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EC336 - TRADE > Political Economy > Flashcards

Political Economy Flashcards

1
Q

Question:

A

if trade policies tend to incur net losses, why do they get implemented?

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2
Q

What are the 4 cases FOR free trade

A
  1. efficiency
  2. EOS
  3. competition and innovation
  4. Best feasible politically
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3
Q

Outline the efficiency case for free trade

A

Restricted trade distorts prices = consumer and producer efficiency losses.

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4
Q

Why might the efficiency case for free trade not be that convincing nowadays?

A

Tariff rates already low for most countries and quotas rare so estimated gains of moving to free trade only small % GDP.

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5
Q

Protection costs are < X% go GDP for most countries

A

<1% GDP

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6
Q

EOS argument for free trade

A

Free trade allows firms to take advantage of EOS –>lower prices and increased choice.

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7
Q

Competition and innovation free trade argument

A

free trade provides more competition and incentives to differentiate. With heterogeneous firms, the least productive exit = average industry productivity rises.

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8
Q

What kind of benefits of free trade are competition and innovation cf efficiency losses?

A

DYNAMIC - accrued over time.

efficiency = static estimates.

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9
Q

Whats the political argument for free trade?

A

Any policy deviating from free trade would be quickly manipulated by special interests - like opening pandora box = decrease welfare. Also, deviating would increase trade policy uncertainty.

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10
Q

2 arguments against free trade

A
  1. TOT

2. domestic market failure

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11
Q

The TOT argument against free trade only exists for

A

LARGE countries who can affect world price.

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12
Q

What’s the optimum tariff rate?

A

-Between 0 an tp
where tp = prohibitive tariff rate i.e one that stops trade.
Where marginal gain from improved TOT = marginal efficiency cost.

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13
Q

Shape of optimum tariff graph

A

N shaped then flat line once tp passes.

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14
Q

What’s the optimum policy in export sectors? + real world example.

A

NOT a subsidy which lowers welfare.

Export TAX - this raises TOT, but not too large as to prohibit trade. EG Saudi Arabia and other oil producers.

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15
Q

Problems w trying to improve TOT =

A

Zero sum gain = foreigners lose = RETALIATION.

Prisoners dilemma: one country imposing tariff while other not NOT NE.

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16
Q

Bottom line on TOT argument against free trade.

A

Largely theoretical - not a useful justification in practice for restricting trade.

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17
Q

Whats the domestic failure argument against free trade>

A

Domestic market failures exist = trade restrictions as 2nd best policy where 1st best not feasible.

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18
Q

Example of market failure and how trade policy could help.

A

Persistently high underemployment. Tariff to raise production in import competiting sector.

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19
Q

What do CS and PS calculations implicitly assume?

A

EFFICIENT MARKETS: if inefficient, CS and PS do not accurately measure welfare.

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20
Q

What benefits do CS and PS capture? Why is this a problem when market failures exist?

A

Capture PRIVATE benefits.
Market failures, +VE externality MSB > MPB
So we need to look at social effects of policy, not just private effects. Social welfare gains could offset efficiency losses.

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21
Q

the domestic market failure argument is an example of what general argument?

A

Theory of second best = government intervention which distorts incentives in one market may increase national welfare by offsetting the consequences of market failure elsewhere.

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22
Q

First best vs second best policies

A

First best = directly intervening in the market that’s failed.
Second best = intervenes in another market to indirectly fix the problem.

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23
Q

2 problems with domestic market failure argument

A
  1. Second best: should rly tackle the source of the problem & always compare to an alternative domestic policy.
  2. Difficult to identify market failures and unclear when and to what degree to intervene.
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24
Q

Example of market failure an 2nd best policy US

A

US sugar quota. Argued labour market is too rigid to allow for wage cuts to create employment in other sectors.

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25
Q

Why is a domestic policy such as subsidy often less preferred to trade policy such as quota even if less welfare damaging?

A

Because its costs are more salient than that from trade. About perception and visibility.

26
Q

Important insight about national welfare

A

In reality, no such thing as national welfare. Only desires of individuals who influence the political process.

27
Q

Median voter theorem predicts

A

Democratic political parties will change their politicise to court the median voter i.e. the voter in the middle of the ideology spectrum on a certain issue.

28
Q

2 assumptions of MVT

A
  1. Only 2 parties.

2. Only care about getting elected and winning majority - not about maintaining party ideology.

29
Q

Equilibrium tariff rates in MVT and why

A

ta=tb=tm

One party always has an incentive to undercut to get closer to median voter –> drives both partied to tM.

30
Q

Does trade policy follow MVT in reality? Give n example.

A

NO - removing US sugar quota should find a majority yet it remains.

31
Q

Collective action problem

A

Consumers as a group have a large incentive to advocate for free trade, but individually have little incentive - the individual gains < cost and time of advocacy.

32
Q

Political activity on behalf of a group is a … good

A

PUBLIC GOOD - an individual acting on behalf of the group doesn’t reap the full benefits themselves. Incentive to free ride –> underinvestment in advocacy.

33
Q

Implication of collective action problem

A

Policies imposing large losses for society as a whole, but small losses individual may NOT face strong opposition.

34
Q

2 conditions to overcome collective action problem

A
  1. small group: politically organised, precise well-defined goals.
  2. large incentives e.g. unemployment.
    = large incentives per person.
35
Q

Trade off between motives for politicians

A
  1. MVT: want to advocate popular policies to please majority.
  2. Collective action: want to please special interst groups who are more likely to donate to campaigns
36
Q

2 industries that are well protected.

A
  1. agriculture

2. clothing: textiles and apparel.

37
Q

Which theory is supported by the factor that farmers receive protection?

A

NOT MVT

collective action - farmers well organised and have their livelihoods at stake.

38
Q

Why have workers in clothing overcome collective action problem?

A

Their work is labour intensive so could easily be shifted to low-wage countries = strong incentives t advocate.

39
Q

Much of tariff reductions since WW2 have come abroad through…

A

INTERNATIONAL / MULTILATERAL negotiations.

40
Q

GATT founded in…

A

1947

41
Q

GATT replaced by WTO in…

A

1995

42
Q

2 benefits of multilateral negotiations

A
  1. Mobilise exporters to support freer trade.

2. Avoid destructive trade wars.

43
Q

How does multilateral collective action help mobilise exporters where unilateral does not?

A 
Unilateral = consumers do not get their act together.
Multilateral = foreign country exporters lose out, threaten retaliation = domestic exporters now incentivised to advocate.
44
Q

Explain destructive trade war with prisoners dilemma

A

Each country acting individual has protection as dominant strategy so NE = both restrict trade. Pareto optimal outcome = free trade for both, which multilateral negotiations act as a coordination device.

45
Q

3 ways WTO negotiates address trade restrictions.

A
  1. reduce tariff rates.
  2. binding - upper bound on tariff rates agree not to raise above in future.
  3. change nontariff barriers to tariffs since the costs of tariff are more transparent.
46
Q

2 exceptions to WTO rules

A
  1. Agricultural subsidies.

2. When market disruption is caused by a surge in imports.

47
Q

What’s the WTO dispute settlement procedure?

A

Formal procedure where countries in a trade dispute bring their cases to a panel of WTO experts. Quick decisions < 15 months. Countries not adhering to decisions are punished by allowing others to retaliate.

48
Q

How many trade rounds since 1947?

A

8

49
Q

Current WTO trade round + issues

A

Doha development round started in 2001 but come to nothing as disagreement between US and EU over agricultural protection.

50
Q

Preferential trading agreements =

A

trade agreements between countries in which they have lower tariffs for each other but not for ROW.

51
Q

PTAs are a form of…(2)

A
  • Bilateral negotiations

- Trade policy discrimination

52
Q

WTO most favoured national principle

A

Each country in the WTO promises that all countries will pay tariffs no higher than the nation that pays the lowest i.e. principle of non discrimination. If decrease t for one country, must decrease for all.

53
Q

EXCEPTION to WTO’s MFN principle.

A

If lowest tariff rate = zero.

54
Q

A PTA is made on what products?

A

ALL products - not just one.

55
Q

2 types of PTA’s with t=0 (or near)

A
  1. free trade area

2. customs union

56
Q

How do FTA and Customs union differ?

A

Both have free trade among members.
FTA = each member can have own policies towards non members.
CU = common external trade policy

57
Q

FTA = … nightmare

A

administrative - have to make sure importers don’t arbitrage import tariff differences with non members.
No country should be a low tariff back door.

58
Q

What kind of admin barriers can stop countries being a low tariff back door?

A

Rules of origin

59
Q

Customs union = … nightmare

A

POLITICAL - time and effort to negotiate and the streamline external trade policy of all members.

60
Q

When does PTA increase national welfare?

A

Trade creation: replace extension domestic production with cheap imports from FTA member.

61
Q

When does PTA decrease national welfare?

A

Trade diversion: replace low cost imports from non members with higher cost imports from FTA member.

EC336 - TRADE (9 decks)

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