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  1. 1. the political economy of International Trade Lecture 1 Introduction and The three ideologies of IPE29 February 2012 Raymond Cairo
  2. 2. Introductory Remarks IGeneral approach: IPE not quantitativeStructure lectures: in three clusters (theory; ITS and regional aspects) seminars: just as important!Assessment 35% Group Assignment Deadline: Week 4, Monday March 19, 16:00hrs 65% Close Book Exam (still faaaaar away………..)
  3. 3. Introductory Remarks II A challenging module…….Focus is not on companies but on states/governments and the international system →new and different theoretical frameworks →much more preparation required →and on a weekly basisLEAVING IT ALL TILL THE VERY LAST IS A RECIPE FOR FAILURE!
  4. 4. Introductory Remarks III ………but also a rewarding one!Only module in your Programme that centres on the international system and the role of states in economic and business settingsHighly topical and practical: on a weekly, if not daily basis aspects of the Political Economy of International Trade make the national and international newsMany of the dynamics that apply to the WTO in the international context apply to other IGOs so if you would like to work for IGOs this module will provide you with useful insights
  5. 5. Reading materialGilpin, Robert (1987). The Political Economy of InternationalRelations. Oxford: Princeton University Press. Chapters 2 & 5Suggestions for further reading:Goddard, C. Roe; Cronin, Patrick and Dash, Kishore C. (eds.)(2003). International Political Economy: State-MarketRelations in a Changing Global Order. Boulder, CO: LynneRienner Publishers (chapters 2-4, 6, 11-13).Miller, Raymond C. (2008). International Political Economy:Contrasting world views. London: Routledge. (All chapters,especially strong on Marxism.)Oatley, Thomas (2010). International Political Economy:Interests and Institutions in the Global Economy. New York:Longman (Pearson).Ingham, Barbara (2004). International Economics. Harlow:Pearson Education Limited (chapter 2)Gilpin, Robert (2001). Global Political Economy:Understanding the International Economic Order. Princeton:Princeton University Press. Chapter 3.
  6. 6. At the end of this lecture you should.........understand what IPE is...have some idea what the three main ideologies are and what they stand for...see how they differ from each other...be able to assess whether this is an approach you are interested in...hopefully have enough ammunition to start thinking about your assignment (we shall deal with the same topic tomorrow at the 1st seminar)
  7. 7. “Theories” The three main ideologies (not actual theories!): Ideology: “systems of thought and belief by which[individuals and groups] explain…..how their socialsystem operates and what principles it exemplifies”(Heilbroner, 1985, p.107 as in Gilpin, 1987, p.25). Applicability does not seem to abate! Politics versus economicsWhat role should the market play in economic life and society at large?
  8. 8. Quick introductions I Mercantilism / economic nationalism (“Realism” in Frieden & Lake GCD chapter 2): Politics over EconomicsDeveloped from practice of statesmen from 14th century Effective state-building
  9. 9. Quick introductions II Liberalism Economics over Politics; Separate spheres (therefore)No market efficiency with political intermingling Building on the Enlightment era 18th century Reaction to Mercantilism
  10. 10. Quick introductions III Structuralists / Marxists Economics determines politics (empirically) Mid-19th century Reaction to both Mercantilism and LiberalismStruggle amongst classes for distribution of wealth
  11. 11. Mercantilism• All cases: state primacy and economics serves to obtain power: but benign and malevolent mercantilism• No separation between politics and economics • Trade is zero-sum, only relative gain matters • Self-sufficiency rather than economic interdependence (!!!)• No faith in market mechanism for state building
  12. 12. Some consequences for trade • Mercantilist’s lack of faith in market mechanism results in a (clearly) visible hand • State should do ALL in its power for its protection including economic measures (tariffs, quotas, etc.).• Foreign actors (i.e. countries, companies, international organisations!!!) should be treated with prudence (benign) or suspicion (more malevolent) → can lead to beggar thy neighbour policies• Protection of infant industry not necessarily temporary • From Strategic Trade Policy to more offensive forms• DO trade but to build the country’s economic position which fortifies its political strength
  13. 13. Liberalism • Commitment to free markets and minimal state intervention (“laissez faire”) • Adam Smith: “The Father of International Economics” (absolute advantage)• Liberalism amalgamation of many forms: classical, neo- classical, Keynsian, monetarist, Austrian, etc. • One thing in common: market price mechanism to organise and manage a market, achieve maximum efficiency, economic growth and individual welfare, both nationally and internationally
  14. 14. (more) Liberalism • Economic activity and power of the state? • Basis of society: individual consumer, the firm or household.• Individuals behave rationally in the pursuit for certain values at the lowest possible cost to themselves• Rationalism and equilibrium: attempting to obtain an objective until cost equal benefits → Economic rational behaviour in tandem with the market mechanism will lead to equilibrium (at least in the long run) • Trade can foster peace amongst nations!!! (EU)
  15. 15. Knowing David from Adam Adam Smith: founding work in economics An Inquiry into the Nature and Causes of the Wealth of Nations (1776):• A nation’s wealth depends on its productive capacity (even gold and silver can be wasted);• Laissez-faire creates the best environment to increase such productive capacity• International trade will benefit all trading countries; free trade has no losers. Absolute advantage and absolute disadvantage…..
  16. 16. Absolutely AdamOutput per unit of labour Suriname Cuba Production of 5 20 oranges Production of 10 6 sugarcanesSuriname concedes the production of oranges to Cuba andCuba concedes the production of sugarcanes to Suriname
  17. 17. …..and this is….. David RicardoThe Principles of Political Economy and Taxation (1817): But what if there is no absolute disadvantage? Comparative advantage!
  18. 18. …..definitely David Output per unit Suriname Cuba of labour Production of 4 24 oranges Production of 3 9 sugarcanesOne unit of Cuba labour produces 24 units of Cuban oranges or 9 units of sugarcanes. If trade takes place between the two and Cuba produces oranges it sacrifices 9 units of sugarcanes but it will obtain 18 units of sugarcanes from Suriname (24:4=6 → 6x3=18)Similarly in the case of Suriname, one unit of labour can produce 4 units of oranges or3 units of sugarcanes. Suriname produces 3 units of sugarcanes and sacrifices 4 units of oranges but will obtain 8 units of oranges from Cuba (9:3=3 → 24:3=8)
  19. 19. Further theoretical developments More countries, more products, more variables: More theories! What determines comparative advantage? Relative Factor Endowments determine a country’s pattern of trade (Heckscher-Ohlin model) Exit labour theory value: (How many Cubans does it take to......?) Neo-classical theory: more attention to consumer and producer behaviour (Jean Baptiste Say)Quantitative Economics and Econometrics are having numerous field days
  20. 20. Marxists/Structuralists interpretations Further developments and other theoretical streams since Karl Marx und Friedrich Engels• Dialectic approach: society is dynamic, conflictual (class struggle); no social harmony or equilibrium• Although individual rational (liberalist), the capitalist system is irrational• Capitalist system carries traces of its own destruction through accumulation by the “have’s”• Development of productive forces and economic activities leads to class struggles throughout history• Legacies include: Lenin’s and Mao’s interpretation of capitalist imperialism and, later, Gramsci (role of hegemony), the dependency school (centre and periphery argument), Prebish, Gunder Frank, Cardoso, Wallerstein’s Modern world System, etc.
  21. 21. Some consequences for trade• International trading system: rejected by most extreme radicals; important changes sought by the more benign streams• State intervention to shield from capitalist system (extreme) or from capitalist excesses (benign)
  22. 22. Final remark Central thread in this module:which ideological position does the actor take and what are the consequences for trade?