Trade policy

Question 1

which are the 3 main phases of chiles trade policy?

Answer 1

Phase 1: 1973-1989 - unilateral Liberalization
Phase 2: 1990 - PrTrAg with Latin American Neighbors
Phase 3 (2000s): PrTrAg’s with Non-Latin American Regions

Question 2

describe phase 1

Answer 2

before the military coup, Chile’s economy was highly protected, high tariffs, significant state intervention.
military government initiated drastic trade liberalization and reducing tariffs
-> rise in exports, follwed by a decline due to balance of payments crisis.
-> tariffs were reduced again -> export recovery by the late 80’s

Question 3

describe phase 2: PTA with LA neighbors

Answer 3

return to democracy in 90’s.
start negotiating PTA’S bc growing importance of international trade and slow progress in trade negotiations

in the mid 90’s Chile entered an associatio nagreement with Mercosur

Question 4

describe phase 3 (2000s)

Answer 4

Chile signed agreements with major trade partners like EU, USA and Asian countries.
Chile aimed to establish itself as an investment hub for South America bc political and economic stable environment

Question 5

what are the 5 key insights from Chile’s PTA experience

Answer 5

1) small countries can promote their economic interest through strategic partnerships
2) inital conditions are crucial, as unilateral liberalization
3) PTA’s are a complement, not a substitute
4) strong institutional Support is Essential
5) Trade is not isolated from the Broader Economy (microecon. challenges such as improving the competetiveness remain)

Question 6

text 2

what were the major factors contributing to LA’s relative economic decline throughout the 20th century?

Answer 6

the protectionism and the ISI strategy (import susbstitution industrialization)

Question 7

when was the ISI strategy implemented and why

Answer 7

in the 1930s, aimed to protect domestic industries through high tariffs and trade restriction
-> leading to inefficiencies and lack of global competetiveness

Question 8

3 impacts of the ISI on LA’s economy

Answer 8

1) disorted pricing mechanism (verzerrter Preismechanismus), resulting in misallocation of resources
2) growing informality and unemployment (dual labor market with high wages in protected industries nad low wages in expanding informal sector)
3) expanding state’s role with many SOE in “strategic” sector, but often inefficient and loss-making

Question 9

how did the oil price shock impact LA’s economy?

Answer 9

OPS in the 70s intensified LA’s economic issues.
Oil-importing countries took on debt to cover oil costs while oil-exporting countries took on debt to fund development plans
–> 1982 debt crisis leading to the “lost decade” for LA

Question 10

Key Conclusion from the Article abt ISI and protectionism

Answer 10

1) ISI strategy was costly bc of its inefficiencies, dual labor market, overextended public sector and a debt crisis
2) Importance of international competition and open economy as a foundation for sustainble growth
3) LA needs structural reforms to modernize its economy and enhance competetiveness. Recomm: trade liberalization, economic deregulation, privatization of SOE

Question 11

3

Chile is often a model for successful economic liberalization. Name the 3 key areas and 3 aspects for each

Answer 11

1. Macroeconomic Effects:
   1.1) growth: lib. first led to decline, then contrib. to strong economic growth in the late 80s and 90s
   1.2) employment: raised during the times of economic growth
   1.3) TFP: mixed trends
2. Distributional effects:
   2.1) wages: wage inequality increased
   2.2) poverty: rates declined during the 90s
   2.3) TFP and inequality: no noticable effects
3. microeconomic analysis:
   3.1) role of labor market reforms: played a role in the distributional impacts of liberalization (e.g. decentralisation of wage negotiation)
   3.2) impact on different groups: the effects of lib. varied based on education level, gender and economic sector

Question 12

Key takeaways from the trade liberalization

3

Answer 12

1) complex relationship between liberalization and inequality; sometimes adverse (nachteilig) effects on income distribution
2) importance of labor market reforms, bc it significantly influences the distributional outcomes of liberalization
3) need for targeted policies; to mitigate the negative impacts

Question 13

how is the relationship between trade liberalization and inflation?
how is the relationship between Liberalization and Income Distribution?

Answer 13

1) weak inverse relationship between liberalization and inflation, so correlation but no too strong
2) wage inequality increased but so did the poverty reduction

Question 14

Main outcome of liberalization

Answer 14

overall macroeconomic impact positive, but also distributional downside.
So the outcomes of lib. depend heavily on unique circumstances -> no universal conclusion about the impacts