International Trade Summary: Chapter 8

International Political Economy (IPE) is dominated by two major views. Mercantilism operates on the assumption that wealth relates directly to military power. States operating under theories of mercantilism, all of their actions, especially in trade, are directed to protect itself and its interests at the expense of anybody else. The other dominating approach to IPE is liberalism. In this approach, it is believed that organizations, institutions, and international norms can serve the common good of trading states. One major difference between the two views on IPE is their takes on free trade. Liberalists disagree with mercantilists view on international borders and tariffs. They believe that Free Trade is the only mutually benefitting option. Mercantilists are only out for their own interests and will make more money any way they can.

Game theorists often compare international exchange to the game chicken. Liberalists seek to create the highest possible wealth of exchanging states, whereas mercantilists seek to create a greater distribution of wealth favoring themselves. In a game of chicken, the liberalists would only seek to not have a head-on collision, but mercantilists would be seeking to be the hero, the one who didn’t swerve. Many times trading states have shared and opposed interests, this is called mixed interest, as described in the game theorists’ analogy.

Two important factors in IPE are Supply & Demand and Balance of Trade. Demand is the willingness of consumers to buy a good based on its price. Supply is the willingness of producers to sell a good to buyers based on its value. This is a very fragile system because if a producer raises the price of a good too much, buyers will naturally seek another seller, or an alternative. If the buyers demand a lower price, producers will just seek other buyers. The price of a good that satisfies bother the buyer and seller is known as equilibrium price. Monopolies are producers that have complete control over an industry, and can therefore sell a good for however much it wants to without the possibility of losing buyers. Balance of Trade is a second important factor in IPE. Balance of trade is the total amount of exports minus the total amount of imports. If the number is above zero, it is known as a positive balance of trade, or a trade surplus. If it is below zero, it is called a trade deficit, or negative balance of trade. IPE experiences much political interference such as sanctions and forms of protectionism. Most commonly, legal regulations and laws and taxes affect trade domestically by placing limits on sales. In the international landscape, sanctions can affect the economy of a state. Sanctions are an attempt to stop the economic interactions of a certain state, typically as punishment for something such as violations of international norms, war crimes, or human rights violations. For example, the US place sanctions on Soviet oil companies after the Cold War. A main reason sanctions are typically ineffective is the incentive for trading partners to break it.

Another type of political interference is protectionism. Protectionism is a policy used to protect domestic industry from international competition. Tariffs, a tax placed on imported good, is a common form of protectionism. Dumping to prevent monopolies is also a way government can protect companies from being taken over by a monopoly. Dumping is when the government dumps products threatened by a monopoly into the market at a very low price, usually lower than the necessary amount to profit, to save the industry. Other non-tariff barriers, such as quotas and subsidies exist to protect domestic industry. Quotas are “ceilings” placed on imports of a certain product to force consumers to purchase domestically produced products. Subsidies are usually used in agriculture to decrease the spending of farmers but allowing them to earn the same amount of money. Governments tell farmers to produce a certain amount of a good and will give them a guaranteed amount of money for doing so.

Many of the actors in IPE are international and intergovernmental organizations such as the WTO, NAFTA, and OPEC. The World Trade Organization began operation January 1, 1995. It replaced the General Agreement on Tariffs and Trade (GATT). The organization has 153 members and attempts to solve problems in international trade by negotiations. Some people have become so upset with the WTO and its ineffectiveness they say it should return to its old name GATT, standing for “the general agreement to talk and talk”. Other organizations such as NAFTA, CIS, and Mercosur are organizations of states in a region practicing free trade with one another. NAFTA, North American Free Trade Agreement is an agreement between Canada, the United States, and Mexico for free trade. Cartels are organizations of producers of a certain good who can affect the price of a good internationally. OPEC (Organization of Petroleum Exporting Countries) is a cartel on oil. Its 13 members make up 40% of all oil exports, enough to affect the price of oil significantly.

State owned industries are very common in states where a few companies have a major impact on economy. Industries such as oil production companies and national airlines are fully or somewhat state-owned. Economies with some privately owned and some government owned companies are known as mixed economies. Economies where everything is government owned or everything is privately owned don’t function with much stability. All of these approaches, interferences, and actors make IPE a complex and confusing area of study and work.