Chapter 12 - Controversies in Trade Policy Flashcards
What are the sophisticated arguments for activist trade policy? (4)
1) There are the kinds of arguments that are used in conjunction with ‘industrial policy’. 2) There are two kinds of market failure that seem to be present and relevant to the “strategic trade policies” of advanced countries: 3) Technological externalities 4) The presence of monopoly profits in highly concentrated oligopolistic industries.
What are technological externalities? Give an example.
Externalities - Firms in an industry generate knowledge that other firms can also use without paying for it. In high-tech industries firms face appropriability problems. Example: In electronics, it is common for firms to “reverse engineer” their rivals’ design.
What is the case for government support of high technology industries? (2)
1) Subsidise the activity with externalities, not all activities in an industry. 2) For instance, R&D
Give two characteristics of externalities.
1) Externalities are hard to measure empirically. 2) Problems for appropriability at the level of the nation (as opposed to the firm) are less severe but still important even for a nation as large as the United States.
Explain the link between imperfect competition and strategic trade policy. (6)
1) In some industries where there are only a few firms in effective competition: 2) The assumptions of perfect competition will not apply. 3) Firms will make excess returns (profits). 4) Firms are competing to ‘steal’ the profits of the other firm/s. 5) There will be international competition over the excess returns. 6) A subsidy from the government to domestic firms can shift the excess returns from foreign to domestic firms.
What did Spencer and Brander have to say regarding imperfect competition and strategic trade policy? (3)
1) Spencer and Brander noticed that it is possible in principle for a government to alter the rules of the game to shift the excess returns from foreign to domestic firms. 2) In the simplest case, a subsidy to domestic firms, by deterring investment and production by foreign competitors, can raise the profits of domestic firms by more than the amount of the subsidy. 3) The subsidy raises national income at the expense of other countries.
What are the problems with the Brander-Spencer Analysis? (6)
1) Insufficient information to use the theory effectively. 2) The exact payoffs of the firms cannot easily be obtained. 3) Industries in isolation 4) A policy that succeeds in giving US firms a strategic advantage in one industry will tend to cause strategic disadvantage elsewhere. 5) Foreign realisation 6) Strategic policies are beggar-thy-neighbour policies that increase our welfare at other countries’ expense.
What is the link between globalisation and low-wage labour? (2)
1) The rise of manufactured exports from developing countries is one of the major shifts in the world economy over the last generation. 2) The workers who produce the good are paid low wages and work under poor conditions.
What is the difference of opinion between activists and economists about trade and wages? (2)
1) Activists argue that globalisation makes workers in developing country export industries worse off. 2) Economists argue that despite the low wages earned by worker in developing countries, those workers are better off than they would be if globalisation had not taken place.
How can international trade agreements improve wages and working conditions in poor countries?
International trade agreements can improve wages and working conditions in poor countries by incorporating a system that monitors wages and working conditions and makes the results of this monitoring available to consumers.
What are formal labour standards? (3)
1) They are conditions that export industries are supposed to meet as part of trade agreements. 2) They have considerable political support in advanced countries. 3) They are strongly opposed by most developing countries.
What is the relationship between the WTO and National Independence? (2)
1) Free trade and free flow of capital has undermined national sovereignty. 2) WTO monitors not only the traditional instruments of trade policy, but also domestic policies that are de facto trade policies.
What is the relationship between trade and the environment? (3)
1) Compared to rich-country standards, environmental standards in low- and middle- income countries are lax. 2) Some have opposed free trade for this reason. 3) But we cannot conclude that trade hurts the environment, since consumption and production in the absence of trade have degraded the environment.
What are the ideas represented by an environmental Kuznets curve? (2) What is it?
1) As poor countries grow richer, possibly partly due to trade, they produce more and can consume more, leading to more environmental degradation. 2) But as countries grow richer, they want to pay for more stringent environment protection. Both of these ideas are represented as an environmental Kuznets curve: an inverted “U-shaped” relationship between environmental degradation and income per person.
What is a pollution haven? (3)
1) Because rich countries usually have strict environmental regulations and poor countries do not, environmentally hazardous activities may be moved to poor countries. 2) A pollution haven is a place where an economic activity that is subject to strict environmental controls in some countries is moved to (sold to) other countries with less strict regulation. 3) Yet, there is evidence that pollution havens are insignificant relative to the pollution that occurs without international trade.
Draw the Environmental Kuznets Curve.
