Fall 2023

INTERNATIONAL POLITICAL
ECONOMY

Dr. H. Kürşad Aslan

CHAPTER 7:
INTERNATIONAL TRADE
STRUCTURE
 Connection btw production &
trade

 GDP: National income

Y = C + I + G + (X-I)

 As columnist Robert Kuttner says:

Trade is always political…
World Trade as a percentage of
World GDP 1990-2015
YOUTUBE VIDEO

 The deceptive promise of free trade

DW Documentary
42:26 MIN
https://www.youtube.com/watch?v=DnW9Z
QtI1_E
YOUTUBE VIDEO

 How do tariffs work? | CNBC Explains

 4:57 MIN
 https://www.youtube.com/watch?v=LKC
MnCZyxiQ
WTO: World Trade
Organization
 Check its website
https://www.wto.org/english/thewto_e/whatis_e/ti
f_e/org6_e.htm
 Trends in international trade: what has
changed in the last decades?
 Fundamental forces shaping the future of international trade:
• demography,
• investment,
• technology,
• The disposition and availability of energy and other
natural resources,
• transportation costs
• institutions
 Winners and Losers…
 The unprecedented increase in trade in the last 50 years has
created high levels of interdependence between countries.
 Controversies in the international trade system: Some
countries win some others lose…
 Within winning (and losing) countries: there are some
winner & some loser groups
 Nation states want to increase the benefits of international
trade while limiting its negative political, economic, and
social effects on producer groups and society in general.
 Winners and Losers…
 After the global financial crisis (in 2007): citizens of
developed industrialized countries became more
nationalistic and demanded greater trade protectionism.
 The political right in Europe and the United States had
traditionally pushed for more free trade.
 However, in the 2010s important segments of both the left
and right blamed globalization for destroying national
industries and good jobs.
 Winners and Losers…
 Populists and nationalists in the EU: criticize free trade
(those who felt left behind during European
integration).
 Trade protectionism is also associated with a fear of
becoming too dependent on other nations (including
food and national defense).
 Without a set of international trade rules, nationalistic
trade policies could easily undermine the global
production structure.
 Ironically, China has now positioned itself as the
defender of free trade.
 Winners and Losers…
 Developing countries that open up to free trade without
appropriate institutions or local industry strength can be
made worse off, as when competition from cheap imports
drives small companies and farmers out of business.
 Ha-Joon Chang explains that the developed states are
“kicking away the ladder” (taking away the choice to
protect) from the developing nations, even though few of
today’s industrialized countries actually practiced free trade
in the nineteenth and early twentieth centuries.
Changing World Trading System

 In 1948, the GATT became the primary organization

responsible for the liberalization of international
trade.
 Through a series of multilateral negotiations called
rounds, the world’s main trading nations agreed to
reduce their own protectionist barriers in return for
freer access to the markets of others.
Changing World Trading System

 Two basic principles of the GATT are reciprocity and

nondiscrimination.
 Trade concessions are reciprocal—that is, all
member nations agree to lower their trade barriers
together.
 Nondiscrimination has two components: most
favored nation (MFN) treatment and national
treatment.
Changing World Trading System

 MFN treatment means not giving preferential

treatment to the imports of one country over those of
another.
 National treatment requires that a country treat
imported goods the same as equivalent domestically
produced goods.
 The GATT’s Tokyo Round (1973–1979) addressed
the growing number of non-tariff barriers (NTBs).
Changing World Trading System

 Keep in mind that as an organization the GATT could

not enforce its own rules; rather, members were
responsible for fulfilling trade obligations based on
trust and diplomacy.
 Rules were established to limit a range of
discriminatory trade practices involving export
subsidies, countervailing duties, dumping,
government purchasing, government-imposed
product standards, and licensing requirements on
importers.
 Neomercantilism on the rise
 Prioritize local industries

 Buy locally produced goods.

 The United States and Germany achieved their impressive

late nineteenth- and early twentieth century growth behind
high tariff walls; many other countries also had some kind
of protection.
 As outlined in Chapter 3, Alexander Hamilton and
Friedrich List challenged liberal trade doctrine. From their
mercantilist perspective, free trade was merely a rationale
for England to maintain its dominant advantage.
 Neomercantilism on the rise
 In the 19th century, free trade policies were enforced
at the point of a gun, as when the United States forced
Japan to open its doors to U.S. trade in the 1860s and
when the European powers forced open China and the
Ottoman Empire in the nineteenth century.
 Neomercantilism on the rise
 For Hamilton, supporting U.S. infant industries and
achieving national independence required the use of
protectionist trade measures.
 List argued that polices such as import tariffs and export
subsidies were necessary (infant industries to compete
on an equal footing).
 …for free trade to work for all, it must be preceded by
greater equality between states.
 Strategic Trade
 The term “strategic trade policy” became synonymous with
efforts by states to stimulate exports and hinder foreign
access to domestic markets through non-tariff measures.
 Proactive strategic trade policy often involved extending
support to infant industries and providing export subsidies
to large companies.
 It also included “the use of threats, promises, and other
bargaining techniques to alter the trading regime in ways
that improve the market position of one’s national
corporations.”
 The idea of strategic trade policy: comparative
advantage is not fixed; it is dynamic.
 Tokyo’s Ministry of International Trade and Industry
(MITI) adopted numerous trade support measures.
 Many of these measures were aimed at creating
comparative advantages…
 Free Trade Versus Fair Trade

 Gradually the notion of fair trade gained

prominence recently.
 It is about creating rules that attempted to level
the playing field when it came to acceptable
amounts and types of protection amongst trade
partners.
Free Trade Versus Fair Trade
Fair trade was proposed to safeguard producers
from developing countries.
 North-South Divide
 The EU, China, Japan, the United States, and South Korea
together account for 74 percent of the world’s exported
manufactured goods.
 If we look at the merchandise exports of the Middle East and
Africa, we find that in 2016 more than 60 percent of all their
exports were fuel and minerals. Likewise, for South and Central
America, 70 percent of their merchandise exports were fuel,
minerals, and agricultural products.
 The Middle East, Africa, and Latin America are also vulnerable
to swings in global prices for primary products. Volatile export
prices have sometimes caused severe economic recessions,
triggered debt crises, or led to unsustainable economic growth.
 RECENT TRADE PATTERNS:
REGIONALIZATION
• The share of intra-regional trade in Asian exports
rose from 42% in 1990 to 52% in 2011.
• Asia poses the largest share of intra-regional trade
in exports of any geographic region when the
European Union is counted as a single entity.
RECENT TRADE PATTERNS:
INTERDEPENDENCE
• international supply chains: the value added by
each location in internationally configured
production processes.
• International supply chains play a major role in
today’s world economy.
Types of Regional Trade Regimes

 Free Trade Area: No internal tariffs (NAFTA)

 Common Market: No internal tariff; common
external tariff (EU pre-1992)
 Single Market: Same as common market plus
common coordinated economic regulation
(EU post-1992)
 Monetary Union: Common currency (EU
post-1999)
 REGIONAL TRADE BLOCS
 The USA has signed more than 300 bilateral agreements
and belongs to a number of Regional Trade Agreements
(RTAs) like NAFTA and APEC.
 RTAs are often easier to form because fewer states are
involved.
 Some see RTAs as obstacles to free trade, because they
proliferate tariffs and preferences between the bloc’s
members that become durably institutionalized.
New Trends: digital revolution

 The digital revolution has made liberalization of trade in services

an important issue in international trade negotiations. Countries
with leading technology-based corporations are spearheading the
effort to gain access to new markets for digitally delivered
services throughout the world.
 Balance of Payments
 “balance of payments” (or BOP) table is used to
measure, visualize, and categorize any given country’s
economic transactions with other nations in a calendar
year.
 BOP summarizes all international economic
transactions in a given year.”
 BOP helps governments to see their overall positions
regarding the international trade figures, money flows,
and capital interactions with other nations.
 There are two major sections in the BOP:
1- Current Account
2- Capital Account
Balance of Payments
Credit Debit
A- Current Account export of goods import of goods

export of services import of services

unilateral transfer unilateral transfer

(inflow) (outflow)

B- Capital Account capital inflow capital outflow

foreign assets held in US US assets held abroad

C- Statistical
Discrepancy

A+B+C = 0