Unit 6: Trade and Money in the International Political Economy

Classical liberal trade theory holds the view that

Free trade without governmental interference will eventually benefit all economies in the international system by ensuring efficiency in the production and distribution of goods and services

The idea of comparative advantage is that

States should specialize in producing the goods which they produce most efficiently and trade for goods that other states produce most efficiently

Those that caution against free trade generally argue

Free trade leads to competition which can cost workers their jobs

Arguments in favor of free trade often include each of the following

- Free trade promotes interdependence among countries and helps maintain international peace

- Everyone benefits when countries produce and sell what they do most efficiently

- Open trade fosters lower prices for consumers

- Free trade produces overall economic growth and jobs in sectors where the country has a comparative advantage

Which two thinkers are most closely associated with setting the classical liberal roots of open markets and free trade?

Adam Smith and David Ricardo

Neoliberal advocates of the "Washington Consensus" argue that

Opening economies to free trade, cutting back state budgets (fiscal responsibility) and privatizing state-owned enterprises is the best strategy for the developing world

The removal or reduction of tariffs or quotas on the trading of specific goods to stimulate freer trade is known as

Trade liberalization

The Bretton Woods institutions were created after WWII

- To allow the United States to dominate the world economy

- To promote stability in international economics and, hence, strengthen international peace

Losing a case through the WTO disputes settlement mechanism could lead a country to face

- Military force

- Economic sanctions from the winning state

Intrafirm trade

Is when MNCs trade with their own affiliates in different countries, producing components and assembling products along their supply chain

Tariff

A tax on imports

Quota

A restriction on the number of goods that can be imported

Subsidy

Direct government payments to domestic producers

Regulations

Rules and standards that can create barriers to the importation of foreign goods

Arguments in favor of protectionist policies include

Countries can temporarily support the growth of infant industries to reshape their comparative advantage

Under the GATT

- States agreed to lower their tariffs and apply the same tariff rate to all members of the GATT (known as the most-favored nation system)

- Average global tariffs were lowered from 22% to 5% over roughly 50 years

- Countries often shifted to new steps to protect their economies¸ such as by using non-tariff barriers

The creation of the WTO in 1995 included

The creation of a trade dispute settlement mechanism with teeth, to resolve trade disputes amongst members

The WTO

- Is criticized on the left for its alleged disregard for environmental and worker standards

- Is criticized on the right for its ability to impinge on the decisions of sovereign states

MNCs build supply chains to

- Find the most qualified and inexpensive labor

- Access foreign markets

- Access abundant raw materials

Proponents of free trade argue

Trade increases overall employment and growth, and can shift jobs to where a country has comparative advantages

Why is trade policy "inevitably politicized"?

There are winners and losers with trade policies, and groups pressure governments to adopt policies beneficial to them

Which country pulled out of the Trans-Pacific Partnership (TPP)?

The United States

Capital

- In the past¸ largely stayed at home¸ in domestic banks and stock markets

- Today crosses borders at lightning speed¸ with over $6 trillion traded every day

- Can be in the form of foreign direct investment¸ foreign portfolio investment¸ foreign aid¸ and remittances from migrants sending money back home

- Is another word for money

IMF

Lender of last resort for countries that experience significant¸ but generally short-term¸ balance of payments problems

World Bank

Lender generally for longer-term development projects across the world

WTO

Organization designed to foster more open international trade and settle trade disputes

FDI can often help a country by

- Increasing competition in a host country, making its industries more efficient

- Generating employment and economic growth in host countries

- Helping build physical infrastructure in a host country

- Bringing in new technology and upgrading local labor skills

The difference between foreign direct investment (FDI) and foreign portfolio investment (FPI) is that

FDI is investing more in fixed assets (companies and real estate), as opposed to stocks and bonds (which is portfolio investment)

One criticism of state efforts to attract international capital is that it can lead to

A "race to the bottom," with countries lowering labor and environmental standards to compete

WTO violations by corrupt MNCs

For people and countries to develop and prosper, they need

Capital (money)

To stabilize currencies during the initial post-WWII era, countries

Fixed (or pegged) the value of their currency to the U.S. dollar, which was fixed to the price of gold

Floating exchange rates, which much of the world shifted to after 1971, differ from fixed exchange rates in that with floating exchange rates

The market determines the price of the currency

Through _________________, the IMF and World Bank set a series of often stiff conditions when establishing an agreement with a borrowing country, pressing such steps as trade liberalization, fiscal responsibility, and privatization.

Structural Adjustment Programs

IMF Structural Adjustment Programs (SAPs) have called for

Privatization (sale to private owners) of state-owned enterprises (SOEs)

With respect to the charge that LG and Samsung take advantage of unfair trade practices as far as washing machines are concerned

- U.S. regulators in the Obama and Trump administrations repeatedly agreed that the companies are breaking international trade rules

- LG and Samsung argued they followed the rules 100%¸ and simply have better products than Whirlpool

Developing countries (LDCs) often face "declining terms of trade" because

Their exports (often agricultural goods or other primary products) often do not bring in enough capital to pay for their imports (often finished goods)

Whirlpool claimed its foreign competitors engage in unfair competition. What are examples in the video of what "unfair competition" means

- Companies getting direct funding (subsidies) from the government

- Companies selling their washing machines at prices lower than their cost of production

- Companies selling their washing machines at prices lower than what they are charging for the same washing machines back home

Because Samsung and LG faced retaliatory tariffs placed on them by U.S. regulators

They moved some production to China (and later Thailand, Vietnam, and the United States), which did not face the tariffs placed on South Korea

As a result of the trade conflict over washing machines

The price of both foreign and domestically produced washers went up

To get Samsung and LG to invest in their states

South Carolina and Tennessee offered significant investment incentives, similar to the advantages the firms received in South Korea

Because of the tariffs placed on imported steel, aluminum, and other products by the Trump administration, the video points to which specific product the Canadians and Europeans targeted for retaliation?

Washing machines

What steps have the Russians taken with respect to food production in Ukraine

- They have targeted agricultural infrastructure in their attacks¸ including silos and the railroad bridges Ukraine needs to export

- They have shelled farms with high-explosive projectiles¸ leaving piglets and calves screaming as they were roasted alive

- They have fired at farmers and tractors

- They have stolen Ukrainian crops

Which of the following is true about global markets and food

- Ukraine grows enough food to feed 400 million people

- Ukraine and Russia together account for one-third of the world's wheat exports

- Russia's invasion and its blockade of Ukrainian ports initially prevented Ukraine from exporting its grain

Which of the following is true

- Iron ore and semi-finished iron are Ukraine's single largest export

- The war cut Ukraine's steel production in half

- Russia has blocked traditional export routes out of Ukraine

If the Ukraine war was to end today,

It would take a significant amount of time and investment to fully bring Ukraine to its prewar levels of agricultural productivity

What point is made about Russian food production?

Western countries have very deliberately not sanctioned Russia's food and fertilizer exports for global food security reasons

What is true about the international oil trade?

- India traditionally has not purchased significant amounts of Russian oil¸ because of the distance between Russian ports and India

- After the United States and Europeans levied heavy sanctions¸ Russian oil has been flowing to China and India at a discounted price

- Russia has received more oil revenue than ever before

What is true about the global trade in grains today

- The Russian blockade of Ukrainian food shipments out of the Black Sea was reinstituted after roughly one year

- To keep exports moving Ukraine has found alternative routes, such as overland by road and rail, or by hugging the coastline near the territorial waters of NATO countries

- Ukraine's moves to find alternative routes for export have caused some tensions with it's western neighbors, such as Hungary and Poland, as they have strained infrastructure and corresponded with a drop in local food prices

- Russia, a major grain producer, has reaped a windfall with record grain production—selling its goods around the world, driving down global prices, and seeking to pull countries into its geostrategic orbit

What is the "shadow fleet"?

- Oil tankers that have changed ownership or have murky ownership (i.e., so they are not Russian, but deal almost exclusively with Russian oil)

- Roughly 100 oil tankers that help Russia skirt Western sanctions on its energy exports

How have the UAE and Saudi Arabia reaped a windfall from the Ukrainian war?

By buying Russian oil at a discount and selling it domestically, then selling their own oil products to European countries