Political Economy of Trading States Essay

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Introduction

David Ricardo proposed the theory of comparative advantage and several other offshoots of the theory arose as refinements. According to the comparative advantage theory, trade is beneficial even in the absence of absolute advantages. Improvements in the competitive advantage theory include the Heckscher-Ohlin theory that calls for the use of the most abundant factor of production to gain a competitive advantage for a state. In addition, the Stolper-Samuelson theory says that trade liberalization is beneficial to abundantly-endowed factors of production, meaning that less-endowed factors are disadvantaged. At the same time, there is the state-centered approach and the society centered approach, seeking to explain the relationship between countries and their uptake of trade globally, as well as the reasons for the existence of protectionist practices amid trading partners.

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Differences between Stolper-Samuelson and Ricardo-Viner

The comparative advantage theory and its offshoots fail to explain the rapid increase in inter-industry and inter-firm trade because they concentrate on national units of production. The society-centered theory cautions against free trade when it jeopardizes positions of state security. However, the theory of Ricardo highlights a state-centered approach, where focus in on the general welfare of a nation when it is trading with other nations. Ricardo’s theory believes that governments will act in the best interest of every citizen when making choices to pursue trade and production in industries that give it the highest comparative advantage. The gains of the given industry, the specific factors referred to in the Ricardo-Viner model, can readily diffuse in the rest of society in this case (Alt and Gilligan 172).

The Ricardo-Viner model focuses on factor specificity, where goods differ in terms of factor intensity and countries differ in factor abundance. The interaction of the two determines the patterns of trade. The model goes on to assume that production functions remain identical throughout the world. On the other hand, the Stolper-Samuelson theory goes with the view that the prices of goods determine the factor prices (Cohn 172).

The society-centered approach is supported by the Stolper-Samuelson theory, which highlights the difficulties of transferring benefits from one industry to another. Therefore, within a country pursuing a particular comparative advantage, the industries that do not enjoy abundantly-endowed factors of production will feel aggrieved and resort to lobbying and activism to compel the state to adopt protectionism policies. In reality, the supporters of the Stolper-Samuelson theory understand that the excess economic gains of one factor of production may not easily transfer and compensate the associated losses in other factors of production (Alt and Gilligan 176).

Meanwhile, liberals believe that freer trade results in more growth, which eventually contributes to the diffusion of cleaner technologies to LDCs. The liberals continue to favor trade over protectionism approaches, such as environmental protection measures. With WTO as a primary driver of free trade, liberals see independent ties among nations as necessary in moving free trade forward. The Stolper-Samuelson theory argues that when business remains uninterrupted over a long time, it results in price factor equalization, where prices for factors converge in the trading countries (Rogowski 1122).

Distinction between state-centered theories of trade and society-centered theories of trade

In the strategy trade theory, the state-centered theorists, who are mainly historical materialists, call for the development of competitive advantages to gain comparative advantages so that countries can safeguard themselves when they are trading internationally. They use limited resources to create advantages that allow them to grow rapidly to gain other advantages (Cohn 171). At the same time, they call for protective measures to limit exposure to vulnerable industries and factors of production to international trade. With protectionist measures, governments can be able to shift excess returns that foreign firms enjoy in particular industries where they have fast-mover advantages to the national economy. The aim is to support the growth of local companies in the same industry to achieve economies of scale and ability to compete globally (Cohn 105). State-centered approaches that were supporting comparative advantage theories eventually had their way when the world realized that a decrease in protective trade measures led to more trade globally (Cohn 174-175).

Society-centered theorists focus on the interrelationship of governments and special interest groups within nations that keep advancing and defending their economic interests based on their performance on trade. On one side, there are groups that call for protectionist measures as favorable approaches to international trade, while other groups support liberalization of commerce. The society-centered theories had their way in the interwar period before 1943, where states preferred protectionism to safeguard their economies against tough economic conditions (Cohn 175).

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Citizens and civil groups object the World Trade Organization (WTO) formation and operations because they cannot hold it accountable. At the same time, the groups organize and create activist campaigns around the world to influence global trade, such as the fair trade movement to counter liberal policies of the WTO that hurt the least developed country (LDCs) producers. Interest groups have also sought to inject environmental issues in trade negotiations to limit the effect of free trade and safeguard the interests of societies that rely on sustainable use of environmental resources (Coughlin 3). The practice of using subsidies to protect vulnerable industries and lobbying for the WTO to accept the vulnerability status of a country’s industries are characteristics of the protective measures of the society-centered theories.

One central idea in the society-centered approaches is that trade has distributional consequences. Therefore, domestic self-interest groups intervene in national politics to safeguard their gains or protest against their losses as they seek to influence state policy. However, with a state-centered approach, the interests in question move beyond domestic issues to state issues, where countries intervene to promote the development of specific national industries. Consequently, nations use protectionism measures or justify their demand for protectionism measures to safeguard infant industries that cannot compete on a global scale (Oatley 97).

The state-centered approaches create trade conflicts, where calls for intervention affect particular national industries. The idea is that protectionism on aggregate welfare could be positive in some circumstances. In addition, a government can operate without facing demands and limitations of interest groups in some cases. Therefore, it is possible for governments to intervene in the domestic economy using tariffs so that the aggregate social welfare rises. The state-centered approach does not work for long because states eventually go back into local politics and take on a society-centered approach. Critics also point out the fact that state leaders may not always work in the best interest of aggregate welfare. Moreover, interest groups in a country will prescribe limitations to what the state can eventually do to affect aggregate welfare.

In conclusion, the state-centered approach only prescribes what states can do in the absence of domestic lobbying, instead of explaining the actual practices in detail. Thus, compared to the society-centered approach, the state-centered theory may not offer practical approaches to particular local situations that companies or industries face. Nevertheless, state actors in this approach remain important actors in politics because they move beyond class and interest group politics.

Works Cited

Alt, James E and Michael Gilligan. “The Political Economy of Trading States: Factor Specificity, Collective Action Problems and Domestic Political Institutions.” Journal of Political Philosophy 2.2 (1994): 165-192. Print.

Cohn, Theodore H. Global Political Economy. 6th. Upper Saddle River: Pearson, 2012. Web.

Coughlin, Cletus C. The Controversy Over Free Trade: The Gap Between Economists And The General Public. St. Louis: The Federal Reserve Bank of St. Louis, 2002. Print.

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Oatley, Thomas. International Political Economy. 5th Edn. London: Longman, 2012. Print.

Rogowski, Ronald. “Political Cleavages and Changing Exposure to Trade.” The American Political Science Review 81.4 (1987): 1121-1137. Print.

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IvyPanda. 2020. "Political Economy of Trading States." June 7, 2020. https://ivypanda.com/essays/political-economy-of-trading-states/.

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