Transcript Slides - James Ashley Morrison

Models of Trade Policy
David Ricardo
1772-1823
Eli Heckscher
1879-1952
Jacob Viner
1892-1970
Lecture 7 – Tuesday, 4 October 2011
J A Morrison
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Admin
1. Review policies & formatting
2. Submit papers online via
Moodle/Measure
3. Papers Due Tomorrow, 10 PM
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Lec 7: Models of Trade Policy
I. Going on to Trade
II. The DV: Trade Policy
III. The Cases for Free Trade
IV. The Cases for Managed Trade
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Lec 7: Models of Trade Policy
I. Going on to Trade
II. The DV: Trade Policy
III. The Cases for Free Trade
IV. The Cases for Managed Trade
3
PS 0304 Int’l Pol Econ
•
Unit 1: Studying the Global Economy
–
–
–
•
✔
Unit 2: Trading Goods & Services
–
–
•
•
•
Topic 1: Introductory
Topic 2: Perspectives on IPE
Topic 3: Explaining Foreign Economic Policy
Topic 4: Trade in Theory
Topic 5: Trade in Practice
Unit 3: The International Monetary System
Unit 4: Migration
Unit 6: Special Topics in IPE
4
Here’s what you should have taken
away from Unit 1…
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Unit 1 Goals
1. Define the Basic Questions in the Study of
IPE
2. Develop Broad Range of Theories of Political
Economy
3. Introduce Some of the Major Decisions that
have Shaped the Modern World Economy
4. Introduce Stories of People who Made a
Difference
6
A very quick recap of the last
month…
7
Topic 1: Introductory
• What is IPE?
• Who studies IPE, and how do they do it?
– Economists versus political scientists
– “British” versus “American” schools
• How has the study of IPE changed over time?
8
Topic 2: Perspectives
• Study of IPE is Organized around Defining
Questions
– What is the end of politics?
– What is the natural state of the economy? Is
market failure pervasive or minimal?
– What is the optimal relationship between politics
& economics?
– How should states maximize the benefits of
integration without losing policy autonomy?
• Theories are developed in response to these
Defining Questions
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Topic 3: Explaining FEP
• How do we explain foreign economic policy?
• What are the key variables that shape FEP?
– Structural Theories: distribution of power &
international institutions/regimes
– Domestic Theories: ideas, interests, institutions
• What is the Relationship between these
variables?
– Smith, Hegel, Marx & Keynes: ideas versus interests
– Schonhardt-Bailey: 3 I’s combine to create policy
outcomes
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So, that was Unit 1.
11
PS 0304 Int’l Pol Econ
•
Unit 1: Studying the Global Economy
–
–
–
•
Unit 2: Trading Goods & Services
–
–
•
•
•
Topic 1: Introductory
Topic 2: Perspectives on IPE
Topic 3: Explaining Foreign Economic Policy
Topic 4: Trade in Theory
Topic 5: Trade in Practice
On to Unit 2!
Unit 3: The International Monetary System
Unit 4: Migration
Unit 6: Special Topics in IPE
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Mode for Units 2-4
1. Deploy economic theories
1. International economics without politics
2. Develop political economic models to explain
FEP
3. Evaluate Relevant History
1. Test models
2. Contextualize and explain the landscape we see
today
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Lec 7: Models of Trade Policy
I.
II.
•
•
Going on to Trade
The DV: Trade Policy
The Cases for Free Trade
The Cases for Managed Trade
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Our dependent variable of interest
here is trade policy.
Trade policy is that set of policies
designed to influence patterns of
trade in goods & services between
domestic and foreign markets.
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Trade Policy Tools
• Tariffs: Specific and ad valorem
• Nontariff Barriers (NTBs)
– Subsidies
– Quotas & Voluntary Export Restraints (VERs)
– Product standards
• [Currency Intervention]
– Exchange Rate manipulation
– Capital controls
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What are the implications of this
complexity?
 It is damned hard to evaluate the overall level of trade
management. (See Krasner, p 24.)
17
Note that intentionality (“design”)
matters here.
In IPE, we treat product standards
requiring full disclosure of
ingredients differently from
“standards” that require minimum
wages.
18
So, how will we operationalize our
dependent variable?
How do we evaluate trade policy?
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Extremes of the Trade Policy
Continuum
• Managed Trade: government intervenes to
affect patterns of trade between domestic
and foreign markets
• Free Trade: government does not intervene
towards this end
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What are the costs and benefits of
each type of trade policy?
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Lec 7: Models of Trade Policy
I. Going on to Trade
II. The DV: Trade Policy
III. The Cases for Free Trade
• The Cases for Managed Trade
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III. The Cases for Free Trade
1. The Classical Model
2. The Neoclassical Model
• Additional Arguments
Free Trade before Smith
• Economists before Smith recognized potential
benefits of free trade
• Their arguments:
– Free trade expands markets and deepens division
of labor
– Free trade increases competition
 Smith used the same arguments.
24
Smith’s contribution wasn’t to
develop an argument in favor of
free trade.
His revolution was to insist that
trade didn’t need to be managed
to secure full employment.
25
David Ricardo brought the first
major innovation in the
justifications for free trade.
Ricardo’s innovation: theory of
comparative advantage.
26
An entity has an absolute advantage
if it can produce a good at lower total
absolute cost than another.
An entity has a comparative
advantage if it can produce a good at
a lower opportunity cost than
another.
27
Intuitive Example: Aaron & Me
• Aaron Rodgers (GB Packers’ Quarterback)
– Shoveling Snow: Absolute Advantage
– Throwing Touchdowns: Absolute Advantage
• BUT: Aaron’s opportunity cost to shovel snow
is high
– Every hour of shoveling costs us 1 touchdown!
• We’re both better off if I shovel, and he plays
football
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The Classic Example in Economics
• The Model
– 2 Countries: Portugal & Britain
– 2 Goods: Wine & Cloth
– 1 Factor of Production: Labor
• Assumptions:
– Each country has 1 million workers
– Production process is linear (no increasing or
diminishing returns to scale)
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Production Possibilities
Annual Output per
Worker
Portugal 100 wine 50 cloth
Britain
10 wine
20 cloth
 Portugal has an absolute advantage in both
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Opportunity Cost of Producing
Cloth
Annual Output per
Worker
Opportunity Cost of
100 lbs of Cloth
Portugal
100 wine
50 cloth
200 wine
Britain
10 wine
20 cloth
50 wine
✓
 Britain has a comparative advantage in
making cloth.
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Opportunity Cost of Producing
Wine
Annual Output per
Worker
Opportunity Cost of
100 bottles of wine
Portugal
100 wine
50 cloth
50 cloth
Britain
10 wine
20 cloth
200 cloth
✓
 Portugal has a comparative advantage in
making wine.
32
The result is that both countries
would be better off if each
specialized and they simply traded
with one another.
33
But what determines the price of
these goods, the rate at which
they’re traded?
34
The Terms of Trade
Acceptable to Portugal
Acceptable to Britain
50 wine : 100 Cheese
200 wine : 100 Cheese
Anything within this range is mutually acceptable.
 The terms of trade specify the rate of
exchange between goods that are traded.
35
(Note that not all terms of trade
are created equal!)
36
What determines where each
countries’ comparative advantage
lies?
37
Heckscher-Ohlin Theorem
• Assumption: Multiple Inputs (labor & capital)
• Relative Abundance/Scarcity
– Determine ratio between inputs
– Each country will be relatively abundant in one
and relatively scarce in the other
• Conclusion: Comparative Advantage lies in
Production that heavily utilizes the Relatively
Abundant Factor
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III. The Cases for Free Trade
1. The Classical Model
2. The Neoclassical Model
• Additional Arguments
Remember the assumption in our
previous model: “production
process is linear (no increasing or
diminish returns to scale).”
Economists have come to
appreciate that this isn’t always
the case!
40
Neoclassical Model
• Assumption: Returns diminish as production
becomes less efficient
– Ideal inputs used first, leaving lesser inputs for
later
• Result: Opportunity costs increase as
production increases
• Effect on Specialization:
– Specialization ends where opportunity costs
converge
– BUT partial specialization still brings gains over
autarky
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III. The Cases for Free Trade
1. The Classical Model
2. The Neoclassical Model
3. Additional Arguments
Economies of Scale
• In some industries production costs fall as
production increases
– Learning, investment in technology, purchase of
better machinery
• In such cases, trade deepens the international
division of labor and increases total
production
43
Endogenous Growth Theory
• Trade increases size of market  increased
competition
• Increased competition  increased efficiency,
innovation, and product development
44
Access to Goods
• Countries can’t always produce the goods
they want
– Limits of climate & geography
– Technological/industrial limits
– Cultural limits (i.e. trade allows for greater
diversity of fashions, designs, &c.)
• Trade allows rapid dispersion of innovation
– E.g. Why build your own iPod? (i.e. imagine L’iPod
d’France)
45
Commercial Liberalism (?)
• Argument: Interdependence diminishes
bellicosity
• Exponents
– Montesquieu (18th C): doux commerce
– Tho. Friedman (Today): Golden Arches Theory
• Problems
– Globalization & war: World War I
– Shared borders  trade and conflict
– J Gowa: security alliances  trade agreements
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Models of Trade Policy
I. Going on to Trade
II. The DV: Trade Policy
III. The Cases for Free Trade
IV. The Cases for Managed Trade
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IV. The Cases for Managed Trade
1. “Management” versus “Protectionism”
2. Special Interest Capture
3. National Interest
Note our use of the formulation
“managed trade” rather than
“protectionism.”
This is deliberate…
49
Why “Managed Trade” rather than
“Protectionism”?
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(1) Protectionism has Negative
Connotation
• Protectionism invokes images of…
– Lazy, inefficient groups “protecting” themselves
from foreign competition
– Misguided pessimists who prefer relative to
absolute gains
• “Protectionist” is now an epitaph
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(2) Denotation of Protectionism is
too Narrow
• “Protectionism” denotes insulating domestic from
foreign markets
• That is only one part of “trade management”
• “Management” also determines…
–
–
which tools will be used to provide insulation
sequence of liberalization
• Management takes a broader view
–
–
Considers trade in the context of other policy
dimensions: monetary policy, fiscal policy, security policy
Reflects different theories about how to encourage
innovation and development
52
On that last point, consider TRIPS,
which protects intellectual property.
For the US (a strong advocate), this
is about protecting property rights.
For South Africa (which has ignored
protections of IP on AIDS drugs), this
is about a public health crisis.
53
With an enlarged understanding of
“trade management,” we can see
two types of explanations for these
types of policies…
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VI. The Cases for Managed Trade
1. “Management” versus “Protectionism”
2. Special Interest Capture
• National Interest
The predominant explanation for
“protection” (which comes from
Smith) is that special interests
capture the government to protect
them from foreign competition.
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How do we determine who
benefits and who suffers from
trade liberalization?
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Stolper-Samuelson Theorem
• Builds on Heckscher-Ohlin Insight: Relative
Factor Abundance/Scarcity
• Key Assumptions:
– Capital is Mobile Across Sectors (Industries)
– Factor Price Convergence: Liberalization equalizes
return on factors across countries
• Conclusions
– Trade liberalization benefits relatively abundant
factor & hurts relatively scarce
– Tension is between factors: labor, capital, land
• Ronald Rogowski uses SS to explain FEP
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Stolper-Samuelson Theorem
• Builds on Heckscher-Ohlin Insight: Relative
But this assumption
Factor Abundance/Scarcity
is a bit problematic.
• Key Assumptions:
– Capital is Mobile Across Sectors (Industries)
– Factor Price Convergence: Liberalization equalizes
return on factors across countries
• Conclusions
– Trade liberalization benefits relatively abundant
factor & hurts relatively scarce
– Tension is between factors: labor, capital, land
• Ronald Rogowski uses SS to explain FEP
59
Ricardo-Viner Theorem
• Also builds on Heckscher-Ohlin Insight: Relative
Factor Abundance/Scarcity
• Key Assumptions:
– Factor Specificity: Capital may not be mobile across
sectors (industries)
– Factor Price Convergence: Liberalization equalizes return
on factors across countries
• Conclusions:
– Where capital is mobile across industries: SS holds true
– Where capital is immobile: cleavage is between industries
• Alt & Gilligan use RV to explain FEP
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But can’t the winners just
compensate the losers?
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VI. The Cases for Managed Trade
1. Special Interest Capture
2. National Interest
National Interest Arguments
• Worst Arguments
– Infant Industries
– Industrialization/Development
– Retaliation (when not part of reciprocal trade agreement)
• Better Arguments
– Security: National Defense
– Market Power & Fear of Dependence
• Best Arguments
– Pursuit of Policy Autonomy; Subordination to other
Economic/Policy Goals (e.g. Fixed ER)
– Stability over Growth
– Strengthen political bonds (e.g. with potential allies)
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