International Political Economy:
International Trade Theory
Before there was theory . . . there was trade! One of
the earliest of humankind’s activities. Are we all,
naturally, inveterate traders?
Trade is the “buying and selling” of goods and
services across national borders. Why? Because, it is
making both parties to any transaction better off.
Trade theories, in general, attempt to explain who
trades how much of what with whom, and why . . .
and at what price. But NO ONE THEORY explains
A Contending Perspective: Statism or
From the mid-16th Century. A nation’s wealth depends on
its accumulated treasure, basically GOLD!
Trade is “win or lose” and “beggar thy neighbor”; a “zero-
sum game”. Conflict is the norm.
The interest of the State is dominant
Theory says you should have a trade surplus. (X >I)
Maximize exports through Government subsidies.
Minimize imports through tariffs and quotas.
Fit quite well with an age of exploration, colonialism,
imperialism, and capitalism. (Hudson Bay and East India
Companies, for example)
“Neo-mercantilism” is a modern echo of this. What
countries do this?
Radicalism: Marxist and Dependency
Beginning with Marx et. al. in the mid-19th century . . . A
reaction to the industrial revolution
Inevitable conflict between capitalists and workers
Capitalism is inherently expansive, so conflict over resources is
continuous and inevitable. The State will always support the
owners of the means of production.
There is a profound “North-South” divide; a wealthy Northern
Hemisphere seeking the continued dependency of the Southern
MNC’s are modern day imperialists. The IMF, World Bank,
WTO and other international actors protect the interests of the
developed world and the owners of capital.
The Dominant Theory:
Adam Smith: The wealth of (a) nation is based on the goods and
services available to its people.
Capability of one country to produce more of a product with the
same amount of inputs than another country.
Produce only goods where you are most efficient, trade for those
where you are not efficient. Specialize.
Trade between countries is, therefore, beneficial and markets will
allocate goods and services.
Assumes there every country has an absolute advantage
of some sort
No longer “zero sum”; everybody wins!
Theory of Comparative Advantage: David
A theory of RELATIVE advantage. Even if a country
produces NOTHING more efficiently than someone else,
both countries can STILL recognize gains from trade.
A nation should give up less-efficient (relatively) output to
produce more efficient (relatively) output without regard to
the ABSOLUTE advantage.
Makes better use of resources; potential world production is
greater with unrestricted free trade than with restrictions on
Trade is a positive-sum game. Everybody wins again!
A Tale of Two Countries:
(An Economic Liberalist’s Morality Play)
Ghana and South Korea
1st British African colony to win independence in 1957.
There were VERY high hopes for Ghana!
But Kwame Nkrumah espoused Pan- African socialism,
nationalized industry, partnered with USSR (involved in
Cold War politics)
Employed High tariffs and Import Substitution. Tried
to be self-sufficient.
Anti-exporting policy. Moved resources from coffee
and cocoa production to other foods for domestic
Kept lowering tariffs on imported manufactured
Created incentives to export.
1950s: 77% of employment in agriculture. Now 7.5%.
Manufacturing GNP went from 10% to over 39%.
Services make up 58% of GNP, and agriculture 3%.
The Impact of Trade Policies
Ghana South Korea
GNP/capita GNP/per capita
• $250 • $260
GDP/per capita (PPP) GDP/per capita (PPP)
• $1,400 • $24,800
GDP Growth/year GNP Growth/year
• ?% • 9%
Shift from productive uses Shift from non-comparative
(cocoa) to unproductive uses advantage uses (agriculture)
(subsistence agriculture). to productive uses (labor-
Volume and Patterns of World Trade
Trade has consistently grown faster than world output.
U.S., Germany, Japan, France, UK (and China) are among top
Trade between the world’s high-income economies accounts for
roughly 60 percent of total world merchandise trade.
Two-way trade between high-income countries and low- and
middle-income nations accounts for about 34 percent of world
Intra-regional trade levels are high (67% in Western Europe, 49
% in Asia, 40% in N. America)
Who Trades with Whom?
The Continuum of Trade
All countries fall on a continuum of trade
interdependencies, with total dependence on
another country at one end, and total independence
from other countries at the other.
Effect on Developing and Transition Nations (sometimes
driven by intra-company transfers; sometimes harkens back to
colonial ties. Trade relationships with a dominant partner can
Dangers of Trade Dependency (Mexico & U.S.; Ireland and
U.S.; Central Europe and Germany)
Balance between Dependence and Independence