Lecture material week 3 Flashcards
Who benefits from free trade within a country?
- Domestically, opening up to trade leads to a shift in production towards the good in which a country possesses a comparative advantage
Heckscher-Ohlin
- Differences in technology are one possibility (Ricardo)
– But let’s assume for now that access to technology is the same worldwide -
HO: differences in countries’ relative endowments in factors of production (fop)
– 3 principal FOPs: land (T), labour (L), capital (K)
– The price of a FOP in a country depends on its relative scarcity - Scarce FOP are expensive
- Abundant fop are cheap
A country’s comparative advantage lies in the industries that require high input of the fop, which is relatively abundant in a country
Leontief paradox
- Wassily Leontief calculated capital-labor ratio of US imports/exports in the 1950s
- Result: US exports are relative labour-intensive; imports relatively capital intensive
- Later studies made more fine-grained categorization of factors of production
– Different kinds of labor, natural resources, capital, etc.
– Found evidence that is more supportive of HO’s prediction
Distributional implications of HO
- Opening to trade…
– … increases export opportunities – and thus incomes - of locally abundant factors - In countries with a lot of labor supply, workers gain
- In countries with a lot of land, landowners gain
– … but creates import competition – and thus lower incomes – for locally scarce factors - In countries with little land, landowners loose
- In countries with little capital, capital owners loose
Short-run vs long-run effects
– In short term, FOP cannot switch industrial sectors:
- groups tied to industries that make intensive use of abundant [scarce] factor win [lose]
– In long term, FOP can switch sectors
- re-training of L, adapt use of T, re-invest K, etc.
- thus, in the long term, the abundant [scarce] factors win [lose], independently from what industry they are initially located in
International System-based Approaches (top-down) (more IR-based)
- Relative gains: a long history of mercantilist thought, security concerns as one driver of protectionism (defense sector; strategic industries) (Walter & Sen)
- Krasner (1976)
o Key insight: there will be an open trade order when there is a hegemon (because only they don’t have to worry about other countries making relative gains or themselves losing, and therefore they will be willing to build an international forum for trade)
Critique Against the Hegemonic Stability Theory: Ideas
- Ideational /critique questioning the idea that leaders of powerful countries just “know” that free trade is
beneficial for their country - Does their belief in that come from predominant economic ideas/theory?
- Morrison (2012): challenges Krasner’s theory and argues that Great Britain already opened up and traded
internationally before they became a hegemon; Adam Smith played an important role in convincing the PM
-Argued that opening up for trade only happened because someone argued for it - TradeTalks with Woodward: Woodward strongly suggests that Trump was just a close-minded person and nothing could convince him (demonstrates how much ideas of leaders can matter)
Critique Against the Hegemonic Stability Theory: International Institutions
- Institutional perspective/critique, Robert Keohane agrees with Krasner that you might need a hegemon to
create an international trade forum, but disagrees with the second part of Krasner’s argument (that if the
hegemon declines the system will crumble and protectionism will arise)
o Keohane argues that it depends on what institutions the hegemons build and whether he builds them in a way that other countries have an interest in maintaining the institution and system -> then the system can remain even if the hegemon declines
Critique Against the Hegemonic Stability Theory: National Interests
- Systemic theories tend to portray states as unitary rational actors with clear national interest (as Krasner
seems to portray states)
o But how are “national interests” constructed? They don’t just exist -> Therefore it argues that domestic politics is also important (the domestic politcal groups etc.) to understanding international
trading order
What happens domestically and how a country defines the national interest can have important implications for the systemic level
Societal Approaches (Bottom-up)
- Is about trying understand how national interests come about, who are the different groups, why they want something and how it plays out, who gets to implement the policy they prefer
- Interest-, ideas- and institution-based theories in the following sections
Factor-based models:
Emphasize cleavages across factors of production
- KEY difference to sector-based: in the longer run, workers, capital, and land can switch industries
- Because in the longer term, workers can be re-trained, capital re-allocated, land put to different uses
- Alliances will not be based on industry, but abundance/scarcity of factors of production that
workers, landowners, and capital owners represent
Sector-based models:
Emphasize industry cleavages
- Internationally competitive domestic industries gain from open trade (because they can then get access to foreign markets)
- Uncompetitive ones lose (who cannot withstand international competition)
- KEY: workers and capital + land owners are tied to one industry (they form a union), in cases of disruption they cannot switch easily to another one →
- Capitalists and workers in export-oriented industries will form alliances and push for free trade
- Capitalists and workers in import-competing industries will form alliances to oppose free trade
