lecture 3 2013 vle

7/27/2019 Lecture 3 2013 Vle

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The Economics of Globalisation

Lecture 3: Trade Policy

Annina Kaltenbrunner

[email protected] G.19

mailto:[email protected]

mailto:[email protected]

7/27/2019 Lecture 3 2013 Vle


Recap and Motivation

• Traditional trade theories (Comparative

Advantage Theories)

– Trade increases welfare for all countries through

static efficiency gains

• Lower prices - Increased output and consumption

• Any restrictions on trade can only be distortionary and

reduce welfare >> no role for trade policy

7/27/2019 Lecture 3 2013 Vle


Trade Policy in the Comparative

Advantage Framework

7/27/2019 Lecture 3 2013 Vle


Trade Policy in the Comparative

Advantage Framework

• Net Effect of Tariff: (b+d)-e – b+d=efficiency loss

• Production Distortion Loss (Home produces goods whichcould be produced more cheaply abroad)

• Consumption Distortion Loss – e=terms of trade gain

• Assessment will depend on how we valuegain/loss of each agent – Redistribution?

• Net effect of tariff depends on the ability of tariff-imposing country to drive down foreign exportprices (large vs. small country assumption)

7/27/2019 Lecture 3 2013 Vle


Recap and Motivation

• Markets do not work efficiently >> Important role of government to intervene in trade relations – Trade policy crucial element of alternative economic paradigms

(Dunkley, 2004)

•

New Trade Theories – Trade increases welfare (lower prices) through increasedefficiency and falling average costs

• Potential role for trade policy

• New trade theory but no new trade policy (Krugman, 1992)

• Political Economy arguments against trade policy /Rent seeking (e.g.

Krueger, 1997)• Historical evidence shows that trade policy important

instrument to promote growth, industrialisation, anddevelopment (Consumer Welfare vs. Development)

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Outline

• Main Instruments of Trade Policy

• The Case for Trade Protection and Trade Policy – The Market Failure Argument

• Infant Industry

– The Keynesian Case for Trade Protection: Thirlwall’s Law

– The Terms of Trade Argument: The Prebisch-SingerThesis

– Verdoorn’s Law and Global Value Chains – Theories of Dependence and Unequal Exchange

• Trade Policy in Practice: ISI vs. Export Promotion

7/27/2019 Lecture 3 2013 Vle


Learning Outcomes

• Know and Understand the case and effect of

trade policy (trade protection) in different

economic paradigms

• Evaluate the appropriateness of trade

protection for different countries at different

time frames in light of the theoretical and

empirical (historical) evidence

7/27/2019 Lecture 3 2013 Vle


Types of Trade Instruments

• Tariffs – Oldest form of trade policy

– Government revenue and domestic protection

– Import vs. Export tariff

– Specific vs. Ad-valorem > Effective rate of protection

• Non-Tariff based Trade Policy Instruments

– Export subsidies (CAP) /Export credit subsidies – Import quotas

– Voluntary export restraints (Multi Fibre Agreement)

– Local content requirements

– National procurement

– Technical, Administrative and other Regulations (Red-tape barriers)

• International Cartels

• Dumping (persistent; predatory; sporadic)

– Trade restrictions to counteract dumping are justified

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Types of Trade Instruments

Source: WTO, 2012

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Global Trade Map

•

http://www.wto.org/english/res_e/statis_e/statis_e.htm

(Data on Tariffs for Country and ProductGroups)









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The Case for Trade ProtectionThe Market Failure Argument

• Inefficient Markets – Gains from Trade not

clear

– For example: Prices do not restore efficient market

equilibrium; Frictions to factor mobility across

sectors; transaction costs

• Marginal social benefit beyond producer

surplus – Private production would not take place without

incentive – need for government intervention

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The Market Failure Argument

Infant Industry

• Governments should temporarily support newindustries until they have grown strong enough tomeet international competition and createcomparative advantage

•Market failure arguments for new industries – (Dynamic) economies of scale (learning effects)

– Public Goods (e.g. large fixed costs)

– (Technological) Externalities

– The Appropriability argument

– Linkages

– Imperfect capital markets

• Example: Bioplastic in Canada (Rudge et al. 2005)

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Infant Industry

Source: Ocampo and Taylor, 1998

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Critique

• Traditional

– Trade policies as “second-best”

– Difficulty to identify market failures

– Foreign Retaliation

• Trade protection only as temporary measure?

• Trade protection only for developing countries

to catch up with the developed world?

• First-Mover Advantage and Catch-Up

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The Case for Trade Protection

The Keynesian View

• Demand Determination of Output

•

Y=C+I+G+(X-M)

• Trade Balance Crucial Determinant of Growth

• What are the implications of tradeliberalisation on the trade balance?

7/27/2019 Lecture 3 2013 Vle


The Keynesian View

Thirlwall’s Law• Developing Countries “Balance of Payments Constrained”

• The rate of growth of output of a country (g) can be approximated by theformula

g=x/y

• where x is the growth of export volume (determined by the growth of world income and the income elasticity of demand for exports) and y isthe income elasticity of demand for imports. (Thirlwall, 2006)

• Implications – Exports as main driver of growth

– Important Role of Income Elasticities – Trade Balance not given• Income Elasticity of Exports (Prebisch-Singer Thesis)

• Income Elasticity of Imports (High in developing Countries)

– Trade protection to support domestic demand

7/27/2019 Lecture 3 2013 Vle


The Case for Trade ProtectionThe Terms of Trade Argument

• Prebisch-Singer Hypothesis

• Developing countries experience a secular decline in their terms of trade (export /import prices) – Developing Countries export commodities and import manufacturing

goods

• Two reasons: – Supply Side:

• Relation between income and productivity

• Factor prices in developing countries rise more slowly than productivity due topopulation pressure and surplus labor

– Demand side:• Demand for primary products grows more slowly than that for industrial

products as world income grows1. Low income elasticity of primary commodities (less than 1)

2. Primary commodities substituted by synthetics (e.g. Rubber)

7/27/2019 Lecture 3 2013 Vle


The Terms of Trade Argument

• Trade leads to: – Balance of Payments Problems (“balance of payments constrained

growth” (Thirwall, 2006)

– Decline in Welfare in Developing Countries

– Underdevelopment (commodity dependence vs. industrialisation)

• Trade Protection (Import Substitution) to: – ration scarce foreign exchange - correct balance of payments

disequilibria

– arrest the deterioration in the terms of trade by damping down thedemand for imports

– start producing and exporting goods with a much higher incomeelasticity of demand in world markets (switch from commodity tomanufacturing goods)

• International Price Stabilisation Schemes

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Source: Cashin and Dermott, 2002

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Global Value Chains

• Heterogeneous Developing Countries – Commodity (Africa, Latin America) vs. manufacturing

producer (Asia – China, South-East Asia)

• Deteriorating Terms of Trade of developing countries

– Deteriorating prices of manufacturing goods exportedfrom developing countries (high vs. low value addedmanufacturing)

• Structure of Global Production (Global Value Chains) – vertical FDI and intra-industry trade

>>> Production and Exports of low value added productsbased on low wages from developing countries

>>> Innovation and Development in Developed Countries

7/27/2019 Lecture 3 2013 Vle


Global Value Chains

Dell Notebook

• http://www.youtube.com/watch?v=owQzo82

ac_M&noredirect=1

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Global Value Chains

Textile Industry

Source: Staritz, 2012

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Global Value Chains

Problems

• Strong Competition – Lower Prices – Deteriorating Terms of Trade – Low entry-barriers

– Labour-intensive nature

• Slow growing markets/low income elasticities

• Vulnerability to international market conditions

• Resource Transfer through Profit and Remittances

(Balance of Payments Problem)• Very little dynamic productivity gains in low-value

added technology (Verdoorn’s Law)

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Global Value Chains

Verdoorn’s Law and Cumulative Causation

• Verdoorn Law (Nicholas Kaldor): In manufacturing sector higher output causes

higher productivity through dynamic economies of scale (e.g. learning by doing)

• Implications: Trade Policy to move from primary products and low value-added

manufacturing to high-value added manufacturing (Taiwan, South Korea, China

etc.)

OutputGrowth

ProductivityGrowth and

(Wage Growth)

PriceCompetitiveness

and

(Foreign IncomeGrowth)

ExportGrowth

7/27/2019 Lecture 3 2013 Vle



Other Factors

• Income Distribution (Heckscher-Ohlin Model)

•

Food protection• Security

• National Autonomy

•Political (both national and geopolitical)

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Theories of Dependence and Unequal

Exchange (Thirlwall, 2006; Palma 1978)• Attempt to explain the perpetuation and widening of the differences

between centre and periphery

• For example: Dos Santos, Baran, Gunder Frank, Amin and Emmanuel

• Unequal development as integral part of the world capitalist system – development of some parts of the system (centre) occurs at the expenseof others (periphery)

• Trade as transfer of economic surplus from the centre to the peripheryand from workers to capital

• Development in centre conditions development in periphery andmaintains underdevelopment (“The development of underdevelopment”)

– colonial dependence (resource exploitation)

– financial-industrial dependence (capital transfer)

– technological-industrial dependence (MNCs)

• Domestic Elites

• Autonomous Development and Focus on Domestic Market

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Trade Policy in Practice

Import Substitution vs. Export Promotion

(Lall, 1994; Liang, 1992; Chang, 2002)

• Import substituting industrialization – Develop industries oriented toward the domestic market by using trade

restrictions to encourage the replacement of imported manufactures

– Based on infant industry argument

– Main development strategy in 1950s and 1960s

• Very successful in promoting manufacturing growth/Strong Growth

• BUT: – Complex and time-consuming regulations

– Firms might not become competitive

– Lack of imports and foreign exchange

– Small market/Production at inefficient scale

–

Necessity of accompanying policy measures• Export Promotion vs. Import Substitution (Asia vs. Latin America)

– Empirical evidence (Chang, 2002; Liang, 1992; Lall, 1994)

– Protected Export Promotion

– Trade Liberalization potentially negative effects on development (Lecture 8)

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Core Readings

• Krugman, Paul, Maurice Obstfeld and Marc Melitz(2011) International Economics: Theory and Policy , 9 thedition (Global edition), Pearson Education, Chapters9-12 OR Salvatore, Dominic (2011) International

Economics: Trade and Finance , 9 th edition, Wiley,Chapters 8,9,11

• Dunkley, G. (2004): Free Trade: Myth, Reality and Alternatives. Zed Books, Chapter 3, 6, 8

• Weiss, J. (2002): Industrialisation and Globalisation.

Routledge, Chapter 4• Thirlwall, A.P (2006): Growth and Development . 8th

Edition; Chapters 7 and 16 (8+15 in 9th Edt)

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Additional Readings

• Palma, G. (1978): Dependency: A Formal Theory of Underdevelopment or a Methodology for the Analysis of Concrete Situations of Underdevelopment? World Development 6, p. 881-924

• Cashin, P.; Dermott, C.J. (2002): The long-run Behaviour of Commodity Prices: Small Trends and Big Variability. IMF Staff Papers, 49 (2).

• Ocampo, J. A. and L. Taylor (1998) “Trade Liberalisation in Developing Economies: Modest Benefits but Problemswith Productivity Growth, Macro Prices, and Income Distribution”, The Economic Journal , 108(450), p. 1523-1546.

• Lall, S. (1994) “The East Asia Miracle Study: Does the Bell Toll for Industrial Policy”, World Development , 22(4), p.645-654.

• Liang, N. (1992) “Beyond Import Substitution and Export Promotion: A New Typology of Trade Strategies”, Journal

of Development Studies, 28(3), p. 447-472.• Chang, H.-J. (2002): Kicking away the ladder? : Policies and Institutions for Economic Development in Historical

Perspective. Anthem Press, London.

• Thirlwall, T. (2011): Balance of Payments Constrained Growth Models: History and Overview. PSL Quarterly Review,Vol. 64, Nr. 259, p. 307-351

• Milberg, W. (2004): The Changing Structure of Trade linked to Global Production Systems: What are the PolicyImplications? International Labour Review, Vol. 143, Nr. 1-2

• Staritz, C. (2012): Apparel Exports. Still a Path for Industrial Development? Dynamics in Apparel Global ValueChains and Implications for Low-Income Developing Countries. OEFSE Working Paper. Available at:

http://www.oefse.at/Downloads/publikationen/WP34_apparel_exports.pdf • Thirwall, A.P. (1983): A plain man’ guide to Kaldor’s growth laws. Journal of Post Keynesian Economics, Vol. 5 (3),

p. 345-358

• Unctad (2013): World Investment Report, Chapter IV (Global Value Chains)

http://www.oefse.at/Downloads/publikationen/WP34_apparel_exports.pdf




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Background Readings

• WTO (2012): World Trade Report ; available at:www.wto.org

• World Tariff Profiles, 2011. Online Source,

Available at:http://www.wto.org/english/res_e/booksp_e/tariff_profiles11_e.pdf

• Rutge et al. (2005): Infant Industries Accessing

Global Markets: Strategic Risks and PotentialTrade Barriers in Bioplastics. InnovativeMarketing, Vol 1(2), p. 22-31

http://www.wto.org/english/res_e/booksp_e/tariff_profiles11_e.pdf




lecture 3 2013 vle

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