Wrap-up of IPE and free trade review◦ Gains from trade◦ Trade balances, in brief

“International institutions” readings takehomes

International Institutions/Regimes◦ What they are◦ Two competing views of their influence◦ Types of problems they resolve◦ Evaluating their effectiveness◦ Strategies for influencing state behavior

Outline

States, as a whole, GAIN from free trade◦ Because they specialize in what they do better

(i.e.,, cheaper) than other countries States must COOPERATE in international

institutions to achieve these gains from trade – it’s a PD, so won’t happen unilaterally

States create institutions only if focused on absolute gains *not* relative gains

Free trade helps consumers and exporters but harms import-competing sector

States get“gains from free trade”

But import-competing sectors are powerful

“For decades, Japan has defended its 778% tariffs on rice with a kind of religious zeal. Rice is a sacred crop, the government has argued, not open to trade negotiations. Its farmers are not just defenders of a proud agrarian heritage, but form the nation’s spiritual center as well.”

NYT, 9 January 2014

Trade deficits and surpluses Trade BALANCE = Exports - imports

◦ Country with more exports than imports has a trade SURPLUS

◦ Country with more imports than exports has a trade DEFICIT Country-by-country variation:

◦ China surplus with US/EU but deficit with Korea/Saudi Arabia◦ US deficit with China/EU; surplus with S. & C. America

Benefits of trade surplus: high employment because producing for own AND other countries

Benefits of strong currency: lower priced imports which makes trade deficit more likely

People as employees like trade surplus (more secure jobs) but as consumers like trade deficits (lower prices)

Trade balancesWhere do they come from Individual choices and free market: consumer

preferences and savings rate General economic status and demand for one’s

exports Government policies try to increase exports

while creating barriers to imports◦ Trade barriers on imports and subsidies on exports◦ Exchange rates: devaluing currency makes imports

less attractive locally and exports more attractive to foreigners

◦ Fiscal (taxes/expenditures) and monetary policies ◦ Industrial policy – help certain industries

Problems of trade deficits “Current account” deficits must be balanced

by “capital account” surpluses, i.e., country must borrow from other countries to finance purchases of imports that exceed income from exports.

Running a current account deficit makes a country vulnerable to foreign investors who may stop providing loans to finance current account deficit

Vulnerability to other countries

US Trade Deficit – We buy more from foreigners than we sell to them

But much of our trade deficit comes from buying foreign oil

Young & Osherenko, “Theories of regime formation”◦ Example of research in social sciences◦ Three types of hypotheses: power-based; interest-based;

knowledge-based Mearsheimer, “False promise of int’l institutions”

◦ States always concerned about relative gains; evidence doesn’t support institutional claims

◦ Rejecting BoP makes war more likely◦ Compare Mearsheimer today to Grieco on Thursday – both

are realists but responses to institutions are quite different Grieco article (for Thursday, on EU)

◦ First point -- intellectual honesty and willingness to examine own preferred theory carefully -- being an analyst rather than an advocate.

◦ Second point -- EU does not fit well with realist theory and yet still not throwing out the baby with the bathwater.

Readings: Takehome Messages

Institutions and Regimes (synonyms)◦ "Norms, procedures, rules agreed to … to regulate

an issue area" (Haas 1980, 397).◦ Cooperative effort by states to overcome

collective action problems International example: human rights

International Institutions

International institutions are more than just the rules (just like democracy is more than just the Constitution)◦ Written rules are PART of it, but only part◦ General norms◦ Actors involved◦ Processes◦ Expectations

International Institutions

Realist view: no influence of institutions

Theoretical Views of the Importance of Institutions

Power and Interests

International Institutions

Behavior and Outcomes

Realist view: no influence of institutions

Institutionalist view: institutions may influence

Theoretical Views of the Importance of Institutions

Power and Interests

International Institutions

Behavior and Outcomes

Power and Interests

International Institutions

Behavior and Outcomes

Coordination games◦ Humorous version / non-humorous version◦ Once rules agreed to, no reason to cheat◦ E.g., air traffic control, sea lanes

Collaboration games◦ Ongoing incentives to cheat◦ E.g., trade, arms control, environment

Upstream-downstream problems◦ Upstream state has no incentive to act

Normative “problems”◦ One/more state wants others to adopt their view

Four Types of ProblemsInstitutions Arise to Address

Collaboration (PD) GameInternational Trade

COLUMN

DecreaseTariffs

IncreaseTariffs

ROW

DecreaseTariffs

C gets SOLIDgrowth

R gets SOLIDgrowth

C gets HIGHgrowth

R gets LOWgrowth

IncreaseTariffs

C gets LOWgrowth

R gets HIGHgrowth

C gets SLOWgrowth

R gets SLOWgrowth

Coordination GameAir traffic control, Sea Lanes

FRANCE

Pilots and ATCSpeak English

Pilots and ATCSpeak French

US

Pilots and ATCSpeak English

No Crashes BUTHigh Training Costs

No Crashes ANDNo Training Costs

Crashes ANDHigh Training Costs

Crashes ANDNo Training Costs

Pilots and ATCSpeak French

Crashes ANDNo Training Costs

Crashes ANDHigh Training Costs

No Crashes ANDNo Training Costs

No Crashes BUT High Training Costs

Manage complexity Reduce transaction costs Create rules Increase reciprocity Improve information Create/strengthen norms

Functions of Institutions

Institutions can always be evaluated against TWO definitions of success◦ Goal achievement: Compare actual behavior (or

outcomes) to stated goal◦ Counterfactual: Compare actual behavior (or

outcomes) to what would have occurred otherwise

Evaluating Institutional Effectiveness

Archetypal Pollution Case

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Pollution Agreements:Evaluating Effectiveness

Treaty In Force

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Pollution Agreements:Evaluating Effectiveness

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Pollution Agreements:Evaluating Effectiveness

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COUNTERFACTUAL:Predicted Emissions if Treaty Wasn’t Signed

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Pollution Agreements:Evaluating Effectiveness

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Success of Treaty Relative to COUNTERFACTUAL

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Pollution Agreements:Evaluating Effectiveness

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GOAL:Emissions Level Treaty Sought to Achieve

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Observed Estimated Counterfactual

Pollution Agreements:Evaluating Effectiveness

Treaty In Force

GOAL:Emissions Level Treaty Sought to Achieve

Failure of TreatyRelative to GOAL

Was the Whaling Treaty a success?

“Having decided to conclude a convention to provide for the proper conservation of whale stocks and thus make possible the orderly development of the whaling industry” (ICRW, 1946)

Goal

Goal

“Having decided to conclude a convention to provide for the proper conservation of whale stocks and thus make possible the orderly development of the whaling industry” (ICRW, 1946)

Goal

Failure Relative To Goal

“Having decided to conclude a convention to provide for the proper conservation of whale stocks and thus make possible the orderly development of the whaling industry” (ICRW, 1946)

Counterfactual

Counterfactual

Success Relative To Counterfactual

Catch LOWER than would have been otherwise, allowing population to recover

But higher population allows MORE catch for longer than would have been possible otherwise

Counterfactual

Success Relative To Counterfactual

Goal

Failure Relative To Goal

Both a success and a failure

Institutions can always be evaluated against TWO definitions of success◦ Goal achievement: Compare actual behavior (or

outcomes) to stated goal◦ Counterfactual: Compare actual behavior (or

outcomes) to what would have occurred otherwise

Evaluating Institutional Effectiveness