International Political Economy: Free Trade or Fair Trade?
By Kyle W. Bell
Smashwords Edition 1.1, July 2010
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Copyright © Kyle Bell 2009-2010
License Notes:
All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording, or otherwise) without the prior written permission of both the copyright owner and the above publisher of this book.
Cover design by Angel Cortes cortesangel@live.com
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Preface
Like it or not, globalization is here to stay. The days of protectionism, while comforting to some during times of economic uncertainty, are long gone. America and the world are trading at levels never seen before in the history of man. As the most recent economic collapse has shown quite vividly, markets are interconnected in a way that an investment banker in London, Shanghai or Dubai is affected by a mortgage default in Los Angeles, California or Detroit, Michigan.
That does not mean that people and governments cannot influence the way we continue to trade. Indeed, it is our government's responsibility to look out for both works and consumers at home, while being mindful of the results of those trade deals abroad. Our very national security interests are at stake.
Do we accept and sign trade agreements with foreign nations that solely look to enhance the profits of multi-national corporations, lowering prices and exporting American jobs? Alternatively, we can trade on the basis of mutual benefit, specializing in areas where one nation has a clear advantage, while raising the living standards of workers by guaranteeing decent wages. The question becomes: free trade or fair trade?
Section I: Introduction to the International Political Economy
Near the end of World War II, the United States convened with other Allied nations at Bretton Woods, New Hampshire. According to Cohn (2008: 3), the Bretton Woods system “helped shape international economic relations in the postwar era.” The new international order that Bretton Woods helped create promoted free trade between states in the post-war era. These liberal economic ideas included conflict resolution between states, lowered tariffs and a focus on efficiency of markets. To implement and enforce their economic policies, the United States and others sought to create international institutions to deal with these issues.
One such institution created under the leadership of the United States and Britain was the International Monetary Fund (IMF). The IMF is an international regime concerned with monetary policy. Created at Bretton Woods in 1944, the gold standard was established that would either peg a country's currency to the U.S. dollar or to gold (Cohn: 130). The U.S. dollar's value, under the IMF, would remain constant at $35 per ounce of gold (Cohn: 132). Thus, if a country wanted to exchange gold for dollars, the United States would give them $35 for each ounce of gold.
During the 1940s when the United States was running massive trade surpluses, this was not a problem. Foreign countries, especially in Europe after World War II, would often buy goods with money that was borrowed from the United States. Throughout the 1950s the U.S. began to run balance of payments deficits, because it was financing more than it was selling. Eventually, beginning in 1960, more U.S. dollars were in foreign banks than the U.S. had gold in its reserves (Cohn: 133).
The IMF created guidelines in which countries experiencing a balance-of-payments deficit could devalue their currency or they could accept short-term loans to correct the imbalance. The IMF provided more flexibility than during the classical gold standard and aimed to avoid the competitive devaluation of currencies that took place during the inter-war period. The stability of currency exchange rates was paramount to the IMF, within reason.
Another international regime whose goal was a new liberal economic order was GATT, the General Agreement on Tariffs and Trade. This would later to be superseded by the World Trade Organization (WTO) in January 1995 (Cohn: 208). Influenced by Bretton Woods (although formed several years later), GATT is an international regime that deals with international trade relations. Unlike the IMF and World Bank, GATT was more of a “code of behavior on international trade” with limited legal obligations and dispute resolutions (Cohn: 201).
Although it was more of an informal agreement between countries, it did result in lower tariffs and quotas on imports. Its weaknesses included an exemption on agricultural goods as well as textile import quotas. Furthermore, being an informal agreement, GATT members often would ignore regulations to their own benefit. Without a dispute resolution process, many trade conflicts between countries went unresolved.
The World Trade Organization replaced GATT in 1995, creating a “formal, legally constituted organization like the IMF and World Bank” (Cohn: 209). The WTO established several new treaties, including the General Agreement on Trade in Services, the Agreement on Trade-Related Intellectual Property Rights and the Agreement on Trade-Related Investment Measures. By establishing trade rules for services, the United States hoped to capitalize on an area where it had an advantage over its international rivals, unlike for goods, where it ran trade deficits. The WTO also kept in place GATT as an agreement to regulate trade in goods.
The United States, Britain and its allies were successful in creating a liberal world economic order. Thanks to Bretton Woods and the international regimes that it spawned, free trade has replaced the protectionist tendencies that predominated before World War II. Whether this has actually benefited the United States is up for debate. The trade deficits that the United States now runs are alarming, particularly with China. Many of the industrial jobs that once dominated central cities in places like Chicago, Detroit, Cleveland, Pittsburgh and even South Bend, have mostly left the country. This is quite evident just by shopping at your local retail store.
As part of this paper, I visited three different stores to see how the international economy affects our shopping on a daily basis. They included a dollar store, a discount store and a department store. The ones that I went to were Dollar Tree, Wal-Mart and J.C. Penney. I suspected going into this paper that I would find a significant number of imports from foreign countries, particularly China. I was correct in that suspicion, but was surprised by the data that I collected to find patterns in the country of origin and the type of store that I visited. There is no doubt that the United States is being deeply penetrated by imports from foreign countries.