International Political Economy
This is the fifth in a series of essays I’m writing about International Relations and Foreign Policy. You can find the first four on March 21, March 28, April 4, and April 11.
This has been a busy week, and next week promises to be equally busy, so I don’t have much time to write today. This will be a quick summary of a major topic in national security: the international political economy.
Trade and Protectionism
Trade and protection represent opposing forces, each with distinct implications for nations, industries, and individuals.
Trade refers to the exchange of goods, services, and capital across borders. It fosters economic growth, specialization, and efficiency.
Two economic concepts come into play here: comparative advantage and economics of scale. Comparative advantage means that nations produce products that they excel at, and countries can access a wider array of goods. Here’s an example of how this works:
Countries involved: United States and Other Country
Goods produced in this simplified model: widgets and thingies
Labor Productivity: In the United States, one hour of labor produces either 20 widgets or 20 thingies. In Other Country, one hour of labor produces either five widgets of 10 thingies
Opportunity Cost Calculation: Opportunity cost is roughly defined as “the value of what you lose when choosing among options.” In this hypothetical scenario, the opportunity cost for the United States of producing one thingie is one widget. For Other Country, the opportunity cost of producing one widget is two thingies. As each country plays out their options, they arrive at a situation where each country employs its comparative advantage, and the United States ends up specializing in widgets while Other Country specializes in widgets. The United States could produce both commodities more efficiently than Other Country, but specialization improves the economies of both countries
Trade also allows firms to achieve economies of scale, reducing production costs and enhancing competitiveness. As firms increase production, the average cost per unit of any product decreases through several factors:
Cost Spreading
Bulk purchasing
Specializing in labor and processes
Technological advancements
Market power
In addition, trade enhances consumer satisfaction, as access to diverse products enriches consumers’ lives.
Of course, trade had its disadvantages as well.
One result can be dependency, as overreliance on trade partners can create vulnerabilities if international trade is disrupted by climate or geopolitical problems
If trade imbalances persist over a long period of time, persistent deficits or surpluses can strain relations between nations as one nation is prospering while the other is floundering under the existing state of affairs.
Production decisions made by firms in trading countries can result in labor dislocation as workers decide to relocate to the country where their skills are more valued
Protection, on the other hand, refers to policies that shield domestic industries from foreign competition. Protection can take a variety of forms:
Tariffs (taxes on imported goods) are designed to raise prices and protect local producers from competition from imported goods that might sell at a lower price if allowed into the domestic market. This is something that #P01135809 and his acolytes don’t understand (or pretend they don’t understand). When a tariff is charged on goods imported from China, for example, the tariff paid by the importer is a tax that goes to the government. The importer then raises the price at which he sells the imported product. This allows domestic manufacturers of the same produce to increase their selling price up to the level of the increased price for the imported commodity. China doesn’t pay the tariff; American consumers do. Tariffs contribute to government revenue and inflated prices. Sometimes tariffs are imposed on imports that threaten what economists call “infant industries.” These are industries that are in development in the United States, for example, that have not yet reached the efficiencies and economies of scale that may already exist in the other country. A tariff can prevent price competition from imported goods until the “infant industry” has matured to full productivity.
Quotas can be intentional legal limits on the quantity of imports.
Subsidies can be offered by government support to domestic industries.
Non-tariff barriers also exist in the form of regulations, licensing requirements, and technical standards that rule a specific product out of the market. For example, the European Union has decreed that the term “champagne” can be applied within the Union only to wines grown in France’s Champagne province under certain manufacturing conditions. The same kinds of restrictions apply to Italian gorgonzola cheese, Dutch gouda cheese, and Greek olive oils. This means that an American vintner who produces champagne cannot sell his product in the European Union without changing the descriptor to something like “sparkling wine.”
The rationale for protectionism is obvious. Protective tariffs or other mechanisms protect infant industries and contribute to national security by ensuring self-sufficiency in critical sectors and preserving jobs.
The critiques are equally obvious. Protectionism can hinder inefficiency and innovation, generate higher consumer prices, and contribute to retaliatory tariffs and the ensuing trade wars that don’t benefit anyone.
International Monetary System
Broadly, the International Monetary System encompasses the rules, institutions, and conventions governing global financial interactions. This system facilitates currency exchange rates, international payments, and capital movement between countries with different currencies.
Exchange rates are complicated. Some currencies are pegged to a specific value in gold or another currency. The value of some other currencies is determined solely by market forces. Often currency exchanges are determined by a mixture of fixed and floating arrangements.
Capital flows across borders fall into three categories:
Foreign Direct Investment, consisting of long-term investments in foreign assets
Portfolio investment, or short-term investments in stocks and bonds.
Foreign exchange reserves, held by central banks to stabilize currencies
The International Monetary System is governed by several institutions or conventions.
The existing global economic framework was created by the 1944 Bretton Woods Agreement. Preparing to rebuild the international economic system while World War II was still being fought, 730 delegates from all 44 Allied nations gathered in Bretton Woods, New Hampshire, for the United Nations Monetary and Financial Conference. This conference established a system of rules, institutions, and procedures to regulate the international monetary system, including the IMF and World Bank, as explained below.
The International Monetary Fund (IMF), based in Washington, DC, is the major financial agency of the United Nations funded by 190 member countries. Founded in 1944, it is regarded as the global lender of last resort for national government and is a leading supporter of exchange-rate stability.
The World Bank, also based in Washington, is an international financial institution that provides loans and grants to the governments of low and middle-income countries to help them pursue needed capital investment projects. It was also established in 1944. Since the mid-1990s, it has expanded its loan strategy to include NGOs and environmental groups in its loan portfolio. It borrows the money it lends. Because it has large and well-managed financial reserves, it can borrow money at low-interest rates from capital markets across the globe and then extend these favorable terms in the loans it provides to nations or other entities in need.
Challenges to this international monetary system include globalization (generating increased international transactions), financial crises (which test IMF resilience) (like COVID), and the dominance of the dollar (currently being challenged in some quarters by the Chinese Yuan).
Development and Inequality
Flows of investment capital and individuals are driven by uneven economic development and inequality among nations. This is complicated, but here are some things we need to think about.
It’s not easy to access data about global poverty and inequality, but I want to point you to a few places where you can find good information.
The World Bank Poverty and Inequality Platform provides historical and current information on key development indicators
Our World in Data offers insights into poverty levels and trends globally. Their charts and maps are particularly handy.
Both developed and emerging nations experience the impact of global inequality. In developed countries, the same factors that create international inequality often create domestic inequality as well, including income and social disparities like unequal access to education, healthcare, and opportunities. For developed countries, these problems are exacerbated by the migrants attracted by the perceived advantages of living in a developed country.
For emerging (or developing) countries, it is also the case that the factors that create international inequality also feed domestic inequality. Political stability is a prerequisite for social or economic stability; as long as developing countries get the short end of the stick in the global economy, they will feel the domestic effects. Domestic effects may include the so-called “brain drain,” as the best minds in a poverty-stricken country may go abroad to get an education and then never return. At the same time, the poorest of the poor may decide to move to a wealthier country, thus depriving their home country of the labor force they may need to improve domestic economic conditions.
In September of 2023, the United Nations launched UN Data Commons for the SDGs (Sustainable Development Goals), an effort to capture information about the extent of global inequality and generate ideas to address it. This website provides the mechanism for the implementation of the UN’s 2030 Agenda for Sustainable Development.