8: Controversies in Trade theory

Question 1

3 arguments (top 2 are main)

Answer 1

Trade and low-wage labour

Trade and environment

Trade and culture

Question 2

What has been a major change in world trade

b) why is this an issue

Answer 2

We’ve seen an increase of manufactured exports from low/middle income countries

e.g Bangladesh relies on exports of manufactured goods more than agricultural

b) as workers in these countries are paid low wages + under poor conditions

Question 3

Who cares about these foreign labour standards (3)

Answer 3

consumers (dont want sweatshop products)

policy makers

unions in the rich countries (empath with foreign, and also because if poor labour conditions/wages in other country, firms may relocate to there, so domestic workers lose out due to offshoring. So they want wages to improve for their domestic workers sake

Question 4

Example: Maquiladora sector: what is it

B) Maquiladora sector wages and conditions

C) Why is this an example of why opposers of free trade

Answer 4

Factories import material on a duty-free basis, then export finished goods back to the country of origin.

Usually in the US and Mexico.

B) wages and working conditions are well below US standards.

C) since NAFTA has allowed employers to replace high-wage workers in US with low-wage workers in Mexico (maybe the US workers are the opposers!)

Question 5

Theoretical predictions to Maquiladoras

A) Ricardian
B) HO
C) overall both predict…

Answer 5

Ricardian - predicts everyone wins.
while wages in Mexico should remain lower than US (since lower productivity), it is still higher than pre-trade level

B)
HO predicts some lose
US unskilled workers lose, unskilled in Mexico gain

C) both predict Mexican workers are better off with trade than none at all!!

Question 6

Empirical evidence on Maquiladoras’ wages and conditions

Answer 6

Wages and conditions in Maquiladoras are actually better than other mexican sectors.

Question 7

So what is the underlying problem

Answer 7

Lack of opportunities in Mexico

Many maquiladora workers were peasants, so it is just them moving from intense poverty to less severe poverty

Question 8

Who supports and who opposes international labour standards in trade negotiations

Answer 8

High income countries want it

Low/middle income countries dont want to as they have cost advantages they don’t wanna give up

Question 9

So international standards unlikely.

What would low/middle income countries agree on?

B) con

C) why is it controversial as to whether foreign firms should pay a living wage (above the norm in the developing country)

Answer 9

A system thay monitors wages and working conditions available to consumers.

B) limited effect since large majority of workers in these countries do not work in export sector.

C)
Wages above equilibrium creates unemployment! Only see those who get paid higher, not those who get laid off!!

Question 10

What must we consider when assessing whether trade hurts the environment?

Answer 10

We cant conclude trade hurts environment as a sole factor, since consumption and production without trade has degraded the environment

So trade could either help or harm

Question 11

What does trade help/harm environment depend on?

Answer 11

Whether we have productioni or consumption externalities

Question 12

Example of positive and negative production and consumption externalities

Answer 12

Positive production externality - production of high tech products, since has knowledge spillovers

Positive consumption externality: solar panels

Negative production externalities: pollution

Negative consumption externalities: fuel cars that emit carbox dioxide

Question 13

Stylized facts

Answer 13

1.Dirty industries (manufacturing) are more exposed to trade
2. Different types of pollution are correlated (co2 with nox)
3. Dirty industries are more upstream (early in production process)
4. More productive plants are cleaner
5. Emission rates differ across countries
6. Most emission growth comes from developing countries
7. Global trade accounts 1/4 to 1/3 of global emissions
8. Rich countries increasingly outsource pollution
9. Technique accounts for a larger share of changes in emmissions (i.e technique of production contributes more to pollution than ratio of clean/dirty industries)

Question 14

Which are dirty industries

B) and why are they more exposed to trade

C) total emission rate of NOx mean of dirtiest 5 industries vs cleanest 5

Answer 14

Manufacturinng industries are dirty. (Services is clean)

B) lower tariffs+NTBS

C) 7.7 compared to 0.5

Question 15

Emission rates differ across countries

Which region cleanest vs dirtiest

Answer 15

Asia dirty EU cleanest

(Implications for outsourcing dirty industries…)

Question 16

Environenmental Kuznets curve

Answer 16

U shape- initally do damage, but then more friendly once rich

Question 17

Empirical evidence of kuznets

Fails or holds?
(Hold has eval)

Answer 17

Mixed.
Fails: Grossman and Krueger (same people as endogenous growth i.e trade function of rate of tech transfer rate due to imitation)

find pollution is not solely a function of income (i.e when they get rich they may still not care!)

In some countries it holds but evaluation:
Even if they reduce their pollution, they increasingly outsource pollution, so bad for global pollution!

Question 18

Pollution haven

Answer 18

When production subject to strict environmental controls is moved to countries with lax regulation.

Question 19

Data on pollution havens

Answer 19

Evidence shows pollution havens are insignificant relative to pollution without global trade

(Antweiler, Copeland and Taylor support pollution havens not being that bad… finding free trade improves envrionment!)

Question 20

So how can trade lower pollution

Answer 20

Remember trade reallocates resources, productive firms survive.

Productive firms are on average cleaner

Question 21

Cherniwchan

(hint; NAFTA)

Answer 21

Finds following NAFTA, emissions fell due to free trade making productive (and cleaner) survive

Question 22

Pollution halo hypothesis

Answer 22

Free trade facilitates globalisation of MNEs, with higher standards.

Thus trade can lower pollution!

Question 23

What is the main cause of pollution in these cases
B) so should we have trade policy to adress environment or not? What else
(Whats the 1st and 2nd best environmental policy)

Answer 23

The production! Not the trade.

B) production. So address thru pigouvian taxes (taxes on activity with negative externalities)
Trade policy is 2nd best environmental policy

Question 24

So trade policy is 2nd best way to address envirinment (first REGULATE negative externalities on production (via pigouvian taxes))

We’ll look at trade policy on environment:
Tuna dolphin case

Answer 24

US imposed trade restrictions in response to Mexico killing too many dolphins

Mexico disputed it and won.
Thus; trade restrictions ineffective in affecting other countries’ environmental regulations (also an argument why you cant interfene in other peoples environmental, esp when US degraded environment themselves)

Question 25

Similar: shrimp turtle case

Answer 25

US wanted to save turtles killed in shrimp shing by banning shrimp imports from India, Pakistan Thailand and Malaysia that used this method

Deemend discriminatory, however WTO ruled US could ban imports to protect the environment in other countries, as long as non-discriminatory

(CONTRASTS TUNA DOLPHIN RULING)

Question 26

Reasons for trade policy being linked to environment (3)

Answer 26

Practical solution to cross-border problems

Incentivise compliance with environmental standards

Can support domestic environmental aims

Question 27

Reasons against linking trade policy to environment (5)

Answer 27

Countries should be able to choose own level of pollution

US has caused problems themselves, so unfair to stop other countries using the same polluting techniques.

Protectionist - Environmental standards can be protectionist to high-income countries

Not a direct solution (ADDRESS THE NEGATIVE PRODUCTION EXTERNALITY -PIGOURIAN TAX)

Conflict - retaliation…

Question 28

Carbon tariff - what is it.

Why good?

Answer 28

Charges importers on goods that emit carbon dioxide.

B) gives oversea producers incentive to limit emissions, and thus reduces carbon leakage (moving to countries with lax climate policies: similar to pollution haven)

Question 29

Criticism of carbon tariffs (2)

Answer 29

Protectionist again (against lax standard cheap countries)

Discriminatory

Question 30

Carbon Border Adjustment Mechanism (CBAM)

Answer 30

Government tax imported goods according to carbon emissions

E.g EU charges carbon-related cost to foreign countries on their exports to the EU