STATE POWER AND THE STRUCTURE OF INTERNATIONAL TRADE

STATE POWER AND THE STRUCTURE OF INTERNATIONAL TRADE

S.D. Krasner (1976)

DV441 LT2

A Summary 

In a Nutshell

Krasner develops a model of receptiveness to open trade based on the interests of states. This contrasts with last week’s readings which focus on societal cleavages that explain the openness to trade liberalisation. He sets up this model not to specifically refute other perspectives although presumably the superiority of his approach is implicit. He does specifically mention wishing to refute the idea that states open trade policy as the result of international elements beyond the control of any state or system created by states. His specific findings are that trade openness is most likely to increase when there is one dominant and ascending hegemonic power. However, states are not always able to act in their best interest due to past policy choice constraints, therefore often some large scale exogenous event is needed to act as a catalyst, to sweep away the previous policy environment.

 The Model

He calls his model the “state-power” model (SPM). It is trying to explain why we see policy that is not in line with neo-classical theory. Theory states that open trade maximises aggregate economic utility and this is what states are seeking to do. Why then do we see protectionism? The answer is that states are pursuing at least four separate goals, and their relative importance and how they interact with freer trade determines policy.

  1. Aggregate national income goal – greater openness leads to greater income. This is so for all states regardless of size or development, although it may benefit smaller states more as they have higher ratios of trade to national income.
  2. Social stability goal – greater openness means exposing domestic economy to the vicissitudes of the world economy. Social instability increases as domestic factors have to adjust to world pricing levels. This is less so in large states as they are less involved in the world economy. Additionally, more developed states are better able to adjust. Instability may be mitigated by increased prosperity.
  3. Political power goal – relative costs of closure are smaller for large states and more for developed states. So a large developed state will find its political power enhanced by an open trading system. [I don’t really understand this point].
  4. Economic growth goal – growth generally associated with openness in small states due to efficiency savings and access to world markets etc. This benefits countries with advanced technology that do not need to protect infant industries etc. Large states need to maintain technological needs if it is to survive the open competition to service its domestic market. It is hard to specify reactions by medium sized states – some say it retards development (ISI, dependistas) others say it spurs economic transformation.

 Next he imagines different international makeups to see which would lead to openness.

  1. Lots of small advanced states – likely to want open structure due to income and growth goals. Instability is mitigated by growth and no loss of power as all in same boat.
  2. Large unequally developed states – likely to want closed structure. Only modest income gains, more instability in less developed countries as well as loss of power.
  3. Hegemonic system – one single state much larger and relatively more advanced than its trading partners. Hegemonic state wants open structure to increase income and growth (when it is ascending – i.e. technological lead is increasing). The open structure increased its power and instability is mitigated by high factor mobility due to skills and technology. Small states likewise will want to be open. Medium states are hard to predict, it depends on the ways the hegemonic state uses its power. Symbolically the hegemonic state stands as an example of successful policies even if they would not be appropriate for all [Washington consensus?]. It can use its resources to create an open structure. It can offer positive incentives (access to market and cheap exports) and negative ones (withholding grants etc. [IMF stabilisation?]). The author states this is the type of situation when we are most likely to see openness increasing.

 Testing the Theory

He looks at tariffs, trade as a proportion of income, and the concentration of trade within specific trading blocs to define periods from 1870-1970 into periods of expanding/contracting free trade. I will not go into all the detail other than to point out the following contradictions highlighted by Krasner:

  • 1945-46 is well explained by the theory. USA was in ascendency and the international trade structure became ever more open. This was the time of the GATT, lowered tariffs, rising trade proportions, and extensions of trade away from traditional blocs (USSR aside). USA used leverage to force Britain to end its imperial preference system. Bretton-Woods revolutionised the monetary system. Behind the economics the USA military stood as protectors of other industrialised market economies – a big incentive for them to accept free trade.
  • 1960 to 1976 is not well explained by the model. The size and development level of the US had fallen but there was no return to protectionism as the model would envisage. This was the time of the Kennedy Round of international tariff cuts. This was a time of increased openness but the SPM predicts a downturn or faltering in these indicators as American power waned.

 Amending the Model

  • Krasner notes that Britain’s free trade commitment lasted well beyond the time when its position in the world declined, and USA’s commitment to openness started many years after it began its rise to hegemonic dominance and continued during its period of decline. So changes do not move in step with state interests.
  • This is because policies are “sticky” (institutions live longer than the environments in which they are created, social groups benefitting from policy have access to lobby etc.) Once they are adopted they are pursued until some event shows them to be no longer feasible. [Presumably this is also a function of needing to placate the new winners and losers that are made by a change in policy]. States become locked in prior policy choices and have to wait until catalytic events allow for dramatic moves of policy to align them with state interests.
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