International Trade Structure
Examine the International Trade Structure. Do you accept Krasner’s Argument for an Open Trade Regime? Address his Desire for a Hegemon.
Now that today’s world is more of a global village, international trade has become institutionalized not only by economic factors, but also non-economic factors. Trade is not solely based on commercial objectives rather politics also plays a dominant role in it. ‘Much of the international trade system both drives and reacts to national, political, fiscal and monetary policies’ (Hanink 1989: 268). As a result, there are new emerging problems and concerns that have come up in the international trading structures (Boger 1958: 1753). ‘The international system is anarchical…sovereign states are rational self-seeking actors resolutely if not exclusively concerned with relative gains’ (Krasner 1992: 39).
Trade usually takes place keeping in view the classical principles of opportunity cost, factor endowment theory and comparative advantage where, ‘each country specializes in those branches of production in which it has a comparative advantage, or in other words produce those goods whose costs are relatively lowest’ (Ellsworth 1940: 286-287). However, the international trade system can best be regarded as a situation of prisoner’s dilemma under which the best outcome for an individual player is for that player to cheat by for instance imposing an optimal tariff, while the other player cooperates. However, if both players cheat, they will be worse off than if both had cooperated (Goldstein, Krasner 1984: 284). Experimental findings suggest that the winning strategy for this sort of a situation is the Tit for Tat strategy ‘in which the player cooperates on the first move and then does whatever the other player did on the preceding move’ (Goldstein, Krasner: 1984: 284). In their views, such a strategy is not meant to start a trade war rather its aim is to promote cooperation and freer trade (1984: 284). The prisoner’s dilemma depiction also ‘claims that a stable system of international free trade involves the supply of a public good. Such goods are joint in supply and non-excludable’ (Gowa 1989: 1245). This public good may be one or numerous depending upon the case. These public goods include political stability, regional stability, liberal economies etc.
After the second World War the emphasis of the trade regime was to regulate all trade distortions. ‘Liberal rules, norms and procedures were to be adopted by states and patrolled by international organizations’ (Goldstein, Krasner 1984: 282). But in today’s world, ‘the bulk of international trade takes place between the industrialized or rich countries. This pattern of trade is in contradiction to the factor endowment theory because trade is taking place between countries with similar, rather than dissimilar, factor (capital) endowments’ (Hanink 1988: 323).
The international trade structure is also characterized by the hegemonic stability theory which ‘asserts that an open international trading regime is most likely where there is a single dominant power’ (Krasner 1992: 40). This view is held by Krasner, Gilpin, Kindelberger and Hirschman. ‘A hegemonic power creates a stable international order and the hegemon’s decline leads to global instability’ (Stein 1984: 355). The assumptions of this theory are that the international system is anarchical with nation-states being the dominant actors, the international market is a non-homeostatic market and the nation-states seek to maximize their absolute and relative gains from trade (Lake 1984: 149). It asserts that the hegemon has an incentive to see if the collective good is provided even if the hegemon alone has to bear the full burden of providing it. ‘The hegemonic leader will place a greater, absolute value upon a liberal international economy than others and, as a result, will undertake to stabilize the international economy and construct a strong regime’ (Lake 1984: 146). Because of the provision of public goods, the element of free riders exist. ‘Kindleberger argues that the international political economy will be stable only if a single leader is willing to assume responsibility for maintaining a relatively open market for distress goods; providing counter-cyclical long-term lending; and discounting in a crisis…the leader must also undertake to manage in some degree the structure of foreign exchange rates and provide a degree of coordination of domestic monetary policies’ (Lake 1984: 145). This theory asserts that only large states have the power, capabilities and the responsibility to lead the international economy. ‘A hegemonic leader will place greater absolute value upon a liberal international economy than others and, as a result, will undertake to stabilize the international economy and construct a strong regime in order to achieve this goal’ (Lake 1984: 146). So the hegemon will provide the public good of stability and security because its own benefits far exceed the costs that it has to bear.
For the large nation, the larger its size is, the more willing it will be to opt for international stability because of its large relative and absolute gains from trade. ‘The free functioning of the international market is therefore assumed to concentrate wealth in nations of high productivity. Under this assumption highly productive nations will give free play to the functioning of the international market and will favor free trade because they enjoy disproportionate benefits from such trade’ (Lake 1984: 149). In the case of middle and smaller nations, they too will be in favor of such a system because they too will gain from the trade, although relatively less. ‘The incentives to cheat and become a free rider are great enough that any international regime which depends on collective provision is inherently unstable. Stability can only be assured when a hegemon both bears the cost of providing the collective good and extracts the support of others’ (Stein 1984: 356).
But this theory has some loopholes as well. First, Krasner is concerned with regime formation and trade but he does not take historical context into account while explaining how the free trade regime is established. He mentions ‘that a hegemon uses inducements and force to create or maintain open markets’ but does not provide a sense of how this occurs (Stein 1984: 357). A hegemon cannot bring about a free trading regime, it can unilaterally lower its own tariffs but this by no means assert that it can create an international trading system of lower tariffs. Tariff bargains only leads to trade liberalization among major trading states. This leads to similar sort of nations trading with each other, especially the powerful trading with one another and the poor nations are discriminated against. ‘It can impose an open trading regime on weak countries, but this too does not create an open regime’ (Stein 1984: 358). This is evident from the fact that both in the 19th and the 20th centuries, the hegemonic power accepted compromises but itself deviated from the free trade ideal. ‘The liberal trade regimes that emerged in both the centuries were founded on asymmetric bargains that permitted discriminations, especially against the hegemon. The agreement that lowered tariff barriers led not to free trade, but freer trade. In the process, they legitimated a great deal of mercantilism and protectionism’ (Stein 1984: 359). Great Britain and the United States had important political motives behind their economic concessions. Also, such economic orders created by trade agreements have been sub systemic rather than global since only some states became parties to such agreements and many were actually excluded from them. They did not even provide collective goods because the non signatory states could be excluded. Thus ‘the systems allowed for discrimination and exclusion, and cannot be considered to have provided a collective good’ (Stein 1984: 360).
‘The periods dubbed ‘free trade eras’ certainly saw years of rapid trade expansion, but they were hardly periods of free trade. Rather, they were periods of freer trade’ (Stein 1984: 383). There was severe discrimination against those outside the system and these systems were based on asymmetric tariff bargains characterized by dumping. Also in the process of evolution, international trade has become institutionalized and non economic factors have become relatively important in evaluating the consequences of changes in the relevant variants (Boger 1958: 1753). ‘Krasner suggests nations may also be interested in additional goals of social stability, political power and economic growth’ (Lake 1984:145).It is this dramatic change in the structure of the international trading system that has led to the creation of new problems and at the same time, more and different concerns. Although the hegemon does provide collective goods, it only promotes and creates liberal international economic orders because of their own vested interests in open markets and not because of altruism (Stein 1984: 357). ‘The hegemon effectively changes the policies of others to satisfy its own goals…the leverage exerted by the hegemon may take many different forms including negative sanctions (threats), positive sanctions (rewards), the reconstructing of market incentives, ideological leadership or simply success worthy of emulation’ (Lake 1993: 469). So it thus proves that the hegemon will go to any length just to satisfy its own self interests.
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