Overview

1. Overview • News items • 1 year ago: Google “recognizes” Palestine • Podcast: Palestinians and free trade • The pressures for free trade – a story of KFC • Take-home reading message • Basics of balances of trade, trade surpluses, and trade deficits • The European Union (courtesy of Craig Parsons)

2. Takehome messages from readings • Grieco article - relevance of theory and need to ensure theory helps address facts. If facts change, theory may need to change. • Why does the EU seem to challenge realism? • Basically the opposite of realism: voluntary transfers of major sovereignty to institutions with explicit autonomous power • Realist John Mearsheimer predicted intra-European conflict would grow after 1990…

3. Import-competing sectors are powerful “For decades, Japan has defended its 778% tariffs on rice with a kind of religious zeal. Rice is a sacred crop, the government has argued, not open to trade negotiations. Its farmers are not just defenders of a proud agrarian heritage, but form the nation’s spiritual center as well.” NYT, 9 January 2014

4. Trade deficits and surpluses • Trade BALANCE = Exports - imports • Country with more exports than imports has a trade SURPLUS • Country with more imports than exports has a trade DEFICIT • Benefits of trade surplus – higher employment: producing for own AND other countries • Benefits of strong currency – lower prices for imports which makes trade deficit more likely • People as employees like trade surplus but as consumerslike trade deficits

5. Influences on balance of trade • Government policy: Can result from specific policies aimed at increasing exports to other countries while creating barriers to imports from other countries • Trade barriers on imports and subsidies on exports • Fiscal (taxes/expenditures) and monetary policies • Exchange rates • Industrial policy • General economic status • Individual choices and the free market: preferences; savings rate;

6. Problems of trade deficits • Current account deficits must be balanced by capital account surpluses, i.e., national level borrowing from other countries to finance the purchase of imports in excess of the income provided by exports. • Running a current account deficit makes a country vulnerable to foreign investors who may stop providing loans to finance current account deficit • Vulnerability to other countries

7. http://www.census.gov/indicator/www/ustrade.html

8. US MONTHLY Balance of Trade with China (in Billion USD)

9. European Union

10. How did the EU develop?Why is free trade huge in Europe but not in other regions, like Asia?

11. Lecture plan • Basics and Background • What IS the EU? • Why has it arisen? Competing theories

12. Basics and background • Unlikely candidate for integration • Monnet: "Faire L'Europe, c'est faire la paix" • 1952 ECSC • 1957 EEC (Treaty of Rome) and Euratom • 1967: Merger into European Community • 1979: EMS and ERM • 1985 - Single European Act passed by EC with target of 1992 for common market • 1991: Maastricht - European Union. Monetary union, ECB, goal of military/foreign policy union • Membership expansion in 1994 (3); 2000 (10); 2006 (2)

14. What IS the EU? • A body created by treaties between 27 national governments • To which they have delegated responsibilities in many policy areas • Treaties give it the power to make own laws and regs… • Close to 100,000 pages of them so far • Overall: by far greatest voluntary transfer of power by states in history

15. An international organization? • IOs created by treaty between states • Usually technical, elite (no citizen input) • UN, IMF, WTO, NATO, NAFTA, ASEAN • Vary in degree of centralization… • But classically IOs for voluntary cooperation • Majority voting rare, often not binding

16. A state? • Organization with ultimate control of a given territory (sovereignty) • Fixed: not just something you sign up for • Central gov and laws trump all others • In modern West, democratic (citizen input) • Vary in degree of centralization… • But seen as given, not voluntary • Binding decisions, majority voting, central gov main player

17. Which does EU resemble more?? • An IO in origin: • Created by Treaty of Rome (1957) as European Economic Community • Treaties can only be modified by unanimous negotiation among member-states • Membership changes over time (though no one leaves…) • And more IO-like than any functioning state • Very decentralized • Member-state leaders most powerful actors

18. But by far most state-like IO… • Unusually state-like even at origin • Treaty with no exit clause • Three branches of government… • …including own binding legal system (ECJ) • Soon claims to trump even national constitutions! • Later gains partial “legal personality” (can sign treaties) • And gradually gets major power…

19. MAIN POWER: REGULATION A specialized gov set up around something like US federal Commerce Clause (so governs all trade-related policies… which is most!) Real power AND: MONETARY POLICY (the euro) Just as centralized as US WEAKER: TAX/SPEND Budget capped at 1.4% of GDP (spending mostly on agriculture, aid to poorer regions) (overall spends about 1/5 budget of UK or France) WEAKEST: FOR POL/SECURITY Constant coop, but member-states still act independently on many big issues

20. Conditions for integration • Economic difficulties (Eurosclerosis) create potential for gains from integration • And it ends up working (therefore, spillover) • Ideological fragmentation regarding value of integration • No strong international policy conflicts • No strong cultural divides (despite languages) • Technocrats replace diplomats • Uncontested regional leadership (Germany)

21. Spillover: functional and geographic • Definition: expansion of integration beyond its initial bounds • From goods to more goods to services to exchange rates to single currency • From few countries to many • From trade to regulation (in many areas) • EC countries try in 1979 to “peg” currencies in European Monetary System • But hard to maintain against speculation • So…maybe must move to single currency? • Notice that there is an “inherent logic” • Notice that economics trumps politics and security • BUT notice that no military integration!!

22. Spillover: processes and logics • Functional linkage of tasks (“real” linkages) • “Constructed” linkages and political coalitions (more on that at end of lecture) • Elite socialization with ideology and identity appeal • Transnational coalitions, e.g.,: • Courts, international norms and “rule of law” • Business groups want lower costs and level playing field • New technologies make marketing more broadly more economically viable and increase opportunities to reap more economic gains

23. EU: The politics of integrationCourtesy of Craig Parsons

24. EEC Crisis and “eurosclerosis” • EEC formed in 1957 among 6 original states • No major steps forward in EEC through 1970s • Pressures against increasing supranationality • French remain wary of supranationality • Anti-supranational Brits join in 1973 • Economic crisis of 1970s • Leaves little political attention for EEC • National economies diverge in response to inflation, unemployment • By end of 1970s, EEC largely stagnant

25. Why the EU? • Main contending theories over time: • “Neofunctionalism” (a kind of institutionalism) • Liberal institutionalism (“intergovernmentalism”) • (less strongly institutionalist…) • On margins: • Realism • Yes, power matters…but otherwise realism as wrong as it could be here? • Constructivism • European integration as an ideological agenda?

26. A constructivist alternative:Can’t explain by interests alone • Economic interests (of export sector and consumers) are generally too weak to prompt enough pressure to get free trade • How do we know? • Countries don’t do it unilaterally, e.g., Japan • Even countries that are committed to free trade “backslide,” e.g., US regularly imposes steel tariffs • We don’t see free trade in agricultural goods (even with respect to Europe!) • So, there must be some politics to the story of EU development, don’t ya think?

27. And EU goes far beyond free trade • Yes, EU is free trade • BUT also a whole bunch of regulation that goes beyond what free trade alone might require • Outlines of story • Thatcher/Britain: like freer trade and less government in markets; accept supranationality in exchange • Delors/Mitterand/French: like supranationality, idea of Europe, and socialist regulation; accept liberalization in exchange • Kohl/Germans: Germans in middle on SEA: support free trade more than French and supranationality more than British • But “a certain idea of Europe” also matters – Mitterand accepts more free mkt because he wants Europe. Good that is worth sacrificing for.

28. A Certain Idea of Europe(UO’s Craig Parsons book) • A minority of politicians takes up idea of supranational integration after WWII • Scattered across political Right, Left, Center • Parties, interest groups fragmented on this issue • Public barely aware • Not a big electoral issue; elections continue to operate as Right vs. Left battles (mostly) • But sometimes pro-supranational leaders end up in power… • And bind their compatriots into new hard-to-alter treaties

29. “Europeanists” who built Europe • Erratic progress when “supranationally-minded” leaders in France and Germany overrule opposition ROBERT SCHUMAN French Foreign Minister, 1958-1952 KONRAD ADENAUER German Chancellor, 1959-1963 FRANCOIS MITTERRAND French President, 1981-1995 HELMUT KOHL German Chancellor, 1982-1998