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    The Economics of Globalisation Lecture 3: Trade Policy: Annina Kaltenbrunner G.19

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    Ujjwal Kumar Das
    The document discusses the theoretical arguments for and against trade protection policies. It summarizes that while traditional trade theories argue against trade protection, new trade theories and political economy arguments acknowledge potential market failures and roles for government intervention in trade. The document then outlines several specific arguments that have been used to justify trade protection policies, including the infant industry argument, Thirlwall's Law on balance-of-payments constrained growth, the Prebisch-Singer thesis on declining terms of trade for developing countries, and theories of unequal exchange in global value chains.

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    The Economics of Globalisation Lecture 3: Trade Policy: Annina Kaltenbrunner G.19

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    Ujjwal Kumar Das
    59 views31 pages
    The document discusses the theoretical arguments for and against trade protection policies. It summarizes that while traditional trade theories argue against trade protection, new trade theories and political economy arguments acknowledge potential market failures and roles for government intervention in trade. The document then outlines several specific arguments that have been used to justify trade protection policies, including the infant industry argument, Thirlwall's Law on balance-of-payments constrained growth, the Prebisch-Singer thesis on declining terms of trade for developing countries, and theories of unequal exchange in global value chains.

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    The document discusses the theoretical arguments for and against trade protection policies. It summarizes that while traditional trade theories argue against trade protection, new trade theories and political economy arguments acknowledge potential market failures and roles for government intervention in trade. The document then outlines several specific arguments that have been used to justify trade protection policies, including the infant industry argument, Thirlwall's Law on balance-of-payments constrained growth, the Prebisch-Singer thesis on declining terms of trade for developing countries, and theories of unequal exchange in global value chains.

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    59 views31 pages

    The Economics of Globalisation Lecture 3: Trade Policy: Annina Kaltenbrunner G.19

    Uploaded by

    Ujjwal Kumar Das
    The document discusses the theoretical arguments for and against trade protection policies. It summarizes that while traditional trade theories argue against trade protection, new trade theories and political economy arguments acknowledge potential market failures and roles for government intervention in trade. The document then outlines several specific arguments that have been used to justify trade protection policies, including the infant industry argument, Thirlwall's Law on balance-of-payments constrained growth, the Prebisch-Singer thesis on declining terms of trade for developing countries, and theories of unequal exchange in global value chains.

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    of 31

    The Economics of Globalisation Lecture 3: Trade Policy

    Annina Kaltenbrunner [email protected] G.19

    Recap and Motivation


    Traditional trade theories (Comparative Advantage Theories)
    Trade increases welfare for all countries through static efficiency gains
    Lower prices - Increased output and consumption Any restrictions on trade can only be distortionary and reduce welfare >> no role for trade policy

    Trade Policy in the Comparative Advantage Framework

    Trade Policy in the Comparative Advantage Framework


    Net Effect of Tariff: (b+d)-e
    b+d=efficiency loss
    Production Distortion Loss (Home produces goods which could be produced more cheaply abroad) Consumption Distortion Loss

    e=terms of trade gain

    Assessment will depend on how we value gain/loss of each agent Redistribution? Net effect of tariff depends on the ability of tariffimposing country to drive down foreign export prices (large vs. small country assumption)

    Recap and Motivation


    Markets do not work efficiently >> Important role of government to intervene in trade relations
    Trade policy crucial element of alternative economic paradigms (Dunkley, 2004)

    New Trade Theories


    Trade increases welfare (lower prices) through increased efficiency and falling average costs
    Potential role for trade policy New trade theory but no new trade policy (Krugman, 1992) Political Economy arguments against trade policy /Rent seeking (e.g. Krueger, 1997)

    Historical evidence shows that trade policy important instrument to promote growth, industrialisation, and development (Consumer Welfare vs. Development)

    Outline
    Main Instruments of Trade Policy The Case for Trade Protection and Trade Policy
    The Market Failure Argument
    Infant Industry

    The Keynesian Case for Trade Protection: Thirlwalls Law The Terms of Trade Argument: The Prebisch-Singer Thesis Verdoorns Law and Global Value Chains Theories of Dependence and Unequal Exchange

    Trade Policy in Practice: ISI vs. Export Promotion

    Learning Outcomes
    Know and Understand the case and effect of trade policy (trade protection) in different economic paradigms Evaluate the appropriateness of trade protection for different countries at different time frames in light of the theoretical and empirical (historical) evidence

    Types of Trade Instruments


    Tariffs
    Oldest form of trade policy Government revenue and domestic protection Import vs. Export tariff Specific vs. Ad-valorem > Effective rate of protection Export subsidies (CAP) /Export credit subsidies Import quotas Voluntary export restraints (Multi Fibre Agreement) Local content requirements National procurement Technical, Administrative and other Regulations (Red-tape barriers)

    Non-Tariff based Trade Policy Instruments


    International Cartels Dumping (persistent; predatory; sporadic)


    Trade restrictions to counteract dumping are justified

    Types of Trade Instruments

    Source: WTO, 2012

    Global Trade Map

    http://www.wto.org/english/res_e/statis_e/st atis_e.htm (Data on Tariffs for Country and Product Groups)

    The Case for Trade Protection


    The Market Failure Argument
    Inefficient Markets Gains from Trade not clear
    For example: Prices do not restore efficient market equilibrium; Frictions to factor mobility across sectors; transaction costs

    Marginal social benefit beyond producer surplus


    Private production would not take place without incentive need for government intervention

    The Market Failure Argument Infant Industry


    Governments should temporarily support new industries until they have grown strong enough to meet international competition and create comparative advantage Market failure arguments for new industries
    (Dynamic) economies of scale (learning effects) Public Goods (e.g. large fixed costs) (Technological) Externalities The Appropriability argument Linkages Imperfect capital markets

    Example: Bioplastic in Canada (Rudge et al. 2005)

    The Market Failure Argument Infant Industry

    Source: Ocampo and Taylor, 1998

    The Market Failure Argument Critique


    Traditional
    Trade policies as second-best Difficulty to identify market failures Foreign Retaliation

    Trade protection only as temporary measure? Trade protection only for developing countries to catch up with the developed world? First-Mover Advantage and Catch-Up

    The Case for Trade Protection The Keynesian View


    Demand Determination of Output Y=C+I+G+(X-M)
    Trade Balance Crucial Determinant of Growth What are the implications of trade liberalisation on the trade balance?

    The Keynesian View Thirlwalls Law


    Developing Countries Balance of Payments Constrained The rate of growth of output of a country (g) can be approximated by the formula

    g=x/y
    where x is the growth of export volume (determined by the growth of world income and the income elasticity of demand for exports) and y is the income elasticity of demand for imports. (Thirlwall, 2006) Implications
    Exports as main driver of growth Important Role of Income Elasticities Trade Balance not given
    Income Elasticity of Exports (Prebisch-Singer Thesis) Income Elasticity of Imports (High in developing Countries)

    Trade protection to support domestic demand

    The Case for Trade Protection


    The Terms of Trade Argument
    Prebisch-Singer Hypothesis Developing countries experience a secular decline in their terms of trade (export /import prices)
    Developing Countries export commodities and import manufacturing goods

    Two reasons:
    Supply Side:
    Relation between income and productivity Factor prices in developing countries rise more slowly than productivity due to population pressure and surplus labor

    Demand side:
    Demand for primary products grows more slowly than that for industrial products as world income grows
    1. 2. Low income elasticity of primary commodities (less than 1) Primary commodities substituted by synthetics (e.g. Rubber)

    The Terms of Trade Argument


    Trade leads to:
    Balance of Payments Problems (balance of payments constrained growth (Thirwall, 2006) Decline in Welfare in Developing Countries Underdevelopment (commodity dependence vs. industrialisation)

    Trade Protection (Import Substitution) to:


    ration scarce foreign exchange - correct balance of payments disequilibria arrest the deterioration in the terms of trade by damping down the demand for imports start producing and exporting goods with a much higher income elasticity of demand in world markets (switch from commodity to manufacturing goods)

    International Price Stabilisation Schemes

    Source: Cashin and Dermott, 2002

    Source: Cashin and Dermott, 2002

    The Case for Trade Protection Global Value Chains


    Heterogeneous Developing Countries
    Commodity (Africa, Latin America) vs. manufacturing producer (Asia China, South-East Asia)

    Deteriorating Terms of Trade of developing countries


    Deteriorating prices of manufacturing goods exported from developing countries (high vs. low value added manufacturing)

    Structure of Global Production (Global Value Chains) vertical FDI and intra-industry trade
    >>> Production and Exports of low value added products based on low wages from developing countries >>> Innovation and Development in Developed Countries

    Global Value Chains Dell Notebook

    http://www.youtube.com/watch?v=owQzo82 ac_M&noredirect=1

    Global Value Chains Textile Industry

    Source: Staritz, 2012

    Global Value Chains Problems


    Strong Competition Lower Prices Deteriorating Terms of Trade
    Low entry-barriers Labour-intensive nature

    Slow growing markets/low income elasticities Vulnerability to international market conditions Resource Transfer through Profit and Remittances (Balance of Payments Problem) Very little dynamic productivity gains in low-value added technology (Verdoorns Law)

    Global Value Chains Verdoorns Law and Cumulative Causation


    Verdoorn Law (Nicholas Kaldor): In manufacturing sector higher output causes higher productivity through dynamic economies of scale (e.g. learning by doing)

    Output Growth

    Export Growth
    Price Competitiveness and (Foreign Income Growth)

    Productivity Growth and (Wage Growth)

    Implications: Trade Policy to move from primary products and low value-added manufacturing to high-value added manufacturing (Taiwan, South Korea, China etc.)

    The Case for Trade Protection Other Factors


    Income Distribution (Heckscher-Ohlin Model) Food protection Security National Autonomy Political (both national and geopolitical)

    Theories of Dependence and Unequal Exchange (Thirlwall, 2006; Palma 1978)


    Attempt to explain the perpetuation and widening of the differences between centre and periphery For example: Dos Santos, Baran, Gunder Frank, Amin and Emmanuel Unequal development as integral part of the world capitalist system development of some parts of the system (centre) occurs at the expense of others (periphery) Trade as transfer of economic surplus from the centre to the periphery and from workers to capital Development in centre conditions development in periphery and maintains underdevelopment (The development of underdevelopment)
    colonial dependence (resource exploitation) financial-industrial dependence (capital transfer) technological-industrial dependence (MNCs)

    Domestic Elites Autonomous Development and Focus on Domestic Market

    Trade Policy in Practice Import Substitution vs. Export Promotion (Lall, 1994; Liang, 1992; Chang, 2002)
    Import substituting industrialization
    Develop industries oriented toward the domestic market by using trade restrictions to encourage the replacement of imported manufactures Based on infant industry argument Main development strategy in 1950s and 1960s

    Very successful in promoting manufacturing growth/Strong Growth BUT:


    Complex and time-consuming regulations Firms might not become competitive Lack of imports and foreign exchange Small market/Production at inefficient scale Necessity of accompanying policy measures

    Export Promotion vs. Import Substitution (Asia vs. Latin America)


    Empirical evidence (Chang, 2002; Liang, 1992; Lall, 1994) Protected Export Promotion Trade Liberalization potentially negative effects on development (Lecture 8)

    Core Readings
    Krugman, Paul, Maurice Obstfeld and Marc Melitz (2011) International Economics: Theory and Policy, 9 th edition (Global edition), Pearson Education, Chapters 9-12 OR Salvatore, Dominic (2011) International Economics: Trade and Finance , 9 th edition, Wiley, Chapters 8,9,11 Dunkley, G. (2004): Free Trade: Myth, Reality and Alternatives. Zed Books, Chapter 3, 6, 8 Weiss, J. (2002): Industrialisation and Globalisation. Routledge, Chapter 4 Thirlwall, A.P (2006): Growth and Development. 8th Edition; Chapters 7 and 16 (8+15 in 9th Edt)

    Additional Readings
    Palma, G. (1978): Dependency: A Formal Theory of Underdevelopment or a Methodology for the Analysis of Concrete Situations of Underdevelopment? World Development 6, p. 881-924 Cashin, P.; Dermott, C.J. (2002): The long-run Behaviour of Commodity Prices: Small Trends and Big Variability. IMF Staff Papers, 49 (2). Ocampo, J. A. and L. Taylor (1998) Trade Liberalisation in Developing Economies: Modest Benefits but Problems with Productivity Growth, Macro Prices, and Income Distribution, The Economic Journal, 108(450), p. 1523-1546. Lall, S. (1994) The East Asia Miracle Study: Does the Bell Toll for Industrial Policy, World Development, 22(4), p. 645-654. Liang, N. (1992) Beyond Import Substitution and Export Promotion: A New Typology of Trade Strategies, Journal of Development Studies, 28(3), p. 447-472. Chang, H.-J. (2002): Kicking away the ladder? : Policies and Institutions for Economic Development in Historical Perspective. Anthem Press, London. Thirlwall, T. (2011): Balance of Payments Constrained Growth Models: History and Overview. PSL Quarterly Review, Vol. 64, Nr. 259, p. 307-351 Milberg, W. (2004): The Changing Structure of Trade linked to Global Production Systems: What are the Policy Implications? International Labour Review, Vol. 143, Nr. 1-2 Staritz, C. (2012): Apparel Exports. Still a Path for Industrial Development? Dynamics in Apparel Global Value Chains and Implications for Low-Income Developing Countries. OEFSE Working Paper. Available at: http://www.oefse.at/Downloads/publikationen/WP34_apparel_exports.pdf Thirwall, A.P. (1983): A plain man guide to Kaldors growth laws. Journal of Post Keynesian Economics, Vol. 5 (3), p. 345-358 Unctad (2013): World Investment Report, Chapter IV (Global Value Chains)

    Background Readings
    WTO (2012): World Trade Report ; available at: www.wto.org World Tariff Profiles, 2011. Online Source, Available at: http://www.wto.org/english/res_e/booksp_e/tari ff_profiles11_e.pdf Rutge et al. (2005): Infant Industries Accessing Global Markets: Strategic Risks and Potential Trade Barriers in Bioplastics. Innovative Marketing, Vol 1(2), p. 22-31

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