Trade and Protectionism

Lsn 19

Three Ideologies of Political Economy

• Nationalism

• Liberalism

• Marxism

Nationalism

• Originally called mercantilism

• Assumes and advocates the primacy of politics over economics

• Essentially a doctrine of state-building

• Asserts that the market should be subordinate to state interests

• Political factors do, or at least should, determine economic relations

Nationalism

• Mercantilism was the conventional trade doctrine of Europe in the 17th and 18th Centuries

• Basic premise was that trade is a zero-sum game– Any advantage gained by one comes at the expense

of the other

• State apparatuses were used to develop the national economy through public works, attempts to create shipping and trade monopolies in colonial areas, and occasionally through outright plunder

Nationalism

• American Alexander Hamilton and German Friedrich List argued that national power is based on manufacturing and that economic values should be subordinated to the more important task of state-building

• In order to promote industrial strength, the state must organize foreign trade and protect infant industries with tariffs and other exclusionary devices

Friedrich List advocated the use of high tariffs to keep cheap English goods out of Germany while building up German industry and thus a strong German state

Nationalism

• The foremost objective of nationalists is industrialization– Industry has spillover effects (externalities) throughout

the economy and leads to its overall development– The possession of industry is associated with

economic self-sufficiency and political autonomy– Industry is the basis of military power and central to

national security in the modern world

Nationalism Example: Stalin’s Five Year Plan

• In 1929 Josef Stalin inaugurated his first Five-Year Plan– Designed to transform the Soviet Union from a predominantly

agricultural country to a leading industrial power– Set targets for increased productivity in all spheres of the

economy, especially heavy industry, at the expense of consumer goods

– Expropriated privately owned land to create collective or cooperate farm units whose profits were shared by farmers

• Even though consumer goods were almost non-existent, full employment in the midst of Global Depression made a centrally planned economy appear a viable alternative to some– Still there was resistance, especially from peasants objected to

the Five Year Plan’s collectivization of land– Stalin eliminated this resistance with the Great Purge

Liberalism

• Emerged from the Enlightenment in the writings of Adam Smith and others as a reaction to mercantilism

• A doctrine or set of principles for organizing and managing a market economy in order to achieve maximum efficiency, economic growth, and individual welfare

• Assumes that politics and economics exist, at least ideally, in separate spheres

Smith wrote An Inquiry into the Nature and Causes of the Wealth of Nations in 1776

Liberalism

• Argues that markets– in the interest of efficiency, growth, and consumer choice– should be free from political influence

• Assumes that a market arises spontaneously in order to satisfy human needs and that, once it is in operation, it functions in accordance with its own internal logic

• The natural laws of supply and demand determine what happens in the marketplace

Liberalism

• Human beings are by nature economic animals and therefore markets evolve naturally without central direction

• Argues that markets– in the interest of efficiency, growth, and consumer choice– should be free from political influence

• Because of the role of self-interest, governments should practice a policy of laissez-faire– Through an “invisible hand,” self-interest guides the most

efficient use of resources in a nation’s economy, with public welfare coming as a by-product

– State and personal efforts to promote social good are ineffectual compared to unbridled market forces

Liberalism

• Provides the intellectual rationale for free trade and capitalism

• In contrast to nationalism, in which the purpose of trade is to build up the state and a modern industrial base, the purpose of trade in liberalism is to increase wealth

• To do so, nations should adhere to the principle of comparative advantage– Countries that enjoy particular advantages of

resources, climate, geography, knowledge, and the like should specialize in producing those things that they can make cheapest

Liberalism Example: Free Trade Organizations

• Many observers saw the disasters of the Great Depression and World War II as being the results of competitive mercantilist policies

• They resolved to shape the post-war trade order based on liberal principles– Maximize free trade through dismantling tariffs,

quotas, and other trade-reducing policies– Applying reciprocity– Promoting free flow of investment funds,

information, and people

Liberalism Example: Free Trade Organizations

• However such ideas could not be implemented unilaterally– They would be the result of negotiations among

representatives of the leading economies, with the tacit or explicit consent of many others

• International Monetary Fund (IMF) was founded at the Bretton-Woods Conference in 1944 to promote market economies, free trade, and high growth rate

• General Agreement on Tariffs and Trade (GATT) was signed by 23 non-communist countries in 1947 (now has over 120 members) and holds regular negotiations to remove or loosen barriers to free trade

• In 1994, the GATT established the World Trade Organization (WTO) which took over GATT activities in 1995 and became a forum for settling international trade disputes with the power to enforce its decisions

Marxism• Appeared in the mid-

nineteenth century as a reaction against liberalism and classical economics

• Holds that economics drives politics

• Political conflict arises from struggle among classes over distribution of wealth– Therefore political

conflict will cease with the elimination of the market and a society of classes

Karl Marx and Friedrich Engels met in Paris in 1844 and developed a belief that the social problems of the 19th Century were the inevitable results of capitalism

EngelsMarx

Marxism

• Marx and Engels felt that capitalism divided people into two main classes– Capitalists who owned industrial machinery and

factories (the means of production)– The proletariat who were wage earners with only their

labor to sell

• The state and its coercive institutions (police, courts, etc) were agencies of the capitalist ruling class and kept the capitalists in power and enabled them to continue their exploitation of the proletariat

Marxism

• In 1848, Marx and Engels wrote Manifesto of the Communist Party – All human history has been the history of struggle

between social classes– The future lay with the working classes because the

laws of history dictated that capitalism would inexorably grind to a halt

– Crises of overproduction, underconsumption, and diminishing profits would undermine capitalism’s foundation

Marxism

• Members of the constantly growing and thoroughly exploited proletariat would come to view the forcible overthrow of the existing system as their only alternative

• The socialist revolution would result in a “dictatorship of the proletariat,” which would abolish private property and destroy the capitalist order

• After the revolution, the state would wither away– Coercive institutions would disappear since there would no

longer be any exploitation of the working class

• Socialism would lead to a fair, just, and egalitarian society infinitely more humane than capitalism

Marxism Example: Land Reform in China

• After World War II, civil war in China resumed between nationalist and communist forces

• The communist forces of Mao Zedong emerged victorious and Mao proclaimed the establishment of the People’s Republic of China on Oct 1, 1949

• He then set out to establish a new order in China Mao Zedong

Marxism Example: Land Reform in China

• During the civil war, Mao’s base of support had been built on the disaffected rural peasant population that were abused and exploited by callous landlords

• One of Mao’s most important tasks after coming to power was to effect land reform

• Mao dispatched land reform teams to mobilize the peasants to confront and humiliate the landlords and seize their land and money for redistribution to the poor peasants

“Destroy the Old World”

Marxism Example: Land Reform in China

• Mao said the process was “not a dinner party”– Between one and two million landlords were killed

• The ancient landlord class that had long dominated China was destroyed and millions of peasants were politicized

• The communists argued that the process not only affected social justice; it also expanded agricultural production and lay the foundation for China’s industrialization

Characteristics of the Post-1990 Global Economy

• Expansion of trade between countries

• Privatization of former state enterprises

• Unfettered movement of capital

• Growth of foreign investments

• Deregulation that undermined the control that national governments once exercised over economic activity

• Emergence of a new brand of corporations

Corporations

• International corporations sought to extend business activities across borders in pursuit of specific activities such as importation, exportation, and the extraction of raw materials

• Multinational corporations conducted business in several countries but had to operate within the confines of specific laws and customs of a given society

Corporations

• Global corporations rely on a small headquarters staff while dispersing all other corporate functions across the globe in search of the lowest possible operating costs– Treat the world as a single market and act as

if the nation-state no longer exists– Some 50,000 global corporations exist,

including General Motors, Siemens AG, and Nestle

Impact of Global Corporations

• In the past, corporations had to operate under the constraints of a social compact with their employees and their communities– Collective bargaining agreements, tax laws,

and environmental regulations forced the companies to contribute to the welfare of their communities

Impact of Global Corporations

• Now, highly mobile global corporations have escaped these obligations– Have moved jobs from

high-wage facilities to foreign locations where wages are low and environmental laws are weak or non-existent

– US federal tax receipts from corporations have dropped from 30% to 12%

Trading Blocs

• Since no single economic power can fully control global trade and commerce, groups of nations have entered into economic alliances designed to gain advantages for the members– EU– OPEC– NAFTA– ASEAN

European Union (EU)

• Began when six European nations agreed in 1957 to dismantle tariffs and other barriers to free trade among themselves

• Subsequent treaties created political institutions

• Now the EU has 15 members who have subordinated much of their national sovereignty to the EU– 12 nations have adopted

a common currency

Organization of Petroleum Exporting Countries (OPEC)

• Established in 1960 by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela and later joined by eight others

• Cartel proved to be a political as well as an economic power during the Arab-Israeli War of 1973– Ordered an embargo on oil

shipments to the US (Israel’s ally) and the price of oil in the US quadrupled between 1973 and 1975

North American Free Trade Agreement (NAFTA)

• Went into effect with the US, Canada, and Mexico in 1994

• Constitutes the world’s second largest free trade zone but lacks the economic coordination of the EU– Ross Perot (1992 third

party presidential candidate would complain NAFTA would produce “a giant sucking sound” of jobs leaving the US for Mexico)

Association of Southeast Asian Nations (ASEAN)

• Established in 1967 by Thailand, Malaysia, Singapore, Indonesia, and the Philippines

• Originally conceived as a bulwark against the spread of communism

• Economic focus became sharper with agreements with Japan in 1977 and the European Community in 1980

• Established a free trade zone in 1992

Case Study

Meiji Reforms in Japan

Relations with Foreigners Under the Tokugawa Shogunate

• In order to prevent European influences from destabilizing Japan, the Tokugawa shoguns that had unified Japan in the 16th Century closely controlled relations with Japan and the outside world– Forbade Japanese from going abroad (punishable by

death)– Prohibited construction of large ships– Expelled Europeans from Japan– Prohibited foreign merchants from trading in

Japanese ports– Forbade the import of foreign books

Relations with Foreigners Under the Tokugawa Shogunate

• Trade with Asian lands was carefully controlled

• Small numbers of Chinese and Dutch merchants were allowed to trade under tight restrictions at Nagasaki

Dutch ship, ca 1800

Relations with Foreigners Under the Tokugawa Shogunate

• The Tokugawa were able to maintain internal stability and prosperity and control foreign interaction until the early 19th Century

• Beginning in 1844, British, French, and US ships visited Japan to establish relations– The US in particular wanted ports where its

Pacific whaling and merchant fleets could stop for fuel and provisions

Relations with Foreigners Under the Tokugawa Shogunate

• The Tokugawas refused all requests and stuck to their policy of limiting European and American visitors to a small number of Dutch at Nagasaki

• In the late 1840s the Japanese began making military preparations in case of attack

The artificial island Dejima in Nagasaki Bay where the

Dutch were allowed to trade

Commodore Perry

• In 1853, Commodore Matthew Perry led a US naval squadron into Tokyo Bay and demanded that the shogun open Japan to diplomatic and commercial relations and sign a treaty of friendship

• The shogun had no good alternative and acquiesced to Perry’s demands Commodore Matthew Perry

The Opening of Japan

• Representatives of Britain, the Netherlands, and Russia soon won similar rights

• The Japanese were subjected to a series of unequal treaties which opened Japanese ports to foreign commerce, deprived the government of control over tariffs, and granted foreigners extraterritorial rights

End of Tokugawa Rule

• The sudden intrusion of foreign powers in Japan resulted in the collapse of the Tokugawa and the restoration of imperial rule

• The dissident slogan was “Revere the emperor, expel the barbarians.”

• On Jan 3, 1868, the boy emperor Mutsuhito took power– He later became known as

Meiji (“Enlightened Rule”)

Meiji Reforms

• The Meiji government strived to gain parity with foreign powers behind the motto “rich country, strong army”

• It looked to the industrial lands of the United States and Europe to obtain knowledge and expertise to strengthen Japan and win revisions of the unequal treaties

Study Abroad

• The Meiji sent many students and officials abroad to learn everything from technology to construction and hired foreign experts to facilitate economic development and indigenous expertise

Fukuzawa Yukichi made four trips abroad and made useful observations about

governments, constitutions, and educational systems

Reforms

• The Meiji transformed Japan by:– abolishing the feudal order and therefore centralizing

political power,– revamping the tax system to put the regime on a firm

financial footing– creating a constitution which gave the emperor

effective power and the parliament the ability to advise but not control him

– creating a modern transportation, communications, and educational infrastructure

Rise in Power• By the early 20th Century, Japan

had joined the ranks of the world’s major industrial powers

• From 1894-1895 Japan defeated China in a war over Korea which showed how modern and powerful Japan had become and how weakened China had become

• In 1899 Japan was able to end extraterritoriality

• In 1902 Japan concluded an alliance with Britain as an equal power

• In 1904-1905, Japan shocked the world by defeating Russia in the Russo-Japanese War

Toyoda Type-G Automatic Loom invented in 1924

Meiji Reforms in Japan

• Discuss the Unequal Treaties and the Meiji Reforms as examples of “malevolent” and “benign” nationalism

Practical Exercise

Product Safety in China

Product Safety in China

• Between 1994 and 2005, China’s exports to the US have grown 600%. But…

• In March 2007 the US Food and Drug Administration issued warnings and recalls on pet foods produced in China that caused sickness and death in many animals

• In May 2007 the FDA issued warnings that some Chinese toothpaste contained poisonous chemicals

• In June 2007 a series of recalls was issued involving Chinese-made toys that contained lead

Product Safety in China

• Hypothetical Situation– Faulty Chinese-made aviation tires are

determined to be the cause of an airplane crash during a landing at Atlanta’s Hartsfield-Jackson International Airport in which 18 people are killed and 46 injured

– Further investigation reveals widespread products with Chinese aviation products provided to US manufacturers

Product Safety in China

• Role play– Chinese exporter– US importer– US Consumer Product Safety Commission– Chinese Minister of Commerce– US Secretary of Commerce

• Argue your organization’s position on the future of US-China trade based on this latest incident

Next

• Globalization and Interdependence