PS 124A Midterm Definitions

The World Before Industrialization

Accumulation of wealth enhanced a country's prestige and power o To accumulate: push exports via subsidies o Limit imports via tariffs • The goal is to run a persistent trade surplus and thus stockpile gold, silver, etc. • Every country cannot be running a trade surplus, impossible • Trade is thus a "zero-sum game." o If you are gaining any wealth then you are gaining it at my expense • This is known as mercantilism, and it was practiced by basically everyone.

Adam Smith

Adam Smith (1776): o Concerned about the desperately poor members of society who cannot find enough to eat (Scotland) o Desires to figure out what the institutions are that can enable people to rise out of at least those desperate levels of poverty -> Capitalism

Feudalism

Born in either land or labor group and that's the group you stay in No class trading

The Gold Standard

Currency Risk • Early 1800s—a variety of currency standards existed: some states used gold, gold and silver, or other systems. • This caused uncertainty over exchange rates, currency risk, which threatened trade. Convergence on Gold Standard • By the late 1800s, states of the Atlantic economy converged on a gold standard o Each currency was valued in relation to gold, and hence to the others o A common valuation reduced currency risk among these states and encouraged trade

The Reagan Thatcher Years

Deregulation Lower taxes Smaller Government => Economic Revival (?)

Specialization

Division of labor allows folks to use their natural gifts most productively, esp when mixed with industrial capital. Ex: Great at baseball, good at football • Trade allows nations to maximize their natural gifts: Britain sends coal to Greece in exchange for olives. • Countries should focus production on most efficient use of their resources − > • By assumption: Countries each have different absolute advantages - something they produce better than everyone else - which they should produce. • In this way all countries benefit from trade: productivity is maximized, so consumption is maximized. • Obvious problem: what about a country like Japan before technological advancements, Japan is very high cost of agriculture and not valuable minerals, when industrializing it developed colonies in order to gain farming and gain some of these resources

Variety of Post-Bretton Woods Monetary Arrangements

Floating rates Collective-currency pegs, such as • European Monetary System (EMS) • Monetary unions, such as European Monetary Union (EMU) • Loose, adjustable pegs of a state's currency to the currency of its major trading partner • Currency control boards that tightly peg a state's currency to its major trading partner

The Liberal World Order

Immanuel Kant Perpetual Peace (1795): 1. Commerce and trade interdependence create common interests and make the costs of war too high 2. Economic freedom promotes to political freedom holding national leaders accountable for the costs of war 3. International Institutions - "embedded liberalism" - World Trade Organization

Hyperinflation

In economics, hyperinflation occurs when a country experiences very high and usually accelerating rates of inflation, rapidly eroding the real value of the local currency, and causing the population to minimize their holdings of local money. The population normally switches to holding relatively stable foreign currencies. Under such conditions, the general price level within an economy increases rapidly as the official currency quickly loses real value

Economic Statecraft

The use of economic means to pursue foreign policy goals. Foreign aid, trade, and policies governing the international flow of capital can be used as foreign policy tools and are considered the most common forms of economic statecraft. Negative: Sanctions o Global -South African Apartheid -Iranian Oil o National -China and its neighbors Positive: o Create common interests upon mutual benefits o MFN (most favored nation), regional FTA's, WTO Negative sanctions are actual or threatened punishments, whereas positive sanctions are actual or promised rewards. Examples of negative sanctions include the following: refusing to export (embargoes), refusing to import (boycotts), covert refusals to trade (blacklists), purchases intended to keep goods out of the hands of target countries (preclusive buying), deprivation of ownership (expropriation), punitive taxation, aid suspensions, and asset freezes. Examples of positive sanctions include preferential tariffs, subsidies, foreign aid, investment guarantees, and preferential taxation of foreign investment.

Anti-Globalists

• 1999 "Battle in Seattle" protests against the WTO • People concerned about losing their jobs • Effects on environment and sweatshop protection in other countries

Automobile Industry concerning NAFTA

• 3 Years after NAFTA goes into effect: o employment in the American automotive industry grew by 14.1 percent o Worker hourly earnings grew by 5.6 percent, and o Ford, Chrysler, and GM invested 39.1 billion in new manufacturing plants and equipment in the US- and only 3 billion in Mexico

Time-inconsistency problem

• A policy dilemma in which the short-term demands on the policy makers are at odds with the long-term welfare of society

Backlash to Globalization

• Are the economic problems caused by trade? • Can the economic problems be solved by protectionism - less trade? • Are their other welfare consequences of protectionism? • Are economic elites using trade as a tool of blame while they continue to rig the system? i.e. Inheritance Tax

Whose interests? National vs. Class

• Civic - nationalist • Racial - nationalist • Rural vs. urban • Anti-elitism

NAFTA - Supply Chinas

• Create U.S.-Mexico supply chains to make U.S. manufacturing, especially the U.S. auto industry, more globally competitive. • 40% of the parts in a typical Mexican product originate in the United State • Before a car arrives at a local dealership, its parts already crossed both southern and northern borders multiple times. • 6 million U.S. jobs depend on trade just with Mexico -U.S. Chamber of Commerce

Government Options to redistribute adjustment costs before WWI

• Increase money supply (reverse price deflation) - required leaving the gold standard, which would undermine exchange-rate system and generate economic uncertainty and instability • Limiting the supply of a commodity and increasing its price through some government intervention • Unable to do either, tariffs and other barriers to trade begin to rise

Disadvantages of gold standard

• No countercyclical policy possible • No autonomy in real (risk-adjusted) interest rate • World money supply limited by supply of gold (1873-1896, falling prices everywhere) • Increasingly prone to panics • Danger of overvalued currency (UK after 1926), collapse of exports

Interest Groups

• Society is divided into groups that define their interests narrowly and may pursue policies that benefit them but harm the collective good. • These interest groups, pulling on the levers of the state, can pressure the state to enact policies that are harmful to the state overall • Different interest groups have different connections, or levels of access, to government

Globalization - good or bad?

• Studies the political battle between the winners and losers of global economic exchange • Battle between winners and losers

Factor Incomes

• The factor endowment framework suggests that under free trade, those factors in which a state is abundant-land, labor, or capital - will benefit, but those in which a state is relatively weak will be harmed

Price Deflation and Shrinking Incomes 1867-1900

• Too much production • Not enough consumption (industrial revolution slowed down birth rates) • Tight money supply due to gold standard • Lacked ability to coordinate a decrease supply o Individual rational choice over the collective good - grow more to maintain income

"New Trade Theory"

"New trade theory offers reason to believe that openness can have a permanent effect on a country's rate of growth, not just the level of real GDP. A high rate of economic interaction with the rest of the world speeds the absorption of frontier technologies and global management best practices, spurs innovation and cost-cutting, and competes away monopoly"

China manipulating currency?

China used to heavily intervene in currency markets to keep exchange rates weaker but not anymore, no longer undervalued Instead of buying dollars to keep weak, sold large amounts of dollars from preventing RMD from sliding any further

Critiques of Mercantilism

David Hume (1752): o Increased exports leads to higher prices (i.e. inflation). o Increased imports leads to lower prices o In the long run no country can run a persistent trade surplus, because relative prices would force an adjustment o Tariffs and subsidies can delay that day but only at increasing cost

Barriers to Economic Openness

Distance: Transportation costs are greater than zero Social barriers: Linguistic, cultural, historical, and political links. Rather, face-to-face contact is important for exchanging info and negotiating deals Security Regional Free Trade Agreements Nationalism: Imagined Communities: idea that trade will complexly erode borders and people will become more cosmopolitan Currencies

Urban-Rural vs. Class Cleavage

High Land-Labor Ratio and Advanced Economy: CLASS CLEAVAGE land and capital free-trading, assertive; labor defensive, protectionist High Land-Labor Ratio and Backward Economy: URBAN-RURAL CLEAVAGE land free-trading, assertive; labor and capital defensive, protectionist (US Populism) Low Land-Labor Ratio and Advanced Economy: URBAN-RURAL CLEAVAGE capital and labor free-trading, assertive; land defensive, protectionist (Radicalism) Low Land-Labor Ratio and Backward Economy: CLASS CLEAVAGE Labor free-trading, assertive Land and capital defensive, protectionist (Socialism)

Structuralism

Structuralist analysis advocates a focus on a system in its totality and on the interrelations between its elements rather than on individual elements in isolation: for instance, understanding the world economy as a system within which the centre and periphery are intrinsically linked, with many economic problems of the periphery deriving from that interaction. Capitalism o The private ownership of the means of production (or capital) o Wage labor

Corn Laws

The Corn Laws were tariffs and restrictions on imported food and grain ("corn") enforced in Great Britain between 1815 and 1846. They were designed to keep grain prices high to favour domestic producers, and represented British mercantilism. The Corn Laws imposed steep import duties, making it too expensive to import grain from abroad, even when food supplies were short. • Price control mechanism: no imports when price falls below 80 • Conflict: Rising manufacturing and export industry o vs. declining agricultural sector o Industrial middle class vs. Landed Aristocracy The laws became the focus of opposition from urban groups who had far less political power than rural Britain. The laws were supported by Conservative landowners and opposed by Whig industrialists and workers. Economic historians see the repeal of the Corn Laws as a decisive shift toward free trade in Britain.

Price Specie-Flow Mechanism

The argument considers the effects of international transactions in a gold standard, a system in which gold is the official means of international payments and each nation's currency is in the form of gold itself or of paper currency fully convertible into gold. Hume argued that when a country with a gold standard had a positive balance of trade, gold would flow into the country in the amount that the value of exports exceeds the value of imports. Conversely, when such a country had a negative balance of trade, gold would flow out of the country in the amount that the value of imports exceeds the value of exports The higher prices would, in the countries with a positive balance of trade, cause exports to decrease and imports to increase, which will alter the balance of trade downwards towards a neutral balance. Inversely, in countries with a negative balance of trade, the lower prices would cause exports to increase and imports to decrease, which will heighten the balance of trade towards a neutral balance. These adjustments in the balance of trade will continue until the balance of trade equals zero in all countries involved in the exchange. the rules of the game required central banks to set monetary policy in response to developments in their balance of payments rather than in response to conditions in the domestic economy

Triffin Dilemma

The dollar could not survive as the world's reserve currency without requiring the United States to run ever-growing deficits. In order to keep the global economy chugging along, it may have to inject large amounts of currency into circulation, driving up inflation at home. The more popular the reserve currency is relative to other currencies, the higher its exchange rate and the less competitive domestic exporting industries become. This causes a trade deficit for the currency-issuing country, but makes the world happy. In order to maintain the Bretton Woods system, the U.S. had to run a balance of payments current account deficit to provide liquidity for the conversion of gold into U.S. dollars. With more U.S. dollars in the system than were backed with gold under the Bretton Woods agreement, the U.S. dollar was overvalued. This meant that the United States had less gold as foreign governments started converting U.S. dollars to gold and taking it offshore. This led to less gold in the country and caused the US Dollar to become more overvalued, leading to a self-propagating cycle. Furthermore, the US had to run a balance of payments current account surplus to maintain confidence in the U.S. dollar. As a result, the United States was faced with a dilemma because it is not possible to run a balance of payments current account deficit and surplus at the same time. BREAKDOWN: • Bretton Woods monetary system more successful than its founders could have hoped. • Yet, carried the seeds of its own demise. Bretton Woods monetary system lasted until August 15, 1971. • The relationship between the dollar and gold began to be challenged. • By 1960s the dollar was overvalued. Other currencies had been devalued under IMF approval, but not the dollar. • A structural disequilibrium, which hurt U.S. producers and labor.

Mercantilism

The economic theory that trade generates wealth and is stimulated by the accumulation of profitable balances, which a government should encourage by means of protectionism. • A country becomes powerful through wealth and self-sufficiency • Want to export more than import • Zero-sum game

Infant Industry Argument

The infant industry argument is an economic rationale for trade protectionism. The core of the argument is that nascent industries often do not have the economies of scale that their older competitors from other countries may have, and thus need to be protected until they can attain similar economies of scale. • How to Change your comparative advantage o Industrialization o State capitalism o Rent-seeking: Rent-seeking is the use of the resources of a company, an organization or an individual to obtain economic gain from others without reciprocating any benefits to society through wealth creation. An example of rent-seeking is when a company lobbies the government for loan subsidies, grants or tariff protection. o The East Asian vs. Latin American Experience: When compared to Latin America, Asian economies since 1980 have grown faster and have done so with relatively modest inequalities. Why? A comparison of Asia and Latin America underlines the superiority of the nationalist capitalist model of development, which has often been pursued more explicitly in Asia, over that of a dependent capitalist model, which has often been pursued in Latin America. In comparison to Latin America, the Asian model has facilitated higher and less volatile rates of economic growth and a greater political room to pursue social democratic policies. The "tap root" of these alternate pathways is relative autonomy from global constraints: states and economies in Asia have been more nationalist and autonomous than in Latin America.

Paradox of Thrift

The paradox of thrift accounts for both investors and consumers to not want to spend during a recession or depression, increasing unemployment and worsening the chances of recovery.

The Factor Model

The principal actors: Factors of production or classes How mobile are factors of production?: Perfectly mobile across sectors of the economy Who wins and who loses from international trade?: -Winner: abundant factor-capital in the advanced industrialized countries -Loser: scarce factor-labor in the advanced industrialized countries Central dimension of competition over trade policy: Protectionist labor versus liberalizing capital a.Stolper-Samuelson -says to produce what you have comparative advantage in (use abundant factor of prod.) -Class Based Conflict = urban vs. rural -Winners: -people with abundant factors of production -developed: high skilled labor, capital/land owners -developing: low skilled labor -Losers: -people without abundant factors of production -developed: low skilled labor -developing: high skilled labor, capital/land owners

The Sector Model

The principal actors: sectors How mobile are factors of production?: Immobile across sectors of the economy Who wins and who loses from international trade?: Winner: labor and capital employed in export-oriented industries Lower: labor and capital employed in import-competing sectors Central dimension of competition over trade policy: Portectionist import-oriented industries versus liberalizing export-oriented industries b. Ricardo-Viner -says that industry based conflict will occur if factors of production aren't mobile -Industry Based Conflict = importers vs. exporters -Winners: -export oriented industries (firms expand) -Losers: -import competing industries (firms close)

Three Groups in the Debate on Trade

Trade Liberalizers o Members of this group encourage the renewal and expansion of tariff preferences for developing-country imports to encourage economic development on the basis of comparative advantage o Prefer multilateral over bilateral agreements (second best option) Fair Traders o Demand that U.S. trade agreements and tariff preference programs include provisions requiring U.S. trading partners to enforce prescribed labor and environmental standards o Emphasis on "trade enforcement" to prevent "cheaters" Trade Skeptics o Current policy is not U.S. economic and national interests -Favor multinational corporations and conglomerates over small business o Erode the sovereignty of national, state, and local governments to protect workers - environment, safe conditions, "living wage" o U.S. and International Labor Unions -The AFL-CIO argues that trade agreements also do not adequately protect the rights of foreign workers

Consequences of Globalization

Welfare Consequences: Effects on society. Welfare will improve for everyone, everyone will get richer?? Distributional Consequences: Effects between individuals, groups and nations Interconnectedness between Markets, Society, and State

Arbitrage

defined as the activity of buying an item in a place where it is cheap and simultaneously selling the same item where it is expensive, should drive prices into equality. Way to measure gloablization

Offshoring/Trade in Tasks

sourcing of a good or service in a foreign country, either from an affiliated or an unaffiliated supplier. Offshoring: • Trade in Tasks: move pieces of production chain of goods or services o Apparel o Computers o Cars (Europe, N. America)

Outsourcing/Trade in Services

the acquisition of goods or services from an unaffiliated party (i.e., from a company that neither owns nor is owned by the buyer of the goods or services), and independently of whether the unaffiliated supplier is located at home or abroad. • Trade in Services: o Insurance o Banking o Tax preparation, bookkeeping o Data entry, dictation o Code-writing o Technical support, phone ordering • Affects some highly skilled workers o Tax preparers o Paralegals o Code writers • Mostly lower-skill: clerical, data entry • But how significant? o One estimate (Forrester Research) : 270,000 U.S. service jobs annually, vs. o 15 m. jobs lost annually to tech or demand shift

The Liberal Order is Rigged

• "The Brexit and Trump phenomena reflect a breakdown in the social contract at the core of liberal democracy: those who do well in a market based society promise to make sure that those disadvantaged by market forces do not fall too far behind." • 1. "First, global integration must be accompanied by a set of domestic policies that will allow all economic and social classes to share the gains from globalization in a way that is highly visible to voters." • 2. "Second, international cooperation must be balanced with national interests to prevent overreach, especially when it comes to the use of military force." • 3. "Third, Washington should nurture a uniquely American social identity and a national narrative."

Senate GOP Hits Resistance on Estate-Tax Repeal—From Republicans

• "Under current law, the tax, with a top rate of 40%, applies to estates valued at more than $5.49 million per person or $10.98 million per married couple. Those levels are indexed to inflation under a deal Congress reached in 2010. The tax applies to about 5,500 estates a year." • "It's very important to me," said Sen. John Kennedy (R., La.) "It's the most unfair tax God ever put breath in. It's taxing money that's already been taxed. I just think it's inherently unfair."

Capitalism

• 1. Markets help coordinate society's economic activity by allocating resources given the tastes and preferences of individual consumers. • 2. Extensive markets exist for the exchange of land, labor, and capital (money). • 3. Competition regulates economic activity; consumer self-interests motivate economic activity (individual self-interest serves society's interest). • 4. Freedom consists of free enterprise; individuals are free to start up new businesses without state permission. • 5. Private property gives the owner of a resource a legal entitlement to the income that flows from the resource.

NAFTA Today: What does the Trump Administration Want?

• 1. Sunset Clause: causing NAFTA to automatically expire unless all 3 countries voted every 5 years to continue it o Oppisition: would instill so much uncertainty in the future of NAFTA that it would basically nullify the trade agreement o Trump administration: "Mr. Lighthizer said that was precisely the point. Nafta, he said, has been "a great deal for businesses that want to take advantage of a situation" encouraging them to invest in Mexico." • 2. Rules of Origin: o A. Currently: -NAFTA: 62% -U.S.: 0 (violates WTO rules) o B. Proposed: -NAFTA: 85% -U.S.: 50 o "Nafta's current rules-of-origin for autos are already the highest of any trade agreement in the world, says John Murphy of the U.S. Chamber of Commerce. Raising them would give car makers an incentive to source components from Asia and pay America's low 2.5% most-favored-nation tariff. A higher-content rule would hurt Mexico, but it won't bring jobs to the U.S." • 3. End parallel access to government o This "dollar for dollar" proposal would shrink the amount of U.S. federal spending to the same dollar amount as the trading partners, which would effectively cut the U.S. procurement open to Canada and Mexico by about 90%. • 4. End Dispute Mechanisms that gives private companies the right to sue governments o was intended to provide firms more certainty when investing in a foreign country, particularly Mexico, where they might not have confidence the local legal system would protect their property rights. o END NAFTA?

History of Monetary Policy Three Phases

• 1. The Classic Gold Standard: ----The gold standard is a monetary system where a country's currency or paper money has a value directly linked to gold. With the gold standard, countries agreed to convert paper money into a fixed amount of gold. A country that uses the gold standard sets a fixed price for gold and buys and sells gold at that price. • 2. The Bretton Woods System: The Qualified Gold Standard and Fixed Exchange Rates ( Dollar to gold, rest of currency to dollar, Creates IMF, World Bank, GATT, Keynesian Compromise suggests states regulate within own borders, US is top currency, or the hegemon, Dollar also reserve currency held in central banks because of its store value ) • 3. The Float or Flexible Exchange-Rate System

The Globalists

• 1.An economic process that reflects accelerated and intense interconnections based on new technologies and communications systems and the mobility of trade and capital, • 2.The integration of national and regional markets into a single global market, • 3.A political process that weakens state authority and replaces it with deregulated market outcomes, • 4.A cultural process that reflects a densely growing network of complex cultural interconnections and interdependencies in modern society, • 5.Is an inevitable occurrence that has produced a new form of capitalism—hypercapitalism, • 6.A process for which nobody is in charge, • 7.Benefits everyone, especially economically, and • 8.Furthers the spread of democracy in the world.

Effects of NAFTA

• A plus then I expected for Wall Street; • A plus for American consumers; • On manufacturing: o A substantial minus for manufacturing that had been sheltering behind protectionist walls they had purchased with the help of lobbyists; o A small minus for labor-intensive manufacturing; o A small plus for capital-intensive manufacturing; o A significantly larger than expected plus for manufacturing that could be disaggregated into transnational value chains.

WTO: The Dispute Settlement Mechanism

• A quasi-judicial body adjudicates disputes over rules and compliance. • When a complaint is filed, "initial consultations" seek to resolve the issue. • If that fails, goes to a Dispute Panel composed of 3-5 experts in trade law. They hear the case, and rule on whether facts support the complaint. If so, they give timeframe for adjustment. • Appellate Panel: 3-5 different individuals. Review Dispute Panel's interpretation of law, monitor adjustment, and approve retaliation when warranted. • Note what's happening here: a reduction in private information, and a commitment mechanism that is credible (because it is self-enforcing).

Collapse of Convertibility and Currency Instability after WWI

• After WWI many states allowed their currencies to float—having values set by market forces. • Some currencies became overvalued— making their goods expensive to foreigners. • Governments compensated by devaluing their currencies, creating instability in the exchange rate mechanism—monetary disorder.

WWI Debt

• Allied nations spent huge amounts of their gold reserves and then borrowed heavily from the US to pay for the war • European nations abandon the gold standard to expand monetary supply in order to finance the war • Allied nations ended WWI in massive debt • U.S. unwilling to forgive debt • Lack of capital (liquidity) in Europe to rebuild economies

Bretton Woods

• Attempt to embed a commitment to nondiscriminatory market- based trading system, international monetary cooperation, and reconstruction and development. • Rooted in 3 international governmental organizations, or IGOs o GATT o IMF o International Bank for Reconstruction and Development (IBRD) • European Integration (strongly pushed by U.S.) All agree at Bretton Woods • No gold standard • No competitive devaluations • Fixed, but adjustable, exchange rates • No tariff wars • Freedom for domestic counter-cyclical policies, welfare state, and redistribution ("embedded Liberalism") • But: HOW? Goal of Bretton Woods • Ruggie: "embdedded Liberalism" o Avoid Draconian deflations of gold standard o Avoid repeat of Depression (blamed by Keynes on gold standard) o Allow countries to readjust, use welfare-state and anticyclical spending • Yet expand trade o Belief at that time: only possible under fixed exchange rates How Bretton Woods Worked: • Old-style gold standard abolished • No coins, no right to exchange currency for gold • No private ownership of gold (sometimes even including jewelry) • Hence: some latitude to change money supply Bretton Woods in Action • Replaced after WWII by a dollar standard o Other currencies pegged to dollar, could be exchanged for it at fixed rate o Dollars could be exchanged for gold ($35 / Troy ounce), but only by other central banks (Bank of England, Bank of France, Bundesbank)

Free Hand of the Market?

• Believed most state interventions contributed to rent-seeking, which occurs when the state rigs the market in ways that favor or rewards certain (powerful) businesses. • Believed in the need for an inheritance tax and argues that "The 'inequality of the worst kind' is when taxes 'fall much heavier upon the poor than upon the rich'." • The role of the state is necessary to keep the market function properly, such as preventing monopolies. The term "invisible hand" is a metaphor for how, in a free market economy, self-interested individuals operate through a system of mutual interdependence to promote the general benefit of society at large. I

Results of 1947 Meeting

• By 1948, when the deal went into place, 23 countries were members. Now 164. • More than 100 agreements on 45,000 tariffs • Lowered world's average tariffs by more than 30% • The process is contained in rounds. A few notables: o Kennedy Round (1962-1967): major tariff reductions, especially in manufacturing. o Uruguay Round (1986-1994): establishes WTO as successor to GATT. o Doha Round (ongoing): emphasizes development.

Asset Mobility

• Certain assets of land, labor, or capital are more mobile than others, even within a factor o More mobile assets can adjust to the forces of creative destruction and globalization more easily than less mobile assets o More mobile assets will be more risk acceptant of liberal trade or economic transformations - or at least exercise fewer objections to such risk/change o Less mobile assets will be more risk adverse and committed to preserving the status quo, even if suboptimal in terms of collective outcomes

Intra-Industry Trade

• Classic trade theory and Adam Smith's world and comparative advantage, you were growing cotton and I'm using that cotton to make cloth and selling back • Especially when had trade between colonies, country that had skill was also controlling a lot of the costs • In the post wwii trading regime, this changed to I'm growing cotton and you're growing cotton but we're still selling cotton to each other • Think of wine: specializing in different varieties but basically same product • Trend starts in 1960s and then in 1980s you have the growth of production chains so basically the cheapest way to make a product is to have areas in different countries specialize in different parts of it Intra-industry trade refers to the exchange of similar products belonging to the same industry. The term is usually applied to international trade, where the same types of goods or services are both imported and exported.

Contrasting Theoretical Perspectives

• Classical Orthodox Economic Adam Smith's The Wealth of Nations in 1776 is usually considered to mark the beginning of classical economics.The fundamental message in Smith's book was that the wealth of any nation was determined not by the gold in the monarch's coffers, but by its national income. This income was in turn based on the labor of its inhabitants, organized efficiently by the division of labour and the use of accumulated capital, which became one of classical economics' central concepts • Heterodox Interventionist Liberals (OELs) Liberals (HILs) OELs is a group of people who cling to economic liberal ideas, values, and policy prescription. They support that an open and free market could determine socio-political outcomes. OELs suggest that the government support on banks, infrastructure project and social welfare programs should be limited. They wish that state doesn't regulate of many parts of the economy. They also offer an idea to stimulate the economic growth, the government should cut taxes HILs Prefer state intervention in the market. Support increase of government spending, as long as it creates more jobs, as opposed to just worrying about inflation. The government should invest more into infrastructure, education, healthcare, etc. Banks also need government help to regulate the derivatives, deposit requirements, pay and bonuses. Agree with the globalization but they prefer to manage it than foster it without purpose.

NAFTA - supply chains

• Create U.S.-Mexico supply chains to make U.S. manufacturing, especially the U.S. auto industry, more globally competitive. • 40% of the parts in a typical Mexican product originate in the United State • Before a car arrives at a local dealership, its parts already crossed both southern and northern borders multiple times. • 6 million U.S. jobs depend on trade just with Mexico -U.S. Chamber of Commerce

Floating Exchange Rates

• Currency prices are determined primarily by supply and demand in currency markets. • Monetary policy focused primarily on growth and inflation -confidence

Balance of Payments

• Current Account o Trade in Goods and Services o Interest payments on loans and/or investments • Capital Account o Foreign Owned assets in the US -Treasury Bonds -Stocks -Real Estate -FDI (foreign direct investment) such as Hyundai Motor Manufacturing plant in Alabama Is it bad to have a trade deficit? No, if o Your economy is booming and local production cannot keep up with demand o Foreigners are investing in your country o You can have more investment without having to save more, because the rest of the world is picking up the slack

Comparative Advantage

• David Ricardo (1817): o Not all countries have absolute advantages. o All countries do have comparative advantages: goods that they produce more efficiently than other goods that they can produce. o Even if they are absolutely disadvantaged countries can gain from trade. o Trade is a "positive-sum game". Under trade, more of everything in the world total. For example: US: Computers - 20 Shoes -10 Brazil: Comps - 6 Shoes -16 • Under Autarky: o The U.S. gets 10 computers and 5 pairs of shoes o Brazil gets 3 computers and 8 pairs of shoes o World total: 13 computers and 13 pairs of shoes • Under Trade o The U.S. produces 20 computers and trades for 8 pair of shoes o Brazil produces 16 pairs of shoes and trades for 8 computers o World total: 20 computers and 16 pairs of shoes

Antidumping Regulations

• Dumping is the process by which a producer exports a product to another country at a price below the normal price. The objective of dumping is to increase market share in a foreign market by driving out competition and thereby create a monopoly situation where the exporter will be able to unilaterally dictate price and quality of the product. o Dumping is defined under GATT and WTO rules as an unfair practice. o In practice, proving it is ambiguous. • Antidumping investigations are often used by domestic groups as a political tool to discriminate against foreign competitors.

Beggar-Thy-Neighbor in 20s/30s

• Economic decline fed time inconsistency dilemmas and encouraged beggar-thy-neighbor policies—shift adjustment costs aboard. • Fordney-McCumber (1922) and Smoot-Hawley Acts (1930) restricted access to largest and healthiest market. o Smoot-Hawley raised tariffs on more than 20,000 commodities. • Tit-for-tat retaliation. • Competitive currency devaluations follow.

Nontariff Trade Barriers

• Even though average tariffs in 1994 stood at 4%, barriers to trade still exist: o Nontariff Barriers (NTBs): Health and Safety Regulations, Domestic Laws o Quotas and voluntary export restrictions (VERs) limit the amount of a good that can be traded between two states. o Currency Devaluations o The last three rounds of GATT negotiations have included discussions on NTBs. a Non-Tariff Barrier is any obstacle to international trade that is not an import or export duty. They may take the form of import quotas, subsidies, customs delays, technical barriers, or other systems preventing or impeding trade."

Scarce vs. Abundant Factors

• Factors: Capital, Labor, and Land • How define local scarcity or abundance? • Only by ratios: o Capital/labor o Land/labor • No country can be abundant in all, or scarce in all, factors • Developed countries have high Capital/Labor ratios by definition; but among them, Land/Labor can vary o High in U.S., Australia o Low in Europe • Not all rich countries are capital-abundant: Saudi Arabia

Triumph of Capitalism/Mission Accomplished

• Free Trade -> Democracy -> World Peace • End of the Cold War is: • Triumph of Capitalism • Democracy • Human Rights • FREEDOM

Globalism

• Globalism stands for the economic liberal ideas behind globalization. It became synonymous with production efficiency, the free flow of currency (capital mobility), free trade, open markets, and individual empowerment, which realize the "triumph of market" that produced economic prosperity and democracy everywhere in the world. • Writing in 2000 but did start with Reagan in the 80s, Reagan was for open borders and saw American exceptionalism in that anyone can come to America and make a good life for themselves

GATT: General Agreement on Tariffs and Trade

• Goal (from the preamble): "substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis." • Not totally free trade; reciprocal reductions in barriers.

New Trend: Reshoring?

• Have we reached peaked offshoring? Why? o Wages rising in China and India (wages more stable in advanced countries o Transport costs (note Economist article was written during high oil prices) o Gains from having people in the same room o Manufacturing less labor intensive o "Routine tasks" not performed better by outside firms o Immigrant workers keep production onshore

NAFTA and Agriculture

• If the U.S. withdrew, three countries would revert to average tariffs. Several agricultural products would see the highest rise o 25% tariff on shipments of beef o 45% on turkey and some dairy products, and o 75% on chicken, potatoes, and high fructose corn syrup sent to Mexico

Core and the Periphery

• Imperialism and colonization: o Colonies could only trade with the metropole o Produced primary commodities and acquired manufactured goods from the metropole • Dependency theory: notion that resources flow from a "periphery" of poor and underdeveloped states to a "core" of wealthy states, enriching the latter at the expense of the former. It is a central contention of dependency theory that poor states are impoverished and rich ones enriched by the way poor states are integrated into the "world system". • "neo-colonialism"

The Mundell Trilemma of International Finance (Unholy Trinity)

• Incompatibility between: • 1. Currency stability (Fixed Exchange Rates) • 2. Monetary autonomy, • 3. Capital mobility • Three cannot be attained simultaneously If governments...Limit capital mobility they can preserve exchange-rate stability and monetary policy autonomy If governments...surrender monetary policy autonomy they can preserve exchange-rate stability and capital mobility If governments... allow currency to float they can preserve capital mobility and monetary policy autonomy

How Mobile are Assets?

• Land o Can a given piece of land or other resource be used for a different purpose, such a growing a different crop? • Labor o Is the labor educated more generally or trained in a specific skill? • Capital o Is the capital liquid? Can it easily be applied elsewhere?

Industrialization

• Land, labor, and capital • Two stages going on: first we have the basic serfdom where everyone produces something for themselves and then you end up moving towards small mills and people are collaborating and becoming more productive • Small mills allow for accumulation of capital • The idea was that capital, before we have land and labor now we have capital to build and would create basis of modern capitalism

Lowering Tariffs Increased Trade

• Most traditional way of protecting a population is through tariffs, the entire revenue came from tariffs on trade • Taxing imported goods so that the tax makes them more expensive • Protects industry but creates inefficiency when paying more which can affect number of jobs and wages both ways

Nondiscrimination in GATT/WTO

• Most-Favored Nation (MFN): All WTO members must offer other members the same terms of trade. • Exceptions: o Regional Trade Agreements (RTA's) -Can create lower trade barriers - Why? Supply chains to increase competitiveness and Easier to make progress when there are fewer parties at the table -Generalized System of Preferences (GSP) o National Treatment (In the context of international agreements, a state must provide equal treatment to those citizens of other states that are participating in the agreement.)

Why the Gold Standard mattered

• National currencies pegged to (and redeemable in) GOLD: US $20 = 1 oz • Only one "world" interest rate o A lower one -> outflow of gold, loss of credibility o A higher one -> inflow of gold, deflation • No expansion of money supply during "panic" • Local recessions -> trade deficits; outflow of gold required rise in interest rates, further economic contraction

Pros and cons of being the reserve currency

• Pro: The U.S. can run a deficit instead of having to tax more or cut spending o foreign governments buy stocks and bonds because they need dollars. Why § Many goods, like oil, are priced in dollars § Holding dollars can give investors confidence in their own economies (remember currency crises) • Con: The U.S. has to run a current account deficit o The dollar is overvalued, so exports are more expensive. Thus the U.S. exports less than it might otherwise. o Might cost low-skilled jobs in the export oriented economy o Throwing good money after bad - unwise investments. Example, the 2008 Financial Crisis

Susan Strange's Four IPE Structures

• Production and Trade Structure • Money and Finance Structure • Security structure • Knowledge and technology structure

Likely Coalitions

• Regardless of scarcity or abundance: o Land and capital versus labor o Labor and capital versus land • Nature of political conflict given coalition partners o Class (land and capital versus labor) o Urban/rural (labor and capital versus land) • Prediction: With expanding trade, the potential coalition of abundant factors will gain wealth, which can translate into political influence

Ideological Manipulation

• Religion o Religion evil because it made people sort of ignore who was controlling the money • Sports • Foreigners • Noam Chomsky: As evidence, he highlights that the U.S. mass media does not employ any socialist journalists or political commentators.He also points to examples of important news stories that have been ignored by U.S. mainstream media because reporting on them would reflect badly upon the U.S. state:

Inequality and liberty

• Role for the state: o Education of children o Aid to the poor o Achieve social goals Healthcare? In Today's social goals

Cultural and Structural Shifts

• Similar to the late 1800s • Super structural changes and how mercantilism tends to come out with big structural shifts • Starting in 1800, plummeting of work force in agriculture • Due a lot to technology and interesting because so many of state universities founded as ways to increase technological advances in agriculture, tend to eliminate a lot of labor • Cultural shifts happening in 60s and 70s, now adjusting to having so many people around them be from other countries

Neoliberalism

• State power (intervention in the economy) comes at the expense of individual economic and political liberty. Radical and laissez-faire capitalist set of ideas. This trend continued into the 1980s, under the Reagan Administration, which included tax cuts, increased defense spending, financial deregulation and trade deficit expansion. This approach has most famously been connected to various economic policies introduced in the United Kingdom by Margaret Thatcher and in the United States by Ronald Reagan.

Who Supports and Opposes New NAFTA Negotiations?

• Support: Labor Unions, including the A.F.L.-C.I.O. and the United Steelworkers, as well as some Democrats o "Any trade proposal that makes multinational corporations nervous is a good sign that it's moving in the right direction for workers," said Senator Sherrod Brown, Democrat of Ohio. • Against: Mexico, Canada, American Chamber of Commerce, Farmers o "Find me the last trade agreement that U.S. passed with the chamber in opposition," Mr. Levy said. "You don't have a chance. It's hard enough with the U.S. Chamber in favor."

Tasks vs. Services (Offshoring vs. Outsourcing)

• Tasks much bigger than services • Threatens mainly low-skill workers o Apple computers: Designed in U.S. Manufactured in China Components from low-wage countries all over o Luxury clothing: -Designed and marketed in Europe -Sewn in China, from Chinese textiles Example: Apple iPhone: • USA: o Engineered and designed - California o Its brain, the A6 chip, is manufactured by a semiconductor company (Intel or IBM) based in the US - Austin, Texas o Software in North Carolina data center o The radio frequency part is made by Ohio-based Triquint o the audio chip by Cirrus Logic, a Texan company o the controller chips by California-based PMC Sierra and Broadcom Corp • Apple iPhone in the U.S. o iPhone creates local derivative economies around it: its innovative marketing is handled by TBWA with offices in Los Angeles and New York, and its apps are written by American software companies. Apple is also one of the few companies that maintains a US- based local customer call center in Indiana, Texas and California to name a few. • Apple iPhone o Mongolia: § Ninety percent of rare earth minerals, naturally occurring solids whose combination comprises essential iPhone parts, are mined in China, notably in Mongolia. o Japan, Korea, Taiwan: § LCD screen § Chip-making § DRAM and flash memory § Rechargeable batteries o Europe: § The gyroscope used for tracking the smartphone's orientation o Assembled in China

Institutions and the Prisoner's Dilemma

• The Nash equilibrium arises because of: o Information asymmetries o Commitment problems • Institutions provide mechanisms for sharing information (via open negotiations) and making commitments credible (by punishing defectors).

Criticisms of the Factor Endowment Framework

• The assumption is that gains and losses from trade translate directly and proportionately into gains and losses in political influence • Failure to consider the possible impact of different governmental organizational arrangements upon the exertion of influence by societal factors such as land, labor, and capital • Uncertainty as to whether factor of production is the appropriate level of aggregation for analysis

National Welfare and whose interests? (Concerning Corn Laws and Britain)

• The debate over the nation's welfare highlighted four main issues: • 1. unilateralism versus reciprocity; • 2. the threat of foreign competition in manufactures; • 3. self-sufficiency as a national security concern; • 4. the effect of repeal on government revenue. Whose Interests? • 1. the relationship between bread prices and wages; • 2. class conflict; • 3. the taxation of landowners relative to other groups; • 4. the extent to which farmers, as opposed to landowners, benefited from protection; • 5. agriculture as a "unique" industry deserving of protection; • 6. the effect of the Corn Laws on the export trade.

The Dollar is Still the Global Reserve Currency, Why?

• The global system has more faith that the U.S. can pay its debts into the future than any other currency. The value of the dollar is stable. • Competitors: o The Euro - still in crisis. Many countries like Greece, Italy, and Spain still have more debt than they can pay. Will Germany continue to bail them out? Too much uncertainty. o The Yuan - lack of transparency about Chinese monetary policy and economic data. Too much uncertainty about its future value.

"New Trade Theory" Consequences

• The potential contagion of financial crises • Inequality - the wage gap between low and high • skilled workers • The Environment

Great Depression

• The state should try to mediate the ups and downs of the market so as to limit the uncertain effects of the market on society. Paradox of Thrift

The problem of Trade Cooperation

• Trade cooperation is difficult: the Prisoner's Dilemma. • Prisoner's Dilemma is a tragedy because the Nash equilibrium (both sides defecting) is suboptimal. (If each player has chosen a strategy and no player can benefit by changing strategies while the other players keep theirs unchanged, then the current set of strategy choices and the corresponding payoffs constitutes a Nash equilibrium. ) • A Pareto-improving outcome exists: both sides cooperating. It's a change to a different allocation that makes at least one individual or preference criterion better off without making any other individual or preference criterion worse off, given a certain initial allocation of goods among a set of individuals. • Institutions can help resolve Prisoner's Dilemma problems.

Decline in Trade in 30s and resultant human misery

• Trade declines as governments attempt to export costs of adjustment abroad by protecting domestic goods. • In the first 4 years of the depression, international trade decreased by 60%. • Limits ability to grow out of recession. • Depression becomes deeper and more durable. • Economic catastrophe! • 20-40 % unemployment in most industrial countries • In U.S.: o 8 million unemployed o Millions homeless or living in shacks ("Hoovervilles") o 1⁄4 of all schoolchildren in NYC malnourished o No unemployment insurance or welfare § All "poor relief" local § in NYC $2.39 per week per family o Parents often give up children because they could not feed them

Return to Gold Standard in 20s?

• U.K. in attempt to limit currency instability supported return to gold standard in the 1920s. • U.K. attempted to restore £ to its prewar value. • Leads to overvaluation of £, which damages British workers and producers in tradable sector. • Inability to support convertibility undermines attempt. • Eventually, states went back off the gold standard in 1931.

U.S. Dollar as Lingua Franca/Leading Currency Problem under the Bretton Woods System

• U.S. Trade Deficits o Borrow money at low interest rates without exchange-rate risk • Exorbitant Privilege o Influence over the policy choices of other governments • Leading currency - to avoid price instability, one currency had to restrain itself from exchange-rate changes • The guardian of stability was the dollar: o The U.S. declared a par value of the dollar - fixed its value in relation to gold o Other countries then declared the par values of their currencies in terms of dollars • The U.S. could not devalue the dollar if it became overvalued without devaluing all currencies

The problem of agriculture

• U.S.: Farm Bill (subsidies and other supports for U.S. farmers). • E.U.: Common Agricultural Policy (ag. subsidies). • Japan Agricultural Cooperatives (subsidies). Worldwide agriculture tariffs/supports still average over 60%. • This kills farmers in the developing world. • Also expensive (and sometimes unhealthy) for those in the developed world.

WTO and unconstitutionality?

• WTO effectively can find national or state laws "unconstitutional," i.e. in violation of treaties • Recent Example: Antigua and Barbuda vs. USA (DS 285): o U.S. outlaws online poker o Harms Antigua and Barbuda (export of services) o Federal and state laws violate WTO commitments (next slide) o U.S. doesn't give way o A & B allowed to violate US copyrights up to $21 million annually

Free Trade Interests

• We can expect abundant factors to pursue free trade • Factors in which a state is relatively poor will oppose free trade, as it will harm them

Pegged (fixed) Currences Why and Why not

• Why? Creates Stability. o Examples: -----Most of the Caribbean islands (Aruba, Bahamas, Barbados, and Bermuda, to name a few), peg to the U.S. dollar because their main source of income is derived from tourism paid in dollars -----In the Middle East, may countries (including Jordan, Oman, Qatar, Saudi Arabia, and United Arab Emirates) peg to the U.S. dollar for the stability—the oil-rich nations need the United States as a major trading partner for oil. • Why not? o Small states are exposed to the demands of the macroeconomic and monetary policies of its larger trading partner • Currency Crises o Speculative attacks (e.g. the Mexican peso crisis, the Asian financial crisis, and the Argentine crisis in the 1990s)