Chapter 06 The Political Economy of International Trade THE REVISED CASE FOR

Chapter 06 the political economy of international

This preview shows page 11 - 13 out of 20 pages.

Chapter 06 - The Political Economy of International TradeTHE REVISED CASE FOR FREE TRADE A) While strategic trade policy identifies conditions where restrictions on trade may provide economic benefits, there are two problems that may make restrictions inappropriate: retaliation and politics. Retaliation and Trade WarB) Krugman argues that strategic trade policies aimed at establishing domestic firms in a dominant position in a global industry are beggar-thy-neighbor policies that boost national income at the expense of other countries. A country that attempts to use such policies will probably provoke retaliation.Domestic Politics C) Governments do not always act in the national interest when they intervene in the economy. Instead special interest groups may influence governments. Thus, a further reason for not embracing strategic trade policy, according to Krugman, is that such a policy is almost certain to be captured by special interest groups within an economy, who will distort it to their own ends.DEVELOPMENT OF THE GLOBAL TRADING SYSTEMA) Many governments recognize the value of unrestricted free trade, but are hesitant to unilaterally lower their trade barriers in case other countries do not follow suit. Since World War II, and international trading framework has evolved that enables governments to negotiate a set of rules to govern cross-border trade and lower trade barriers. For the first 50 years, the framework was known as the General Agreement on Tariffs and Trade (GATT). More recently, it has been known as the World Trade Organization (WTO).From Smith to the Great Depression B) Up until the Great Depression of the 1930s, most countries had some degree of protectionism. Great Britain, as a major trading nation, was one of the strongest supporters of free trade.C) Although the world was already in a depression, in 1930 the United States enacted the Smoot-Hawley Act, which created significant import tariffs on foreign goods. As other nations took similar steps and the depression deepened, world trade fell further. 1947-1979: GATT, Trade Liberalization, and Economic Growth D) After WWII, the U.S. and other nations realized the value of freer trade, and established the General Agreement on Tariffs and Trade (GATT). 6-11
Image of page 11
Chapter 06 - The Political Economy of International TradeE) The approach of GATT (a multilateral agreement to liberalize trade) was to gradually eliminate barriers to trade. Over 100 countries became members of GATT, and worked together to further liberalize trade. Teaching Tip: A full review of GATT, containing an actual copy of the agreement, is available at {}. 1980-1993: Protectionist TrendsF) During the 1980s and early 1990s the world trading system as “managed” by GATT came under strain. First, Japan’s economic strength and huge trade surplus stressed what had been more equal trading patterns, and Japan’s perceived protectionist (neo-mercantilist) policies created intense political pressures in other countries. Second, persistent trade deficits by the United States, the
Image of page 12
Image of page 13

You've reached the end of your free preview.

Want to read all 20 pages?

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes