POLI 445 Politics of International Economic Relations · manufacturers produce” (Kegley 2009:298). Trade protection is meant to give advantage to local industries at the expense

College of Education

School of Continuing and Distance Education2014/2015 – 2016/2017

POLI 445

Politics of International

Economic Relations

Session 7 – STATE-CENTRED APPROACH TO TRADE POLITICS

Lecturer: Dr. Bossman E. AsareContact Information: [email protected]/[email protected]

Session OverviewIn this session we will look at the State-Centered Approach to Tradepolitics.

We will make the effort to respond to the following questions:

What is a state-centered approach to trade politics?

What are the differences between a state-centered approach to tradepolitics and a society-centered approach to trade politics?

We will also discuss State strength and Industrial Policy

Session Outline

• Topic One –the State-Centered Approach

• Topic Two – State strength and Industrial Policy

Reading List

• Thomas Oatley (2013), International Political Economy (fifth Edition): Interests and Institutions in the Global Economy, Pearson Longman.

Topic One The State-Centered Approach

• The state-centered approach, according to Oatley (2008:95-96), argues that nationalpolicymakers intervene in the economy in pursuit of objectives that are determinedindependent from domestic interest groups’ narrow self-interested concerns. Governmentsor national policymakers’ intervention in the economy means that the state or country isdeeply involved in the management of the economy. This also suggests that most, if notall, decisions about economic policies are made by the national government.

• Moreover, in making decisions about the national economy, interests groups in thecountry are unable to influence politicians and policymakers. Put differently, unlike thesociety-centered approach in which interest groups influence politicians, with the state-centered approach politicians and the state are not controlled by interest groups. The state-centered approach further notes that governments intervene to promote specific sectors ofthe economy. Once governments identify that certain sectors of their economies arecritical or extremely important to national development, they make sure they control thosesectors rather than allow the private sector to be the dominant players in those sectors.

The State-Centered Approach

• There are two key assumptions of the state-centered approach to trade politics. The first is that, under certain circumstances trade protection can increase social welfare in a country. Trade protection or protectionism “are barriers of foreign trade, such as tariffs and quotas, that protect local industries from competition for the purchase of products local manufacturers produce” (Kegley 2009:298). Trade protection is meant to give advantage to local industries at the expense of foreign industries that want to compete with the local industries. Social welfare is the use of the states resources to guarantee certain services for citizens and residents of a country. Per this assumption, supporters of the state-centered approach believe that when governments protect their domestic markets from foreign competition, they will be able to ensure that their people have jobs to do and they can also raise more money to provide certain services (schools, hospitals, roads, and etc) in their countries.

The State-Centered Approach (Cont’d)

• The second assumption is that under specific circumstancesgovernments are relatively unconstrained by interest groups demands.This simply means that under specific circumstances (especially whengovernments want to promote a policy they believe will improve thestandard of living of their people and consequently lead to nationaleconomic development) interest groups cannot influence their policies.With these two assumptions, states intervene in their domesticeconomies with measures that will stimulate the domestic economyand improve social welfare of their countries. In the next section wewill talk about the economic reasons why states intervene in theireconomies.

The Infant Industry Argument for Trade Protection • The main reason why the state-centered approach to trade politics stresses

government intervention in the economy has to do with infant-industries operatingin the domestic economy. This part examines the infant-industry case for tradeprotection according to the state-centered approach to trade politics. Infant-industries are newly established industries (infants) that cannot compete withgoods produced by established companies or organizations in other countries.

• The infant-industry case for trade protection primarily argues that there are casesin which newly established firms or companies (they are infants) will not initiallybe efficient (that is the short run) but could be efficient in the long run if they aregiven time to mature. Because of this, it is important for these industries to beprotected by the use of tariffs and other nontariff policies so that they can besuccessful. Once they become successful in the long run, the tariffs and othernontariff measures can be removed since they will now be in a position to competewith the established companies in other countries. This argument has been used bymany late-industrializing countries. A late-industrializing country is a country thatis trying to develop manufacturing industries in competition with establishedmanufacturing industries in other countries (Oatley 2008:100).

The Infant Industry Argument for Trade Protection (Cont’d)

• There are two main reasons why newly established companies may not beefficient and successful in the short run. The reasons are economies of scale andeconomies of experience. Economies of scale are the advantages firms enjoy whenthey produce on a large scale. The reason is that when you produce on a largescale the unit cost of production reduces and this enables firms to benefit from lowcost of production. For example, let us take two firms (firm A and firm B)producing shirts.

• Assuming firm A is an infant industry and it produces 100 pieces of shirts, theunit cost for each shirt will be $5. This means that the total cost for the 100 piecesof shirts will be $500. On the other hand, firm B (say an established industry)produces 1000 pieces of shirts. Because firm B produces on a large scale (witheconomies of scale), the unit cost for each shirt will be $3, and the total cost ofproducing all the shirts will be $3000. When you take this example intoconsideration, you will realize that 100 pieces of shirts is just 10% of the 1000pieces. So 1000 pieces of shirts should cost $5000, but this is not the case. Theexplanation is simple: firm B produces on a large scale so it enjoys the advantagesof producing on a large scale (reduction in the unit cost of production).

The Infant Industry Argument for Trade Protection (Cont’d)

• Economies of experience, according to Oatley (2008:98), “arise whenefficient production requires specific skills that can only be acquiredthrough production in the industry.” This suggests that, to be efficientand successful in the industry, you needed to have been in productionfor some time to gain certain skills and experience that are vital foryour success. Kenen (1994:280, cited in Oatley 2008) has observedthat, in several industries, efficient production requires “seasonedmanagers, skilled workers, and reliable suppliers of equipment andmaterials.” In many instances, infant industries, because they areinfants or newly established, do not have the seasoned managers orthose with skills and experience that can make them competitive. Putdifferently, you are more likely to gain experience and skills in aparticular production sector after you have been producing in thatsector for some years.

The Infant Industry Argument for Trade Protection (Cont’d)

• Because of economies of scale and economies of experience, countriesthat want to make their local industries competitive adopt tradeprotection policies. Thus, governments believe once they intervene intheir economies, they will be able to improve the living standards oftheir people and promote domestic economic development.

• Both rich and poor countries do at times adopt these protectivemeasures to promote their local industries. Many rich countries startedgrowing their economies by using the infant-industry argument toprotect their domestic markets from foreign competition. Is thereanything Ghana and other African countries can learn from the infant-industry argument?

Sample questions

1. What is the infant-industry argument for trade protection?

2. How can Ghana use the infant-industry case for trade protection to promote industrialization in the country?

3. How practical is the state-centered approach to trade politics in the contemporary global economy?

Topic twoState Strength and Industrial Policy

• In this discussion we will talk briefly about the meaning of industrial policy and also examine how the strength of states allows them to promote particular industrial policies, especially those that lead to the protection of their markets.

• What is industrial policy?

• What is the meaning of a weak state?

• Describe the characteristics of a strong state.

Questions like these will engage us in this topic.

State Strength and Industrial Policy

• The word policy basically means a plan of action to accomplish something.A country’s industrial policy involves the use of various policy instruments(strategies), such as taxes (tariffs), subsidies and several others to promotecertain industries (Oatley 2008). Usually governments channel resources tothe industries they consider very critical to their countries’ development.Industrial policy also implies the policies adopted by governments topromote infant industries.

• These policies can be both tariffs and nontariff. At times governments mayuse certain safety and health requirements to prohibit goods coming fromcertain countries. These safety and health standards have been used bymany advanced countries to prevent goods from developing countries fromentering their markets. There have been instances where some rich countrieshave also used that against other rich countries.

State Strength and Industrial Policy (cont’d)

• State strength is the degree to which national policymakers (includingpoliticians) are exempted or insulated from the influence and pressures ofdomestic interest groups. We have already discussed interest groups in thisunit and, as such, I am not going talk about that again. As far as statestrength is concerned, you can have strong states and weak states. Strongstates are those states that are completely exempted or free from thepressures and influences of domestic interest groups.

• Strong states, more often than not, have a centralized authority system (thatcontrols the entire country) and a high degree of coordination among thevarious agencies of government and this makes it difficult for interestgroups to influence the policy process. Because political power iscentralized and there is coordination among state agencies, to influence thepolicy process, interest groups will have to do it at the national level andthis limits them from influencing politicians.

State Strength and Industrial Policy (cont’d)

• This is because they have only one avenue (the central government) to influence.Strong states usually have unitary political systems, which ensures that all regionaland district authorities serve at the pleasure of the national or central government.A unitary political system is the type of political system that has a centralgovernment responsible for the entire country. All other authorities that exist in thecountry serve at the pleasure of the central government.

• Examples of strong states are Japan, France and Ghana. In Ghana, for example,when interest groups want to influence the country’s trade policies or theeconomy, they have to do it from and in Accra, not any other regional capital. Alsobecause of the high degree of coordination among state agencies in Ghana, all thebranches of state agencies will have to get clearance from the national secretariator head office in Accra (in many instances) before they can do something for you.As a result of this, strong states are in a better position to adopt policies theybelieve are in the interest of their countries, rather than those policies that willplease sectional or interest groups. This further suggests that strong states are ableto protect their infant industries from foreign competition because they areinsulated from the pressures of interest groups.

State Strength and Industrial Policy (Cont’d)

• Japan is represented in the literature as the typical example of a strong state that has been able and willing to use industrial policy to promote national economic development. Johnson (1982) has observed that Japan’s postwar economic transformation and development is the direct result of this state-centered approach. Political power is centralized in Japan and the state also provides limited access to domestic interest groups. This has enabled the state to promote a coherent industrial policy since the end of the Second World War. The Japanese used the Ministry of International Trade and Industry (MITI, now called Ministry of Economy, Trade, and Industry) and the Ministry of Finance (MoF) as the principal government agencies responsible for making the Japanese state a leader in heavy industries, such as steel, shipbuilding, and automobiles. Later on the state also decided to become a leading player in high technology (Oatley 2008).

• The difference between Ghana and Japan is that the ‘state’ must be committed to the economic transformation otherwise this transformation will not come about. This means that you can be a strong state and still be a poor country. This is especially so when you do not have the ideas to promote economic development or you have allowed international financial institutions, such as the World Bank and the IMF, to influence and dictate your economic policies.

• Weak states, on the other hand, are characterized by decentralized political authority, a lack of coordination among the various state agencies, and numerous channels for domestic interest groups to influence the policy process. Because there are a large number of channels for interest groups to influence the policies, weak states are exposed to the pressures of interest groups. States that are weak tend to have federal political systems or federalism and strong decentralized institutions (the decentralized bodies are independent of the central government in many policy areas).

• Federalism implies the existence of two levels of government in a country; a central government responsible for the entire country and states and provincial governments that have responsibility over specific sections of the country (Asare 2007). Domestic interest groups have influence in federal systems because the division of power between the central and state governments is based on a constitutional provision that allows the states to be independent of central government in many policy areas (Castles and Mckinlay 1979).

State Strength and Industrial Policy (cont’d)

• Examples of weak states are the United States of America and Canada.In both the US and Canada domestic interest groups are veryinfluential and they do influence the policies of politicians. In thesecountries politicians ignore interest groups at their own peril. Wheninterest groups in the US want to influence policies in their country,they have multiple avenues to do that.

• They can operate from any of the state capitals, not only Washington,D.C. (the country’s capital). The same applies to interest groups inCanada. They are not confined to the central government in Ottawaalone; they can also influence policies in and from any of theprovincial governments. In the US, for example, trade and economicpolicies usually reflect the positions of domestic interest groups.

State Strength and Industrial Policy (cont’d)

• The question at this juncture is; both Canada and the US are weak states,why are they among the dominant economic players in the global system?The US, for instance, has the largest economy in the world. The reason isthat being a weak state does not necessarily mean that you are not going tobe prosperous economically. Moreover, the US government especiallysupports the private sector and other domestic interest groups with resourcesso that the country can be the global leader in technological advancement.

• The government also supports basic research in the areas oftelecommunication, computer technology, Internet, and etc. Although theUS is a weak state, the government’s support for the activities of the privatesector and other domestic interest groups has made her the most powerfulcountry in world. Domestically, you can be a weak state but internationallyyou can be a strong state.

Sample Questions

1. State three characteristics of weak states.

2. What is the difference between a unitary political system and a federal political system?

3. Why would you describe most African states as strong states?

4. Why are most weak states in the global north highly developed?

Conclusion

• The session has outlined the state-centered approach to trade politics as wellas how the strength of states influences their industrial policy. in topic one Iexplained that there are two main reasons why in the short run newlyestablished firms may find it difficult to compete with established ones inother countries. These are the economies of scale and economies ofexperience. With trade protection, the newly established or infant industrieswill be able to sell their products in their countries’ (domestic) marketwithout any competition from the established industries in other countries.These two justifications provide the basis for countries to protect theirmarkets whenever they feel that their domestic industries cannot competewith industries abroad.

Conclusion (Cont’d)

• In topic two I presented the differences between weak states and strong states against the backdrop of how they are able to promote policies that are unimpeded by domestic interest groups. I argued that state strength is the degree to which policymakers in a country are insulated from the pressures of domestic interest groups. The section also noted that being a weak state does not necessarily imply being weak internationally and economically, and being a strong state does not necessarily imply being strong internationally and economically.

Additional Readings

• Charles W. Kegley Jr. and Shannon L. Blanton, 2010. World Politics:Trend and Transformation, Wadsworth: Cengage Learning.

• Richard Payne, 2007. Global Issues: Politics, Economics, and Culture.New York: Pearson Longman.