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Chapter 10: International Political Economy of Trade and Globalization

Study

Summary

This chapter focuses on the political economy of globalization and trade. It begins by introducing the concept of globalization and its historical background; it then presents the concepts of comparative advantage, supply and demand, and trade as a public and private good. Then it presents the main concepts related to currencies and exchange rates, and how they are related to who wins and who loses from free trade. Next, it discusses how various factors of production and their mobility determine who wins and who loses from trade openness.

The main idea is that free trade is a public good because it contributes to the reduction of prices and greater efficiency. Even though free trade benefits many, some people still might lose, at least in the short run, due to differences between countries in comparative advantages as well as due to mobility of factors of production. Those who are worse off as a result of free trade demand government protection.

When both labor and capital are mobile and can shift from one sector to another, free trade benefits workers in poor countries and capital owners in rich countries more than it benefits workers in rich countries and capital owners in poor countries. Therefore, when there is complete mobility of the factors of productions, demands for government protection are divided along class lines. Conversely, when one or both factors of production are tied to a specific industry and cannot move, the mobile factors of production will benefit, but immobile will lose. Therefore, demands for protection will create intra-industry (as opposed to class-based) conflict.

Governments can respond to demands for protection by imposing tariffs and nontariff barriers, which include various measures such as environmental and health standards, restrictions on the mobility of people, and exchange rate manipulations. Those measures always benefit specific groups of voters at the expense of larger groups of consumers. Therefore, protective measures are considered to be private benefits. It is easier to organize small groups of people with special interests to demand protection than to organize large groups of consumers in favor of free trade.

Small-W coalitions are more likely to impose trade restrictions than large-W coalitions because of the former's focus on private rewards and the latter's focus on public goods.

The chapter concludes with a briefly presentation of empirical evidence showing that free trade does not increase income inequality but, in fact, contributes to greater equality in the long run, both across countries and between labor and owners of capital.

Study Questions

1. What is the difference between comparative advantage and absolute advantage? How does comparative advantage lead to trade?
   



2. What are the factors of production? When factors are mobile, which groups within a country benefit from open trade? Which groups are hurt (think in terms of factors)? Which pattern of politics emerges?
   



3. Why does factor mobility matter? When factors are not mobile, which groups within a country benefit from open trade? Which groups are hurt? Which pattern of politics emerges?
   



4. How can states respond to political pressure from those hurt by free trade? How might currency policy be used to protect domestic producers?
   



5. Why does the level of democracy in a country matter in explaining a state's level of protectionism?