LECTURE 3: INTERNATIONAL ECONOMIC SYSTEM

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LECTURE 3 INTERNATIONAL ECONOMIC SYSTEM
1. INTRODUCTION 2. THE INDUSTRIAL
REVOLUTION 3. WORLD WAR I, THE INTERWAR PERIOD,
AND THE COLD WAR 4. THE NEW WORLD ORDER 5.
PRISONERS DILEMMA 6. INTERNATIONAL REGIMES 7.
GATT
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THE INDUSTRIAL REVOLUTION
1. SHIFT FROM AGRICULTURE TO MANUFACTURING AND
SERVICES 2. SHIFT FROM ARTISAN PRODUCTION TO
MACHINE-AIDED PRODUCTION 3. SHIFT IN ENERGY
SOURCES WATER, STEAM, ELECTRICITY, AND THE
INTERNAL COMBUSTION ENGINE 4. SHIFT IN ROLE OF
WORKER IN THE PRODUCTION PROCESS 5.
COMMUNICATION AND TRANSPORTATION REVOLUTIONS 6.
SYSTEMATIC APPLICATION OF SCIENCE TO PRODUCTION
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THE SPREAD OF INDUSTRIALIZATION
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IMPACT ON TRADE
1. GREATER SPECIALIZATION (WITHIN AND BETWEEN
COUNTRIES) 2. VASTLY IMPROVED TRANSPORTATION --
RAILROADS CUT LAND TRANSPORT COSTS BY 85-95 --
STEAM SHIPS CUT SEA TRANSPORT COSTS BY 50 3.
TRADE EXPLODES GROWS BY 5 PER YEAR FROM
1840-70 4. ADAM SMITH (1723-1790) AN INQUIRY
INTO THE NATURE AND CAUSES OF THE WEALTH OF
NATIONS (1776) -- MARKETS NOT COMMANDS LAISSEZ
FAIRE NOT MERCANTILISM 5. LIBERAL OR
MANCHESTER SCHOOL BECOMES DOMINANT IN 1850S
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TRADE IN THE MODERN PERIOD
1. TRADE LIMITED DURING FRENCH REVOLUTIONARY
AND NAPOLEONIC WARS (1792-1815) 2. TRADE GROWS
SLOWLY 1815-40 DUE TO MERCANTILISM 3. THE RISE
OF FREE TRADE IN BRITAIN REPEAL OF CORN LAWS
(1846) AND NAVIGATION ACTS (1849 1854) 4. THE
RISE OF FREE TRADE IN EUROPE 1860
COBDEN-CHEVALIER TREATY FIRST OF SERIES OF
TREATIES 5. BRITISH LED SYSTEM INCLUDES
FRANCE, GERMANY, ITALY, NETHERLANDS, BELGIUM,
SWEDEN, DENMARK, NORWAY, SPAIN, AND PORTUGAL
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TRADE IN THE MODERN PERIOD
1. THE DEPRESSION OF 1873 AND THE 1873-1896
PERIOD OF CONFLICT a) POWER
SHIFT UK GE US FR RU
1870 32 13 23 10 4 1900 20 17 30 7 5 b)
STRUCTURAL ADJUSTMENT -- GROWTH BUT DECLINING
PRICES AND WAGES c) RISING TARIFFS -- BUT
TRADE GROWS DUE TO LOWER TRANSPORTATION COSTS 2.
INTERDEPENDENCE EFFICIENT BUT VULNERABLE
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TRADE IN THE 20TH CENTURY
1. 1896-1913 GROWTH AND INTERDEPENDENCE 2.
WORLD WAR I a) SELL ASSETS AND BORROW FROM THE
US b) HASTENS DECLINE OF UK c) INFLATION IN
GERMANY 3. THE INTERWAR PERIOD DEPRESSION AND
PROTECTIONISM a) MONEY CYCLE US TO GERMANY TO
FRANCE/BRITAIN TO US b) THE GREAT DEPRESSION c)
SMOOT-HAWLEY AND THE COLLAPSE OF THE
INTERNATIONAL SYSTEM d) THE RECIPROCAL TRADE
AGREEMENT ACT (RTAA)
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THE RISE OF THE POST WAR SYSTEM
1. WORLD WAR II RISE OF THE SUPER POWERS 2.
POST-WORLD WAR II PERIOD a) RAPID GROWTH IN
TRADE AND INTERNATIONAL INVESTMENT b)
UNPRECEDENTED ECONOMIC COOPERATION c) TREMENDOUS
ECONOMIC GROWTH 3. US HEGEMONY SHIFT FROM
ISOLATIONIST TO INTERNATIONALIST 4. THE NEW
INTERNATIONAL ORDER a) INTERNATIONAL MONETARY
FUND b) INTERNATIONAL BANK FOR RECONSTRUCTION
AND DEVELOPMENT (COMMONLY CALLED THE WORLD
BANK) c) GENERAL AGREEMENT ON TARIFFS AND TRADE
(GATT) (NOW THE WORLD TRADE ORGANIZATION (WTO))
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THE DECLINE IN TARIFFS UNDERU.S. HEGEMONY
AVERAGE AVERAGE US TARIFF WORLD YEAR RATE TARIFF
-------- --------- ---------- 1940 36 40 1946 2
5 -- 1950 13 25 1960 12 17 1970 10 13 1975
6 -- 1984 5 5
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RECENT CHANGES IN THE INTERNATIONAL SYSTEM
1. STABILITY IN 50s CONFLICT IN 60s COLLAPSE
IN 70s a) BRETTON WOODS MONETARY SYSTEM b) OIL
PRODUCTION AND DISTRIBUTION SYSTEM 2. THE DEBT
CRISIS 3. THE EUROPEAN UNION 4. THE FALL OF
COMMUNISM IN EASTERN EUROPE AND THE SOVIET UNION
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CONCLUSIONS
1. CONTINUAL SHIFT IN THE CENTER OF POWER 2.
ECONOMIC POWER BECOMES KEY TO POLITICAL
POWER 3. STORY IS ABOUT DIFFUSION OF IDEAS AND
POWER
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THE PRISONERS DILEMMA
1. GENERIC TOOL USED TO EXPLAIN MANY TYPES OF
EVENTS (e. g., TARIFF WARS, ARMS RACES, GLOBAL
WARMING) 2. DECISION THEORY VERSUS GAME
THEORY 3. STORY TO TWO PRISONERS SVEN AND OLLIE
SVEN
COOPERATE
DEFECT
1 YEAR
NO TIME
COOPERATE
1 YEAR
LIFE
OLLIE
LIFE
20 YEARS
DEFECT
NO TIME
20 YEARS
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PRISONERS DILEMMA
PLAYER B
COOPERATE
DEFECT
2
1
COOPERATE
2
4
PLAYER A
4
3
DEFECT
1
3
1. DC A DEFECTS WHILE B COOPERATES (BEST) 2. CC
BOTH PLAYERS COOPERATE 3. DD BOTH PLAYERS
DEFECT 4. CD A COOPERATES BUT B DEFECTS (WORST)
PREFERENCE ORDER
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PRISONERS DILEMMA
1. STANDARD GAME NO COMMUNICATION BETWEEN
PLAYERS ONLY ONE PLAY (OR ITERATION) OF THE
GAME 2. TWO STRATEGIES FOR EACH
PLAYER COOPERATE OR DEFECT 3. DOMINANT STRATEGY
FOR EACH PLAYER DEFECT REGARDLESS OF OPPONENTS
MOVE 4. EQUILIBRIUM OF THE GAME DEFECT-DEFECT
(DD)
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PRISONERS DILEMMA EXAMPLES USING CARDINAL
PAYOFFS
STANDARD PRISONERS DILEMMA 1. DC -- 10 2. CC
-- 5 3. DD -- 0 4. CD -- -20
VERY HARSH PRISONERS DILEMMA 1. DC --100 2. CC
-- 5 3. DD -- 0 4. CD -- -200
VERY MILD PRISONERS DILEMMA 1. DC -- 6 2. CC
-- 5 3. DD -- 0 4. CD -- -1
KEY SOME PRISONERS DILEMMA GAMES ARE MORE
CONFLICTUAL THAN OTHERS
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POSSIBLE GAMES
PRISONERS DILEMMA 1. DC 2. CC 3. DD 4. CD
CHICKEN 1. DC 2. CC 3. CD 4. DD
STAG HUNT 1. CC 2. DC 3. DD 4. CD
DEAD LOCK 1. DC 2. DD 3. CC 4. CD
KEY SOME GAMES ARE MORE CONFLICTUAL THAN OTHERS
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DEFINITIONS OF A REGIME
KRASNER REGIMES ARE INSTITUTIONS POSSESSING
NORMS, DECISION RULES, AND PROCEDURES WHICH
FACILITATE A CONVERGENCE OF EXPECTATIONS.
KEGLEY AND WITTKOPF REGIMES ARE INSTITUTIONALIZED
OR REGULARIZED PATTERNS OF COOPERATION IN A GIVEN
ISSUE-AREA, AS REFLECTED BY THE RULES THAT MAKE A
PATTERN PREDICTABLE.
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MODIFYING THE STANDARD PRISONERS DILEMMA
1. STANDARD PRISONERS DILEMMA a) DOMINANT
STRATEGY DEFECT b) EQUILIBRIUM
DEFECT-DEFECT c) EXPECTATION NO
COOPERATION 2. MODIFICATIONS a) MULTIPLE PLAYS
OR ITERATIONS b) COMMUNICATION BETWEEN THE
PLAYERS 3. SOME MUTUAL INTEREST EXISTS NOT
GAME OF PURE CONFLICT OR PURE COOPERATION
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PRISONERS DILEMMA
PLAYER B
COOPERATE
DEFECT
5
10
COOPERATE
5
-20
PLAYER A
-20
0
DEFECT
10
0
1. DC A DEFECTS WHILE B COOPERATES (BEST) 2. CC
BOTH PLAYERS COOPERATE 3. DD BOTH PLAYERS
DEFECT 4. CD A COOPERATES BUT B DEFECTS (WORST)
PREFERENCE ORDER
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PRISONERS DILEMMA WITH ITERATION
TOTALS
1 2 3 4 5 6 7 8 9 10
DEFECT STRATEGY COOPERATIVE STRATEGY
PLAYER A D D D D D D D D D D PLAYER B C
D D D D D D D D D
10 -20
50 50
PLAYER A C C C C C C C C C C PLAYER B
C C C C C C C C C C
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MANY STRATEGIES AVAILABLE INMULTIPLE ITERATION
GAME
1. RANDOM STRATEGY -- FLIP A COIN 2. ALWAYS
DEFECT 3. ALWAYS COOPERATE 4. TIT-FOR-TAT a)
COOPERATE ON FIRST MOVE b) RECIPROCATE ON ALL
OTHER MOVES
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SEVEN WAYS OF INCREASING COOPERATION
1. LENGTHEN SHADOW OF THE FUTURE -- PLAY MANY
TIMES -- BREAK GAME INTO MANY PIECES -- NEW
STRATEGIES AVAILABLE (e.g., TIT-FOR-TAT) 2.
ALTER THE PAYOFFS OF THE GAME 3.
INSTITUTIONALIZE RULES FOR COOPERATION AND
DEFECTION 4. PROVIDE INFORMATION TO MEMBERS 5.
REDUCE TRANSACTION COSTS 6. FACILITATE ISSUE
LINKAGE 7. REDIRECT DOMESTIC HOSTILITY
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MANIPULATING THE PAYOFFS
STANDARD PRISONERS DILEMMA 1. DC -- 10 2. CC
-- 5 3. DD -- 0 4. CD -- -20
REGIME PRISONERS DILEMMA 1. DC -- 6 2. CC
-- 5 3. DD -- 0 4. CD -- -1
KEY REGIMES CAN MAKE THE GAME LESS CONFLICTUAL
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FOUR FINAL POINTS ON REGIMES
1. REGIMES CANNOT FORCE MEMBERS TO COOPERATE IN
AN ANARCHICAL WORLD MEMBERS MUST VIEW
COOPERATION AS IN THEIR SELF INTEREST. 2.
COOPERATION IS EASIER IN THE ECONOMIC REALM THAN
THE SECURITY REALM 3. NOT ALL INTERNATIONAL
ORGANIZATIONS ARE REGIMES
INTERNATIONAL ORGANIZATIONS
REGIMES
4. REGIMES ARE NOT ALWAYS FORMAL ORGANIZATIONS
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GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT)
1. ESTABLISHED IN 1947 AS A TEMPORARY
ORGANIZATION DESIGNED TO PROMOTE FREE TRADE 2.
BECOMES PERMANENT AFTER THE FAILURE OF THE
INTERNATIONAL TRADE ORGANIZATION (ITO) 3.
SERIES OF NEGOTIATIONS CALLED ROUNDS THE MOST
IMPORTANT ROUNDS WERE THE KENNEDY (1963-67), THE
TOKYO (1973-79) AND THE URUGUAY (1986-94). 4.
GATT WAS REPLACED BY THE WORLD TRADE ORGANIZATION
(WTO) IN 1995
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KEY GATT NORMS
1. NON-DISCRIMINATION NORM -- PERMANENT NORMAL
TRADING RELATIONSHIP NORM 2. LIBERALIZATION
NORM 3. RECIPROCITY NORM -- OR THE
TIT-FOR-TAT NORM 4. SAFEGUARD NORM 5.
MULTILATERALISM NORM
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FINAL POINTS ON GATT
1. GATT HAS GREATLY EXPANDED FREE TRADE 2. GATT
HAS CONTINUALLY EVOLVED AS A REGIME 3. GATT HAS
BEEN CHARACTERIZED BY PRAGMATISM