Chapter 6 — The Production and Trade Structure
Balaam & Dillman, Introduction to International Political Economy — Study Notes
1. Overview and Main Theses
The production and trade structure is the set of rules and relationships between states, IOs, businesses, and NGOs that
determine what is produced and sold, where, by whom, and at what price. It links states and other actors, generating
both interdependence/mutual benefit and tension. Trade is highly political — as columnist Robert Kuttner notes,
cross-border trade always requires politically negotiated rules since there is no world government. The chapter's three
theses: (1) trade controversies stem from businesses' and states' drive to capture trade's benefits while limiting its costs
to producers and society; (2) criticism of neoliberalism and globalization, worsened by the financial crisis, has
hardened resistance among emerging economies, stalling trade talks; and (3) officials and social groups in
industrialized nations increasingly want better controls over production and globalization to serve national interests.
2. Global Production
Since the Industrial Revolution, production has changed at an accelerating pace — from assembly lines to robotics,
aided by computerization, miniaturization, digitization, satellite communication, fiber optics, and the internet
(Thomas Friedman's "flat world"). Production has also fragmented through vertical specialization and outsourcing —
e.g., Boeing's 787 Dreamliner is assembled in Washington State from components made worldwide, though
outsourcing caused costly delays when foreign suppliers couldn't meet specifications. Every product now goes
through research, incubation, development, testing, manufacturing, and support stages that can be split across many
countries — in manufacturing as well as agriculture, food, and defense systems.
These shifts closely track foreign direct investment (FDI) patterns. Global FDI inflows rose from $54 billion (1980) to
$1.5 trillion (2011). Developed countries' share of FDI fell from 81% (2000) to 49% (2011) as investment spread
rapidly to Asia and South America; China, Hong Kong, Singapore, Brazil, and Chile gained large FDI shares from the
1990s, while India, the former Soviet Union, the Middle East, and sub-Saharan Africa attracted little until the mid-
2000s. The very poorest countries have continued to attract almost no FDI, undermining their development prospects.
In 2011 global GDP was about $70 trillion: high-income countries produced 67% (down from 78% in 2005), middle-
income countries (China, Russia, Brazil, India) 33%, and the 36 lowest-income countries just 0.7% — showing
production shifting toward middle-income emerging economies even as the poorest states remain marginal.
3. International Trade: Scale and Interdependence
World exports of goods grew from $1.8 trillion (1983) to $17.8 trillion (2011); commercial services exports (travel,
transport, insurance) grew over 8%/year to reach $4.2 trillion by 2011. Trade as a share of GDP rose in the US (23%
to 26%, 1995–2009), the EU27 (58% to 71%), and Japan (17% to 25%); globally it rose from 38% to 56% between
1990 and 2010. This deepening interdependence means one state's trade policy can impose costly adjustment
problems on others, which is why states need shared international rules — economic liberals stress the rational gains
from common rules, while mercantilists and structuralists agree gains exist but stress how trade shapes national power
and benefits some groups more than others.
4. Three Perspectives on Trade
Historians Pomeranz and Topik note that from the 1400s states mixed mercantilist, imperialist, and free-trade policies
depending on their development level — pure free trade with successful industrialization has essentially never
existed; even the US and Germany grew behind high tariffs in the late 19th/early 20th centuries.
a) Economic Liberals
Rooted in Smith and Ricardo, liberal trade theory rests on the law of comparative advantage: trade based on
opportunity cost makes everyone better off regardless of who produces what, where. This dominated British policy for
a century and underlies today's WTO-era Washington Consensus, with broad (though not universal) agreement that
open trade's benefits outweigh its costs.
b) Mercantilists
Hamilton and List argued liberal free-trade doctrine was really a rationale for British dominance, and that protection
of infant industries was necessary for national development and security — free trade only works once states are on a
more equal footing. Neomercantilists today doubt that comparative advantage benefits everyone equally: workers
displaced as comparative advantage shifts will resist, and states can deliberately create comparative advantage via
subsidies and cheap loans (seen in farming, autos, steel, textiles). Democracies structurally tend toward protection
because displaced workers lobby louder than the diffuse beneficiaries of cheaper imports; states also fear dependency
on others for food and defense-related goods, and worry that regional trade blocs (NAFTA, EU) could unintentionally
harm outside countries.
c) Structuralists
Structuralists label the mercantilist era classical imperialism: European economic crises pushed colonization, with
colonies serving as dumping grounds for surplus goods and outlets for capital tied to cheap labor and resources. Lenin
and other Marxists argued trade policy served the bourgeoisie, with colonies kept on the periphery. Wallerstein's core-
periphery-semiperiphery framework holds that today's globalized free trade is a continuation of the same imperial
economic logic under a new international division of labor.
5. Vocabulary of Trade Policy (Key Instruments)
• Tariffs — taxes on imports that raise prices and protect domestic industry (or raise government revenue)
• Import quotas — quantity limits on imports that raise prices and restrict competition
• Export quotas — limits on how much a country can export (e.g., Voluntary Export Restraints/Agreements, the
Multifibre Agreement on textiles)
• Export subsidies — measures that cut the price of exports to make them more attractive abroad
• Currency devaluation — cheapens a currency, mimicking a tariff plus export subsidy at once, but across all traded
goods
• Nontariff barriers (NTBs) — health/safety standards, content and labeling rules, and licensing requirements that
restrict imports without formal tariffs
• Strategic trade practices — state subsidies for R&D or production scale-up to manufacture a comparative
advantage, often tied to industrial policy
• Dumping — selling a good cheaper abroad than at home, generally seen as unfair when used to capture monopoly
power
• Countervailing trade practices — defensive antidumping measures or countervailing tariffs/quotas
• Safeguards — defensive measures used when tariff reductions lead to import surges that threaten domestic
producers
6. GATT and the Liberal Postwar Trade Structure
Before WWII, trade rules reflected dominant states' interests (Britain, France, Germany), often enforced by force
(e.g., forcing open Japan and China in the 19th century). Depression-era protectionism (Smoot-Hawley and similar
tariffs elsewhere) helped cut world trade by roughly 54% between 1929 and 1933, feeding the economic desperation
ultranationalists like Hitler and Mussolini exploited; notably, the US itself did not adopt a free-trade policy until 1934.
At Bretton Woods (1944), Allied leaders built a new liberal economic order to prevent a repeat of interwar conflict. A
planned International Trade Organization (ITO) collapsed when the US Congress refused to ratify it, so the General
Agreement on Tariffs and Trade (GATT, 1948) became the default framework. GATT rested on reciprocity (mutual,
simultaneous tariff reductions) and nondiscrimination (national treatment and most-favored-nation/MFN status, so
imports are treated equally regardless of origin). Communist states mostly avoided GATT until the 1980s, viewing it
as a Western tool. GATT had no enforcement power of its own — members relied on trust and diplomacy — and it
carved out exceptions for regional trade agreements and sensitive sectors like textiles and agriculture.
7. Mercantilism on the Rebound (1960s–1980s)
Post-war growth slowed in the 1960s–70s, then the 1973 OPEC crisis triggered recession. Tariffs kept falling (down
to about 9% average on industrial goods by the Tokyo Round, 1973–79), even as states devised subtler ways to boost
exports and limit imports — the Tokyo Round targeted a growing array of NTBs (export subsidies, countervailing
duties, dumping, government procurement rules, product standards, licensing). Trade among industrialized nations
quadrupled from 1963–73 but grew only 2.5x over the next decade, and trade's share of GDP kept rising (about 20%
for the US and Japan, 50% for the EU by the 1980s).
Japan exemplified this era's mercantilism, its MITI-guided export-led growth strategy picking high-tech corporate
winners even while benefiting from the liberal GATT system. "Strategic trade policy" became the label for state
efforts (export subsidies, infant-industry support, bargaining threats) to boost national firms — e.g., the US Omnibus
Trade Act's Super 301 (1988) targeted "priority" unfair-trading countries; France in 1982 slow-walked Japanese VCR
imports through a small customs post at Poitiers; the US and Europe negotiated Voluntary Export Restraints with
Japan on autos. "Free trade" gradually gave way rhetorically to "fair trade"/a "level playing field," and trade
diplomacy shifted from GATT's multilateral table to bilateral talks (US–Japan, US–EU).
8. The Uruguay Round (1986–1993) and the WTO
Reagan pushed to reassert liberal free trade partly to counter Soviet influence in the developing world, launching the
eighth GATT round at Punta del Este, Uruguay (1986–93). It curbed dumping and state subsidies, eliminated many
import quotas, and for the first time comprehensively tackled agriculture — previously excluded as too politically
sensitive. The US and the Cairns Group (Australia plus 17 others) pushed to phase out farm subsidies; after resistance,
the US agreed to gradually cut domestic farm support, while the EU's Common Agricultural Policy (fiercely defended
by France) took nearly five years to bring into compliance. In practice, the method used to convert NTBs into tariff
equivalents often set new tariffs even higher than before, so agricultural protectionism largely persisted despite the
rhetoric of reform.
The round produced roughly sixty agreements, including the General Agreement on Trade in Services (GATS,
covering banking, insurance, transport, telecoms) and the Trade-Related Aspects of Intellectual Property Rights
(TRIPS, setting minimum patent/copyright/trademark protections). Most importantly, it created the World Trade
Organization (WTO, 1995) — by 2012, 157 members covering 97% of global trade, headquartered in Geneva,
administering GATT/GATS/TRIPS, and running Dispute Settlement Panels (DSPs) that give it real enforcement
power (unlike GATT), with member states able to impose sanctions if rulings are ignored. Notable DSP cases include
the EU hormone-fed beef dispute, the transatlantic GMO conflict, and a Boeing–Airbus subsidies dispute in which
both the US and EU were found to have improperly subsidized their manufacturers.
9. The Doha "Development Round" (2001–)
Talks meant to start in 1999 collapsed at Seattle amid the "Battle of Seattle" antiglobalization protests over
sweatshops, agribusiness, the environment, and WTO transparency. Relaunched at Doha, Qatar (2001) as the
"Development Round," developing nations argued the Uruguay Round hadn't benefited them and demanded a real
seat at the table. Talks broke down again at Cancún (2003), with US Trade Representative Zoellick blaming
developing nations and NGOs; the Group of 20 (G20, led by Brazil, India, South Africa, China) rejected 105 proposed
rule changes and pushed instead to cut rich-country farm subsidies — a demand undercut by the US's own 2002 farm
bill, which added $70 billion in farm support even as Bush acknowledged US/EU subsidies hurt poor-country farmers.
Renewed G20 pressure in 2005 and a failed G8 attempt at St. Petersburg (2006) led to the round effectively stalling
by 2008, with developed states insisting on greater non-agricultural market access (NAMA) from developing
countries. Other unresolved issues include TRIPS (developing countries want easier access to generic medicines
against patent protections favoring mainly US firms) and disputes over cultural products, insurance, banking, and
local-content rules. Many fear Doha may never conclude, and Obama has not pushed hard to revive it.
10. Regional Trade Blocs (RTAs)
With Doha stalled, states have shifted toward bilateral and regional deals — the US alone has over 300 bilateral
agreements plus RTAs like NAFTA and APEC. RTAs are formal intergovernmental arrangements that mix liberal
and mercantilist logic: freer trade within the bloc, protection against outsiders. They grew fast after the Cold War,
covering nearly 60% of world trade by 2010. The EU and NAFTA are the biggest (EU: 35% of global trade; NAFTA:
15%; ASEAN: 6%; Mercosur: 1.9%), with intraregional trade making up 71% of EU exports and nearly half of
NAFTA members' exports. RTAs are technically GATT/WTO exceptions but legally permitted (GATT Article
XXIV, GATS Article V) as long as they liberalize trade within the bloc — they can help infant industries mature,
attract FDI through streamlined rules, and serve (per Bhagwati's concern) as a "spaghetti bowl" of overlapping tariffs
that complicate further liberalization.
Mercantilists see RTAs as political bargaining tools — Clinton pushed NAFTA partly to lock in Mexican markets
before Japan could. The Trans-Pacific Partnership (TPP), started by Brunei, Chile, New Zealand, and Singapore and
later joined by the US, Australia, Canada, Mexico, Peru, Malaysia, and Vietnam, aimed to liberalize agriculture,
goods, and services, strengthen IP protection, open government procurement, and let firms sue governments over
violations — critics like Lori Wallach call it a "corporate coup," while supporters see it as a counterweight to China's
rising power.
11. North–South Trade Issues
After the 1973 oil shock, the developing-country Group of 77 (G77) demanded a New International Economic Order
(NIEO) — better market access, a TNC code of conduct, and more say in GATT — but this produced no fundamental
changes; the North instead urged developing states to integrate further into liberal trade. In the 1980s, similar liberal
logic underpinned the "Washington Consensus" and IMF/World Bank structural adjustment policies (SAPs) tied to
debt-crisis lending.
Trade data show a mixed picture: China's share of world merchandise exports rose from 1.2% (1983) to 10.7%
(2011), and six East Asian traders (Hong Kong, Malaysia, Singapore, South Korea, Taiwan, Thailand) nearly doubled
their share too, lifting developing nations' overall export share from 25% (1993) to 41% (2011). But Africa and Latin
America have not gained share, and developing countries overall still account for only about a fifth of world
manufactured exports — 84% of manufactured exports come from the EU, China, Japan, the US, and South Korea.
The Middle East, Africa, and Latin America remain heavily reliant on fuel, minerals, and agricultural commodity
exports (echoing colonial-era patterns), leaving them vulnerable to price swings even though 2000–2011 commodity
prices rose an average 12%/year. Trade dependence (trade as % of GDP) is far higher in poorer/heavily indebted
regions (e.g., 71% in East Asia, 84% in the Middle East, 69%+ in heavily indebted poor countries by 2010) than in
high-income countries (56%).
Structuralists (e.g., Robert Hunter Wade) argue trade has raised per-capita incomes in China and India but deepened
inequality within developing nations. Walden Bello argues agricultural trade liberalization mainly serves the US
"dumping lobby" and a small elite of Asian agro-exporters — NAFTA, for instance, is linked to roughly two million
Mexican agricultural jobs lost (1994–2010) due to cheap US corn imports. Trade sanctions (against Vietnam, Cuba,
apartheid South Africa, Iraq, North Korea, Iran, Syria, Burma, etc.) are another lever of Northern/UN power, though
by the mid-1990s many viewed them as morally troubling given the harm to ordinary citizens and their track record of
propping up the very regimes they target. Mercantilists like Rodrik and Chang argue history shows high-tariff
countries actually grew faster, and that developed states are now hypocritically trying to "kick away the ladder" from
developing nations.
12. Critics of Globalization: Outsourcing and NGOs
Since the 1990s, NGOs (Oxfam, Global Trade Watch, Global Exchange) tied to the antiglobalization movement have
highlighted trade's links to the environment, labor conditions, poverty, and human rights, feeding a growing "fair
trade" movement (coffee, chocolate, handicrafts, quinoa, timber) that pays developing-world producers higher
certified prices. US public support for free trade has fallen — a 2010 Pew survey found 44% of Americans saw trade
agreements as bad for the US and 55% blamed them for job losses — driven by perceived unfair Chinese trade
barriers, large-scale outsourcing (e.g., Walmart and Target alone imported over 1.15 million cargo containers from
China in 2010), and lingering effects of the financial crisis.
Outsourcing (moving manufacturing or services abroad for cheap labor) is a major flashpoint: liberal economists tout
efficiency and lower consumer prices, while critics say it hollows out American manufacturing and depresses blue-
collar wages. Former Intel CEO Andy Grove warned that outsourcing today's "commodity" manufacturing risks
locking the US out of tomorrow's emerging industries, and outsourcers also risk IP theft and quality-control problems.
A newer countertrend, insourcing (GE, Apple, Whirlpool, Sleek Audio bringing production back to the US), is being
driven by rising Chinese wages, higher shipping costs, cheaper US natural gas, weaker unions/more right-to-work
states, and increased automation.
13. Conclusion
The postwar production and trade structure achieved much of the economic liberal agenda — shifting production
globally and dramatically increasing trade's volume and value — but this liberal order coexists with strong
countertrends showing its values are not universally shared. The Doha impasse reflects lasting North–South tension:
the WTO's rules still largely reflect Northern interests even as emerging powers gain influence as markets, labor
sources, and energy suppliers for transnational corporations. Antiglobalization NGOs have pushed states to shift
energy from multilateral WTO talks toward bilateral and regional deals, which conveniently let states embrace both
free trade and selective protectionism at once. With the money and finance structure in crisis since 2008 (covered in
the next two chapters), the trade structure is described as a managed trade system — a mix of economic liberal,
mercantilist, and structuralist practices — that risks being undermined by growing protectionist pressure unless it
undergoes real reform.
14. Key Terms
• Specialization — producing goods a country/individual can make relatively most efficiently
• Outsourcing — transferring production or business functions to other countries
• Foreign direct investment (FDI) — cross-border investment in factories, mines, land, and other productive assets
• Law of comparative advantage — nations gain by specializing in goods with the lowest opportunity cost, then
trading
• Strategic trade policies — state measures (subsidies, cheap loans) to manufacture a comparative advantage for
domestic industry
• GATT — General Agreement on Tariffs and Trade (1948), the postwar framework for liberalizing trade
• Reciprocity / Nondiscrimination — GATT principles requiring mutual tariff cuts and equal treatment of imports
(national treatment, MFN)
• Nontariff barriers (NTBs) — regulatory measures (standards, labeling, licensing) that restrict trade without tariffs
• Super 301 — US legislation requiring an annual list of countries deemed unfair trading partners
• Fair trade — movement/label paying developing-world producers higher, certified prices
• GATS — General Agreement on Trade in Services
• TRIPS — Trade-Related Aspects of Intellectual Property Rights
• Dispute Settlement Panel (DSP) — WTO's binding trade-dispute enforcement mechanism
• Regional trade agreements (RTAs) — intergovernmental trade blocs (e.g., EU, NAFTA, ASEAN)
• Intraregional trade bloc — a trade arrangement whose main trade flows occur among its own members
• Structural Adjustment Policies — IMF/World Bank lending conditions requiring liberalization
• Insourcing — bringing previously outsourced production back to the home country
• Managed trade system — a mixed regime blending liberal, mercantilist, and structuralist trade practices