代写留学生作业The Political Economy of Trade Policy
References
Textbooks:
Appleyard, D. and Field, A. (2005) International Economics, McGraw-Hill Ch. 16 and 17
Husted, S. and Melvin, M. (2007), International Economics, Addison-Wesley Ch. 7
Krugman, P. and Obstfeld, M. (2006) International Economics Addison-Wesley Ch. 9
Articles (as per Lecture 5):
Baldwin R E (1969) “The case against infant industry protection”, Journal of Political Economy, 77, pp.295-305
Feenstra, R. (1992), “How Costly is Protectionism”, Journal of Economic Perspectives, 6(3), pp.159-78
Krugman, P. (1987) “Is free trade passé?” Journal of Economic Perspectives, 1, pp.132-144
Winters L A (1989) “The ‘So-Called Non-Economic Objectives’ of Agricultural Policy”, OECD Economic Studies No. 13, Winter 1989-1990, pp.237-266
Outline
The Case for Free Trade
The Case against Free Trade
Distribution Effects and Trade Policy
International Agreements
The Case for Free Trade
Efficiency Case
National welfare can be improved by removing deadweight losses
Estimates of the cost of protection range from about 1% of National Income to 10% depending on the average protection level
Dynamic Gains
Economies of scale – avoid fragmenting production
Internationally
Domestically (reduce firms producing at inefficient levels)
Opportunities for learning and innovation
Incentives to seek new ways to export/compete with imports
The Case for Free Trade
Political Arguments
Trade policies are dominated by special interest politics rather than national considerations
Attempts to follow sophisticated exceptions to free trade may be subverted by these groups
Results of protection may lead to undesirable redistribution
Therefore it may be better to advocate free trade rather than justify a few exceptions
The Case Against Free Trade
National welfare
Terms of trade
Large countries may be able to lower the price of imports and improve terms of trade (optimum tariff)
Terms of trade benefit may outweigh the cost from tariff induced distortions …but
May lead to retaliation by trading partners
Not relevant for small countries although….
Tendency for terms of trade for primary producers to decline has implications for gains from trade
Domestic Market Failure
Market prices might not adequately reflect economic costs and benefits due to unemployment or domestic price policies
Minimum wages may not reflect opportunity cost of labour
Price support policies may cause domestic prices to exceed world price e.g. agricultural support prices
The Case Against Free Trade
National welfare
Theory of the second best
Government intervention in one market may increase welfare by offsetting consequences of market failure in another market
Imperfections in internal functioning of an economy may justify interfering in external economic relations
But … should the source of the market failure be tackled?
Policy response may lead to unintended impact on incentives elsewhere in the economy
Infant industry argument
Temporary protection may be justified to protect establishment of a domestic industry until it can achieve sufficient economies of scale to compete internationally
Long run comparative advantage may not be the same as short run comparative advantage
The Case Against Free Trade
Infant industry argument
But how long does temporary protection last?
For which industries is protection justified?
Could same objective be achieved by other means (e.g. production cost subsidy)?
Strategic trade policy
Policies to promote particular exports or discourage particular imports
Promote industries with technological externalities (e.g. industries that contribute to developing skills)
Promote growth of national enterprises
Discourage or tax importation of luxuries (e.g. luxury cars) or culturally incompatible products (e.g. alcohol in Islamic countries)
Promote growth of sectors where terms of trade not expected to decline
Strategic trade policy
But…. How do we identify ‘winners’?
How do we nurture them?
Is there a risk of retaliation from countries wishing to export?
Government Revenue
Taxes on trade may be needed to raise revenue
Optimal tariff for revenue purposes is one that maximises tariff revenue – not necessarily the same as the optimal tariff for welfare purposes
Distribution Effects and Trade Policy
Tariffs and Factors of Production
Stolper-Samuelson theorem shows that tariffs may benefit one factor vis à vis another
This creates vested interests in certain tariffs
Political Markets
Demand for policies reflected in votes so…
Politicians follow policies to maximise chances in elections
Does the political system encourage special interest groups to exert power?
American political system (weak party system) may be particularly prone to special interest lobbying
Distribution Effects and Trade Policy
Political Markets
Bureaucrats may identify with sector interests and related interest groups (e.g. agriculture)
Pressure groups – formed to lobby for special interests
Problem that policies that may impose large losses in total but only small losses on individuals may not be effectively opposed
Empirical Evidence
Mixed results but….
Magnitude of an industry and the region where it is located tends to enhance the level of protection
Adjustment costs for tariff removal are greater the poorer the workers and region and the less dynamic the local economy
Historical continuity provides the best explanation - tariff becomes a ‘right’ (e.g. EU Common Agricultural Policy)
Tariff regimes often favour countries with close economic, political and cultural links at the expense of others
Distribution Effects and Trade Policy
Protected Sectors
Developing countries - manufacturing - import substituting industrialisation but often quite inefficient
Developed countries - agriculture (political power of farmers), clothing, steel
International Cartels
Similar function to nationally based cartels - restrict production to raise prices
Usually illegal between companies in a single nation but can occur between producing nations
Can be distinguished from commodity agreements in that consuming nations are excluded
Most well known example is OPEC
International Commodity Agreements
Response to unstable commodity markets
Mainly cover primary commodities (e.g. coffee, tin, cocoa)
Involve both producers and consumers
Buffer stocks are used to stabilise prices
Potentially beneficial but tend to break down and therefore success is limited
代写留学生作业International Agreements
GATT (General Agreement on Tariffs and Trade)
Formed in 1947 to provide framework for settling disputes and reducing trade barriers
Recognition that unilateral reduction in trade barriers is difficult
Guiding principles of non-discrimination and reciprocity
WTO (World Trade Organisation)
Succeeded GATT in 1994
Continued process of liberalisation but conflicting interests limits progress