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Trade and Protectionism

Three Ideologies of Political


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

Mercantilism was the conventional trade
doctrine of Europe in the 17th and 18th Centuries
Basic premise was that trade is a zero-sum
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

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

The foremost objective of nationalists is
Industry has spillover effects (externalities)
throughout the economy and leads to its overall
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: Stalins 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
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 Plans collectivization of land
Stalin eliminated this resistance with the Great Purge

Emerged from the
Enlightenment in the
writings of Adam Smith and
others as a reaction to
A doctrine or set of
principles for organizing
and managing a market
economy in order to
achieve maximum
efficiency, economic
growth, and individual
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

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

Human beings are by nature economic animals and
therefore markets evolve naturally without central
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 nations economy, with public
welfare coming as a by-product
State and personal efforts to promote social good are
ineffectual compared to unbridled market forces

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

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

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 BrettonWoods 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

Appeared in the midnineteenth century as a
reaction against
liberalism and classical
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

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

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 capitalisms

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

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
Peoples Republic of
China on Oct 1, 1949
He then set out to
establish a new order in

Mao Zedong

Marxism Example: Land Reform in

During the civil war, Maos base
of support had been built on the
disaffected rural peasant
population that were abused
and exploited by callous
One of Maos 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

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
Chinas 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

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

Global corporations rely on a small
headquarters staff while dispersing all
other corporate functions across the globe
in search of the lowest possible operating
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

Impact of Global Corporations

In the past, corporations had to operate
under the constraints of a social compact
with their employees and their
Collective bargaining agreements, tax laws,
and environmental regulations forced the
companies to contribute to the welfare of their

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

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

European Union (EU)

Began when six European
nations agreed in 1957 to
dismantle tariffs and other
barriers to free trade among
Subsequent treaties created
political institutions
Now the EU has 15
members who have
subordinated much of their
national sovereignty to the
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
Cartel proved to be a
political as well as an
economic power during
the Arab-Israeli War of
Ordered an embargo on oil
shipments to the US
(Israels 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 worlds
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
Forbade Japanese from going abroad (punishable by
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

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
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 Perrys

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
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

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

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 worlds
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
In 1902 Japan concluded an
alliance with Britain as an equal
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, Chinas 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
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 Atlantas HartsfieldJackson 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 organizations position on the

future of US-China trade based on this
latest incident

Globalization and Interdependence