International Political Economy Midterm

Vocab for midterm exam

Comparative advantage

Producing a good at lower OPPORTUNITY COST than other countries, relative to your own alternatives. Gains from trade exist even without absolute advantage. Ex: Corn Laws, Britain's advantage in manufactures; Swedish farmers (land scarce, no grain exports).

Absolute (competitive) advantage

Producing more output per unit of input than other countries. vs. comparative: compares you to OTHER COUNTRIES, not to your own alternative uses.

Heckscher-Ohlin model

Countries export goods that use their ABUNDANT factors intensively and import goods using SCARCE factors. Explains where comparative advantage comes from. Assumes factors move freely between sectors. Ex: Britain (capital/labor rich) exports manufactures, imports grain.

Stolper-Samuelson theorem

Free trade raises returns to a country's ABUNDANT factor and lowers returns to its SCARCE factor; protection does the reverse. Predicts CLASS cleavages. Ex: Corn Laws, landowners (scarce) vs. capital + labor (abundant); Rogowski.

Ricardo-Viner (specific factors) model

Factors are stuck in their industry, so interests follow the INDUSTRY: export sectors want free trade, import-competing sectors want protection. Predicts INDUSTRY cleavages. Ex: US steel owners and workers lobby together; US sugar protected despite land abundance.

Factor endowments

How much land, labor and capital a country has RELATIVE to others. Ex: Sweden's scarce, poor land; wheat vs. sugar endowments shaped US North vs. South institutions.

Factor mobility

How easily factors move between uses/industries. High mobility -> H-O/S-S class politics; low -> Ricardo-Viner industry politics. Ex: 150m European farmers squeezed by New World grain; ~50m emigrated, ~50m moved to cities.

Factor price equalization

Trade pushes factor returns (wages, returns to capital) toward equality across countries, even without factors moving: trade substitutes for migration. vs. S-S: S-S = who wins/loses WITHIN a country; FPE = how factor prices respond ACROSS countries.

Welfare consequences

Effect of a policy on the size of the national pie (aggregate welfare). Protection shrinks it via deadweight loss. Ex: 1981 car quotas cost consumers $50-75bn. Usually the settled part of the argument; distribution decides policy.

Distributional consequences

WHO gains and who loses (who gets which slice). Explains why welfare-reducing protection persists. Ex: 17 sugar plantations + 3,000 growers gain; millions of consumers each lose a few cents.

Collective action problem

Group members would all gain from acting, but each has an incentive to free-ride, so large diffuse groups under-organize; small concentrated groups organize. Ex: sugar growers organize, consumers don't. Internationally: a hegemon can solve it.

Special interest groups

Organized groups lobbying for concentrated benefits whose costs are spread thinly. Ex: sugar growers = ~1/3 of all farm lobbying; farm lobbies (Davis); Smoot-Hawley lobbying frenzy.

Rents

The PRIZE: a return above what a resource earns in its next-best use. Policy rents come from tariffs/quotas (sugar); resource rents from land/minerals (plantation elites, Acemoglu).

Rent-seeking

SPENDING resources (lobbying, bribes) to win or keep rents; socially wasteful. Ex: sugar lobbying; Junkers sought protection rather than adapt (Rogowski).

Pareto improvement

A change that makes at least one person better off and no one worse off. Usually requires compensating losers. Ex: buying out at-risk auto workers would have cost less than the 1981 car quotas.

Pareto-optimal outcome

An end point where no Pareto improvement is left: no one can gain without someone losing. Says nothing about fairness. Free trade is Pareto-optimal in neoclassical theory (Krasner).

Public good

Non-rival (my use doesn't reduce yours) and non-excludable (no one can be kept out), so free-riding means under-provision. Ex: international monetary stability; nobody supplied it interwar, US did after 1945 via Bretton Woods. Frieden: secure property = quintessential public good.

Externalities

Costs or benefits that fall on people outside a transaction. Ex: pollution (negative); learning spillovers from new industries (positive, Rodrik).

International spillovers

Externalities that CROSS BORDERS: one country's policy imposes costs/benefits on others. Ex: 1930s devaluations and tariffs pushed adjustment costs onto trading partners.

Prisoner's dilemma

Each player does better by defecting WHATEVER the other does, so both defect and both end up worse off. Needs ENFORCEMENT, not information. Ex: 1930s tariff wars; US-EU farm trade (FLSHR p.351); tariff-for-terms-of-trade trap (Mattoo).

Assurance game

Everyone prefers mutual cooperation, but each cooperates only if confident others will. Problem is FEAR OF MISCOORDINATION, so it needs INFORMATION/reassurance. Ex: interwar monetary coordination; 1936 Tripartite Agreement.

Commitment problem

An actor can't credibly promise FUTURE behavior because it will be tempted to renege later, so others won't deal. Ex: pre-1934 Congress could reverse tariff cuts (RTAA fixed it); host governments and sunk FDI (BITs); compensation promises (Frieden).

Issue linkage

Bundling several issues into one deal so a concession on one is traded for a gain on another. Ex: Lend-Lease tied to ending imperial preference (positive); 1931 France-Germany bank rescue tied to politics, failed (negative); Davis on agriculture.

Reciprocity

Exchanging trade concessions: I cut tariffs if you do. Mobilizes exporters for liberalization. Ex: RTAA 1934 (cuts up to 50%); GATT rounds. Britain after 1846 was the unilateral exception.

Agenda control

Who gets to make the first proposal. Ex: RTAA moved it from Congress to the president; same interests, lower tariffs.

Political institutions

The rules that decide whose interests count. Locally elected legislators -> protection; nationally elected president -> freer trade (FLSHR p.341). Ex: Smoot-Hawley vs. RTAA; 1832 Reform Act and Corn Laws repeal.

Gold standard

Currencies fixed to gold (1870s-1914). Deficit countries ADJUSTED their domestic economies: wages and prices fell 25%+. Worked when labor was unorganized and suffrage limited; collapsed after WWI with unions, big firms, democracy.

Bretton Woods System

1944 order: dollar fixed to gold at $35/oz, other currencies fixed but ADJUSTABLE, capital controls, IMF lending, World Bank. Openness + welfare state (embedded liberalism). Keynes (UK, borrower) vs. White (US, lender); US view won.

GATT / WTO

GATT 1947: rounds of reciprocal tariff cuts extended via MFN. WTO 1995: broader, adds dispute settlement. Ex: Kennedy Round; softwood lumber ruling 2020.

Most favored nation (MFN)

Any favorable terms given to one partner are extended to all MFN partners: nondiscrimination. One tariff cut spreads to every member; covers ~3/4 of world trade. Main exceptions: PTAs, customs unions like the EU.

Dispute settlement mechanism

WTO procedure: complaint, expert panel ruling, appeal to Appellate Body; WTO can authorize retaliation. Ex: 2020 ruling against US lumber tariffs; Appellate Body paralyzed by US refusal to appoint judges.

Trade creation / trade diversion

Creation: PTA lets you buy from a CHEAPER partner instead of costly home producers (welfare up). Diversion: buy from a COSTLIER partner instead of a cheaper outsider (welfare down). Ex: EEC customs union diverted trade -> Kennedy Round; NAFTA apparel.

PTAs vs. RTAs

PTA = any better-than-MFN deal, even one-way preferences. RTA = a PTA among 3+ countries in one region (EU, USMCA). WTO allows them if they cover substantially all trade and don't raise barriers to outsiders.

RTAA (1934)

Reciprocal Trade Agreements Act: president negotiates bilateral cuts up to 50% for equal foreign cuts; Congress votes up or down. Shifted agenda control, mobilized exporters, solved commitment problem; ~22 agreements; model for GATT.

Protectionism

Policies shielding domestic producers from imports: tariffs, quotas, VERs, subsidies, non-tariff barriers. Shrinks the pie but concentrated benefits win. Ex: US sugar; Smoot-Hawley 1930, highest US tariffs of 20th century.

ISI

Import-substituting industrialization: produce at home what was imported, via tariffs, import bans, subsidies, state firms, overvalued currencies. Latin America after WWII. Ended in current account deficits and the 1982 debt crisis.

EOI

Export-oriented industrialization: state promotes manufacturing FOR EXPORT via cheap loans, tax breaks, weak currencies. Korea, Taiwan, Singapore, Hong Kong from mid-1960s. Korea exports $385m (1970) -> $15bn (1979).

ISI vs. EOI

Both use heavy state intervention; the difference is WHAT THE STATE REWARDS: serving the protected home market vs. exporting. Hyundai and Kia, not GM and Ford plants for the home market.

Singer-Prebisch theory

Primary-product exporters' TERMS OF TRADE decline: competitive commodity prices fall easily, oligopolistic manufacturers keep prices up. Basis for ISI (Prebisch, UN ECLA).

Structuralism vs. Singer-Prebisch

Structuralism = broad view that the structure of the world economy blocks poor countries' industrialization. Singer-Prebisch = its specific terms-of-trade thesis.

Terms of trade

Export prices relative to import prices. Improve = each unit of exports buys more imports. Ex: Prebisch; mercantilists turned them against colonies; OPEC 1973; tariffs to improve them create a prisoner's dilemma (Mattoo).

Institutions vs. geography hypothesis

Institutions: rules made by people (property rights vs. extractive institutions) drive development. Geography: climate, disease, location. Geography can shape institutions. Ex: Venice vs. Spain; Botswana vs. Zambia; Korea/Taiwan.

Foreign direct investment (FDI)

Acquiring or building a facility abroad WITH MANAGERIAL CONTROL (10%+ stake). vs. portfolio investment: stocks, bonds, loans, no control. ~80% flows between rich countries. Ex: GM in Brazil; Japanese auto plants in US.

Horizontal vs. vertical integration

Horizontal: same product made in several countries (old GM in Brazil, tariff-jumping). Vertical: different stages of one chain in different countries (today's GM: rubber Malaysia, chips Costa Rica, windshields Belgium; aluminum, Caves).

Obsolescing bargain

Power shifts from MNC to host once capital is sunk; host can rewrite terms. Ex: extractive industries 1/5 of FDI but >1/2 of takings 1960-76; Chile nationalized copper 1971. Leads investors to demand BITs.