“Do developments in international trade regime since 1995 (when WTO was formed) confirm Stephen Krasner’s theory concerning the determinant relationships between trade openness and balance of powerif not, what theory may explain these developments?
This paper aims to discuss and analyse the effects of trade openness (globalization, free trade and international trade organizations) on the political power of individual states by comparing the global globalization phenomena with Stephen Krasner’s realist view of the loss of state political power following trade openness. Has the opening up of borders to international trade, in the form of free trade and globalization, really resulted in a loss of political or economic power by developing countries, and a resulting social instabilityHas it also resulted in a win-win situation for hegemonic countries such as the United States?
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This paper aims to answer these questions by drawing up on the political realist views of Stephen Krasner (1976), political liberalism and comparing them to the increasing pace of globalization that has occurred following the establishment of the World Trade Organization.
2.International political economy
Trade openness and its impact on state political power is studied under the umbrella of International Political Economy (IPE). Prior to modern research on globalization, economics and politics had been treated as different topics, with a different view on international relationships and globalization (Cohen, 2008), However an increasing emphasis on global outlook and increasing interrelatedness of political and economic occurrences, such as the establishment of OPEC and the Saudi Arabia oil crisis decades ago, has prompted a merger of both studies with the aim of studying how they affect each other.
IPE is the study of the interrelatedness of international politics and global economy. It is a widely accepted view that political reforms and actions are enacted in a bid to attain state economic benefits, while economical situations within a country or region also greatly contribute to the resultant political climate (Hoekman and Kostecki, 1995). IPE is multidisciplinary and could be studied based on different contexts such as a regional or country specific focus; a global issue such as North – South relations. It could also be studied in the context of particular economic sectors, issues or social groups (Underhil, 2000). IPE therefore is very diverse. However as outlined by Underhill (2000), there are 3 basic fundamental principles that categorise any IPE study, and these are:
- Political and economic factors are jointly studied and cannot be separated.
- Political interaction is one of the major means through which economic structures are established and transformed in the market.
- There is a genuine connection between domestic and international level political and economic analysis and the two cannot be separated.
Cohen (2008) further asserts that IPE aims to promote the ideology of connecting economics and politics beyond the confines of a single state, into a broader global view. It aims to study how a nation’s foreign policy are determined by the global environment, and how changes to international trade policies, could be enacted due to actions within a specific region (Frieden and Lake, 2000).
The discussion of the factors affecting IPE are therefore crucial in this paper, as it helps the writer and prospective readers to understand the context within which globalization studies have taken place, and the underlying principles that promote political economists’ view of an interrelatedness between trade openness and balance of power.
The World Trade Organization, established in 1995, is the main international body promoting free trade globally. Its main objectives are to oversee international trade rules, organize trade negotiations, enforce free trade agreements, and settle trade disagreements between member countries (Gallagher, 2005).
Prior to its establishment in 1995, its predecessor was the GATT (General Agreements on Trades and Tariffs), which was established in 1948 with 23 member countries. The main aim of the GATT was to regulate trade tariffs on exported goods within member states. Following the Uruguay negotiation rounds that lasted from 1986 – 1993, the WTO was established as a supranational organization whose main aim is to liberalize global trade.
In contrast to the predominant GATT system that only included tariffs for exported goods, the WTO contains 143 member countries and promotes trade negotiations and dispute resolve in not just exported goods, but also services and intellectual property.
WTO has chaired over 400 trade disputes between member states from its commencement (WTO, 2009) and these disputes, mostly filed by an affected country, has resulted in a ruling which affects the economic policies currently in place in some countries. Therefore illustrating the strength of the global organization against individual economic policies if they go against international trade.
b. Recent developments in world trade
Since its inception in 1995, the WTO has aggressively pursued the following rules amongst its member states (Gallagher, 2005):
- Binding and enforceable commitments
- Safety values
Due to its global acceptance, and the membership of new states like China in 2001, world trade – as a result of these agreements and rules – has increased significantly since the WTO inception (Bagwell and Staiger, 2002).
Merchandise exports rose by 9% in 2004, while trade in commercial services grew by 18%. China has also emerged as a major import and export market, and its share of international trade has continued to rise steadily since joining the WTO in 2001. Share of Chinese exports and imports in many member countries also doubled considerably between 2000 and 2004 (WTO, 2005). The increasing proliferation of Chinese products and its emergence as a global leader in merchandise export would not have been made possible without the WTO.
China, India and Russia have also opened up their borders to international trade as a result of membership requirements in the WTO, therefore presenting an opportunity for developed countries such as the UK and US to outsource business processes into these countries, and also export business services (Kegley, 2000). The potential for world trade to continuously increase in coming years is therefore great, owing to an increasing acceptance of free trade by previously communist-laden economies.
4.Traditional Views of IPE
a.Stephen’s Krasner’s realist view
According to Stephen Krasner (1976), any state pursuing a trade openness agenda, usually does so with one of the following state interests in mind:
- Political power
- Aggregate national income
- Economic growth
- Social stability
He further asserts that empirical neoclassical evidence suggests that the greater the degree of trade openness that any state has to the international trading system, the greater the level of aggregate economic income. Economic growths are also more pronounced in smaller states. Though trade may give the smaller state more welfare benefits, they however do not enjoy the same economies of scale, as do the large developed states.
However, trade openness does lead to deleterious effects in terms of social stability and political power. Opening up of borders to international trade results may result in an increase of workload for the local working population. Developing countries that have a relatively small working population would be at a huge disadvantage, when compared to larger states that are able to alleviate any deleterious effects due to its large size and greater economic development. The difference in sizes between member states and variations in economic development also increases the potential for the emergence and dominance of hegemonic states. The large state can threaten to alter the trade system in order to secure economic or noneconomic agendas.
These assumptions therefore lead to Krasner’s conclusions that globalization, especially when both developed and developing countries are joined together in mutual agreements, is usually for the benefit of the small number of large developed countries, who are able to gain economic and political benefits by requesting favourable trade deals. He further asserts that it is the power and policies of member states that create order in times of chaos, and by leaving transitional corporations to act on their own accord, could only lead to unfair competition and uneven distribution of wealth.
Stephen Krasner therefore promotes political realism, and calls for a limitation of global trade, as governments opting for social stability and political growth should avoid entering trade agreements with developing countries that pose a significant threat to their development. The political realist’s view also supports the notion that the state should be totally responsible for dictating economic and political policies within a country, rather than having it decided by supranational entities (Robinson, 2001).
b. Liberalist view of transnational trade
Liberalism is the political view that supports the absence of state political influence, and increasing economic freedom – as it is known to correlate strongly with higher standards of living, social stability and peace (Moravcsik, 1997). Katzenstein and Koehane (1999) states that the main aim of political economic liberalism is to promote trade openness, free trade and limit government regulations in both domestic and international trade, as opposed to the realist view expressed earlier, which supports state control and protectionism. Drabek and Laird (1997) also states that liberalism aims to promote the free exchange of intellectual property, goods and services between international countries, without the disadvantages of tariff embargoes and import bans.
Liberalism therefore focuses on the preferences of each state, rather than their military or economic capabilities. Instead of just promoting international trade with no state regulation, liberals largely support the establishment of supranational bodies, such as the European Union, and also global trade organizations (WTO) and custom unions between neighbouring countries (NAFTA, ASEAN). The emergence of these unions and trade bodies aim to promote liberalism by supporting trade negotiations, reducing tariff and promoting free trade globally (Gallagher, 2005). Bagwell and Staiger (2002) states that given the right factors, these supranational establishments provide the right framework for global cooperation and interaction.
The emergence and dominance of such associations and unions in recent times largely emphasizes the role of liberalism in international political economics.
Therefore, judging by the major research question in this paper, has the emergence of liberalism through free trade organizations and economic unions, confirmed Krasner’s view on trade openness and shift in the balance of power?
Based on existing literature and empirical evidence, it can be assumed that the WTO is the new proposed supranational body that governs the process of trade between its 143 member states. This significantly reduces the single power of each member state, and encourages mutual agreements and negotiations based on the objective of promoting free trade. It is indisputable that WTO has greatly promoted world trade since its inception, and that it has also given a number of developing countries such as China and India, the opportunity to join the global economy with the aim of promoting economic growth and aggregate national income.
a. Political Power
The increasing power and global acceptance of the WTO has significantly reduced the state political power of each member states, and its ability to impose tariffs and discriminate against imported goods. Thereby promoting international trade beyond levels witnessed prior to its establishment.
In the advent that any participating member intends to impose a protectionist embargo on its domestic products or services, in a bid to save that industry, a member country of the WTO could file a dispute opposing those roles (WTO, 2009). Member countries that aim to adopt a realist approach in protecting domestic industries have seen their powers greatly reduced by the liberalism that constitutes globalization and free trade. This curb in state power has predominantly been seen as a major consequence of globalization. The ability to control the economies of the state, once an autonomous activity, is now based on the consideration of foreign, as well as local political and economical factors.
b. Social Stability
Trade openness usually results in an influx of foreign competitors and businesses that need human labour. The opening up of borders to international trade in countries that do not necessarily have the technological know how or human capital education to produce globally competitive products and services could lead to a social instability whereby labour is insufficient or lacks technical understanding. Thus confirming Krasner’s (1979) theory that openness creates more social instability in developing countries, as opposed to developed countries.
China for instance, in the wake of joining WTO has seen a shortfall in agricultural output and a rise in manufacturing output (Bagwell and Staiger, 2002). Local manufactures are unable to compete effectively against foreign companies as Chinese companies lack to relevant technological know how and brand awareness in order to compete effectively in global markets, thereby putting it at a disadvantage. Foreign companies, laden with these resources, could therefore enter into the Chinese or Indonesian or Malaysian economy, with international brands and claim market share away from indigenous companies. The state, unable to exert protectionism or impose tariffs on foreign products is therefore powerless and unable to protect its industries.
This occurrence is not limited to just South Asia. The emergence of China, as the ideal location to manufacture products cheaper, and also the emergence of India as an emerging technological services economy, has seen these jobs and industries gradually disappearing from developed countries such as the UK, EU and also the US. Manufacturing output in the UK has continuously accounted for a decreasing portion of national GDP since 1960 (ONS, 2009). Though US and EU economies can impose bans and subsidies for their agricultural industry, it may not be so viable in manufacturing. They have therefore had to succumb to international trade agreements and allowed the trade of cheaper Asian products in their economies, at the detriment of the once thriving manufacturing sectors (Krasner, 2009).
However it is not all bad news for large developed countries. The fall in manufacturing output within these regions, has led to a rise in the service sector industry and also a rise in its export. UK services export has grown in recent years to 70% of Nominal GDP (ONS, 2009), and is increasingly becoming predominant especially in regions like India and China. It could therefore be argued that increasing global trade may have led to comparative advantage in these regions, whereby China with a huge number of human capital would be able to effectively attain world dominance in manufacturing output, while the UK and US with their technological supremacy, could maintain their competences in service based industries and intellectual properties.
On the other hand, it seems like these arguments of social stability and industrial dominance can only be applied to large developed and developing countries. How about those countries in South America or in Africa that have opened up their borders to international trade as a purported means to attain economic growth and aggregate national incomeHave they enjoyed the benefits of globalization as the UK, US and China have?
c. Effects of Trade Openness on Developing countries
A state’s decision to open up its borders to free international trade has its advantages and disadvantages. One the plus side, it results in an increasing amount of foreign direct investments (FDI) in particular industries within the developing country (Robinson, 2001). Governments and indigenous corporations value FDIs as they lead to an increased economic growth and aggregate national income within the country. They also positively affect infrastructure development in the forms of schools, hospital and roads. Such global investments also tend to introduce new technologies into the economy that aim to increase productivity and therefore the competitiveness of the companies within the developing country (Bagwell and Staiger, 2002)
However, a number of disadvantages also exist, such as promotion of particular industries such as financial services and manufacturing, and the lack of support for non-competitive industries such as Agriculture. This could result in a diversion of budget funds towards the growth of international profitable sectors, while leaving out sectors that are thoroughly essential for social health and standard of living.
Also the increasing competition from market entry of foreign competitors would severely impair the competitive advantage of indigenous firms, if they do not possess the key factors for success that are essential to compete against global companies. A lack of competitive advantage could result in a divergence in population preference from locally produced goods, to international products. Thereby resulting in trade deficit – increasing import relative to export (Krasner, 2009).
This occurrence seems to concur with Krasner’s assertion that trade openness furthers the rate of growth of large developed countries with advanced technologies and economies, as they do not necessarily have to protect infant industries from global competition and can also take advantage of the global world market. Though the general effects of free trade and globalization illustrate that developed and developing countries would be exposed to the threat of market entry and international competition, “it is only by maintaining technological lead and continually developing new industries can even a large state escape the undesired consequences of an entirely open economic system” (Krasner, 1976).
This analysis seems contrasting with the predominant liberalist philosophy in that free trade promotes a mutual environment for all companies to trade freely and exchange products and services. What then happens to the developing countries that would be ridden with imported goods and services, but would not necessarily possess the industrial capacity that enables their industrial advancement or technology to compete effectively against international competitionShould they therefore succumb and be left with no indigenous products or services.
Based on the review of existing literatures outlined in this paper and developments that have occurred since the establishment of the WTO, it can be confirmed that trade openness does result in a shift of power towards to few developed countries such as the EU, US, India and China that have the technological, economical or socio-cultural capabilities to compete effectively in the international market. The US may still have global hegemonic powers, due to its relative military and economic size, but its influence over globalization is increasingly being reduced by other countries and unions such as China, India and the EU, which possess valuable resources in manpower, technology and capital.
However, developing countries such as Latin America, other Asian countries and Africa are left at a disadvantage, as they may not necessarily possess the relevant resources necessary to compete in the global economy. They are therefore left at the mercy liberalist transnational companies, trading under the auspice of ‘Free Trade’, who have relieved the state of its control over its political and economic climate, and therefore invaded these developing nations with its goods and services.
Developments in world trade since 1995 therefore confirm Stephen Krasner’s theory that trade openness has resulted in a shift in power from developing countries to developed countries.
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