Trade and the Relationship between Economics and Politics - Essay Example

This is clear in the theory of comparative advantage attributed to David Ricardo as well as in the “standard theory of international trade” that are both discussed in many of the undergraduate and graduate books of economics. One of the books discussing the two topics, for example, is that one by Krugman and Obstfeld (2003). A policy of trade liberalization adopted by policymakers through the political process commits a country to an economic environment that requires the conversion of tariffs to quota as well as the reduction of tariffs which are the standard policy prescriptions under the World Trade Organization (WTO).

On the other hand, a policy of autarky emphasizes the policy of “self-reliance” wherein nations produce all that they need. In contrast, the policy of trade liberalization emphasizes the interdependence among nations wherein self-reliance is achieved through domestic production as well as trade with other nations. In other words, the foregoing emphasizes that policy regimes that are adopted through the political process determine trade policy and, consequently, policy regimes or politics determine people’s access to higher welfare levels.

Second, the discipline of economics recognizes that there is a definite and solid political economy dimension in the adoption of protectionism rather than trade liberalization. For example, this is clear in Salvatore (2001, p. 293-298). According to Salvatore (2001, p. 297), if society benefits overall from trade liberalization, protectionist policies are adopted by countries because although producers are few relative to consumers, local producers of import-competing goods can benefit greatly from protectionism and have a strong incentive and the means to lobby government for the latter to adopt protectionist measures. Salvatore (2001, p. 297) argued that even if consumers strongly benefit from trade liberalization, consumer losses from protectionism are highly diffused such that consumers are not likely to protest strongly against protectionism.

Finally or third, several thinkers in economics have stressed the importance of a political economy perspective in both domestic and international trade. One of such thinkers as Adam Smith. Adam Smith explained that division of labor is responsible for social progress (Smith 1784, Book I, Chapter I). However, Smith also pointed out that division of labor is limited by the extent of the market (Smith 1784, Book I, Chapter III). This is clearly a reference to the importance of politics in limiting or enhancing/facilitating the state of social progress. The book of David Ricardo in 1817 (with the third edition in 1821), “On the Principles of Political Economy and Taxation,” is clearly a work on political economy. In the book, Ricardo has chapter 25 on colonial trade, chapter 22 on the prohibition of importation, and chapter 7 on foreign trade. In all chapters, Ricardo emphasized the role of politics and policy on economics, particularly in the ways in which politics can facilitate or provide obstacles to the advancement of economic development or benefits. In other words, the work of Adam Smith emphasized the role of trade in promoting the division of labor and how politics can limit both trade and the division of labor. On the other hand, the work Ricardo emphasized the role of politics in shaping both international and domestic trade policy.

Thus, we can conclude that trade reveals the link between economics in at least the following ways:
1. politics or the political process can determine whether a country can benefit from trade liberalization;
2. a political economy perspective can explain better why a country can adopt protectionist rather than trade liberalization policies despite the benefits from trade liberalization; and
3. politics or political policies can either facilitate or provide obstacles to the division of labor promoted by domestic or international trade. Read More