Core Issues, Governing institutions and Governance of International

Political Economy

International Trade and The World Trade Organizatiom

The World Trade Organization

The World Trade Organization (WTO) is an international organization which sets the rules for
global trade. This organization was set up in 1995 as the successor to the General Agreement
on Trade and Tariffs (GATT) created after the Second World War. It has about 150 members.
All decisions are taken unanimously but the major economic powers such as the US, EU and
Japan have managed to use the WTO to frame rules of trade to advance their own interests.
The developing countries often complain of non-transparent procedures and being pushed
around by big powers.

International Trade

Most people have a basic understanding of trade, but let’s clarify: if someone gives you their
laptop in exchange for your brand-new iPad, this is an example of barter trade—a direct
exchange of goods or services without money. While barter trade existed historically, modern
trade primarily involves exchanging money for goods and services, whether domestically or
internationally.

There are key distinctions between domestic and cross-border trade. In cross-border trade, the
exchange of goods and services involves at least two national governments, each with its own
interests, concerns, and sovereign control over its borders. This complexity means that even “free
trade,” often defined as the unrestricted exchange of goods and services between countries
without tariffs, duties, or quotas, is rarely entirely free in practice.

Despite its long history, the scope and scale of international trade today are greater than ever
before. Liberal economists argue this expansion is beneficial for individual national economies
and the global economy. Many, especially in wealthy capitalist nations, agree that the alternative
—autarky (complete economic independence)—is neither feasible nor desirable in modern
industrial and post-industrial eras. However, debates persist about who benefits and who loses
from trade, as well as theoretical disagreements about its implications. These disputes often lead
to tensions between nations.

This raises the question: How is global trade governed? A common answer lies in global and
regional trade agreements, such as the World Trade Organization (WTO) and the now-replaced
North American Free Trade Agreement (NAFTA). Take NAFTA, for example. Initially, “free
trade” under NAFTA meant reducing governmental barriers to cross-border trade, though not
eliminating them entirely. By 2008, tariffs between the U.S., Canada, and Mexico were removed
by mutual agreement. However, safeguards remained in place to protect “import-sensitive
sectors” in case of serious harm to domestic producers.

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Interestingly, even agreements like NAFTA include protectionist policies, such as tariffs, import
bans, or quotas. These are examples of non-tariff barriers (NTBs), which also include domestic
health, safety, and environmental regulations, technical standards, and inspection requirements.
Thus, the notion of “free trade” is often a balance between liberalization and protectionism.

As trade continues to grow, so will the debates surrounding it. Liberals will likely continue to
emphasize the principle of comparative advantage, while mercantilists and Marxists will focus
on power imbalances between economies or issues of class inequality and exploitation.
Understanding these perspectives is essential to navigating the complex dynamics of
international trade.

International Investment and the World Bank

The World Bank, established in 1945 after World War II, focuses on promoting economic development in
developing countries. Its work spans critical areas, including:

1. Human development: Education and health.

2. Agriculture and rural development: Irrigation, rural services.
3. Environmental protection: Pollution reduction, regulation enforcement.
4. Infrastructure: Roads, urban renewal, electricity.
5. Governance: Anti-corruption measures, legal institution development.

The World Bank provides loans and grants to member countries, significantly influencing their economic
policies. However, it has faced criticism for imposing stringent conditions on its loans, often promoting
free-market reforms that some argue undermine the sovereignty of developing nations.

Originally designed to disburse funds for Europe’s reconstruction under the Marshall Plan, the World
Bank later expanded its focus to developing countries in Asia, Africa, and Latin America. Unlike its largely
positive impact in Europe, its influence on developing countries has been controversial. Critics highlight
its “one-size-fits-all” neoliberal policy prescriptions and rigid loan conditions, which can be difficult to
implement and sometimes harm local economies. This has often strained relations between the Bank
and governments striving to retain policy autonomy.

International Investment and Global Production

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Global Foreign Direct Investment (FDI) refers to the production process in which different components
of a product are manufactured in various countries, reflecting the interconnected nature of the global
economy. For example, consider the production of a modern smartphone:

Processor: Manufactured by TSMC (Taiwan).

Display: Supplied by Samsung (South Korea).

Camera lenses: Produced by Sunny Optical (China).

Battery: Sourced from LG Chem (South Korea).

Software development: Handled by engineers in the United States and India.

Assembly: Performed in factories in Vietnam or China.

This interconnected system highlights the complexity and scale of transnational production networks,
where components and expertise are sourced globally before being integrated into a single product.

This complex transnational production network illustrates the unprecedented scale and scope of global
production today.

Factors Driving Global Production

Several factors explain the rise of these integrated systems:

1. Lower transportation and communication costs: Innovations have made transnational

production more economically viable.
2. Technological advancements: Better manufacturing and logistics technologies enable
seamless integration across borders.
3. Improved global finance: Easier access to capital facilitates efficiency-seeking
investments.
In developed nations, multinational corporations primarily govern investment and development. In
contrast, the development process in many developing countries is often heavily influenced by the
World Bank, sometimes surpassing the authority of their own governments.

Controversies Surrounding the World Bank

While the World Bank played a pivotal role in rebuilding post-war Europe, its record in developing
countries has been more contentious. Critics argue that its conditional aid often limits the policy
freedom of recipient nations, enforcing reforms that prioritize global market integration over local
needs. As a result, the Bank’s relationship with governments that seek greater policy autonomy remains
fraught.

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International Finance and the International Monetary Fund(IMF)

The International Monetary Fund (IMF) is an international organization that oversees financial
institutions and regulations at the global level. With 184 member countries, decision-making power
within the IMF is not equally distributed. The top ten countries, including G-8 members (the US, Japan,
Germany, France, the UK, Italy, Canada, and Russia) along with Saudi Arabia and China, control 55% of
the votes, with the US alone holding 17.4%. This voting power is tied to a member country’s financial
contributions or quotas, meaning those who pay more have a greater say in the IMF’s decisions.

The global financial system Is divided into two tightly interrelated components: the monetary system
and the credit system. The monetary system focuses on relationships among national currencies,
particularly their exchange rates, while the credit system facilitates the transnational flow of financial
capital for investment and trade. Both systems are foundational to understanding the workings of
international finance.

Exchange Rates and the Exchange-Rate System

An exchange rate is the price of one currency in terms of another. For instance, as of November 2024,
one U.S. dollar (USD) equals approximately 154.77 Japanese yen (JPY), while one British pound (GBP)
equals around 1.23 U.S. dollars. This shows how exchange rates fluctuate over time, influenced by
economic factors such as trade balances, inflation rates, and market conditions.

To illustrate, if you have $2,000, exchanging it today would yield approximately 309,550 yen in Japan.
Similarly, exchanging £2,000 would provide around $2,460. These variations in currency value directly
impact international trade and travel costs.

There are two main exchange rate systems:

1. Fixed Exchange Rates: A currency’s value is pegged to another currency or a basket of

currencies, offering stability but limiting flexibility.
2. Floating Exchange Rates: Market forces determine currency value, reflecting real-time
supply and demand without direct government intervention.
Role of the IMF in Governing the Global Financial System

The IMF was established as a neutral institution to stabilize the international financial system. However,
its policies primarily reflect the interests of major economic powers, particularly the US. The IMF
governs global financial stability by monitoring exchange rates, providing financial assistance, and
setting economic policies. Its interventions often include conditionality clauses that require member

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countries, particularly developing nations, to implement specific economic reforms in exchange for
financial support.

While the IMF has been instrumental in promoting monetary cooperation and addressing financial
crises, it has faced criticism for prioritizing the interests of developed nations and enforcing policy
prescriptions that may not align with the unique circumstances of developing economies.

Major Theories of Regional Integration

Regional integration theories explain how and why countries collaborate to
achieve common goals, transitioning from isolated national policies to
cooperative regional frameworks. Below are the main theories that have
shaped our understanding of this process:

Functionalism

Functionalism views regional integration as a solution to shared problems

arising from interdependence among states. It suggests that cooperation
begins with technical, non-political issues and gradually expands to broader
areas, creating a “spillover” effect that deepens integration.

Functional Spillover: Collaboration in one sector, such as trade, inevitably

leads to cooperation in other areas like security or governance.

Political Spillover: The establishment of supranational institutions creates

momentum for further integration, shifting loyalties from national to regional
identities.

Outcome: States become increasingly interconnected, and supranational

entities gain influence over national governments.

Functionalism underlines the idea that integration starts with practical needs
but eventually transforms political and economic structures, as seen in
regional organizations like the European Union.

Neo-functionalism

Emerging in the 1960s through the work of Ernst Haas and Leon Lindberg,
neo-functionalism builds upon functionalism but emphasizes political agency
and the role of supranational institutions.

Principles:

Integration is a process, not just a condition.

The spillover effect is central, driving integration from the political sphere to
other areas like economics and social policies.

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Supranational institutions play an autonomous role, promoting deeper
cooperation.

Conditions for Success :

1. Creation of central institutions with broad mandates.

2. Linkage between member states’ national interests and regional
objectives.
3. Expansive tasks that encourage integration.
Neo-functionalism explains the dynamics of integration as a self-reinforcing
process where each step builds upon previous achievements.

Intergovernmentalism

Intergovernmentalism highlights the primacy of nation-states in the

integration process. It argues that governments act based on rational choices
influenced by domestic political pressures and international bargaining.

Stages of Integration:

1. National Preference Formation: Domestic groups influence

governments to pursue international agendas.
2. Interstate Bargaining: States negotiate agreements reflecting their
national interests.
3. Institutional Choice: States create or reform institutions to facilitate
cooperation.
Unlike functionalist theories, intergovernmentalism asserts that integration
depends on states’ willingness and ability to cooperate rather than automatic
processes.

Supranationalism

Supranationalism, rooted in neo-functionalism, focuses on the role of

supranational institutions in driving regional integration.

Mechanisms of Integration :

Positive Spillover: Success in one sector, like trade, necessitates cooperation

in others, such as transportation or energy.

Transfer of Allegiances: Domestic interest groups shift their focus from

national to regional institutions for better representation.

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Technocratic Automaticity: Supranational entities develop their interests and
actively promote further integration.

For example, the European Commission in the EU exemplifies a supranational

body that drives policies, fostering interdependence and broader integration.

Each theory provides unique insights into regionalism. Functionalism and

neo-functionalism emphasize the gradual and automatic nature of
integration, while intergovernmentalism underscores the centrality of state
agency. Supranationalism focuses on the evolving role of international
institutions in shaping regional frameworks. Together, these theories
illustrate the complex interplay of economics, politics, and institutions in
regional integration processes.

Selected Cases of Regional Integration

The trajectories of regional integration across the globe have been diverse
yet profoundly shaped by European experiences. As such, the concept of
regional integration often carries a Eurocentric foundation. This section
examines three prominent cases: the European Union (EU), the Association
of Southeast Asian Nations (ASEAN), and the African Union (AU), each
reflecting unique historical, political, and economic contexts.

The European Union: A Paradigm of Deep Integration

Emerging from the European Economic Community, the European Union

represents the most advanced model of regional integration. The EU
transitioned from a common market to a consolidated political and economic
entity, achieving institutional and policy harmonization, and introducing a
unified currency. This evolution underscores the EU’s role as a template for
regionalism worldwide, influencing integration experiments in diverse
regions. The EU’s institutional framework has provided a benchmark for the
development of supranational governance, making it a critical reference
point for scholars and policymakers.

The African Union: From Decolonization to Continental Unity

The African Union evolved from the Organization of African Unity (OAU),
which focused primarily on decolonization. The AU, established in 2002,
sought to emulate the EU’s integrationist model, aiming for political
unification and economic integration across the African continent. Key

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achievements include the African Continental Free Trade Area (AfCFTA), the
promotion of visa liberalization, and the strengthening of regional economic
communities such as the Southern African Development Community (SADC),
the Economic Community of West African States (ECOWAS), and the East
African Community (EAC). The AU’s transformative agenda reflects a
commitment to overcoming colonial legacies while fostering regional
solidarity.

The Association of Southeast Asian Nations: A Focus on Pragmatism

ASEAN, established in 1967, represents a distinct model of regionalism

driven by political and security motives rather than economic imperatives in
its formative years. The early decades following World War II saw ASEAN
countries—such as Vietnam, Indonesia, and Malaysia—grappling with
decolonization and great-power interventions. Economic integration gained
momentum only after the Asian Financial Crisis of 1997, culminating in the
establishment of the ASEAN Free Trade Area (AFTA) in 1992. Unlike the EU
and AU, ASEAN’s approach has been characterized by non-interference and
incrementalism, with a pragmatic focus on consensus-building.

Regionalization Versus Globalization, and the State: A

Triangular Nexus
The Relations between Regionalization and Globalization
The interplay between regionalization, globalization, and the state varies
significantly across economic and security domains. Understanding this
relationship requires a nuanced examination of their interactions, which may
converge, diverge, or overlap depending on the issue area.

Convergence: Regionalization as a Component of Globalization

Regional integration can be seen as an extension of globalization, facilitating

the competitiveness of national economies in global markets. This
perspective positions regionalism as a chapter within the broader narrative
of globalization, characterized by liberal multilateralism and the opening of
local economies. Scholars such as Mittelman (1996a) argue that
globalization’s uneven dynamics may manifest as regionalization, reinforcing
interconnectedness at both regional and global levels.

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Divergence: Regionalization as a Challenge to Globalization

Conversely, regionalization may arise as a counterforce to the homogenizing

pressures of globalization. This reaction often reflects nationalistic or
pluralistic impulses, emphasizing regional solidarity and distinct socio-
economic frameworks. By creating trade blocs or alternative governance
structures, regionalism challenges the neoliberal dominance of globalization,
promoting diversity in global order.

Overlap: Parallel Processes of Regionalization and Globalization

Regionalization and globalization frequently coexist, especially in economic

contexts. The division of the global economy into mega-regions (e.g., North
America, Europe, East Asia) exemplifies this parallelism. In the security
realm, however, regionalization is less pronounced, with global frameworks
for issues like nuclear non-proliferation often overshadowing regional
initiatives

Regionalization, Globalization and the State

The dynamic relationship among regionalization, globalization, and the nation-state is marked by
both convergence and divergence, highlighting a complex interplay of overlapping and
contradictory trends. When nationalism and the role of the nation-state are brought into the
equation, several patterns emerge:

1. Nation-States Opposing Globalization (Divergent Trends)

Nation-states often view globalization as a threat to their sovereignty, culture, and economic
independence. This opposition stems from concerns about homogenization and the erosion of
control over domestic policies due to transnational forces. For example, events such as Brexit
illustrate how nations may reject globalizing trends in favor of reasserting national control.
Similarly, protectionist policies implemented by countries reflect this resistance to the perceived
destabilizing effects of globalization.

2. Globalization Encouraging Nationalism and the Formation of New States

(Convergent Trends)
Paradoxically, globalization can foster nationalism. Through the dissemination of technology and
ideas, globalization raises expectations and equips communities with tools for self-determination,
sometimes resulting in the creation of new states. For instance, social media platforms, products
of globalization, have amplified nationalistic and separatist movements by providing global
visibility for local grievances. This phenomenon highlights how globalization can both
undermine state sovereignty and simultaneously empower localized identities.

3. Nation-States Opposing Regionalization (Divergent Trends)

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Nation-states may resist regionalization when it threatens to diminish their sovereignty by
transferring authority to supranational organizations. States often impose limits on regional
frameworks to protect their domestic jurisdiction and policy-making authority. The European
Union provides a relevant example, where member states like Hungary and Poland have
challenged EU mandates that are perceived as undermining their national policies.

4. Regionalization Strengthening Nation-States (Convergent Trends)

While regionalization may appear to dilute national sovereignty, it can also strengthen nation-
states by pooling resources, fostering economic collaboration, and ensuring security. Regional
integration frameworks, such as ASEAN and NAFTA (now USMCA), demonstrate how states
use regionalism to enhance their power and stability. In this context, regionalism acts as a
strategic tool for balancing national interests with collective benefits.

5. Coexistence of Regionalism, Nationalism, and Globalization (Overlapping Trends)

Rather than being mutually exclusive, these processes coexist and evolve simultaneously. While
globalization drives economic integration and technological advancement, regionalism and
nationalism work to preserve local identities and political autonomy. For example, China
exemplifies this coexistence by maintaining strong nationalist policies while participating
actively in global markets and pursuing regional initiatives like the Belt and Road Initiative. This
highlights how nations can navigate parallel processes of integration and fragmentation.

6. Nation-States as Mediators Between Regionalization and Globalization

Nation-states play a pivotal role as mediators between regionalism and globalization. Their
policies shape the direction and scope of both processes. Strong states, such as Germany, have
demonstrated the ability to align global economic demands with regional commitments, thereby
maintaining their national identity while thriving in international markets. Conversely, weaker
states may struggle, becoming more vulnerable to global economic pressures and cultural
influences.

7. Nation-States Opposing Globalization Through Regionalism (Divergent Trends)

To counter the destabilizing effects of globalization, nation-states may foster regional alliances
that are outwardly protectionist while maintaining liberal economic policies within the region.
For example, initiatives like MERCOSUR and the African Continental Free Trade Area
(AfCFTA) illustrate how regionalization can act as a shield against global economic competition
while encouraging intra-regional trade. This strategy reflects a dual logic of economic integration
and protectionism.

Broader Implications

The interplay among globalization, regionalization, and nationalism has far-reaching economic,
political, and cultural consequences. Economically, states must navigate the tension between

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participating in a globalized market and protecting domestic industries. Technological
advancements further complicate this balance by simultaneously integrating and fragmenting
societies. Culturally, globalization fosters exchange and interconnection but also prompts a
resurgence of nationalism as communities strive to preserve their unique identities.

Ultimately, these dynamics underscore the adaptability of the nation-state, which continues to
play a central role in mediating and managing the forces of globalization and regionalization. By
understanding these interactions, states can develop strategies to navigate an increasingly
interconnected yet fragmented world.

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