Chapter 3 - The Political Economy of International Trade Cooperation Flashcards
Why do countries engage in trade?
The anarchical international system makes cooperation difficult.
PPF: finite factor endowments (labour and capital) –> quid allocation?
What is an indifference curve?
Countries try to maximize their collective utility, the slope (=MRS is the marginal rate of substitution = how much of good X is willing to give up for one Y), bends towards the origin (marginal utility decreases)
What is the optimum point of production?
When the Marginal Rate of Substitution equals the Marginal Rate of Transformation (relative production)
Which goods will a country produce?
This will depend on the factor endowments.
The Heckscher-Ohlin Model argues that there is a comparative advantage in the abundant factor. So, will be cheaper to employ the abundant factor.
How does trade bargaining work?
Governments strive to open foreign markets to the exports of competitive domestic industries and continue to protect less competitive industries from imports. As a result, trade liberalization generally occurs through trade bargaining in which governments exchange market access commitments.
Bargaining power determines which distribution of gains governments ultimately select.
Patience = rather settle today than tomorrow because both gain from trade.
Outside option = next-best alternative.
How are trade agreements enforced?
How to enforce cooperation?
Not certain of compliance, the dominant strategy is to impose tariffs.
But, this Nash-equilibrium is Pareto-inefficient.
1) Parties prefer an iteration, which leads to a stream of payments.
2) Aim for reciprocity (example is tit-for-tat), rewards each other for cooperation.
3) Should have low discount of future pay-offs.
Enforcement also enabled by the WTO Dispute Settlement Body
