A Neo Liberal Institutionalist Approach To Trade Liberalization

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Trade liberalization is a complex phenomenon which can be elucidated by theories of international relations. Liberalism, and neo-liberal Institutionalism in particular, illuminates important aspects of trade liberalization by focusing on the logic of relative and absolute gains, the possibility of creating a regime of fair trade to diminish the fear of cheating, and the ability of institutions to enforce their rules. However, before explaining how neo-liberal Institutionalism accomplishes this it is necessary to clarify what is meant by “Liberalism.”
Liberalism, at a very basic level, is a theory used to analyze certain features of a multifaceted world dominated by state interaction, economic transactions, and social progress. In stark contrast to Liberalism is Realism, its historical competitor and ideological opposite, and there are important differences which highlight the essentials of any IR Liberalist framework. First, while a Realist worldview is state centric, often ignoring other agents by claiming that they have a negligible effect on international events, a Liberalist worldview encompasses aspects of domestic politics such as individuals’ actions and state intentions, and other international agents such as institutions (Dunne 192; Keohane 48). This Realist bias of states is due to the anarchic international system in which states interact, thereby forcing them to avoid cooperation with each other and focus on self help and competition for fear of being cheated. Even though Liberalism accepts the Realist assumption of the international system as anarchic, Liberalism does not uphold the Realist conclusions of conflict being inevitable, cooperation being implausible, or change being unlikely (Dunne 187; Keohane 41). Therefore, neo-liberals do not stress the significance of state survival as the overarching goal for each state and maintain that issues of international political economy are just as important (Lamy 215).
Although there are a variety of Liberalist frameworks, neo-liberal Institutionalism has been one of the most coherent and influential. Neo-liberals contend that “institutions exert a causal force on international relations” which can shape state preferences and lock them into cooperative arrangements (Dunne 195; Keohane 46). As institutions become more prevalent a regime of interdependence emerges through an increased amount of connections made “among states and non-state actors” with governments investing “significant material and reputational resources” in international institutions such as NATO, the EU, the WTO, and NAFTA (Lamy 213; Keohane 40). This cooperation is most likely to occur when two or more nations have mutual interests and are both able to benefit through joint interaction and the fact that these institutions’ “membership [is expanding], and hardly in decline” proves this (Keohane 40). One consequence of such interaction is the displacement of the logic of relative gains. Rather than states supposing zero sum games to be decisive when forming decisions, the possibility of maximizing absolute gains is influential in swaying states to cooperate “if the potential absolute gains from cooperation are substantial, or in any context involving more than two states” (Keohane 44). Once states accept the possibility of benefiting through cooperative behavior institutions are created to eliminate impediments to cooperation. One problem is states’ fear of “‘cheating’ or non-compliance by other states” (Lamy 215). Institutions can rectify this problem since they provide information about the intentions of other states, “make commitments more credible, establish focal points for coordination, and in general facilitate the operation of reciprocity” (Keohane 42). Another important feature of institutions which Realists doubt is the efficacy of institutions enforcing compliance with cooperative agreements. This overview of neo-liberal Institutionalism provides the groundwork for analyzing trade liberalization.
Neo-liberal Institutionalism is perfectly suited to analyzing trade liberalization since “international trade is not about competition, it is about mutually beneficial exchange” (Krugman 24). This is because each country can “benefit from their comparative advantages” through trade and neo-liberal Institutionalists argue that institutions can “ensure the smooth and relative unfettered operation of markets” in a number of ways (Ngaire 332). First, institutions aid in the emphasis on absolute gains in economic relations between states. Even if neo-liberals concede that states unconditionally value relative gains in security matters, they argue that relative gain logic does not necessarily carry over into the economic realm. Realists disagree with this claim by demonstrating that “the relative size of a state’s economy has profound consequences for its standing in the international balance of military power” (Mearsheimer 20). Unfortunately Mearsheimer does not consider the possibility that a nation can trade with a military ally or a nation that does not care about military power, such as Switzerland. Also, this overlooks unique services that an institution can provide. Keohane writes: “Institutions can facilitate cooperation by helping to settle distributional conflicts and by assuring states that gains are evenly divided over time, for example by disclosing information about the military expenditures and capacities of alliance members” (Keohane 45). Thus, even if states view economic transactions as a form of competition there are sufficient rational justifications for states to cooperate through institutions since the long-term gains will outweigh any short-term sacrifice. In this way “states act rationally when they construct institutions” since states can “specify the conditions under which institutions can have an impact and cooperation can occur” (Keohane 48, 42). The potentially impedimentary valuing of absolute gains touches on the second issue that states face when trading with each other: the fear of cheating. For instance, firms can sell below cost, also known as dumping, in an attempt to force other firms out of business and eventually acquire a monopoly or nations can subsidize certain industries and set up tariffs giving them an advantage over foreign producers (Stiglitz 91; 84). Within each nation is an interest to remain protectionist since “each jurisdiction [looks] after its own citizens” by frequently fighting “in favor of their own global monopolies” due to “administrative courts’…sensitivities to political pressures” and because “consumers in small and developing countries” are not their concern (Stiglitz 201). Institutions are able to deal with such problems since “a system of international tribunals…would at least move the deliberations out of the protectionist environments in which they are now conducted” (Stiglitz 95). These deliberations facilitated by internationally appointed tribunals can create “a single standard for unfair trade practices, which would apply both domestically and internationally” (Stiglitz 93). The final benefit that institutions can offer is the enforceability of the rules they create. Empirically the WTO, although not punishing violators itself, authorized countries with the ability “to retaliate by imposing trade restrictions on the offending country” if they had been harmed (Stiglitz 76). In addition “institutions are created by states because of their anticipated effects on patterns of behavior,” such as the keeping of a state’s promises by virtue of an institution’s credibility and the resulting tarnished reputation that a state would acquire if it lied or cheated (Keohane 46). This ethic of legitimacy in international agreements is enhanced if institutions and nations agree that “advanced industrial countries should provide legal assistance to those in developing countries” in case they incur any harms (Stiglitz 208).Therefore, institutions reduce barriers and provide a variety of incentives to facilitate cooperation between states.

Works Cited
Dunne, Tim. “Liberalism.” The Globalization of World Politics: An Introduction to International Relations, Third Edition, (New York: Oxford University Press, 2005), pp. 185-201.

Keohane, Robert O. & Lisa L. Martin. “The Promise of Institutionalist Theory.” International Security, Vol. 20, No. 1. (Summer, 1995), pp. 39-51.

Krugman, Paul R. “What Do Undergrads Need to Know About Trade?” The American Economic Review, Vol. 83, No. 2, Papers and Proceedings of the Hundred and Fifth Annual Meeting of the American Economic Association. (May, 1993), pp. 23-26.

Lamy, Steven L. “Contemporary Mainstream Approaches: Neo-realism and Neo-Liberalism.” The Globalization of World Politics: An Introduction to International Relations, Third Edition, (New York: Oxford University Press, 2005), pp. 205-221.

Stiglitz, Joseph E. Making Globalization Work. W. W. Norton, 2006. Pp 61-101, 186-244.

Woods, Ngaire. “International Political Economy in an Age of Globalization.” The Globalization of World Politics: An Introduction to International Relations, Third Edition, (New York: Oxford University Press, 2005), pp. 325-345.

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