses
to make a profit by importing goods and selling them at a higher
price. However, in order to import goods, businesses needed to
obtain a license from the government. These licenses were often
given out to businesses that had close ties to the government, or
that were willing to pay bribes.
Rent seeking had a number of negative consequences for the
economy. It led to higher prices for consumers, lower quality
goods, and less innovation. It also created a system of crony
capitalism, where businesses that were close to the government
were able to prosper at the expense of their competitors.

In addition, rent seeking led to corruption. Businesses that

wanted to obtain import licenses or other forms of government
assistance often had to pay bribes to government officials. This
corruption eroded public trust in the government and made it
more difficult for the government to function effectively.

Overall, rent seeking was a major problem under ISI. It led to

higher prices, lower quality goods, less innovation, and
corruption. It also made it more difficult for the government to
function effectively.

Here is a summary of the key points:

 Rent seeking is an economic concept that occurs when an

entity seeks to gain wealth without any reciprocal
contribution of productivity.
 Rent seeking was a major problem under ISI.
 Rent seeking led to higher prices, lower quality goods, less
innovation, and corruption.
 Rent seeking made it more difficult for the government to
function effectively.
--
There are a number of reasons why East Asian countries
outperformed other developing countries by such a large margin.

 Export-oriented development: East Asian countries focused

on producing manufactured goods that could be sold in
international markets. This allowed them to take advantage
 of economies of scale and to compete with developed
countries on price.
 State intervention: East Asian governments played a
proactive role in supporting export-oriented development.
They provided subsidies, tax breaks, and other forms of
assistance to businesses that were willing to export. They
also invested heavily in education and infrastructure, which
helped to create a skilled workforce and a supportive
environment for businesses.
 High savings rates: East Asian households have high
savings rates, which has provided a source of capital for
investment. This has helped to finance the growth of export-
oriented industries.
 Culture: East Asian cultures emphasize hard work,
education, and respect for authority. These values have
helped to create a strong work ethic and a supportive
environment for economic growth.

Neoliberal interpretation: The neoliberal interpretation argues

that East Asia's success was a consequence of market-friendly
development strategies. This thesis argues that East Asian
countries were able to achieve rapid economic growth by
adopting free market policies, such as free trade, deregulation,
and privatization.

State-oriented interpretation: The state-oriented interpretation

argues that East Asia's success is due in large part to state-led
industrial policies. This thesis argues that East Asian
governments played a proactive role in supporting economic
growth by investing in education, infrastructure, and export-
oriented industries.

Summary:
  East Asian countries outperformed other developing
countries by focusing on export-oriented development, state
intervention, high savings rates, and a strong work ethic.
 There is a debate about the relative importance of the
market and the state in East Asia's economic success. The
neoliberal interpretation argues that market-friendly policies
were the key, while the state-oriented interpretation argues
that state intervention was more important.
--

The quote argues that the success of East Asian economies is

due to government intervention in the economy, rather than free
markets. The author cites several scholars who support this
view, including Robert Wade, Alice Amsden, and Stephan
Haggard.

The East Asian model of development is based on the idea that

economic development is a series of distinct stages. In each
stage, the government identifies and promotes specific
industries that are likely to be profitable in the face of
international competition.

In the first stage, the government promotes labor-intensive light

industry, such as textiles and other consumer durables. In the
second stage, the government emphasizes heavy industries such
as steel, shipbuilding, petrochemicals, and synthetic fibers. In
the third stage, the government targets skill- and research and
development (R&D)-intensive consumer durables and industrial
machinery, such as machine tools, semiconductors, computers,
telecommunications equipment, robotics, and biotechnology.

The government designs policies and organizations to promote

the transition from one stage to the other. For example, the
government may provide subsidies to businesses in certain
industries, or it may restrict imports of goods from other
countries.
Summary:

The East Asian model of development is a government-led

approach to economic growth. The government intervenes in the
economy to identify and promote specific industries that are
likely to be profitable in the face of international competition.
The government designs policies and organizations to promote
the transition from one stage of development to the next.

The East Asian model of development has been successful in

raising living standards and reducing poverty in East Asia.
However, the model has also been criticized for being too
interventionist and for creating a system of crony capitalism.

--

The passage describes how the International Monetary Fund

(IMF) and the World Bank encouraged governments to adopt
structural adjustment programs (SAPs) in response to economic
crises. SAPs are a set of economic reforms designed to reduce
the role of the state and to increase the role of the market in the
economy. The IMF and the World Bank believed that these
reforms would help countries to recover from economic crises
and to achieve long-term economic growth.

The specific content of the reforms that the IMF and the World
Bank advocated varied from country to country, but they typically
included:

 Cutting government spending: This included reducing

subsidies for basic goods and services, such as food and
healthcare, as well as cutting public sector jobs.
 Privatizing state-owned enterprises: This involved selling
state-owned businesses to private investors.
 Deregulating the economy: This involved removing
government controls on prices, wages, and foreign trade.
The IMF and the World Bank argued that these reforms would
help to improve the efficiency of the economy and to attract
foreign investment. However, critics argued that the reforms
would lead to job losses, poverty, and environmental damage.

Summary:

In response to economic crises, the IMF and the World Bank

encouraged governments to adopt structural adjustment
programs (SAPs). SAPs are a set of economic reforms designed
to reduce the role of the state and to increase the role of the
market in the economy. The IMF and the World Bank believed
that these reforms would help countries to recover from
economic crises and to achieve long-term economic growth.
However, critics argued that the reforms would lead to job
losses, poverty, and environmental damage.

--

Inclusive institutions are those that allow all members of society

to participate in economic and political activities. They are
characterized by broad political participation, the rule of law, and
strong property rights. Inclusive institutions are associated with
sustained economic growth because they encourage investment,
innovation, and entrepreneurship.

Here are some additional details about the benefits of inclusive

institutions:

 Broad political participation: Inclusive institutions allow all

members of society to participate in political decision-
making. This helps to ensure that the government is
responsive to the needs of its citizens and that policies are
made in the interests of the majority.
 Rule of law: The rule of law is a principle that ensures that
everyone is treated equally under the law, regardless of
 their social status or economic power. This helps to create
a stable and predictable environment for economic activity.
 Strong property rights: Strong property rights protect
individuals' rights to own and use their property. This
encourages investment and innovation, as people know that
they will be able to keep the fruits of their labor.

Summary:

The passage argues that inclusive institutions are essential for

sustained economic growth. Inclusive institutions are
characterized by broad political participation, the rule of law, and
strong property rights. These institutions encourage investment,
innovation, and entrepreneurship, which are all necessary for
economic growth. Inclusive institutions are not always easy to
establish or maintain. However, they are essential for sustained
economic growth and development.

--

Extractive institutions are political and economic systems that

are designed to benefit a small, elite group at the expense of the
majority. They are characterized by a lack of democracy, weak
rule of law, and poor property rights enforcement. In extractive
institutions, the elite use their power to extract resources from
the rest of society, rather than using their power to promote
economic growth and development.

Here are some specific examples of extractive institutions:

 Political institutions: A monarchy, dictatorship, or oligarchy

are all examples of political institutions that are extractive.
In these systems, power is concentrated in the hands of a
small group of people, who use their power to benefit
themselves and their allies.
  Economic institutions: A system of taxation that is heavily
weighted towards the poor, or a system of land ownership
that gives most of the land to a small number of wealthy
landowners, are both examples of economic institutions
that are extractive. These systems make it difficult for the
poor to accumulate wealth and economic resources, which
stifles economic growth.

Summary: Extractive institutions are harmful to economic

growth because they discourage investment, innovation, and
entrepreneurship. They also lead to corruption, rent-seeking, and
social unrest. Countries with extractive institutions tend to be
poor and unstable.

Extractive institutions are a major obstacle to economic

development. Countries that want to grow and prosper need to
create inclusive institutions that distribute power and resources
more broadly. Inclusive institutions promote economic growth by
encouraging investment, innovation, and entrepreneurship. They
also lead to greater social harmony and stability.

--

OATLEY Chapter 8:

Foreign direct investment (FDI) is a type of investment in which a

company or individual invests money in a business or asset in
another country. This type of investment is different from
portfolio investment, which is when someone buys shares in a
company on a stock exchange. With FDI, the investor has a
controlling interest in the business or asset, and they are
involved in its management.

There are many reasons why companies might make FDIs. One
reason is to access new markets. By investing in a business in
another country, a company can gain access to new customers
and sell its products or services in a new market. Another reason
for FDI is to lower costs. By investing in a business in a country
with lower wages or production costs, a company can reduce its
overall costs. FDI can also be used to gain access to new
technology or expertise. By investing in a business in another
country, a company can gain access to new technologies or
expertise that it would not be able to develop on its own.

The total volume of FDI has grown dramatically in recent

decades. In 1990, the total volume of FDI was $180 billion. By
2016, the total volume of FDI had grown to $1.45 trillion. This
growth in FDI has been driven by a number of factors, including
globalization, technological advances, and the deregulation of
markets.

Here are some of the benefits of FDI:

 Increased investment: FDI can lead to increased

investment in a country, which can help to boost economic
growth.
 Job creation: FDI can create jobs in a country, both directly
and indirectly.
 Technology transfer: FDI can help to transfer technology to
a country, which can help to improve the productivity of
businesses.
 Export promotion: FDI can help to promote exports from a
country, which can help to improve the balance of trade.
 Competition: FDI can help to increase competition in a
country, which can lead to lower prices and better quality
products and services for consumers.

Summary: FDI is a major driver of economic growth and

development. It can help to create jobs, boost exports, and
transfer technology to developing countries. FDI can also help to
improve the efficiency of businesses and increase competition.
However, FDI can also have negative consequences, such as job
displacement and environmental damage. In addition, intrafirm
trade —that is, trade that takes place between an MNC parent
and its foreign affiliates.

--

Locational advantages are factors that make a particular

location more attractive for business activity than other
locations. These factors can include natural resources, a large
pool of skilled labor, a favorable tax environment, or a strategic
location near major markets.

Companies often internationalize their activities to take

advantage of locational advantages in other countries. For
example, a company that produces natural resources may
internationalize its activities to access new sources of these
resources. A company that manufactures products may
internationalize its activities to access new markets or to reduce
its production costs by moving to a country with lower labor
costs.

Summary: Locational advantages are an important factor in

determining where companies choose to locate their operations.
Companies often internationalize their activities to take
advantage of locational advantages in other countries.

--

Locational advantages in natural-resource investments arise

from the presence of large deposits of a particular natural
resource in a foreign country. This can be a major motivation for
international activities, as companies seek to secure access to
these resources in order to meet demand or reduce costs.
For example, the American copper firms Anaconda and
Kennecott made large direct investments in mining operations in
Chile in order to secure supplies for production in the United
States. Similarly, American and European oil companies have
invested heavily in the Middle East because the countries of that
region hold so large a proportion of the world's petroleum
reserves.

The desire to gain access to natural resources remains important

today. Indeed, petroleum and mining together account for 17 of
the 100 largest multinational corporations (MNCs) currently in
operation.

Summary: Locational advantages in natural-resource investments

arise from the presence of large deposits of a particular natural
resource in a foreign country. This can be a major motivation for
international activities, as companies seek to secure access to
these resources in order to meet demand or reduce costs. The
desire to gain access to natural resources remains important
today. Indeed, petroleum and mining together account for 17 of
the 100 largest multinational corporations (MNCs) currently in
operation.

--

Market-oriented investments are those made by firms that are

looking to sell their products in foreign markets. These firms are
attracted to countries with large and growing markets, as these
markets offer the potential for increased sales and profits. In
addition, firms prefer to invest in countries where there is less
competition, as this will make it easier for them to sell their
products. Finally, firms may also be attracted to countries with
tariff and non-tariff barriers to imports, as these barriers can
protect them from foreign competition.

For example, consider the case of a firm that produces and sells
cars. This firm might be interested in investing in a country with
a large and growing population, such as China. China has a
population of over 1.4 billion people, and its economy is growing
rapidly. This means that there is a large potential market for cars
in China. In addition, the Chinese government has imposed tariffs
on imported cars, which makes it more expensive for foreign car
companies to sell their products in China. This gives the
domestic car companies, such as Geely and BYD, a competitive
advantage.

Summary: Market-oriented investments are those made by firms

that are looking to sell their products in foreign markets. These
firms are attracted to countries with large and growing markets,
as these markets offer the potential for increased sales and
profits. In addition, firms prefer to invest in countries where there
is less competition, as this will make it easier for them to sell
their products. Finally, firms may also be attracted to countries
with tariff and non-tariff barriers to imports, as these barriers can
protect them from foreign competition.

--

Locational advantages in efficiency-oriented investments arise

from the availability at a lower cost of the factors of production
that are used intensively in the production of a specific product.
For example, in the computer industry, labor-intensive assembly
stages of production are performed in labor-abundant developing
countries, such as China and Mexico, while the more capital-
intensive design and chip fabrication stages are performed in
capital-abundant advanced industrialized countries, such as the
United States and Japan.

This is because labor is relatively cheaper in developing

countries, while capital is relatively cheaper in advanced
industrialized countries. By locating different stages of
production in different countries, firms can take advantage of
lower input costs and produce goods at a lower cost. This can
lead to increased efficiency and profitability for the firm.
Summary: Locational advantages in efficiency-oriented
investments arise from the availability of factors of production at
a lower cost in different countries. Firms can take advantage of
these differences by locating different stages of production in
different countries, which can lead to increased efficiency and
profitability.

--

Market Imperfection – arises when the price mechanism fails to

promote welfare – improving transaction.

--

Horizontal integration is a strategy where a company acquires or

merges with other companies that operate in the same industry
and at the same level of the supply chain. This strategy can help
companies to increase their market share, reduce competition,
and achieve economies of scale. Horizontal integration can be
achieved through a variety of methods, including mergers,
acquisitions, and joint ventures.

Some of the benefits of horizontal integration include:

Increased market share: When two or more companies merge,

they combine their market shares. This can give the new
company a significant advantage over its competitors.

Reduced competition: When two or more competitors merge,

they reduce the number of competitors in the market. This can
lead to higher prices and lower innovation.

Economies of scale: Horizontal integration can lead to

economies of scale, which are cost savings that can be achieved
by producing a larger quantity of goods or services.

Summary: Horizontal integration is a strategy where a company

acquires or merges with other companies that operate in the
same industry and at the same level of the supply chain. This
strategy can help companies to increase their market share,
reduce competition, and achieve economies of scale. Horizontal
integration can be achieved through a variety of methods,
including mergers, acquisitions, and joint ventures. Horizontal
integration has both benefits and risks, and companies should
carefully consider the potential impact of this strategy before
making a decision.

--

An intangible asset is a non-physical asset that has value. It can

be based on knowledge, such as a patented process or design, or
it can arise from "know-how" shared among employees of a firm.
Intangible assets are often difficult to sell or license to other
firms because it is difficult to accurately measure their value.
This is because the value of an intangible asset is often based on
the knowledge and expertise of the people who created it, and
this knowledge is difficult to transfer to another person or
organization.

Summary: The passage discusses the challenges of valuing and

selling intangible assets. Intangible assets are often difficult to
value because their value is based on knowledge and expertise,
which is difficult to transfer. This makes it difficult for firms to
sell or license intangible assets to other firms. As a result, firms
with valuable intangible assets often choose to keep them in-
house, rather than selling or licensing them to others.

--

Vertical integration is a business strategy in which a company

controls multiple stages of its production process and supply
chain. This can include owning or controlling suppliers,
manufacturers, distributors, and retailers. Vertical integration
can help a company to reduce costs, improve efficiency, and gain
more control over its operations.
There are two main types of vertical integration: backward
integration and forward integration. Backward integration occurs
when a company moves upstream in its supply chain to acquire
ownership of suppliers. Forward integration occurs when a
company moves downstream in its supply chain to acquire
ownership of distributors or retailers.

Vertical integration can be a risky strategy. It can be expensive

to acquire new businesses, and it can be difficult to integrate
different operations into a single, cohesive organization.
However, vertical integration can be a successful strategy for
companies that are able to execute it effectively.

Summary: Vertical integration is a business strategy in which a

company controls multiple stages of its production process and
supply chain. This can help a company to reduce costs, improve
efficiency, and gain more control over its operations. However,
vertical integration can be a risky strategy, and it is important for
companies to carefully consider the risks and benefits before
pursuing this strategy.

--

A specific asset is an investment that is dedicated to a particular

long-term economic relationship. This means that the asset has
little or no value outside of that relationship. For example, a rail
spur that is built to transport goods from a shipowner's dock to a
railroad is a specific asset. The rail spur is only useful for
transporting the shipowner's goods, and it would be very
expensive to move or adapt for other uses.

The existence of specific assets creates incentives for vertical

integration. Vertical integration is when a company owns all of
the different stages of production, from the raw materials to the
final product. For example, a company that produces cars might
also own the mines that produce the iron ore and the factories
that produce the car parts.
There are two main reasons why vertical integration is more
likely to occur when there are specific assets. First, it can help
to reduce the risk of opportunism. Opportunism is when one party
in a transaction takes advantage of the other party. In the case
of specific assets, one party might try to renegotiate the terms of
the contract after the asset has been built, in order to get a
better deal. Vertical integration can help to reduce this risk,
because the company that owns both the asset and the
transaction is less likely to engage in opportunism.

Second, vertical integration can help to reduce transaction

costs. Transaction costs are the costs of negotiating, monitoring,
and enforcing contracts. When there are specific assets, these
costs can be high, because it is difficult to write a contract that
covers all of the possible contingencies. Vertical integration can
help to reduce these costs, because the company that owns both
the asset and the transaction can make decisions without having
to negotiate with another party.

Summary: A specific asset is an investment that is dedicated to

a particular long-term economic relationship. The existence of
specific assets creates incentives for vertical integration.
Vertical integration can help to reduce the risk of opportunism
and transaction costs.

--

A global value chain (GVC) is a network of interconnected

companies that work together to produce a good or service. The
different stages of production are often located in different
countries, which allows companies to take advantage of different
factor endowments and costs. For example, a company might
design a product in one country, manufacture it in another
country, and sell it in a third country.

GVCs are becoming increasingly common, as companies look for

ways to reduce costs and increase efficiency. They can also help
to promote economic development in developing countries, by
providing them with opportunities to participate in the production
of high-value goods and services.

The iPhone is a good example of a product that is produced

through a global value chain. The research and design for the
iPhone is done by Apple in the United States, but the components
are manufactured in China and other countries. The finished
product is then assembled in China and sold around the world.

Summary: A global value chain (GVC) is a network of

interconnected companies that work together to produce a good
or service. GVCs are becoming increasingly common, as
companies look for ways to reduce costs and increase efficiency.
GVCs can help to promote economic development in developing
countries. The iPhone is a good example of a product that is
produced through a global value chain.

--

Positive externalities are benefits that accrue to third parties as

a result of an economic transaction. In the context of MNCs,
positive externalities can arise from the transfer of technology
and managerial expertise to host countries.

For example, when an MNC transfers technology to a local

affiliate, the affiliate may be able to use that technology to
produce inputs for other firms in the host country at a lower cost.
This would benefit the other firms in the host country, even
though they were not directly involved in the technology transfer.

Similarly, when an MNC transfers managerial expertise to a local

affiliate, the affiliate may be able to operate more efficiently.
This would benefit the affiliate, the MNC, and the host country as
a whole.
Managerial expertise refers to the knowledge and skills that
managers need to effectively run a business. MNCs often have
access to superior managerial expertise than firms in host
countries. This is because MNCs have to manage operations in
multiple countries, which requires a high level of cross-cultural
and cross-functional skills.

When MNCs transfer managerial expertise to local affiliates, they

can help to improve the efficiency and productivity of those
affiliates. This can benefit the affiliates, the MNCs, and the host
countries in which they operate.

Summary: Positive externalities are benefits that accrue to third

parties as a result of an economic transaction. MNCs can
generate positive externalities for host countries by transferring
technology and managerial expertise. The transfer of technology
can help host countries to produce inputs at a lower cost. The
transfer of managerial expertise can help host countries to
operate their businesses more efficiently.

OATLEY Chapter 9:

Governments often impose performance requirements on local

affiliates of multinational corporations (MNCs) in order to promote
specific economic objectives. For example, a government might
require an MNC affiliate to purchase a certain percentage of its inputs
from domestic suppliers in order to promote backward linkages. This
means that the MNC would be forced to use local suppliers for some of
its materials, which would help to boost the domestic economy.

Another common performance requirement is to export a certain

percentage of an MNC's output. This is done in order to promote export
industries and to help the country earn foreign exchange. Some
governments also require MNCs to conduct research and development
inside the host country. This is done in order to help the country build
up its own technological capabilities. Finally, many governments limit
the access of MNCs to the local capital market. This is done in order
to protect domestic businesses from competition from MNCs.

Summary: Governments impose performance requirements on local

affiliates of MNCs in order to promote specific economic objectives.
These requirements can include purchasing inputs from domestic
suppliers, exporting a certain percentage of output, conducting
research and development, and limiting access to the local capital
market. These restrictions are aimed at avoiding the downside of MNC
involvement, while simultaneously trying to capture the benefits that
MNCs can offer.

--

Export-processing zones (EPZs) are industrial areas that are set up by

governments to attract foreign investment. These zones offer a
number of incentives to foreign investors, including subsidized land,
utilities, and transportation infrastructure. In addition, foreign firms
based in EPZs are allowed to import components duty-free, as long as
all their output is exported.

Taiwan was the first country in East Asia to establish an EPZ, in 1965.
South Korea followed suit in 1970. These EPZs attracted a lot of
investment from American, European, and Japanese multinational
corporations (MNCs). The MNCs set up assembly plants in the EPZs to
produce goods for export. This helped to boost the economies of
Taiwan and South Korea, and it also helped to create jobs.

In the mid-1970s, both Taiwan and South Korea further liberalized

foreign investment in an attempt to attract high-technology firms into
their economies. This policy was successful, and a number of high-
tech firms, such as Intel and Samsung, set up operations in the two
countries.

Summary: Export-processing zones are industrial areas that are set up

by governments to attract foreign investment. These zones offer a
number of incentives to foreign investors, including subsidized land,
utilities, and transportation infrastructure. In addition, foreign firms
based in EPZs are allowed to import components duty-free, as long as
all their output is exported.

EPZs have been successful in attracting foreign investment and

boosting economic growth in East Asia. They have also helped to
create jobs and promote technological development.

--

The obsolescing bargain theory is a model of the relationship between

multinational corporations (MNCs) and host governments. The theory
argues that the bargaining power of MNCs and host governments shifts
over time. Initially, the MNC has more bargaining power because it has
the technology and expertise that the host government needs.
However, over time, the host government's bargaining power
increases as it acquires the technology and expertise from the MNC.
This is because the MNC's investment becomes a hostage in the host
country. The MNC cannot easily remove its investment from the
country, so it is vulnerable to the host government's demands.

The theory also argues that the host government's bargaining power
increases as the uncertainty about the return on the investment
diminishes. This is because the host government knows more about
the investment and its potential profitability over time. This gives the
host government more leverage in negotiations with the MNC.

Summary: The obsolescing bargain theory is a model of the

relationship between MNCs and host governments. The theory argues
that the bargaining power of MNCs and host governments shifts over
time. Initially, the MNC has more bargaining power, but over time, the
host government's bargaining power increases. This is because the
MNC's investment becomes a hostage in the host country and the
uncertainty about the return on the investment diminishes.

The obsolescing bargain theory has been used to explain a number of

phenomena, including the widespread nationalizations of MNC assets
in the 1960s and 1970s.

--
The passage discusses the growing competition between host
countries to attract manufacturing investment from multinational
corporations (MNCs). This competition has led to the increasing use of
locational incentives, which are packages of benefits that host
countries offer to MNCs in order to attract their investment.

The passage cites several examples of the types of locational

incentives that host countries offer. These include tax incentives,
such as reduced corporate income tax rates or tax holidays;
exemptions from import duties; and direct financial incentives, such as
grants or subsidized loans.

The passage also discusses the growing size of the typical locational
incentive package. In 1989, the total value of locational incentives
offered by OECD countries was $11 billion. By 1993, this figure had
increased to $18 billion. In the United States, the typical locational
incentive package averaged between $50 million and $70 million in the
1990s, but the value of these packages has been increasing. For
example, Alabama provided Honda with more than $158 million in
incentives to attract a new plant, and North Carolina provided Dell
with $242 million in incentives to build a facility in the state.

The passage concludes by suggesting that the growing use of

locational incentives suggests that host countries are at a
disadvantage when bargaining with MNCs over manufacturing
investments. This is because MNCs have a number of bargaining
advantages, such as their ability to move their investment to another
country if they do not receive the incentives they want.

Summary: The passage discusses the growing competition between

host countries to attract manufacturing investment from MNCs. This
competition has led to the increasing use of locational incentives,
which are packages of benefits that host countries offer to MNCs in
order to attract their investment. The passage cites several examples
of the types of locational incentives that host countries offer, and
discusses the growing size of the typical locational incentive package.
The passage concludes by suggesting that the growing use of
locational incentives suggests that host countries are at a
disadvantage when bargaining with MNCs over manufacturing
investments.
--

The passage discusses the four legal principles that have historically
governed foreign direct investment (FDI). These principles are:

1. Foreign investments are private property to be treated at least as

favorably as domestic private property.
2. Governments have a right to expropriate foreign investments, but
only for a public purpose.
3. When a government does expropriate a foreign investment, it
must compensate the owner for the full value of the expropriated
property.
4. Foreign investors have the right to appeal to their home country
in the event of a dispute with the host country.

The passage also notes that these principles were designed to protect
the property of foreign investors and therefore clearly reflect the
interests of the capital-exporting countries. However, capital-
exporting and capital-importing countries alike accepted these
principles throughout the nineteenth century.

The one exception came from Latin American governments, which

challenged the right of foreign governments to intervene in host
countries in support of their firms. By the late nineteenth century,
Latin American governments were invoking the Calvo doctrine, which
argues that no government has the right to intervene in another
country to enforce its citizens' private claims.

Summary: The passage discusses the four legal principles that have
historically governed FDI and the challenges to these principles from
Latin American governments.

Here are some additional points that you may want to consider:

The four principles discussed in the passage are still relevant today,
and they continue to be debated by governments and investors. The
Calvo doctrine is still invoked by some Latin American governments,
and it has been used to challenge the actions of foreign governments
in support of their firms.The debate over the four principles and the
Calvo doctrine is likely to continue as FDI continues to grow in
importance.

--

The passage discusses the role of developing countries in setting the

agenda for international discussions about FDI during the 1960s and
1970s. Working through the United Nations (UN), developing countries
sought to create international investment rules that reflected their
interests as capital importers.

The passage begins by discussing the United Nations Resolution on

Permanent Sovereignty over Natural Resources, which was passed in
1962. This resolution recognized the right of host countries to exercise
full control over their natural resources and over the foreign firms
operating within their borders extracting those resources. The
resolution also affirmed the right of host-country governments to
expropriate foreign investments and to determine the appropriate
compensation.

The passage then discusses the developing countries' efforts to write

a code of conduct for MNCs. This code of conduct would have ensured
that MNC activities were compatible with the medium and long-term
needs of the capital-importing countries.

Summary: The passage discusses the efforts of developing countries

to set the agenda for international discussions about FDI during the
1960s and 1970s. These efforts were largely unsuccessful, but they did
help to shape the debate about FDI and the role of MNCs in developing
countries.

--

The passage discusses the efforts of capital-exporting countries to

regulate host-country behavior in the early 1980s. These efforts were
focused on trade-related investment measures (TRIMs), which are
government policies toward FDI or MNCs that have an impact on the
country's imports or exports.
The passage begins by discussing the United States' efforts to place
TRIMs on the agenda of the Uruguay Round of trade negotiations. The
United States argued that TRIMs distort international trade and that
they should be prohibited.

Developing countries, on the other hand, were reluctant to incorporate

TRIMs into the GATT. They argued that "development considerations
outweighed whatever adverse trade effects TRIMs might have."

In the end, the GATT was able to reach an agreement on TRIMs.

However, the agreement was a compromise, and it did not go as far as
the United States would have liked.

Summary: the passage discusses the efforts of capital-exporting

countries to regulate host-country behavior in the early 1980s. These
efforts were focused on TRIMs, and they resulted in a compromise
agreement in the GATT.

Here are some additional points that you may want to consider:

The debate over TRIMs continues today. Some countries believe that
TRIMs are necessary to protect their domestic industries, while others
believe that they distort trade and should be prohibited. The GATT
agreement on TRIMs is not perfect, but it is a step in the right
direction. It provides some protection against the use of TRIMs, and it
encourages countries to negotiate further agreements on this issue.

--

The passage discusses the Multilateral Agreement on Investment

(MAI), which was an attempt to liberalize FDI and provide greater
security to MNCs. The MAI was negotiated among OECD members, and
it was intended to be a comprehensive agreement that would cover all
aspects of FDI.

The passage begins by discussing the three advantages that the OECD
offered for negotiating the MAI. First, the OECD was composed of
advanced industrialized countries, all of which shared a commitment
to liberal investment rules. Second, most FDI takes place between
advanced industrialized countries, so an agreement among OECD
members would regulate the majority of international investment.
Third, an OECD-based agreement would not preclude participation by
developing countries.

The passage then discusses the two main objectives of the MAI. First,
the MAI was intended to liberalize FDI by requiring states to treat
foreign-owned firms operating in their economy no differently than
domestic firms. Second, the MAI was intended to provide greater
security to foreign investors by incorporating the historical standard of
prompt, effective, and adequate compensation in cases of
expropriation.

The passage also discusses the dispute-settlement mechanism that

was proposed for the MAI. This mechanism was patterned on NAFTA,
and it would allow for both state-to-state claims and firm-to-state
claims.

Summary: the passage discusses the MAI, which was an attempt to

liberalize FDI and provide greater security to MNCs. The MAI was
negotiated among OECD members, and it was intended to be a
comprehensive agreement that would cover all aspects of FDI.

--

A Bilateral Investment Treaty (BIT) is a legally binding agreement

between two countries that establishes the terms and conditions for
investment by nationals of one country in the other. BITs typically
require fair and equal treatment, limit expropriation, and protect the
repatriation of earnings and assets. In addition, many BITs include
arbitration clauses that commit the parties to adjudicate disputes in
international forums such as the International Center for the
Settlement of Investment Disputes (ICSID).

The proliferation of BITs is due to the absence of a broader

multilateral framework for governing FDI. In the absence of such a
framework, states have come to rely heavily on BITs to provide some
protection for investors and to promote FDI.
Summary: The passage discusses the role of BITs in governing foreign
direct investment (FDI). BITs are legally binding agreements between
two countries that establish the terms and conditions for investment
by nationals of one country in the other. BITs have become the
predominant approach to governing FDI in the absence of a broader
multilateral framework. The proliferation of BITs has provided some
protection for investors and has helped to promote FDI. However, BITs
have also been criticized for giving too much power to investors and
for undermining national sovereignty.

--

Sovereign wealth funds (SWFs) are government-owned funds that purchase private assets in
foreign markets. They have been around for 50 years, but the recent sharp rise in oil and natural
gas prices has stimulated their rapid growth.

There are more than 20 governments that currently have SWFs, and perhaps six others may be
about to create them. The single largest fund, Norway's Government Pension Fund, controls
approximately $1 trillion as of September 2017. The second largest, United Arab Emirate's Abu
Dhabi Investment Authority, controls approximately $830 billion. As a group, the 20 active
SWFs control approximately $6.3 trillion.

The recent growth of SWF activity has worried some American and European policymakers.
Some fear that governments intend to use their SWFs to achieve political rather than economic
objectives. Others are concerned about the lack of transparency in SWF operations and the
absence of a common regulatory framework.

American and European policymakers have responded to SWF activity in three ways. One strong
impulse has been to welcome SWF investment in the midst of the extended difficulties in the
American financial system. Simultaneously, however, policymakers have become a bit more
protectionist regarding foreign investment. Finally, American and European policymakers have
sought to reconcile these two conflicting tendencies by trying to develop international rules, or
codes of best practices, to govern SWF activities.

Summary: The passage discusses the rise of sovereign wealth funds (SWFs) and the concerns
that they have raised in the United States and the EU. SWFs are government-owned funds that
purchase private assets in foreign markets. They have grown rapidly in recent years, and some
policymakers are concerned that they could be used for political purposes or that they could
destabilize financial markets. American and European policymakers have responded to SWF
activity in three ways: welcoming SWF investment, becoming more protectionist, and trying to
develop international rules to govern SWF activities.