PSCI 229

GATT

General Agreement on Tariffs and Trade—-multilateral legal agreement signed in 1947 to promote international trade by reducing tariffs and other trade barriers. Provisional agreement that fostered economic growth and other trade barriers.

Current account

tracks a country's international trade and financial flows, primarily the balance of goods, services, income, and transfers, acting as a key part of the overall balance of payments to show if a nation is a net lender or borrower with the world

rentier effect

a political science concept where states that rely heavily on resource rents (like oil) remain non-democratic because the government buys off its population with low taxes and patronage, reducing the need for taxation and citizen demand for political accountability

OECD Economic Outlook 2025

Uncertainty

• Tariff policy —> growth

  • markets, exchange, infrastructure

• trade ←→ growth

  • GDP, output, living standards

inflation

• money

• prices, price changes (going up)

• CPI

• purchasing power of money goes down

• Fed => 2% inflation target

“monetary policy” - they like Personal Consumptions Expenditures

• Tariffs

What do the OECD and IMF want?

They want free trade and believe low inflation and movement of capital is important. Economic and political ramifications.

Services

Behaviors and skills that are paid for—-tourism, international education, and legal services. This is traded.

• $1.2 trillion of services exported in 2024, which is a large part of our economy

David Ricardo

example of Portugal and England is very influential—-for comparative advantage. Absolute advantage was Adam Smith’s idea.

• Natural advantages given to a country.

His idea believed that comparative advantage explains mass global trade

Relative Advantage

“gains from trade” — factor immobility

Country X has a comparative advantage in Good A.

Happens when a country is more efficient at producing the same thing as other countries

Everyone has a comparative advantage in something.

Institutions market - “Factors of production” - land, labor, capital

Absolute Advantage

factor immobility is the only reason why comparative advantage is the way it is. Factor mobility would cause absolute advantages.

Hecksher-Ohlin theory

comparative advantage in commodities produced of their relatively abundant factor—export abundant, important scarce. Consider factor endowments.

There are winners and loses, and you can compensate the losers.

labor-capital ratio:

are countries labor abundant? or capital abundant?

NAFTA

Mexico should produce labor-intensive goods and the US should produce produce capital intensive goods

Lantif paradox

first serious test of H-O model in 1954. In the US, the most capital abundant, exported labor intensive goods, and imported capital intensive goods.

• Completely opposite to what was supposed to be done

• Comparative advantage does not explain 100% of trade

Old Trade Theory

inter-industry trade

• However, comparative advantage does not explain enough—only explains around 20% of trade

• Vast majority of trade is intra-industry trade.

Harmonized trading system

• 2-digit: broad

• 4-digit: specialized

• 6-digit: very narrow distinctions between industries and increasing returns

Levels of trade theory

• Old: inter-industry

• New: intra-industry

• New New: Firm

factor endowment argument

Regions specialize due to:

• time/history

• randomness/accident

• gov’t industrial policy

The added element of new new trade theory

• Fixed costs of trades only most productive firms with export, and they typically the largest

• firm level differences and firm level fixed and sunk costs

• trade spurs innovation

• don’t restrict imports

• regulations “non-tariff barriers to trade”

Driskill

GDP can hide lower-income losses, critiques that assumption that tastes are the same. Compensating losses is impossible.

Pareto optimality

you can make someone better off without making else worse off

Deardoff

comparative advantage in future production idea. Subsidize what we have a comparative disadvantage in.

Industrial Policy

lies at the heart of economic nationalism

• development is the goal for this

• qualitative change in the structures of the economy

• relative gains —> relative wealth —> relative power

• growth productivity and competitiveness

• dynamic efficiency gains — applying tech, increasing tech sophistication.

Gov’t interventions aimed at developing/supporting specific domestic firms, industries, or economic activities to achieve national economic or non-economic objectives

• Barriers to exports

domestic subsidies, import barriers, subsidizing export, public procurement measures

getting prices

right

• state funding for research, sticking to comparative advantage, and not staying to close to it

wrong

• pursue development, strong state with many instruments, do what the market wants to do

money

medium of exchange, a store of value, and a unit of account

credit/debt

• “credere” — to trust, to believe, to owe

• money-ness — things can have a degree of money-ness

• Federal Reserve — makes money, sets interest rates, does monetary policy, and is the “central bank”

How banks create money

Banks create money just by a bank manager approving a loan

Payment communities

places/countries/agreements that agree on a type of money as their currency, like US dollars or Berkshares

state theory of money

state tells us what my money is—-through ability to tax

hegemonic stability theory

public goods

• non-excludable

  • highway?

  • national defense

  • schools?

• non-rival

  • clean air

• the hegemon will produce these goods

1. Open market for distressed goods

2. counter-cyclical lending

3. stable exchange rates

4. coordination of macroeconomic policies

5. lender of last resort

Trilemma

Exchange rate stability, open capital immobility, independent monetary policy

• You can have at most two, but you can’t have all three

Balance of Payments

BoP must balance to zero

• Current account tracks flow of goods, services, and income from trade

• Combined Capital and Financial Account (C+FA) tracks changes in ownership of assets and liabilities

Federal Reserves

most valuable, means actual money, think of money as a promise—-bank needs money

CA and C+FA account rule

CA + C&FA = 0

GDP formulas

C + I + G + (X-M)

C + S + t

OPEC oil

reduce supply, prices rise

• inflation

  • “tug of war”

1990 distributional conflict

• producers of oil happy, drive inflation, consensus unhappy

• borrowers/debtors liked inflation if not

• unions have power, profit off inflation with wage increases with or above inflation

2000s-2010s

low inflation / deflation, especially Europe

decide want 2% inflation —> maximized economic growth —> everyone benefits

in past 40 years, price

Organization of Arab Petroleum Exporting Countries (OAPEC)

founded in 1973, subset of OPEC. Nationalization meant arab countries and OAPEC controlled oil. Saudi Arabia #1 exporter. and had the most oil reserves too. OAPEC did an embargo against Israel’s allies, which doubled oil prices and caused a recession

Global consumption of fossil fuels

has gone up (oil, gas, coal). 2024 was the highest consumption in history

energy continuity

sustaining product, weathering shocks, demand can be met by supply, risks

• risks can be technical, human, or natural

• affordability

• adequacy—ability to respond to peak demand

• environemnt

energy “autarky”

or even better, geographical diversification

• domestic

• diversify imports/exports

• diversify sources of energy (oil, gas, solar, nuclear)

• storage—-strategic oil reserve of the US.

  • Tech development—-efficiency

Politics of clean energy

clean energy is not the obvious good thing; it’s deeply political. STEPS projections have goals—-highly unlikely to happen. Historically, one fuel has never declined in absolute terms. Even biofuel—dung, straw—-have not declined. Maybe coal one day will decline —→ oil and natural gas are not going anywhere.

• Political questions funelled through markets.

Oil market

is “one big pool”—it is barely different depending where it is.

Resource curse

• No country wealthier in oil than Mexico has been democratic since 1960.

• democracy and authoritarianism due to gov’t massive oil reserves.

• “rentier effect”

• declining growth of GDP

• corruption/consumption—-not investment

• military

  • civil conflict

petro-alignment

oil —> security in (1) geo-strategic locations, (2) market poewr

Saudi Arabia

• “Swing producers”

  • “excess capacity”

“tight oil”

tech ot develop shale oil.

shale oil

unconventional oil resource found trapped in fine-grained sedimentary rock

Low barriers to entry

quick conversion to production

front-loaded production

low fixed/variable cost ratio

oil power

sanctions

prices rise = rising stability

medium-run power, not short

public vs. private

What did USSR/Russia want? (When building a relationship with the West)

Divide NATO, generate World currency, import tech, prestige, increase trust—wants to build market relations, and security of demand

What did the Europeans want? (When building a relationship with Russia/USSR.)

need imports, build competitive markets, environmental interests—-Greens in Germany did not like Nordstream, and they hate Putin—stability with Russia and the USSR, anti-OPEC, and pro-EU project

ostpolitik

West Germany's foreign policy, led by Chancellor Willy Brandt in the late 1960s and 1970s, aimed at normalizing relations with the Soviet Union, East Germany (GDR), and other Eastern Bloc countries through dialogue, trade, and cultural exchange, fundamentally shifting from confrontation to détente to reduce Cold War tensions and peacefully overcome Europe's division, ultimately contributing to greater openness and challenging Communist rule

What did the US want when the USSR and West were solidifying their relationship?

• get into the European market

• stop NordStream 1 and 2

  • politics—-US wants more European dependence on the US

geopolitical approach to energy security

emphasizes controlling supply, transport routes, and diversification

market approach to energy security

includes competitive internal market, green and alternative sources, and market integration

Who receives the most immigrants?

the U.S.

Who sends the most immigrants

Russia, China, Mexico, Ukraine, and India

H-O model on exchange of labor

exchange of labor should have same wage effects as the free trade of labor intensive goods. We currently fall short of this model

Purchasing Power Parity

big mac price index

equalizes the purchasing power of different currencies, showing how much money is needed to buy the same basket of goods and services in different countries, thus allowing for fair comparisons of living standards and GDP

Why do prices differ across countries for the same good?

• no free movement of labor

• non-tradable

  • technology differences

Frisch and Borjas said

we wanted workers, but we got people instead

Welfare State Immigration

In aggregate, over an entire lifetime—no one pays for themselves. Our takings are much higher than our labor contribution. Countries want people who produce a ton, cost little, and even pay taxes.

• Points system has been proposed—you get points for nice qualities

• By far, immigrants are the number one beneficiaries of immigration. #2 is the company/capital that benefit from the immigrant labor.

• Borjas said, “It is a net wash for the native born person in this exchange.”

  • Maybe that’s why many people get agitated on issue like crime, identity, and culture.

Reasons to restrict immigration

culture/identity

crime

insufficient resources to accomodate them

Remittances

countries like the Philippines gain a lot from workers sending money back to family. Skill development too.

syncretic territorial state

describes a nation or region where diverse cultural, religious, or political traditions blend to form a unique, shared identity within defined borders, fostering unity

immigration leads to

increased support for right-wing politics (immigration restrictions)

decreased support for redistribution

increased political polarization

more heterogenous communities —> “white flight”

culture > economics

right-wing parties benefit from “welfare state chauvinism”

salience matters

Character of immigrants

cultural distance

skills

• generosity of welfare regime

• crime

concentration

character of natives

contact hypothesis

libs/cons

4 channels for the effects of international migration on the migrants' country of origin

1. prospective

2. absence

3. diaspora

4. return

What is a refugee?

Owing to well-founded fear of oppression, is unable or unwilling to remain in his country. Only persecution for defined reasons

• “non-refoulement” - no forced returns

• far and open asylum process — over 1 million cases are backlogged

• UNHCR

asylee: an asylee lives in the US who meets the definition of refugee

Securitization

visas are security measures. we collect info and tell you if you can come

migrant camps, not allowing them to disperse and keep them in the same place

interdiction (forbidding), when migrants try to enter a country by sea, drone surveillance, highways. It sees migrants as security threats

surveillance, biometric info, face scans

limit access

Externalization

the border exists in multiple forms, not just physical but legal, social, and more

diplomatic gains/favors => accession talks

pay them/”bribe”

deportation(for them/acceptance)

prevention; pay for military/immigration forces

visas

build state capacity

sanctions/threats

pros and cons of securitization and externalization

pro:

• get around law

• domestic politics

• human rights protection

• logistic benefits

• effective

con:

• status harm

• long-term costs

  • support dictators

  • support smugglers

• ineffective/band-aid

• legal/illegal

economic warfare

“liberal approach to war”

sanctions have become alternatives to war—-a way to keep the peace—deterrence

If the goal is to force the enemy to do something, then economic warfare might be that tool.

Clausewitz

1. fundamental purpose of war “destroy the enemy”

2. “act of policy” is what war is—-limits what war can be. War is merely the continuation of policy by other means

preconditions for economic warfare

• conflict of interest (violence)

• interdependence (not autarky)

• cooperation (foreign govts, banks, insurance companies)

• enforcability (naval power, payment systems, etc).

• financialization

petro dollar

a U.S. dollar earned by a country from selling oil, but the term also refers to the broader system where oil-exporting nations invest these dollar revenues, often back into U.S. assets or debt, creating global financial flows and supporting the dollar's dominance

What do sanctions do?

introduce friction => (“major”) (“downgrade capabilities”)

deterrence

compellance

deglobalization

alternative networks or infrastructure to not get too dependent.

Chokepoints have been so attractive, used so much that its very enforcement goes down the more its used as countries find alternatives

3 qualities to chokepoints

1. market concentration

2. difficult to substitute

3. asymmetric coercive potential

Fishman’s challenge of assessing policy

not on what is the best policy—but would we be better off not having done them?

Why does the US begin countering China?

shift in power relative to Soviet Union; China grwoth story

benefits of trade/investment

technology

• patents/IP → R&D - IP

• “dual-use” tech” to spy on people

• tech. transfer

rules of liberalism

Huawei

The U.S. targeted Huawei due to deep national security concerns, primarily the fear that its telecom equipment could be used by the Chinese government for espionage, coupled with allegations of intellectual property theft, sanctions violations against Iran, and unfair trade practices, viewing Huawei as a key part of China's push for global tech dominance

Tools Trump used to counter China

tariffs

chips ← ISMC, foreign direct product rule, export controls

USD

investment restrictions

forced sales

foreign direct product rule

The Foreign Direct Product Rule (FDPR) is a U.S. export control that extends American regulations to certain foreign-made goods, making them subject to U.S. licensing if they are a "direct product" of U.S. technology/software or made with U.S.-origin equipment, especially when destined for restricted entities or countries like China or Russia, controlling items like advanced semiconductors even if produced abroad by non-U.S. companies.

G7 sanctions against Russia

oil price cap

embargo; oil, nautral gas

central bank assets frozen (BoR) => “investor confidence” - Financial contagion

bank freeze

semiconductor ban (FDPR)

insurance

• shipping

• financing

Political goals of the West/G7 against Russia

maintain dominance of semiconductors

alliance test - India - Taiwan

isolate Russia

deter Russia

punish Russia; defend reputation

maintain International Liberal Order

uphold “international law”

Political goals of Russia against the West

weaken NATO credibility
fracture EU political cohesion
end U.S. unipolar dominance
secure sphere of influence (post-Soviet space)
normalize use of force to change borders
delegitimize liberal democratic norms
reduce effectiveness of sanctions regime
force Western recognition of Russian great-power status

Fishman said “free trade is dead”, why?

• trust - no trust to provide public goods, follow law

• “zero-sum” / Relative gains → straTtegic industries

• insecurity

  • China

  • US post 9/11

Does liberalism lead to peace

Probably not, instead:

• Peace leads to liberalism

Fishman’s impossible trinity

geostrategic competition, economic interdependence, and economic security