Final Review Chapter 8 Terms and Questions International Political Economy (IPE): studies the politics of international economic activities Mercantilism: generally shares with realism that each state must protect its own interests at the expense of others?not relying on international organization to create a framework for mutual gains Emphasizes the use of economic policy to increase state power relative to other states. It is conceptually related to realism. Emphasize relative power: what matters is not so much a state?s absolute amount of well-being as its position relative to rival states Holds that the importance of economic transactions lies in their implications for the military States worry about relative wealth and trade because these can be translated directly into military power Thus, although military power is generally not useful in economic negotiations, they believe that the outcome of economic negotiations matters for military power Liberalism: generally shares with liberal internationalism a belief in the possibility of cooperation to realize common gains Emphasizes international cooperation?especially through worldwide free trade?to increase the total creation of wealth (regardless of its distribution among states). It is conceptually related to idealism It holds that by building international organizations and institutions, and norms states can mutually benefit from economic exchanges It matters little to liberals whether one state gains more or less than another?just whether the state?s wealth is increasing in absolute terms Dominant Approach in Western economics, though more so in micro than macro Comparative Advantage: principle that says states should specialize in trading goods that they produce with the greatest relative efficiency and at the lowest relative cost (relative, that is, to other goods produced by the same state) For specialize to pay, a state need only specialize in producing goods that ar relatively lower in cost than other goods Specialization and free trade increase the overall efficiency of production; free trade allocates global resources to states that have the greatest comparative advantage in producing each kind of commodity As a result, prices are both lower overall and more consistent worldwide Balance of Trade: the value of a state?s imports relative to its exports Positive Balance of Trade if you export more than you import creating trade surplus Negative Balance of Trade (Trade Deficit): a state that imports more than exports Free Trade: the flow of goods and services across national boundaries unimpeded by tariffs or other restrictions; in principle (if not always in practice), free trade was a key aspect of Britain?s policy after 1846 and of US policy after 1945 Protectionism: the protection of domestic industries against international competition, by trade tariffs and other means Tariff: a tax imposed on certain types of imported goods (usually as a percentage of their value) as they enter the country Nontariff Trade Barriers: forms of restricting imports other than tariffs, such as quotas (ceilings on how many goods of a certain kind can be imported) NAFTA: a free trade zone encompassing the US, Canada, and Mexico since 1994 World Trade Organization (WTO): an organization begun in 1995 that is a global, multilateral IGO that promotes, monitors, and adjudicates international trade Most Favored Nation Status (MFN): a principle by which one state, by granting another state MNF status, promises to give it the same treatment given to the first state?s most favored trading partner Generalized System of Preferences (GSP): a mechanism by which some industrialized states began in the 1970?s to give tariff concessions to 3rd World States on certain imports; an exception to the most favored nation principle Customs Union: beyond free trade areas, states may reduce trade barriers and adopt a common tariff toward states that are not members of the agreement; this what it is called Common Market: if members of the customs union decide to coordinate other policies such as monetary exchange, the customs union becomes a common market Cartel: an association of producers or consumers (or both) of a certain product, formed for the purpose of manipulating its price on the world market Intellectual Property Rights: the legal protection of the original works of inventors, authors, creators, and performers under patent, copyright, and trademark law; such rights became a contentious area of trade negotiations in the 1990?s Centrally Planned Economy: an economy in which political authorities set prices and decide on quotas for production and consumption of each commodity according to a long term plan Mixed Economy: economies such as those in the industrialized West that contain both government control and some private ownership Interdependence: a political and economic situation in which two states are simultaneously dependent on each other for their well-being; the degree of interdependence is sometimes designated in terms of sensitivity or vulnerability Issues to Know Know the difference between liberalism and mercantilism in some detail. Mixed Interest?most international economic exchanges contain some element of mutual interests?joint gains that can be realized through cooperation?and some elements of conflicting interests; game theorists call this a mixed interest In international trade, even when two states both benefit from a trade (a shared interest), one or the other will benefit more (a conflicting interest). Liberalism emphasizes the shared interests in economic exchanges, whereas Mercantilism emphasizes the conflicting interests For Liberals, the most important goal of economic policy is to create a maximum of total wealth by achieving optimal efficiency (maximizing output, minimizing waste). For Mercantilists, the most important goal is to create the most favorable distribution of wealth Liberal economics believe in markets; the terms of an exchange are defined by the price at which goods are traded Often the bargaining space?the difference between the lowest price a seller would accept and the highest price a buyer would pay?is quite large Market competition determines price when there are multiple buyers and sellers of a good Thus, in liberal economics, bilateral relations between states are less important than they are in security affairs Liberalism sees individual households and firms as the key actors in the economy and view government?s most useful role as one as noninterference in economics, except to regulate markets in order to help them function efficiently Liberals argue that interdependence inherently promotes peace Mercantilists, by contrast, economics should serve politics; the creation of wealth underlies state power; because power is relative, trade is desirable only when the distribution of benefits favors one?s own state over rivals The terms of exchange shape the relative rates at which states accumulate power and thus shape the way power distributions in the international system change over time Mercantilists preferred means of making trade serve a state?s political interests?even at the cost of some lost wealth that free markets might have created?is to create a favorable balance of trade Balance of Trade: the value of a state?s imports relative to its exports Positive BOT if you export more than you import creating trade surplus Negative BOT (Trade Deficit): a state that imports more than exports Understand what the WTO is and what it does. The WTO shapes the overall expectations and practices of states regarding international trade It facilitates freer trade on a multilateral basis It arbitrates trade disputes, clarifying the rules and helping states observe them The WTO incorporated the General Agreement on Tariffs and Trade (GATT) agreements on manufactured goods and extended the agenda to include trade in services and intellectual property The WTO has some powers of enforcement and an international bureaucracy, which monitors trade policies and practices in each member state and adjudicates disputes among members The WTO has limited power over states The WTO framework rests on the principle of reciprocity?matching states? lowering of trade barriers to one another; it also uses the concept of nondiscrimination, embodied in the most-favored Nation (MFN) concept, which says that trade restrictions imposed by a WTO member on its most favored trading partner must be applied equally to all WTO members The WTO does not get rid of barriers to trade altogether but equalizes them in a global framework to create a level playing field for all member states; states aren?t prevented from protecting their own industries but cannot play favorites among their trading partners An exception to the MFN system is the Generalized System of Preferences (GSP), by which rich states give trade concessions to poor ones to help their economic development; preferences amount to a promise by rich states to allow imports from poor ones under lower tariffs than those imposed under MFN Uruguay Round: a series of negotiations under the GATT that began in Uruguay in 1986 and concluded in 1994 with the agreement to create the WTO Doha Round: a series of negotiations under the WTO that began in 2001; its focus was on agricultural subsidies, intellectual property, and other issues Know what is meant by protectionism and which policies can be considered protectionism. Protectionism is the policy of a state trying to manipulate international trade to strengthen one or more domestic industries and shelter them from world markets It is contrary to liberalism because they seek to distort free markets to gain an advantage for the state, generally by discouraging imports of competing goods and services States often protect infant industries as they start up in the state for the first time, until they can compete on world markets; this is considered a relatively legitimate reason for protectionism Another motivation for protectionism is to give a domestic industry breathing room when market conditions shift or new competitors arrive on the scene Government?s also protect against industries considered vital to national security Finally, protection may be motivated by a defensive effort to ward off predatory practices by foreign companies or states Predatory generally refers to efforts to unfairly capture a large share of world markets, or even a near-monopoly, so that eventually the predator can raise prices without fearing competition Most often these efforts entail dumping products in foreign markets at prices below minimum level necessary to make a profit The following policies can be considered protectionism: The simplest form is a tariff or duty?a tax imposed on certain types of imported goods (usually as a percentage of their value) as they enter the country; not only restrict imports, but can also be an important source of state revenues; this is the preferred method of protectionism according to international norms Other means to discourage imports are nontariff barriers to trade Quotas: imports can be limited by a quota, which is a ceiling on how many goods of a certain kind can be imported; the extreme version is a flat prohibition against importing a certain good Subsidies: a more complex nontariff barrier is to give subsidies to a domestic industry, which allow it to lower its prices without losing money; include tax breaks, loans on favorable terms, and high guaranteed prices paid by governments Restrictions and Regulations: imports can also be restricted by restrictions and regulations that make it hard to distribute and market a product even when it can be imported Environmental and Labor Regulations: can function as a nontariff barrier as well Know how trade agreements are enforced. Because there is no world government to enforce rules of trade, such enforcement depends on the reciprocity principle and state power In particular, states reciprocate each other?s cooperation in opening markets (or punish each other?s refusal to let in foreign products) Although it leads to trade wars on occasion, reciprocity has achieved substantial cooperation in trade Reciprocity is how they are enforced Often there is a differing opinion of what is fair Disadvantage of reciprocity is that it can lead to a downward spiral of noncooperation?trade war Retaliation for unfair trade usually attempt to match violation Trade cooperation easier under hegemony Understand the pros and cons of international interdependence in trade. Interdependence: two or more states dependent on each other Political and economic phenomenon Often one state is more dependent than the other Short term vs long term dependence?oil As world economy develops and technology increases, states are becoming increasingly dependent?MNC?s Integration of world market through expanding flow of information and communication Arises from competitive advantage Violence is not effective leverage?interdependence inherently promotes peace Because job loss/unfair conditions can exist, many oppose globalization Interdependence isn?t necessarily symmetrical because world commodity markets vary Increases in MNC?s, communication, scope of the economy have all led to increased interdependence But state gains from trade leave the state vulnerable to their suppliers Drawbacks: Dependence on a state?they have power over you Ties well-being of a state?s population and society to policies and conditions in other states, outside its control Price of trade-generated wealth = loss of autonomy and sovereignty Know what Intellectual Property Rights are and how they are protected. Because US laws cannot be enforced in foreign countries, the US government wants foreign governments to prevent and punish violations of intellectual property In response, the int?l community has developed an extensive IGO with 184 member states, the World Intellectual Property Organization (WIPO), which tries to regularize patent and copyright law across borders The WTO oversees the world?s most important multilateral agreement on intellectual property, called TRIPS (Trade-Related aspects of Intellectual Property Rights) TRIPS rules are stronger than WIPO safeguards and can be relaxed only if all WTO members agree WIPO rules require only a majority vote to change
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