ch01 overview master - copy

8/9/2019 Ch01 Overview Master - Copy

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Overview

The context

Political economy of trade

Road map


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Which countries have inflicted the most harm?


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Measures used to discriminate


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Sectors most affected


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Composition of trade and competition


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How important are the emerin

economies?

!round "#$ of %uropean corporate

revenues& '($ for )*& and +"$ for

Swit,erland derive from emerinmar-ets

!.out "/$ of the profits of S0P /11

companies come from emerinmar-ets


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Political economy of trade

The case for free trade

The case aainst free trade

Political models of trade policy


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The Case for 2ree Trade


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The Case for 2ree Trade 3cont45

The first case for free trade is the arumentthat producers and consumers allocateresources most efficientlywhen

overnments do not distort mar-et pricesthrouh trade policy4

6ational welfare of a small country is hihest withfree trade4

With restricted trade& consumers pay hiher prices4

With restricted trade& distorted prices causeoverproduction either .y existin firms producinmore or .y more firms enterin the industry4


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However& .ecause tariff rates are already low

for most countries& estimated .enefits of

movin to free trade are only a small fraction

of national income for most countries4

7et for some countries in some time periods&

the estimated cost of protection was

su.stantial4


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! second arument for free trade is that allowsfirms or industry to ta-e advantae of economiesof scale4

! third arument for free trade is that it providescompetition and opportunitiesfor innovation4

These dynamic benefitswould not .e reflectedin static estimates of the elimination of efficiencylosses of producers& caused .y distorted pricesand overproduction4


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! fourth arument& called the political

argument for free trade& says that free trade

is the .est feasiblepolitical policy& even

thouh there may .e .etter policies in

principle4

!ny policy that deviates from free trade would .e

8uic-ly manipulated .y special interests& leadin todecreased national welfare4


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The Case !ainst 2ree Trade

2or a 9lare: country& a tariff or 8uota lowers theprice of imports in world mar-ets and eneratesa terms of trade gain4

This .enefit may exceed production and consumptiondistortions4

;n fact& a small tariff will lead to an increase in

national welfare for a lare country4


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The Case !ainst 2ree Trade 3cont45


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! tariff rate that completely prohi.its imports

leaves a country worse off& .ut tariff rate t0

may exist that maximi,es national welfare= anoptimum tariff4


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!n export tax3a neative export su.sidy5 that

completely prohi.its exports leaves a country

worse off& .ut an export tax rate may exist that

maximi,es national welfare throuh the terms oftrade4

!n export su.sidy lowers the terms of trade for a lare

country> an export tax raises the terms of trade for a

lare country4

!n export tax may raise the price of exports in the world

mar-et& increasin the terms of trade4


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! second arument aainst free trade is that

domestic market failuresmay exist that

cause free trade to .e a su.optimal policy4

The economic efficiency loss calculations usin

consumer and producer surplus assume that

mar-ets are functionin efficiently4


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Types of mar-et failures include

Persistently hih underemployment of la.or

Persistently hih underutili,ation of capital

Technoloical .enefitsfor society from additional

production that are not captured .y individual firms

%nvironmental costsfor society from additionalproduction that are not paid for .y individual firms


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%conomists calculate the marginal social

benefitto represent the additional .enefit to

society from additional production4 ;n each of the mar-et failure cases& marinal social

.enefit is not accurately measured .y the producer

surplus of private firms& so that economic efficiency

loss calculations are misleadin4

;t is possi.le that a tariff raises domesticproduction& there.y increasin the .enefit to

domestic society .ecause a mar-et failure4


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The Cases

!ainst2ree Trade

3cont45


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The domestic mar-et failure arument aainst freetrade is an example of a more eneral arumentcalled the theory of the second best4

This theory states that overnment intervention whichdistorts mar-et incentives in one mar-et may increasenational welfare .y offsettin the conse8uences ofmar-et failures elsewhere4

The .est policy would .e to fix the mar-et failuresthemselves& .ut if this is not feasi.le& then overnmentintervention in another mar-et may the 9second.est: wayof fixin the pro.lem4


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Counter!ruments

%conomist supportin free trade counter aruethat domestic mar-et failures should .e corrected.y a first.estpolicy= a domestic policy aimed

directly at the source of the pro.lem4 ;f persistently high under-employment of laboris a

pro.lem& then the cost of la.or or production of la.orintensive products could .e su.sidi,ed .y theovernment4

These su.sidies could avoid the economic efficiencyloss for consumers due to a tariff4


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Counter!ruments 3cont45


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Political Models of Trade Policy

How is trade policy determined?

Models that address this 8uestion=

"4 Median voter theorem

'4 Collective action

+4 ! model of trade policy that com.ines aspects of

collective action and the median voter theorem


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Collective !ction

Political activity is often descri.ed as a

collective action problem=

While consumers as a grouphave an incentive toadvocate free trade& each individualconsumer has

no incentive .ecause his .enefit is not lare

compared to the cost and time required to advocate

free trade4

Policies that impose lare losses in for society as a

whole .ut small losses on each individual may

therefore not face stron opposition4


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Collective !ction 3cont45

However& for those roups who may suffer

lare losses from free trade 3for example&

unemployment5& each individual in that roup

has a stron incentive to advocate the policy

he desires4

;n this case& the cost and time re8uired to advocate

restricted trade is small compared to the cost ofunemployment4


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Summary= !dvantaes of intAl

speciali,ation

@eoraphic proximity

Country differences

;ndustry differences 2irmlevel advantaes 3competitive

advantaes5

Spatial advantaes

Strateic .ehaviour


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@eoraphy of international

competition 3preview5

China is not usin Chinese factors of production

the Chinese content of its Bprocessin exportsA

is less than '1$ and processin exports

accounted for more than half of the nationAs.oom in manufactured trade4


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! Road Map

3'5 The advantae of unilateral free trade

3+5 The advantae of productivity

3(/5 The advantae of alomerations

35 The advantae of neotiations

3D5 ;dentities& reularities& correlations

ch01 overview master - copy

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