Evolution of trade theory Flashcards
What are the major evolutions of trade theory?
Ricardian comparative advantage
- justified ISI and dependency theory
Endogenous growth and new trade theory
- explained intra-industry trade and dynamic (not level) effects
Firm heterogeneity, TFP and new new trade theory
- explained why only some firms engage in international trade, and the firm-specific effects of trade
Trade policy research
- investigates how trade policy impacts trade
What are the implications of Ricardian comparative advantage for developing countries?
Developing countries have a comparative advantage in primary goods, which means they have no opportunity to manufacture, as it’s more efficient to import manufactured goods.
Export pessimism
- Demand for primary commodities won’t grow fast enough to finance industrialization
Harrod-Domar suggested that all was needed was capital injection > industrialization > growth, but manufacturing not possible due to comparative advantage
Solow suggested that gains from trade were only going to be level effects
All this supports dependency theory, and implies the only way for developing countries to grow is to close trade borders and protect infant industries: ISI or EP.
How does import substitution industrialization work?
- identify easy-to-manufacture goods that are imported, to ensure there’s a domestic market
- put up trade barriers, begin basic manufacturing of these products, financed by agricultural surplus
- move into more complex manufacturing, financed by the saved forex from no longer importing basic manufactured goods
How does export promotion work?
- promote exports of basic manufactured goods, rather than supplying the domestic market
- use forex earned from exporting to finance more complex manufacturing
Why was there a shift away from comparative advantage/dependency theory/ISI in the 1970s and 80s?
- Advances in theory
- three-factor models (land, labour, capital)
- dangers of non-operational and negative theories (Baldwin)
- – no criteria for identification (no criteria to see which industries had dynamic externalities)
- – exception to the rule (infant industry)
- dangers of “second-best” theories
- – hard for second-best regulation not to be arbitrary - Advances in empirics (Bhagwati and Krueger)
- ISI economies were struggling, while EP economies were thriving, due to:
- – incentivizing monopolies in existing markets rather than efficiency in existing firms > considerable misallocation
- – increased returns to import licenses led to competition for licenses rather than competition on efficiency
- – incentivizing smuggling and black markets
- – severe forex shortages, as inefficient manufacturing meant needed to continue to import
- – inability to pay back debts due to forex shortages: particularly troublesome with oil crises and SAPs
Example: in Pakistan there was negative value add from ISI - it would have been cheaper to pay people to import the basic manufactured good!
Why was export promotion successful?
- export subsidies offered more visible feedback mechanisms
- can’t force international buyers to buy your products, so incentivized efficiency/quality competition
- no forex shortage, so much quicker response to debt/currency crises
- in E Asia, no fallback to primary commodity revenue
What were the advances of new trade theory?
Helpman and Krugman explained intra-industry trade
- firms benefitting from economies of scale
- consumers that value variety (differentiated goods)
Grossman and Helpman explained dynamic, not level, effects
- tangible trade leads to spillovers and knowledge transfers
What are the characteristics of firms that export, and what does this imply?
- larger
- more productive
- pay higher wages
- more capital- and skill-intensive
This implies self-selection: productivity leads to exporting, which leads to further productivity - it’s not just that exporting > productivity
What is expected to happen to the composition of firms within a given country if trade barriers fall?
- more productive, exporting firms survive
- aggregate productivity increases
Example: Pavcnik - in Chile, 2/3 of the aggregate productivity came from survival of more productive firms, 1/3 came from within-firm productivity improvements
How does our understanding of comparative advantage change with the introduction of firm heterogeneity?
- exporting even occurs in sectors with no comparative advantage
- when barriers fall, reallocation within-industry dominates reallocation across-industry
- shows that comparative advantage plays a bigger role within narrow product categories, rather than across industries
What happens to firm productivity and innovation if trade barriers fall?
Schumpeterian effect (not much empirical evidence) - import competition increases > reduces potential rents from innovation > innovation decrease
Escape-competition effect (Stu and Steinwender)
- import competition increases > increases innovation via the escape-competition effect
- escape-competition effect stronger among firms with higher initial productivity
Market-size effect (Stu and Steinwender)
- increased market access > increased potential rents from innovating > increased innovation
Induced-competition effect
- increased market size > new competition in domestic market > either Schumpeterian or Market-size effects on innovation
Learning-by-exporting (Stu and Steinwender)
- occurs when exporting to developed countries
Access to foreign intermediate goods > TFP increase (Amiti and Konings)
How does the introduction of superstar firms influence our understanding of what happens to firms after trade barriers fall?
Superstar firms compete more intensely at extensive margins
- number of export products, markets
- number of intermediate inputs, sources of intermediate inputs
Autor et al: A smaller number of firms gain even more:
- increased concentration
- decreased labour share of income, driven by between-firm reallocation
How does trade policy impact trade outcomes?
Yi - matters via its interaction with vertical specialization
Goldberg and Pavcnik - matters via its impact on policy uncertainty. Eg. China entering WTO, mattered for US, not Europe (who had given China MFN provision)
