Beruflich Dokumente
Kultur Dokumente
Daniel TRAÇA
1
Globalization I:
Increased trade in goods and services
countries.
|2
Trade in services and merchandise
•! Most of world trade is in goods Share of goods and commercial services in total trade
Commercial Commercial
•! Services trail behind, but are Goods Services Goods Services
component.
North America 77.2 22.8 85.9 14.1
|3
Globalization II:
Foreign Investment - complex strategies of
multinationals
|4
Drivers of Modern Globalization
|5
Theory and practice of international trade
and foreign investment
WHAT WE WILL LEARN…
|6
Organization of the course
|7
Materials and exams
•! Recommended textbook
–! “International Economics, 6th ed”by Krugman P. and Obstfeld M., Addison-Wesley
•! Older edition available in French version
•! Additional readings available at website
|8
The theory of Comparative Advantage
9
Absolute Advantage
|10
Absolute Advantage
Manufacturing Food
(pieces) (bushels)
NORTH 10 8
SOUTH 3 9
|11
Gains from specialization
1 southerner
(MANUF to 3 Manuf 9 Food
FOOD)
|12
Comparative Advantage
|13
Comparative Advantage
North is MORE productive in both goods
NORTH 10 10
SOUTH 3 9
|14
Even so, there are gains from
specialization
|15
How does the market work?
•! Who benefits and who looses from international trade in the free-market?
–! Among individuals within a country?
–! Among countries?
|16
In Autarky...
North
Northern worker
They work in both
sectors, and trade
among them at the
autarky relative price
Food
South
The relative price
P=p Manuf/pFood
|17
The Production Possibility Frontier, the
price and the choice of consumers
North
Manuf Production
possibility
10 frontier
+1
Consumer choice…
…determines the allocation of labor
in Manuf in autarky
Slope = -1
Northern workers
UN In equilibrium
P=1, to ensure
that both goods
are produced
-1/PN = -1
Northern
10 workers in Food
Food in autarky
|18
The prices in autarky (closed)
economy
Manuf Food
P
(pieces) (bushels)
NORTH 10 10 10/10 = 1
SOUTH 3 9 9/3 = 3
|19
In Autarky...
Manuf Manuf
|20
Production Possibility Frontier
North South
Manuf Manuf
10
Average [production =
consumption] basket in autarky
+1
PN =1 -1
3
UN +1
PS =3 -3
US
-1/PN -1/PS
10 Food 9 Food
|21
Wages and productivity
|22
The beginnings of Trade…
|23
Openness in the Short Run...
1 . Trade
starts due
to arbitrage
Manuf Manuf
|24
In the Long-Run, there is re-
allocation
North South
Each country specializes
PN >10/10 PS < 9/3
completely in, and exports, the
Food good in which it has Food
comparative advantage
Manuf Manuf
There is one world price,
which is between the
initial prices
10/10 < PW <9/3
Manuf Manuf
There is one world price,
which is between the
initial prices
10/10 < PW <9/3
only Manuf
Relative Supply (RSW)
3 World
North and South specialize North produces Manuf only
completely South produces both
1<PW <3
1
North and Relative Demand (RDW)
South South produces Food only World
produce North produces both
only Food
Manuf/Food
|27
The Gains from Trade according to
Comparative Advantage
North South
Manuf Manuf
10
-1/PW
UN(Manuf)
-1/PN
3
UN US(Food)
-1/PW US
-1/PS
10 Food 9 Food
|28
The Gains from Trade according to
Comparative Advantage
North South
Manuf Manuf
10
-1/PW
UN(Manuf)
-1/PN
3
UN US(Food)
-1/PW US
-1/PS
10 Food 9 Food
|29
Some unrealistic features of the
model, so far…
|30
Transport Costs and Non-traded
goods
|31
Global markets vs. local markets
TRADABLES and NON-TRADABLES
|32
Summary
•! Comparative advantage:
–! Consumers react to price differences and buy from lower price
foreign producers the goods in which their country does not have
comparative advantage (gains from exchange).
–! Producers react to price differences and allocate resources to
industries where relative productivity is higher, exporting those
goods (gains from specialization).
|33
Specific factors and Costs of
Adjustment
International Trade – Session 2
Daniel TRAÇA
1
A summary of the last session
•! Globalization
–! Growth of Trade and Foreign Direct Investment; Mostly among rich
countries;
–! Developing countries rising fast (East Asia) but still small;
|2
This session
|3
The myth of competitiveness
|4
Wages and productivity
|5
The competitiveness of sectors of
comparative advantage
–! In the industry of comparative advantage, the productivity gap will be wider than the wage
gap.
•! So, if in an industry we see differences in wages that are larger than the productivity
differences, that is OK! It just means that one is the sector of comparative advantage.
|6
The case where FACTORS cannot
adjust
UN! UN(average) are the gains from
North exchange.
•! They occur because, in autarky, North
Manuf had too much Manuf relative to Food,
compared to the South.
•! So, even if production does not change,
10 1<P W
<3 there are incentives to exchange Manuf
for Food with the South.
UN(Manuf) UN(average) ! UN(Manuf) are the gains
from specialization.
•!They occur when resources are able to
UN(average) move to the sector of comparative
consumption] basket in
Average [production =
UN(Food) At home:
do the same exercise
for the South!
10 Food
|7
If Adjustment costs are high, trade
becomes highly political
•!The Manuf producers in the North (exporters) •!The Food producers in North (exporters) are
are better off, but ... better off, but ...
•! Food producers (import-competing) are worse •! Manuf producers (import-competing) are worse
off off
•!The gains outweigh the losses and the average •!The gains outweigh the losses and the average
worker is still better off. worker is still better off.
•!The North is a net producer of Manuf, for which •!The South is a net consumer of Manuf, for which
the price has risen. the price has fallen.
International Trade has positive benefits (gains from exchange), but is hot politics. It is similar to
technological progress that displaces workers.
|8
The Political Economy
|9
Dealing with Adjustment Costs
•! Trade politics
–! Organization matters, and losers are more likely to get organized.
–! The small gains of the many versus the large losses of the few.
|10
Costs of Protectionism
Consumer cost
Billions of US$ 70* 74 - 110 12 - 13 67 - 100
Share of GDP (%) 1.2* 2.6 – 3.8 3.8 – 4.3 1.1 – 1.6
Average tariff equivalent (%) 35 180 170 40
Jobs “saved” (‘000) 190 180 174 - 405 1,500
|11
Short-term protection… becomes
long-term! An example
|12
Dealing with Adjustment Costs
•! Unemployment subsidies
•! e.g. the Trade Adjustment Assistance in the US
–! Danger: discouraging job-search and creating long-term
unemployment.
•! Retraining
–! The difficulty is that the mean worker displaced in manufacturing
in the US is aged 38.6, has 12.3 years of education, and has a
job tenure of of 6.5 years
–! Life-long learning is a better option.
|13
Incomplete specialization I
Decreasing returns and the concavity of the PPF
Manuf
Employment in Manuf
|14
Incomplete specialization II
The equilibrium with decreasing returns
Recall that P is the relative
price of manufactures
Equilibrium
w = MPLF = MPLM x P w
|15
Incomplete specialization III
Decreasing returns and the concavity of the PPF
Food
|16
Incomplete specialization IV
Supply and demand
Relative Supply
P SOUTH
•!Assume that the North is more
productive in Manufacturing than the
South.
•!How do its supply and demand look like,
relative to the South?
PS
Relative Demand
SOUTH
Manuf/Food
|17
Incomplete specialization II
Trade
•! The PPF of North is larger, because the
marginal productivity is higher in the North.
•! The change in the PPF is not parallel:
–! The marginal product is relatively higher in
manufacturing, the same relative employment
levels.
Manuf
MN •! The comparative advantage (productivity
differential) of the North is larger in
MS manufacturing.
Equilibrium: P = MPLF/MPLM
•! For any given price (P), the relative supply
of Manuf is larger in the North (MN/FN>MS/FS).
–! The higher MPL in Manuf encourages higher
employment is this sector.
FNFS Food
|18
Incomplete specialization II
World prices from supply and demand
•! The equilibrium price of Manuf is lower in
the North.
P –! Because the supply of Manuf is relatively
RSS
larger there.
RSW
PW
PN
Manuf/Food
|19
Incomplete specialization III
The gains from trade in the North
–! Effects on consumption of
Gains from manufactures depend on income
trade
(+) and substitution effect.
Imports
•! But there is incomplete
specialization,
–! The North still produces some
Food for its own consumption
Food
|20
Equilibrium productivity and
comparative advantage
|21
Summary
|22
The Factor-Proportions Model
International Trade – Session 3
Daniel TRAÇA
A summary of the last session II
w/r
FF
Food
w/r
K/L
L
The substitutability of factors
ISOQUANT:
combinations of
•! Manuf is a Capital Intensive sector.
K inputs that
produce the
–! It uses a higher ratio of K/L, for any given
same quantity of
the good
factor prices.
w/r
FF
MM
Manuf
Food
w/r1
K/L
L
Concavity of the PPF
Food
The factor-price ratio (w/r) and the
relative price of manufacture (P)
P
Prices, relative factor returns and
factor intensities
w/r
MM FF
w/r2
w/r1
SS
•! An increase in Abundance of
Kapital
–! The PPF becomes larger, but the
Manuf change is not parallel:
M2
–! Since Manuf is the main user of
M1 Kapital, the difference is relatively
larger in Manuf.
•! For the same price, the output of
Manuf rises and that of Food
declines
F2F1 Food
An interesting theorem (Rybczinsky)
•! An increase in the
supply of a factor,
with prices •! A rise in L lowers K/L (right-hand side).
Gains from
trade
export increases;
Imports
–! Effects on consumption of
manufactures depend on income
(+) and substitution effect.
Food
Resource Abundance, Comparative
Advantage and the Pattern of Trade
Labor Intensive
comparative advantage in
Kapital Intensive
FOOD
the sectors that use
MANUF
relatively INTENSIVELY
the factors that are
relatively ABUNDANT.
NORTH
Kapital Abundant
Specializes in Manuf
Dynamic Comparative Advantage
- Accumulating Skills and Capital
Education, Investment, Infrastructure
(Aeronautics)
Resource Intensive
Natural Resources (Rice, Oil)
Real Factor Returns and Factor
intensities
w/rS
SS
Good working
Rich Abundance in conditions
High returns for
coun skilled labor
unskilled labor High unskilled
tries and capital
wages
Poor working
Poor conditions
coun Abundance in Low returns for
tries unskilled labor unskilled labor Low unskilled
wages
Unfair Competition and Comparative
Advantage
w/rS
SS
France, Germany
Unskilled-intensive sector shrinks, releasing too much unskilled labor
•! Comparative Advantage (and gains from trade) may arise from differences
in the relative abundance of factors, if they are used with different
intensities across sectors
•! Comparative advantage in sectors the used intensively the abundant factor.
–! Changes in factor abundance due to economic development will affect the
country’s comparative advantage.
•! Low wages in poor countries are due, in part, to low capital abundance.
–! These low wages are the source of gains from trade and not unfair competition
•! Trade causes adjustments in factor returns
•! Trade and factor flows are substitutes.
–! Factors that are used intensively in import-competing sectors, i.e. the relatively
scarce factors, loose out.
–! However, recent increases in the wage-skill gap and unskilled unemployment are
most likely caused by technological change.
Extensions of the competitive trade model
International Trade – Session 4
Daniel TRAÇA
Three models of international trade
1/PW1
Usoe2
PW1
PW2
1/PW1 Utot2
Relative Demand
U1 WORLD
1/PW2
Manuf/Food
Food
Terms of trade effects II
Immiserizing growth?
•! Example:
–! The German War reparations
Shortcomings of theories of
Comparative Advantage
•! Many countries export and import from each other goods that are
very similar and belong to the same sector (e.g Autos).
•! Many world markets are not competitive, and have instead a few
players that operate strategically.
paut F D
Marginal Marginal
Rev Cost
p* C
J
B
A exports
Demand
qaut qc* q p* q
International Trade and Imperfect
Competition
•! With imperfect competition, prices are no
longer a good way to assess Comparative
Advantage, because they may not reflect
p Autarky: MR=MC costs!
E –! In the figure, the autarky price (paut) is higher
than the world price (p*) and the country
Trade: p*=MC becomes an exporter.
•! There are gains from trade (DBCJ)
–! Gains due to competition: The competitive
Paut F D pressure of foreign competitors prevents
the monopolist from creating deadweight
loss.
•! Emerge even if there is no trade (e.g. a
Marginal Marginal prohibition to export)
Rev Cost
•! The competitive force of trade represents a loss to
p* G H C producers (FDGH-HBC), but a gain to consumers
(FDGC), and a net social gain (DBIC)
J –! Gains due to Comparative Advantage: The cost
I of producing at home is lower than the
price obtained abroad, suggesting a new
B export market
A exports •! The monopolist’s sector would become a net
Demand exporter (p* is higher than marginal cost when
supplying the home market). This benefits
producers (CIJ)
qaut qc* q p* q
Imperfect competition and
international trade
North South
p p
Autarky prices are identical.
Will there be trade?
pN pS
Marginal Marginal
Rev Rev
B B
Demand Demand
qaut q qaut q
Reciprocal dumping
•! Since the price in export markets is larger than the marginal cost,
each monopolist has an incentive to sell in the export market (if it is
able to price-discriminate)
–! The equilibrium will be such that both monopolists will fall back to
p=MC.
–! There will be trade, due to the aggressive strategies of the monopolists.
•! The gains include the loss of market power of the monopolists
–! There may be some losses due to useless trade (if the goods are
identical).
•! Domestic firms often accuse foreign firms that export at prices lower
than in their home markets of UNFAIR TRADE
–! This may simply be due to segmented markets and the price-
discrimination strategy of firms
Increasing returns and the gains
from integration
•! Monopolistic Competition:
–! Firms produce differentiated goods
price •! MR=MC for each firm
of –! Free entry drives away profits
each Average Cost –! In equilibrium, there are n identical firms in
is declining due to increasing returns each country.
firm
•! With trade, they become integrated
Initial autarky equilibrium –! INCREASED VARIETIES
•! With more varieties, the elasticity of demand will
rise, as closer substitutes will arise
long-run eq. w/ trade
–! INCRAESED COMPETITION
paut •! In the short-run, this will increase competition,
short-run eq. w/ trade leading to lower prices and higher output.
•! But firms are now in loss
p** –! RATIONALIZTION
•! In the long-run, some firms will drop out, to
p* ensure the return to profitability of survivors.
•! Surviving firms increase size and lower unit costs
Marginal Cost
Differentiate
goods.
d Manuf
•! There will be intraindustry trade!
–! The pattern of trade is ambiguous. Determined
MANUF FOOD
by luck or first-mover advantage (e.g. Labor
Capital
semiconductors). intensive intensive
Food
•! There is simultaneously interindustry trade,
explained mostly through Comparative
Advantage.
NORTH Relative Capital
–! Here, the pattern of trade is unambiguous.
Abundant - Specializes in Manuf
Measuring intraindustry trade
Japan
US Headquartered
Headquartered
Companies
Companies
Japan
US
Korea/Taiwan
Europe
Sources of Japanese competitive
advantage in DRAM’s
•! Government Support (NOT VERY IMPORTANT!)
–! Protectionism up to mid 70’s
–! Only light subsidies afterwards
Micron
1.0 1.3 24.6
Technology
National
-1.7 1.7 11.3
Semiconductor
Texas
0.0 3.6 7.0
Instruments
•! Restrictive
•! Competence and
competition policy United
higher returns in
•!Focus on innovation States
microprocessors
(defense contracts)
•! Lax competition
•! Competence and
policy
Japan •!Excellence in
higher returns in
DRAM’s
manufacturing
Daniel TRAÇA
1
The Gains from International Trade
|2
Free-Trade is better for the
economy, because…
Supply, MC
Consumer surplus
Free-trade
price
Free-trade price
producer
surplus
Demand
IMPORTS
Output Cons
|3
…Protectionism imposes losses on
consumers ...
Supply, MC
FT price
Loss of consumers Tariff
IMPORTS
|4
… some of which are deadweight
losses
A – loss of gains
from
specialization
Deadweight loss B – loss of gains
from exchange
IMPORTS
|5
A simple example:
Portugal and the textile industry
•! The sector represents more than 200,000 jobs, 16% of total exports and 2%
of GDP
•! What are the net effects of trade with China?
–! Assumptions:
•! With free-trade in textiles, wholesale prices fall by around 30%
•! At this Free-Trade price, no domestic producers will survive
•! Workers will not find jobs elsewhere
|6
Costs of Protectionism
Consumer cost
Billions of US$ 70* 74 - 110 12 - 13 67 - 100
Share of GDP (%) 1.2* 2.6 – 3.8 3.8 – 4.3 1.1 – 1.6
Average tariff equivalent (%) 35 180 170 40
Jobs “saved” (‘000) 190 180 174 - 405 1,500
|7
The case for unilateral free-trade
•! t is a tariff
Manuf The case where t > s –! On imports of food
–! pTF= pwF(1+t)
•! s is an export subsidy
–! On exports of Manufactures
- 1/PW
Consumption –! pTM= pwM(1+s)
with T
Consumption
•! PT= pwM(1+s)/pwF(1+t) = Pw(1+s)/(1+t)
with FT
Exports of
manuf •! Lerner symmetry: Import- and export-
UFT
Imports of - 1/PT taxes are equivalent.
food - 1/PT UT
Production –! What matters is resource allocation!
with FT
Production •! Both, a rise in t or a decline in s,
with T promote the import-competing sector at
the expense of the exporting sector.
Food
|9
Anti-competitive effects of Quantitative
Restrictions: the monopolist case
Demand
Residual
Demand Supply, MC
Marg
Rev
QUOTA QUOTA
Price
More losses to consumers with QUOTA
Tariff Tariff price
price
Losses of consumers with TARIFF Tariff
FT price
IMPORTS
QUOTA
|10
Anti-competitive effects of Quantitative
Restrictions: the monopolist case
Demand
Residual
Demand Supply, MC
Marg
Rev
QUOTA QUOTA
Price Additional
More lossesgains
Producer to consumers with QUOTA
Tariff Tariff price
price
Producer (-) B
Gains Revenue w/ tariff Tariff
FT price A QUOTA Rents
|12
Reasons for protectionism
|13
1. Terms of Trade effect
|14
2. The trade balance
|15
3. Unfair Trade: Anti-Dumping I
Legal Analysis: WTO rules on anti-dumping and
countervailing duties; Article VI of the GATT, 1994
|16
3. Unfair Trade: Anti-Dumping II
Economic Analysis
Causes Consequences
•! Foreign government practices •! Benefits consumers and hurts domestic
–! foreign subsidies producers
–! protected home markets
•! Net gains for the economy (improved
•! Firm strategy: terms of trade)
–! market segmentation
–! forward pricing
•! Caveat: Predatory Dumping
–! If used to monopolize the industry,
–! predatory dumping dumping has costs, in the long run.
–! There are important conditions for
predatory success
•! Large size of foreign producer or cartel.
•! High barriers to re-entry by domestic
producers.
•! High barriers to entry by other foreign
producers.
–! These conditions are not required in the
WTO law and are very difficult to exist.
|17
3. Unfair Trade: Anti-Dumping III
Anti-Dumping on the rise
|18
4. Political and Social Factors
|19
4. Political and Social Factors (cont)
|20
5. Enter the Strategists…
Protectionism that raises GDP!
Expanding output with a tariff
Supply
Private MC
Social MC
Consumer
Surplus
Tariff price
Prod
Tariff Rev dwl FT price
Surplus
dwl (-)
Social Demand
surplus
Lower Cons.
|23
Summary
|24
Summary
•! Exceptions to free-trade
–! Large countries may benefit from terms-of-trade effects.
–! Protectionism and the Trade Balance are independent, in the long-run.
–! Unfair trade: Anti-dumping duties only make sense in the very unlikely
case of predatory dumping.
–! Political and social issues: responding to special interests,
•! Redistribution is difficult
•! Organization matters, Revenues matter, Social peace matters
–! Promoting Strategic Industries (with market failures)
•! Protection may help but is almost never the best policy
•! The best policy targets distortions through minimal intervention
|25
From Classicist,… to Strategist,… to
Realist
International Trade – Session 6
Daniel TRAÇA
1
From Mercantilist to Classical
|2
The Classical view
|3
Enter the Strategists…
Protectionism may raise welfare!
Expanding output with a tariff
•! There are MARKET FAILURES. Most
Supply markets are imperfect.
Private MC
–! Social Cost/Benefit may differ from
Private Cost/Benefit
Consumer Social MC –! Trade intervention may increase
Welfare, in this case.
Surplus
Tariff price
In the figure:
Tariff Rev dwl •! The social cost is lower because the
FT price production of the good provides
Prod dwl (-) Demand
externalities
Social •! A tariff raises welfare if the Social
surplus gains from increased production are
larger than the deadweight loss from
FT
output
Socially reduced consumption.
Optimal Social gains
output Deadweight
from increased losses from
production reduced
consumption
Achieved
with tariff
|4
5. Arrivée des Stratégistes…
Le protectionnisme qui augmente le PIB!
Offre
CM privé
•! Il y a des ECHECS DE MARCHE dans la plupart
des marchés.
–! les coûts / bénéfices sociaux peuvent diverger des
Surplus du CM social coûts / bénéfices privés
Consommateur –! Dans ce cas, une intervention commerciale peut
améliorer le bien-être.
Prix a/Tarif
|7
The Fundamental Argument of the Strategists I:
Low Costs of Protection
|8
The Fundamental Argument of the Strategists II:
Some industries are Strategic
|9
What makes a sector strategic?
MARKET IMPERFECTIONS
|10
Assessing Strategic Sectors I
|11
Rents and the role of the gov’t
1. The entry of Airbus without government
support
Airbus
Given that Boeing will fight,
Airbus does not enter.
Enter No Entry
Fight Accommodate
Airbus (60,40)
Stay Exit
If Boeing fights,
(50,-10) (80,-5) Airbus exits.
Boeing’s threat keeps Airbus out of the market, and gives it monopoly profits.
|12
Rents and the role of the gov’t
2. But with a Government subsidy of 20 ...
Enter No Entry
Since Airbus resists, Boeing
Boeing (100,0)
accommodates.
Fight Accommodate
Airbus (60,40)
(60,40+20)
If Boeing fights, Airbus
stands up to it.
Stay Exit
(50,-10+20)
(50,-10) (80,-5)
Boeing accommodates, and Airbus enters with profits, - even after paying back the subsidy.
|13
Rents and the role of the gov’t
3. But…, are there really High Rents in Civil
Aviation?
|14
Assessing Strategic Sectors II
External effects (1)
|15
Assessing Strategic Sectors II
External effects (2)
•! Competition gains
–! The conditions for industry domination are difficult.
•! Large size of foreign producer or cartel.
•! High barriers to re-entry by domestic producers.
•! High barriers to entry by other foreign producers.
–! Overall, markets are quite competitive.
•! Anti-dumping
•! Semiconductors (see the case): Although the US feared that six
Japanese firms would end up dominating the market in a cartel,
these firms were quite aggressive and, when prices rose, there was
entry by Korean and Taiwanese firms.
|16
Assessing Strategic Sectors II
External effects (3)
•! Spillovers
•! Technological know-how benefits other firms and industries
•! Increased demand to other industries (pecuniary)
–! Distinguish:
•! Spillovers (not appropriated by the innovator)
•! Private returns to innovation (licensing, market-share gains)
–! Only spillovers, often associated with basic R&D, are a reason for government
support
–! Two concerns:
•! The guessing game: What will be the spillovers?
•! Only Local spillovers warrant intervention.
–! Technological spillovers can often be obtained through trade and information
flows.
–! Demand spillovers are dissipated by international outsourcing.
|17
Technological spillovers
The spillover effects of R&D travel with trade
source: Of strategies, subsidies and spillovers, The Economist, March 18th 1995
|18
Demand spillovers
International outsourcing dissipates local spillovers
|19
The Classic View of Strategic Trade Policy
A balance sheet: perfect markets
markets). value.
|20
The Strategist View of Strategic Trade Policy
A balance sheet: imperfect markets (strategic sectors)
good policy
better than others markets destroy value.
sectors.
•!Shifts (capture) rents Economies of scale
and/or external changes in trade patterns do
economies from trading not destroy value, unless:
partners. •!loss of economies of scale.
•!hinder competition
|21
Raising the burden of proof on the
strategic nature of an industry
•! Tough questions..
–! What is the evidence on strategic sectors?… Are some industries better
than others?
–! If there are rents, why isn’t the private sector investing?
–! What will be the non-financial benefits? Can we guess them?
•! Can we ensure that they are only local?
–! What is the best way to obtain those benefits?
–! Will the resources not come from other strategic sectors?
–! Will the money not be better spent in the fundamentals of growth?
•! The Realist’s answer:
–! The practical, real-world answer to these questions undermines the
strategist’s case
|22
The Realist’s critique
From market failures to government failures
The Realist’s view: too many failures, too much money wasted
|23
The Realist’s critique
From market failures to government failures
|24
The Realist Critique
|25
Markets vs. Governments in International
Trade: Historical context
|26
How to explain the Japanese success
in implementation up to the 1970’s
|27
Was the Japanese industrial policy
responsible for the growth miracle?
Relative levels of Targeting and growth rates of Japanese industries
(1 highest government support ... 13 lowest support)
Source: Beason and Weinstein (1996) - Growth: Annual average rates of growth; Subsidized loans from JDB as a percent of total loans; Subsidies
net of indirect taxes; Tariff measure based on Shouda (1982); Total taxes paid by the sector as a proportion of of the taxable component of
corporate earnings.
|28
Summary
|29
If government failures are more serious than market failures,
Free Trade is the best better policy
|30
The WTO and The Multilateral
Trading System
International Trade – Session 8
Daniel TRAÇA
1
Outline
|2
The WTO
|3
Why the GATT/ WTO exists
United States
•! But, why do trade wars arise, if 10 20
FREE TRADE IS THE BEST Free Trade GATT/ WTO
|4
Origins of GATT/WTO (Bretton Woods,
1948)
|5
The system has worked!
•! Progressive liberalization:
–! Very low tariffs
–! Commitment to free-trade
United
(even during economic crisis) Canada EU Japan
States
WTO non-
•! Disciplines and new areas agriculture 4.4 4.5 4.0 4.7
–! Services, Investment
–! Agriculture Petroleum 2.6 2.9 6.5 2.3
|6
Key elements of GATT
|8
The WTO and global governance
|9
Two Principles of Non-Discrimination
|10
Are these like products ?
US beef produced with hormones, that are European beef produced in hormone free
not proven to harm consumer environment
Thai shrimp caught w/out turtle friendly US shrimp caught with turtle excluding
devices devices
Pakistani clothes produced with child labor US textiles produced in plants with high-
in sweatshops cost working conditions
US products produced with GMO’s, that are European products produced in GMO free
not proven to harm consumer environment
|11
WTO Rules
|12
Trade Conflict due to Standards
|13
The Uruguay Round (1995)
Commitments achieved
|14
Seattle, 1999 - An Unpopular WTO
•! Environmentalists
•! NGOs
•! Organized labor
•! Protectionists
•! Consumer groups
•! Human rights
activists
•! Developing
countries
|15
Need for new round
–! Trade facilitation
•! Reducing the costs of customs clearance
|16
Difficulties in access to markets in
rich countries
|17
Developing countries’ requests in the
Doha Round
–! Protecting indigenous
knowledge
|18
The debacle in Cancun, September 2003
|19
Regionalism
International Trade – Session 9
Daniel TRAÇA
Preferential Trading Agreements
(PTA’s)
•! Two or more countries decide to reduce their bilateral
rates of protection.
–! Among the best known:
Brunei Darussalam Cambodia Indonesia Laos Malaysia Myanmar Philippines
AFTA ASEAN Free Trade Area Singapore Thailand Vietnam
CACM Central American Common Market Costa Rica El Salvador Guatemala Honduras Nicaragua
EAEC Eurasian Economic Community Belarus Kazakhstan Kyrgyz Republic Russian Federation Tajikistan
EC European Communities …
GCC Gulf Cooperation Council Bahrain Kuwait Oman Qatar Saudi Arabia United Arab Emirates
NAFTA North American Free Trade Agreement Canada Mexico United States
Southern African Development Angola Botswana Lesotho Malawi Mauritius Mozambique Namibia South Africa
SADC Swaziland Tanzania Zambia Zimbabwe
Community
West African Economic and Monetary Benin Burkina Faso Côte d'Ivoire Guinea Bissau Mali Niger Senegal Togo
WAEMU
Union
PTA’s and the GATT/WTO
•! Building blocks
–! PTA’s can grow and merge, in a path to global
FT (domino)
Global
–! Facilitate negotiations in the Multilateral
Integration
system:
•! Lower number of negotiating partners
Global
•! Provide experience with new, difficult topics Free-Trade
Building
•! Stumbling blocks
blocks
–! Lower bargaining power of developing
countries will force them to accept worse Stumbling
conditions.
RIAs blocks
•! This will make US and Europe loose interest in
multilateralism
Time
Customs Unions and Free Trade Areas
•! Political arguments
–! Economic interdependence raises the cost of wars
–! Economic integration may pave the way to political integration
–! Increase global bargaining power: Small countries benefit from
negotiating as a merged entity
–! Lock-in economic and political reform
tariff
FTA Partner
producers for efficient producers surplus rev price
reduces welfare.
–! Knowledge transfers are also lost, FT price
if imports of advanced Trade diversion Dem
intermediates are displaced
Qt
Welfare loss due to trade diversion
Pr
•! Trade diversion is large if
Sup
–! External tariff is very high Cons
surplus
–! FTA partner is not efficient, but
Partner
price
imports will come from there. Prod Trf
tariff
surplus rev
–! Imports from PTA partner and
FT price
other countries are strong Trade diversion Dem
substitutes
Qt
Trade diversion and government
revenue
weak.
Zimbabwe 18.4 -53.3 -9.8
Internal and external comparative
advantage in a PTA I
•!They have tariffs on –! France (the rich country) wins less (or may loose), due to
trade diversion in textiles.
imports of textiles
–! PTA causes convergence among rich countries!
FDI and PTA’s
Philippines
Is there convergence?
•! Flows of labor
–! Migration
•! Flows of capital
–! Official flows: Aid
–! Private capital flows
•! Short-term speculative flows
–! e.g. Hedging exchange-rate misalignments
•! Long-term flows
–! Searching for higher rates of return
Unskilled Labor from developing
countries searches for higher wages
in industrialized countries
•! Migration of unskilled workers is explained by the differences in the
abundance of unskilled labor and capital between rich and poor
nations.
–! Developing countries are abundant in unskilled labor. Hence unskilled
wages are lower there, because the marginal product of unskilled labor
is lower.
Developing
Industrialized
countries
countries Capital flows
•!Relatively abundant in
from rich to poor •!Capital is scarce
capital
•! Capital
countries •!Lack of
accumulation development
through the
development •!High returns to
process capital
•!Low return to capital •! decreasing
•! decreasing returns returns
•! Risk
–! Political instability
–! Security
•! Knowledge
–! Low availability of skilled workers
•! Lack of infrastructure
Managing globalization in developing
countries
International Trade – Session 11
Daniel TRAÇA
What policies for developing
countries?
•! Rapid growth of exports, due to China 1,134 0.6 1.3 6.8 1.8 2.3
explicit promotion East Asia
(exc. China)
308 0.9 3.6 6.8 2.2 2.5
•! Diverse approach to FDI: Korea 43 0.9 6.7 8.5 1.7 2.6
–! Japan and Korea constrained it Singapore 3 1.6 11.7 8.3 1.7 2.7
–! Singapore strongly encouraged it Taiwan 20 1.3 8.1 8.7 2.1 2.7
•! State guidance and industrial South Asia 1,130 0.8 1.1 4.2 2.3 1.9
policy, but flexible and with small Africa 432 0.6 0.7 2.9 2.8 2.6
role. Middle East 175 1.9 3.0 4.5 2.9 2.9
•! Declining income inequality and Latin
421 2.4 4.1 4.2 2.4 2.7
reduced poverty America
Industrial
countries
853 6.4 14.9 3.5 0.9 1.1
Poor adjustment
Debt crisis (1982)
•! Failed macro Import substitution
Mexico and other Latin
adjustment and
American countries
borrowed abroad
•! Increased •! Inflation, Capital flight,
Protectionism Low investment
Petrodollars
Good adjustment
Good Adjustment
•!Did not borrow Outward oriented
Singapore, Taiwan Korea, Chile
Closed countries
•! Trade restrictions
•! Socialist
•! Distorted exchange rate
regimes
•! Marketing boards for
agricultural exports
Sachs and Warner (1997)
The Washington Consensus
•! Of the 51,000 sugar cane growers in South Africa, most of them farming in
the lush terrain beside the Indian Ocean, 49,000 are small farmers. Another
85,000 South Africans depend on jobs in the sugar industry - harvesting,
milling or transporting sugar cane.
•! It costs between US$250 and US$300 to produce one tone of sugar in South
Africa. In Europe, it costs US$600. But EU subsidies enable European
farmers to continue growing sugar beet and dumping their excess on the
world market.
•! The South African Sugar Association estimates that over the past decade,
the EU has depressed the world sugar price by 20 to 40 per cent, forcing
small farmers out of business.
–! "If there were changes in the subsidy regime, European farmers would no longer produce sugar.
It might increase our chance of competing in the world market."
Vish Suparsad, director of external affairs for the South African Sugar Association
Agriculture export subsidies II
The players
121
US 6.6 15.0 20.8 ground 1.25 23 9.0 23 8.9 89
nuts
Source OXFAM
Trade-Related Intellectual Property’s
Duration: 2 h 30’
Questions:
•! 3 short questions with direct answer (max 10 lines)
•! 2 open ended question, asking for a comment on current
events (real or simulated) (max 1 page)
High… Low…
because Unilateral
because all industries
Comparative
advantage drives pay the same returns
FREE TRADE
trade (perfect markets)
Low… High…
because the economy Promote/
because Increasing
benefits more from protect
returns and
Strategic Industries
Imperfect than from traditional strategic
Competition drive ones (imperfect sectors
trade markets).
MARKET IMPERFECTIONS make a
sector strategic