Trade And Investment

Question 1

Ricardian trade theory

Answer 1

Trade benefits all participants through the efficient allocation of resources based on comparative advantage. Eg: India and china, opening up to global trade can reduce poverty

Question 2

Protectionism

Answer 2

Domestic politic pressures that lead government to impose trade barriers even if trade benefits the economy as a whole. Eg. Brexit and US trade policies under trump

Question 3

What is the paradox?

Answer 3

Although free trade is theoretically optimal, political actors often prioritize short term domestic concerns, leading to long term global inefficiencies

Question 4

With type of good is free trade

Answer 4

Public good: non rival (one country’s used does not reduce availability for others) non excludable (it is difficult to prevent countries from benefiting).

This makes free vulnerable to under provision, as individual states may opt for protectionism to safeguard domestic industries.

In perfect markets public good are often under provided due to the free rider problem

Question 5

Prisoners dilemma

Answer 5

A metaphor that Is used to explain why states may defect from free trade agreements. Even though cooperation would lead to mutual benefits, each state has a short term incentive to protect its own industries while benefiting from others’ leading to a collectively suboptimal outcome

Free trade vs. optimal tariffs (defection strategy)

Tension between short term self interest and long term mutual gains in global trade relations

Question 6

Mancur Olson

Answer 6

Group size theory: smaller groups are better at providing collective goods, the larger the group the more free riders

Question 7

Club goods in trade

Answer 7

Regional trade agreements (RTAs), such as EU or NAFTA. Benefits members (tariff reductions) but exclude non members

Question 8

Hegemonic stability theory

Answer 8

A dominant global power (hegemon) is necessary to maintain a stable and open global economy

Question 9

Charles Kindleberger

Answer 9

HST
Analysis of Great Depression (1929-39), the absence of a hegemon (Britain’s decline and America’s isolationism -US unwillingness to establish global economy- ) led to economic instability, trade protectionism and prolonged depression.

Hegemon provides public good + benefit: US post 1945 Bretton Woods system

Question 10

Hegemon’s role and functions

Answer 10

Role: to maintain global economic stability
Functions:
maintain and open market,
provide stable long term lending (ensuring liquidity during financial crises)
Stable system of exchange rates. coordination of macroeconomic policies
Lender of last resort (US federal reserve during 2008 financial crisis or IMF)

Question 11

Stephen Krasner’s Theory (1975)

Answer 11

Hegemonic distribution of power as critical factor influencing the global trade structure.
Krasner’s model uses the distribution of power in the international system as the independent variable to explain fluctuations in global trade openness.

An open trading system is most likely to occur when a hegemonic system is in its ascendancy.

A hegemon not only opens its own markets but also uses its economic and military power to enforce trade liberalization globally. Eg: 1) Britain in the 19th century (abolish corn law, signed a Paris treaty with France, use its military might to open up markets and integrated India in the international trading system. 2) us after WWII Gatt. = hegemonic power shape the structure by creating institutions and enforcing rules that benefit global trade.

Limitations —> modification: stickiness of institutions: once stablished institutions (trade agreements) tend to persist even if the hegemon that created them is in decline

Question 12

James Kurth

Answer 12

Political implication of the product cycle

Product cycle influences domestic politics and by extension trade policy.

The product cycle consists of 4 phases that shapes the political landscape in ways that either enhance or diminish support for free trade.

Innovation phase: domestic investment, protectionis

Saturation phase: domestic market saturated, free trade.

Overseas production phase: foreign direct investment, free trade

Re- import: exported product lower cost, protectionist policies

Leading sectors (industries dominated by production and innovation- automobile and technology) play a pivotal role in shaping trade policy.

The balance between export oriented and domestically focused industries is key in determining the overall tarde policy of a hegemonic state

Question 13

Robert Keohane’s

Answer 13

Institutional theory

International institutions (WTO, IMF) play a crucial role in facilitating cooperation between started by addressing collective action problems, reducing anarchy .

3 ways of fostering cooperation: reduction of uncertainty and transactional costs, establishment of legal liabilities.

These international institutions are created by a single dominant power, typically during hegemonic leadership (US after WWII Bretton Woods institutions-IMF, WB, GATT/WTO). Even after the decline of the hegemon (decline of US economic dominance) this institutions persist.

Question 14

Arthur Stein

Answer 14

Hegemonic leadership

Dilema faces by hegemonic power when deciding between openness and closure in international trades. The dilema revolves around the trade off between maximizing absolute gains (own returns) and maintaining and improving a hegemon’s relative power in the international system.

Both strategies can be dominant but each serves a different decision rule:

Openness goal is to maximize absolute gains: ensuring that hegemon’: economy benefits in the short and long term, regardless the actions of others.

Closure : the goal is to preserve or enhance the hegemon’s relative power preventing rivals from catching up or gaining a competitive advantage.

Us post WWII opens with GATTfree trade . Now china and Europe rising US is more protectionism

Question 15

Critics to the hegemonic theory

Answer 15

Realist logic, power dinámica and relative gains are central to decision making
Competitive and zero-sum nature of international politics.

Robert Gilpin: war and change in world politics (1981). Instability of global systems dominated by a singles power, cyclical nature of war and power transitions.

John Ruggie: power is not only about dominance or material resources, ideational frameworks, liberal ideologies

Susan Strange: power is not just about the size of economy but is rooted in the dominance around 4 criterial structures (security, production, finance and knowledge). Even if US economy is in declain its control over these 4 pillars ensures its influence and leadership.

Joseph Nye: soft power the ability to shape the preferences of others through co-operative means. Us is not in decline, its soft power (culture, political ideals and foreign policy) remains strong)

Question 16

How persuasive is HST

Answer 16

Mainstream Hegemonic Stability Theory (HST), as articulated by Kindleberger, Krasner, and others, is persuasive in its explanation of how a single dominant power (the hegemon) creates and maintains a stable global economic order. The theory posits that hegemonic powers provide essential public goods (open markets, liquidity, stability) that benefit both the hegemon and the global system. HST convincingly argues that a hegemon is necessary to prevent chaos, ensure free trade, and stabilize global markets, which was evidenced after World War Il when the United States assumed a hegemonic role and led the creation of institutions like the IMF, World Bank, and GATT (later the WTO).
However, HST has its LIMITATIONS:
• It tends to oversimplify the relationship between power and stability, often ignoring domestic political dynamics and the rise of competing powers.
• It assumes that a hegemon will always act in global interests, even when domestic politics or economic conditions discourage this.
• The theory has been critiqued for not fully incorporating the role of non-material forms of power (such as soft power or structural power) that have become more important in today’s international system.

Question 17

Does HST theory apply to comtemporary global economics?

Answer 17

HST can still be applied to some aspects of the contemporary global economy but with
IMPORTANT CAVEATS:
• The U.S. is no longer the undisputed hegemon in the same way it was after World War II. While it remains a dominant power in global financial and military terms, the rise of powers like China and the European Union complicates the notion of a singular hegemon.
• HST’s relevance is being challenged by the growing importance of regional economic systems,
multilateral institutions**, and non-state actors (like multinational
corporations) that operate independently of any one state’s leadership.
• Global governance has become more diffuse, with organizations like the WTO, G20, and IMF playing pivotal roles, even as U.S. influence has waned in some respects.
• HST may not fully explain the current U.S.-China trade tensions, the increasing influence of international institutions, and the complex interdependence of global markets. As Arthur Stein suggests, today’s global economy may not rely on one hegemon, but rather on multiple influential actors balancing power.
In short, while HST helps to explain the legacy of U.S. hegemony, it may not fully capture the dynamics of a multipolar world where China, India, and regional powers play increasingly important roles.

Question 18

Other bases of hegemonic leadership

Answer 18

The lecture notes and readings suggest that hegemonic leadership can be based on more than just material power. Key alternatives include:
• Structural Power (Susan Strange’s concept): The U.S. maintains structural power through its dominance in the global financial system (e.g., the dollar as reserve currency, global markets dominated by Wall Street), its leadership in technology and innovation, and its role in setting global knowledge norms.
• Ideational Power (John Ruggie): Hegemonic leadership also involves shaping global norms and ideologies. The U.S., for example, has promoted liberal economic ideas** democracy, and human rights, which remain influential even as its relative power declines.
• Institutional Power (Keohane): International institutions can help a hegemon lead more effectively by reducing uncertainty, transaction costs, and facilitating cooperation. The U.S. still benefits from institutions it created post-1945, like the UN, IMF, and **World Bank.

holds
Other bases of hegemonic leadership might include leadership in technology (as the U.S. in AI, biotechnology,information) and cultural
Hollywood, Silicon Valley)

Question 19

Hard vs soft power

Question 20

Hard vs soft power

Answer 20

The relationship between hard and soft power is dynamic and complementary:
• Hard
power
refers to
coercive abilities,
such
as military might and economic
sanctions. The U.S. remains a hard power giant, with unparalleled military capacity and influence over global financial markets.
• Soft power (as discussed by Joseph Nyc) involves persuasion and attraction, where countries shape global preferences through culture, values, and diplomacy. For
instance, American culture, political ideals, and economic practices continue to shape the world.
The U.S. has historically balanced both, using hard power for security and soft power to promote democracy and liberal economic ideas. However, as soft power rises, nations like China have invested heavily in shaping global discourse, promoting alternative development models (e.g., Belt and Road Initiative), and spreading their cultural influence.
The effective combination of both powers is crucial for long-term influence in international politics. As hard power wanes, soft power (e.g., through diplomacy, educational exchanges, and global leadership in crises like climate change) becomes more important in maintaining hegemonic leadership.

Question 21

Weary titan

Answer 21

The notion of the “Weary Titan” refers to the challenges that a hegemon faces in sustaining global leadership, especially when its relative power is declining or when the costs of leadership begin to outweigh the benefits. This concept has been applied to Great Britain in the 19th century and more recently to the United States:
As Arthur Stein discusses, the U.S. is increasingly weary of the costs associated with maintaining its global leadership, especially in the face of rising domestic pressures (e.g., populism, protectionism, economic inequality).
The Hegemon’s Dilemma highlights the tension between sustaining openness in the global economy and protecting the hegemon’s relative position. The U.S. faces this challenge today, as seen in its shifting stance toward free trade, the rise of America First policies, and increasing domestic resistance to global engagement.
The U.S. is showing signs of being a weary titan, balancing the need to maintain global leadership with the growing burden of economic and military commitments.

Question 22

Weary titan

Answer 22

The notion of the “Weary Titan” refers to the challenges that a hegemon faces in sustaining global leadership, especially when its relative power is declining or when the costs of leadership begin to outweigh the benefits. This concept has been applied to Great Britain in the 19th century and more recently to the United States:
As Arthur Stein discusses, the U.S. is increasingly weary of the costs associated with maintaining its global leadership, especially in the face of rising domestic pressures (e.g., populism, protectionism, economic inequality).
The Hegemon’s Dilemma highlights the tension between sustaining openness in the global economy and protecting the hegemon’s relative position. The U.S. faces this challenge today, as seen in its shifting stance toward free trade, the rise of America First policies, and increasing domestic resistance to global engagement.
The U.S. is showing signs of being a weary titan, balancing the need to maintain global leadership with the growing burden of economic and military commitments.

Question 23

Do we need a hegemon?

Answer 23

HST posits that a hegemon is necessaty for global stability, particularty in maintaining open
markets, providing public goods,
and ensuring financial liquidity. However, contemporary
global politics suggests that hegemonic leadership might not be as crucial as it once was.
Multilateral
institutions,
regional
organizations, and transmatiomat
actors
corporations and NGOs) are increasingly capable of managing global challenges without & single dominant leader.
The global economy is increasingly multipolar, with countries like China, the EU, and India playing significant roles in shaping global governance. This suggests that we may be moving towards a more decentralized model of global leadership.
However, the absence of a hegemon could lead to a less stable global order, as competing interests and rivalries may increase.
The world might need a form of collective leadership
(e.g., G20 or UN), rather than relying on a single hegemon.
In Conclusion: Mainstream HST remains a valuable framework for understanding global order, but it must be adapted to account for the complexities of a multipolar world, the rise of soft power, and the structural power that maintains U.S. influence. While a hegemon has historically been necessary for global stability, new forms of multilateral governance may emerge to address the challenges of the 21st century.