Controversies in trade policy

Question 1

Arguments for an activist trade policy?

Answer 1

• Activist trade policy usually means gov policies actively supporting export industries through subsidising
• Use assumption that import-substituting industrialisation and the cases against free trade used : market failure –
• Externalities or an appropriability problem
• Imperfect competition that results in revenues that exceed all opportunity costs – excess profits

Question 2

Technology and externalities?

Answer 2

• Firms that invest in new tech generally create knowledge that other firms can use without paying – an appropriality problem
• By investing in new tech, firms creating extra benefit that is easily used by others
• Appropriality problem is an example of an externality – benefits/costs that accrue to parties other than the one that generates it
• Externality implies the MSB of investment not represented by producer surplus
• Should the US gov subsidise high tech industries which create high MSB?

Question 3

Activist trade policy - need to consider?

Answer 3

• 1. Ability to subsidise the right activity – much activity by high tech firms has nothing to do with generating knowledge (subsidising equipment purchase/non-technical workers generally doesn’t create new tech) – knowledge and innovation created in industries that not usually classified as high tech
• 2. Instead of subsidising specific industries, US subsidises R&D through tac code
• 3. Economic importance of externalities – diff to determine quantitative importance, thus diff to decide how much to subsidise
• 4. Externalities may occur across countries – no individual country has incentive to subsidise industries if all countries can take advantage
• Some argue US should have deliberate policy of promoting high tech industries to compete against foreign rivals
• Fear in 80s that Japan dominance of semiconductor memory market would translate into a broader dominance of computers and related tech

Question 4

Imperfect competition and strategic trade policy?

Answer 4

A government policy to give a domestic firm a strategic advantage in production is a strategic trade policy (Boeing/Airbus example)
* Imperfectly competitive industries typically dominated by few firms generate monopoly/excess profits
* Excess profits are revenues that exceed all opportunity costs – profit higher than what equally risky investments elsewhere in the economy earn
* In imperfectly industry, gov subsidies can shift excess profits from foreign to domestic firm

Question 5

Criticisms of analysis - strategic trade policy?

Answer 5

• 1. Practical use of strategic trade policy requires more info about firms than is likely available – predictions from the example differ if numbers are slightly different – Boeing may have better tech that only it can recognise
• 2. Foreign retaliation could result – US could subsidise Boeing which would deter both from producing, starting a trade war and waste taxpayer funds
• 3. Strategic trade policy like any can be manipulated by politically powerful groups

Question 6

Trade and low wage labour?

Answer 6

• Manufactured exports from low and middle income countries have been increasing
• Compared to rich country standards, workers who produce these goods are paid low wages and may work under poor conditions
• Some have opposed free trade for this reason
• Example – Maquiladora sector, Mexican firms producing for export to US
• Opponents of NAFTA argue easier for employers to replace high wage workers in US with low wage workers in Mexico
• May be true but cannot conclude that trade hurts workers
• A Ricardian model predicts whilst wages in Mexico should remain lower than in US due to lower productivity, they will rise relative to their pre-trade level
• A Heckscher-Ohlin model predicts unskilled workers in US will lose from NAFTA and unskilled in Mexico will gain
• Despite low wages, both theories predict those workers are better off with trade
• Evidence shows wages in Maquiladoras have risen relative to wages in other Mexican sectors
• Can also compare the working conditions in the differing sectors

Question 7

Labour standards?

Answer 7

• Some labour activists want to include labour standards in trade negotiations –
• However, labour standards imposed by foreign countries are opposed by governments of low and middle income countries
• International standards could be used as a protectionist policy or basis for lawsuits when domestic producers don’t meet them
• Standards set by high income countries would be expensive for low and middle income producers
• Policy that could be agreeable for gov of low and middle income countries is a system monitoring wages and working conditions and makes this info available to consumers
• Products could be certified as made with acceptable wages and working conditions
• But this would have limited effect as large majority of low/middle income country workers don’t work in the export sector

Question 8

Trade and the environment?

Answer 8

• Compared to rich countries, environ standards in low/middle income are lax
• Some have opposed free trade for this reason
• Cannot conclude that trade hurts the environment as consumption/production in absence of trade have degraded the environment
• Some want to include environ standards in trade negotiations – but same problem as labour where standards set by high income would be too expensive
• As poor grow richer, produce and consume more, leading to environmental degradation
• But as rich grow richer, want to pay for more stringent environment protection
• Represented as an environmental Kuznets curve – inverted U-shaped relationship between environmental degradation and income per person

Question 9

Trade and environment - pollution haven?

Answer 9

• As rich usually have strict regulations, environmentally hazardous activities may be moved to poor countries
• A pollution haven is where an economic activity subject to strict controls in some countries is sold to other countries with less strict regulation
• Yet, evidence that pollution havens are insignificant relative to pollution occurring without international trade
• Pollution in some may cause a negative externality for others
• E.g. production in China could cause air pollution in Korea
• To the degree pollution causes negative externalities for others, they should want to include it in international negotiations
• E.g., emissions of carbon dioxide has been included

Question 10

Trade and culture?

Answer 10

• Some believe trade destroys culture in other countries
• This neglects the principle that we should allow people to define their culture through choice they make, not standards set by others
• Also, any economic change, not just trade, leads to changes in everyday life