PSCI 152 Midterm #1

brexit

"british exit" - UK's decision to leave the european union

tariff

A tax imposed on imported goods and services. It is used to restrict imports by increasing the price of goods and services purchased from overseas to make less attractive, and make domestic goods more attractive. Also used as an extension of foreign policy: imposing tariffs is a way to exert economic leverage. However, can have side effects. Can make domestic industries less efficient by reducing competition. Can hurt domestic consumers, as a lack of competition pushes up prices.

oligopolies

An industry dominated by a small number of firms ex. tech firms & world auto industry -oligopolistic firms earn excess returns. that is profits greater than could be earned in equally risky investments in other sectors of the economy -oligopolies have a first-mover advantage which arises from economies of scale and experience -according to strategic trade theory the firm that is first to enter a high-tech industry will hold a competitive advantage, and the country that is home to this country will capture the rents in this industry.

How do politics shape the decisions that societies make about how to use the resources available to them?

Decisions about tariffs will effect how the society's resources are used. Ex. a decision to raise tariffs will encourage business owners to invest and workers to seek employment in the industry that's protected by tariff. Decision to lower tariffs will encourage business owners and workers employed in newly liberalized industry to seek employment in other industries. There are welfare consequences and distributional consequences. Welfare consequences determine the level of societal well-being. Distributional consequences say that decisions about resource allocation influence how income is distributed between groups within countries and between nations in the international system.

Multinational corporations (MNCs)

Firm that controls production facilities in at least two countries. Largest examples are Ford, GE, and General Motors. 1/4 of world's economic production 1/3 of world trade

Most-favored nation

First form of non-discrimination . Prohibits governments from using trade policies to provide special advantages to some countries and not others. Requires WTO to treat each member of the WTO equally. ALl countries have access to foreign markets on equal terms.

winners and losers in trade policy

IPE studies how politics shape developments in the global economy and how the global economy shapes politics. Focuses on enduring battle between winners and losers from global economic exchange. -All societies benefit from participation on the global economy, but these gains aren't distributed evenly. It raises the income of some and lowers some of others. -These distributive consequences of global economic exchange generate political competition (winners seek deeper links with the global economy to extend and consolidate their gains, where the losers try to erect barriers between the global and national economies to order to minimize or reverse their losses)

RTAA

Reciprocal Trade Agreements Act: -legislation Roosevelt administration passed that has continued to shape US trade policy since. -congress gives president authority to reduce tariffs in exchange for equivalent concessions from foreign governments. -RTAA transformed the large and heterogeneous group favoring liberalization into small groups of export oriented industries that could more easily organize to pursue common goals. -Note that minority interests can construct legislative majorities more easily in majoritarian than proportional representation systems. Tariffs are higher in countries with majoritarian electoral systems than they are in proportional systems.

RTAs, FTAs, PTAs

Regional Trade Agreements- a trade agreement between two or more countries, usually located in the same region of the world, in which each country offers preferential market access to the other. Comes in two basic forms (free-trade areas and customs unions). RTAs are inherently discriminatory because they provide tariff free market access to some countries but not others. an RTAs net impact on trade is the difference between the trade it creates and the trade it diverts. If more trade js created, the RTA has liberalized trade. If more trade is diverted than created, the RTA has pushed the world toward protectionism.

Infant industry argument

argues that there are cases in which newly created firms will not be efficient initially but could be efficient in the long run if given time to mature. So a short term of tariff protection will enable these industries to become efficient and begin to export. Once reached, the tariff can be removed. Long run welfare gains are greater than the short run losses of social welfare imposed by the tariff.

Green industrial policy (GIP)

attempt to accelerate the growth of green industries to transition towards a low carbon environment.

Nontariff barriers

includes quotas, embargoes, sanctions, levies, and others.

Free riding

situations in which individuals rely on others to pay for a public good. Ex. radio station. The incentive to free ride is higher in large groups than small groups. The WTO has public good characteristics.

trade liberalization

the removal or reduction of restrictions or barriers on the free exchange of goods between nations. Includes removal or reduction of tariff obstacles, such as duties and surcharges, and nontariff obstacles such as licensing rules, quotas, and other requirements.

society-centered approach

-A society-centered approach argues that a government's trade policy objectives are shaped by politician's responses to interest groups' demands. Ex. EU's reluctance to liberalize European agriculture reflects EU policymakers' responses to the demands of European farmers. Society-centered approach emphasizes the interplay between organized interests and political institutions.

Production possibility frontier

-Allows us to measure opportunity costs precisely. Ex. say US has fixed stock of capital and labor that could use to produce shirts and computers. If allocates all to computer production could produce 100 mil computers. If allocates all to shirts could produce 300 mil shirts. If you connect these with a line, that's your PPF. Along the PPF lies all combinations of shirts and computers the US can produce using all of its factors of production. Slope of line called marginal rate of transformation, and tells us exactly how many shirts US forgoes for each computer produces (ex. each computer = 3 shirts) A straight PPF assumes that country faces constant OC (& returns to scale in production - so whenever factors employed in shirt production are increased by some factor, we will increase the amount of shirts produced by the same factor.)

Nondiscrimination

-First core principle of multilateral trade system. Ensures that each member of the WTO faces identical opportunities to trade with other WTO members.

Marxism

-Originated as a critique of capitalism (which has two central condition - the private ownership of the means of production (capital) and wage labor. -Karl Marx said that the value of goods was based on the labor used to produce, and capitalists did not pay for full value. -Marxists argue that capitalists make decisions about how society's resources are used. -Decisions about what to produce are made by the few firms that control the necessary investment capital. -The state operates as an agent of the capitalist class --> isn't autonomous So in contrast to the mercantilists who focus on the state and liberals who focus on the market, Marxists focus on large corporations as the key actor determining how resources are used.

National treatment

-Second form of nondiscrimination found in the WTO. Prohibits governments from using taxes, regulations, and other domestic policies to provide an advantage to domestic firms at the expense of foreign firms. Basically, requires government to treat domestic and foreign versions of the same product identically once they enter the domestic market. Together MFN and national treatment ensure that firms in every country face the same market opportunities and barriers in the global economy.

state-centered approach

-State centered approach argues that national policymakers intervene in the economy in pursuit of objectives that are determined independent from domestic interest groups' narrow self interested concerns & this intervention may raise social aggregate welfare. 1. Protectionism: society centered approach argues that it reduces social welfare by depriving society of the gains from trade and by employing society's resources in comparatively disadvantages industries, but the state-centered approach argues that under certain circumstances trade protection can raise social welfare. Overall, state approach says that under a specific set of circumstances governments will intervene in the domestic economy with tariffs, production subsidies, and other policy instruments in ways that raise aggregate social welfare. -Economic justification for state-centered approach rests on the claim that targeted government intervention can increase aggregate social welfare.

Comparative advantage

-The ability of any economic actor to produce goods and services at a lower opportunity cost than other economic actors. A country will have a comparative advantage in goods produced using a lot of their abundant factor and a comparative disadvantage in goods produced using a lot of their scarce factors. So comparative advantage tells us that all countries gain from trade by specializing in the goods that rely heavily on the factors of production they hold in abundance and exchange them for goods that use factors of production scarce in their economy.

uruguay round

-conducted within GATT. Led to the creation of WTO. main mandate had been to extend the GATT trade rules to areas previously exempted too difficult to liberalize (like agriculture and textiles) and new areas (like trade in services, intellectual property, investment policy.)

Factor vs sectoral models of trade

-factor model argues that trade politics are driven by competition between the two factors of production (labor and capital) -factor model says that generally, trade raises the income of society's abundant factor and reduces the income of society's scarce factor. -in capital abundant countries such as the US, factor model predicts that owners of capital (abundant actor) will prefer liberal trade policies while workers (scarce factor) will prefer protectionist trade policies. Opposite in developing countries. SECTOR MODEL: -argues that trade politics are driven by competition between industries. -trade pits workers / capitalists in one industry against those in another over the distribution of national income. SECTOR VS FACTOR: factor model assumes factors are highly mobile, and people define their interests in terms of factor ownership. Sector model assumes that factors are immobile, and people define their interests in terms of industry where they each their living

Collective action problem

-groups often can't organize because of this -the incentive to free ride makes collective action in pursuit of a common goal difficult. Collective action problem helps us understand 3 characteristics of trade politics: a. why producers not consumers dominate trade politics b. suggests that trade politics will exhibit a bias toward protectionism c. why governments rarely liberalize trade unilateraly, but do so through negotiated agreements.

three traditional schools of political economy offers 3 distinctive answers to question of how politics shape the allocation of society's resources

-mercantilists focus on the consequences of resource allocation for national power -liberals rely upon economic theory to focus principally on the welfare consequences of resource allocation -marxists rely upon theories of class conflict to focus on the distributional consequences of resource allocation

Liberalism

18th century -Emerged to challenge the dominance of mercantilism in government circles. Challenges all three propositions of mercantilism. 1) Separate economics and politics (economics is about enriching individuals, not state power) 2) States gain from all trade (regardless of trade balance being positive or negative) 3) best off producing what they are best at (use relative advantage, then trade) So countries are made wealthy by making products that they can produce at a low cost at home then trading them for goods that they could only make at a high cost. Gov. efforts to allocate resources only reduces national welfare. Market is best for social welfare (individuals should make their own choices, in free exchanges, all parties benefit from exchange) State must establish property rights (judicial system enforces ownership and contracts) State should intervene where market fails (market fails to allocate resources to desirable areas) Social welfare will be highest when people are free to make their own decisions about how to use the resources they possess. So rather than acception the mencantilist argument that the state should guide allocation of resources, liberals argue that resources should be allocated through voluntary market-based transactions between individuals.)

Hegemonic stability theory

A hegemon is a state that has the capacity and the will to lead and overpower other states in the international system. Used to explain why the international trade system shifts between periods where its open and liberal and period in which its closed and discriminatory. Rests on logic of public good provision (public good is non-excludable and non-rivalry) Argues that hegemons act like privileged groups (i.e small groups where each individual contribution is large relative to total, so there is a weaker incentive to free ride, and thus overcomes the free-riding problem. A hegemon is a country that produces a disproportionately large share of the world's total output and leads in the development of new technologies. Because so large and advanced, the benefits the hegemon gains from trade are so large that it's willing to bear the full cost of creating international trade rules.

after hegemony (theories of international institutions post-hegemon)

A hegemon is a state that has the capacity and the will to lead and overpower other states in the international system. British empire was hegemonous until the start of the 20th century, and the US from that point forward. Hegemon provides public good of stable international economic order. After hegemony international regimes may persist. This helps states reach mutual beneficial agreements and increase interdependence and cooperation. Hegemony may be necessary to build regime, but not necessary to maintain regime.

Dispute settlement and enforcement

Ensures that governments comply w/ the rules they establish by helping governments resolve disputes and by authorizing punishment in the event of noncompliance. Ensures compliance by providing an independent quasi-judicial tribunal. By creating rules, establishing a decision-making process to extend and revise them, and enforcing compliance, governments have brought the rule of law into international trade relations. -follows standard procedure that was agreed to by all members of the WTO during the Uruguay round. Initiated when a government beings an alleged violation of WTO rules to WTO dispute settlement body. Initially the governments involved in the dispute try to resolve conflict through direction consultations. This DSB creates formal body to investigate the complaint The WTO enables governments to enforce trade agreements they reach by: providing a set of mutually agreed on rules, helping governments monitor the extent to which their partners comply with these rules, and by providing a dispute-settlement mechanism that helps governments resolve these issues of compliance that do arise.

GATT/WTO

GATT is the predecessor of the WTO. GATT (General Agreements on Tariffs and Trade) Enables governments to progressively eliminate tariffs and other barriers to the cross-border flow of goods and services. The WTO is an international political system that regulates national trade policies, it's the hub of an international political system under which governments negotiation, enforce, and revise rules to govern their trade policies. As a political system, the WTO can be broken down into 3 distinct components: a set of principles and rules, an intergovernmental bargaining process, and a dispute settlement mechanism. 153 countries belong and have created a nondiscriminatory international trade system. Each country gains access to all other WTO members' markets on equal terms. WTO is important because it helps enforce international agreements that they conclude as the international system has neither a police force nor a judicial system through which to enforce compliance WTO is based on the market liberalism economic logic. Market liberalism says that an open or liberal international trade system raises the world's standard of living. And the gains from trade are greatest for the world when goods can flow freely across borders. The WTO brings the rule of law to bear in international trade relations. It does so by promoting nondiscriminatory international trade, establishing a formal process for making and revising rules, and by allowing governments to enforce the rules they create, so the WTO reduces the impact of raw power on international trade relationships. WTO reflects the interests of the powerful (ex. creation reflected the interests of a hegemonic US.) -The largest current challenges to the WTO emerge from the ability of its decision making process to continue to produce outcomes in a changing world. (emergence of NGO movement critical of WTOs tendency to place business interests before consumer interests has made it even more difficult to reach agreements within the organization.)

Protectionism

Government actions and policies that restrict or restrain international trade, often with the intent of protecting local businesses and jobs from foreign competition.

Enforcement problems in international trade

Govs. can't be certain that other govs. will comply with the trade agreements they conclude. So govs. will be reluctant to enter into trade agreements, even when they know they'd benefit. Ex. prisoners' dilemna = a symmetric game, meaningboth players face the same outcome but the position of the most and least preferred outcome are reversed. Pareto suboptimal = a way to conceptualize social welfare. When no actor can be made better off without making another actor worse off at the same time. nash equilibrium = an outcome at which neither player has an incentive to change strategies unilaterally. The prisoner's dilemna suggests that even when all countries would benefit from trade liberalization, political dynamics trap government in a protectionist world. Governments are unable to conclude agreements that make them all better off because each fears getting the sucker payoff. Cooperation isn't impossible (can occur if three conditions are meant.) 1. Iteration (a game repeatedly played by the same governments --> leads to the liberalize strategy) 2. Reciprocity strategies (ex. tit for tat - in tit for tat each government plays the strategy that its partner played in the previous round of the game.) 3. future payoffs (gov. must care about the payoffs they will receive in future rounds) - WTO PROVIDES FIRST TWO of these requirements)

Mercantilism

One of three traditional schools of IPE (17th - 18th centuries) Three central propositions: 1) National wealth and state power are connected (power comes in large part from wealth) 2) Trade is a tool of acquire wealth (only if country runs a positive balance of trade - so country sells more to foreigners than purchased from foreigners) 3) some types of economic activity are more valuable than others. Favors manufacturing while agriculture/ other nonmanufacturing activities should be discouraged. MODERN MERCANTILISM: -economic strength is critical to national power -encourage exports, discourage imports -prefer high-tech manufacturing such as computers and telecommunications is preferable to manufacturing industries such as textiles and apparel. -Thus, mercantilism overall argues that the state should play a large role is determining how society's resources are allocated. (the only way to ensure society's resources are used appropriately is to have the state play a large role)

strategic trade theory

Provides the theoretical justification for industrial policy in high-tech industries. expands on the basic insight of the infant-industry case for protectionism -says that government intervention can help domestic firms achieve economies of scale and experience in order to become efficient and competitive in global economies -high-tech industries are oligopolistic while infant industries are perfectly competitive.

Doha round

The latest round of trade negotiations among WTO membership. Launched in 2001 w/ plans to conclude by 2005. However, still in 2010 hasn't reached conclusion. Aim is to achieve major reform of the international trading system through the introduction of lower trade barriers and revised trade rules. Covers 20 areas of trade.

Logrolling

advance agreement by legislators to vote for each others bill

General agreement on trade in services (GATS)

Treaty of WTO that was part of the uruguay rounds. Created to extend the multilateral trading system to the service sector.

Customs union

a group of countries that have agreed to charge the same import duties as each other and usually to allow free trade between themselves.

Factor endowments

factor endowment is the amount of land, labor, capital, and entrepreneaurship that a company possesses and can exploit for manufacturing

Interest groups

goals or policy objectives that central actors in the political system and the economy want to use foreign economic policy to achieve

Public goods

non-excludable and non-rivalrous. A product that one individual can consume without reducing its availability to another, and to which no one is excluded.