Oatley Chapter 3: The Political Economy of International Trade Cooperation

Abstract Theory of International Cooperation

International cooperation is difficult, even when all states stand to gain from cooperation, because the anarchical international system within which states interact makes it difficult to enforce any agreements that they might make.

How and why the WTO remains important

Societies often solve such cooperation problems by creating common institutions that help them enforce agreements.

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.

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.

Consumption Indifference Curves

Consumers will acquire shirts and computers in the combination that maximizes their collective utility.

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.

Diminishing Marginal Utility

Indifference curves typically bend in toward the origin.

Community Indifference Curves

Aggregate utility for all consumers in that society.

Equilibrium Production and Consumption

Production and consumption will occur at the point where the marginal rate of transformation (the slope of the PPF) is equal to the marginal rate of substitution (the slope of the indifference curve).

Comparative Advantage

These gains are not dependent upon having an absolute cost advantage in a particular industry.

Hecksher-Ohlin (or H-O) model

Argues that comparative advantage arises from differences in factor endowments.

Factor Endowments

Factors are the basic tools of production.

Trade Bargaining

Which governments exchange market access commitments.

International Bargaining

Enables governments to liberalize domestic sectors that they are unwilling to liberalize unilaterally.

Contract Curve

The set of mutually beneficial agreements that exhaust available joint gains.

Patience

Refers to the fact that both parties to the negotiation would prefer to settle today rather than tomorrow.

Outside Option

Is a government's next-best alternative to agreement.

Enforcement Problem

Refers to the fact that governments cannot be certain that other governments will comply with the trade agreements that they conclude.

Two important characteristics of game theory outcome

Pareto suboptimal and Nash equilibrium

Pareto Suboptimal

When no single actor can be made better off without at the same time making another actor worse off. This refers to outcomes in which it is possible for at least one actor to improve its position without any other actor being made worse off.

Nash Equilibrium

Outcome at which neither player has an incentive to change strategies unilaterally.

Tit-for-tat

Each government plays the strategy that its partner played in the previous round of the game.

Reciprocity

The exchange of resources, goods, and services among people of relatively equal status; meant to create and reinforce social ties.

Dispute Settlement Mechanism

Follows a standard procedure that was agreed to by all members of the WTO during the Uruguay Round.

Dispute Settlement Body

Initially encourages the governments involved in the dispute to try to resolve the conflict through direct consultations. If such consultations are unsuccessful, they creates a formal panel to investigate the complaint.