Transcript 18.0 Trade Policy

18.0 Trade Policy
18.1.1
“Open economy macro” –
viewing macro analysis from a global rather
than national perspective
There are many governments, but they can
not impose their rules beyond their borders
However, other nations can respond to one
nation’s policies
Nations have several tools
they can use in order to influence their
position in global trade
We will examine them and
also look at the problems with using these
tools
18.1.2
A nation can out-compete its rivals by
lowering its cost of production and offering
a better price on goods
This can be done by increasing efficiency
and/or lowering factor costs
Under the nice assumptions, this advantage
would not be maintained, as others enter
and profits get driven to zero
In the global economy,
as in the domestic one,
advantages can be sustained if competitors
play by a different set of rules
Nations can create market power
for themselves
by shaping policies regarding production
standards
Ex. Have no child labor laws, no limits on
work hours, no safety rules, and no
environmental rules
This gives a real advantage to those nations
compared to nations which place those
restrictions on themselves
18.1.3
A nation could also become more
competitive in the global economy
by making products suitable with tastes of
the time
(ex. Volkswagen –1960s)
or developing a reputation for quality and
dependability
(ex. Toyota, Honda - 1970s and 80s)
An imbalance in trade
can not be sustained without an offsetting
capital flow
Increased Japanese car imports were also a
result of the U.S. high budget deficits
causing higher interest rates, and a stronger
dollar
Each Japanese car was “on sale” because of
exchange rate changes
18.1.4
Nations can make it difficult to have others
sell in their country through red tape –
bureaucratic hassles for importers
U.S. claimed Japan was a master at this
Some see these same rules as a reasonable
regulation
Ex. Biologically engineered food
People who lose jobs and
market share to other nations
often call for their politicians to have a
response
These responses can be subtle, or more
“in your face”
18.1.5
A nation can weaken its own currency
This will encourage more exports and less
imports
It can be done in two ways
First,
governments can buy and sell currencies on the
open market
Many governments not only have access to their
own currencies, but also
have stocks of other currencies as well
To weaken our dollar,
the U.S. could buy yen on the open market and
supply more dollars, shifting supply of dollars
out
Second,
Monetary policy choices can weaken a
currency
A lower domestic interest rate means capital
flows out, weakening the dollar
Manipulating exchange rates
carries risk
Weaker currencies and lower rates may
provide stimulus,
but as foreign competitor’s goods become
more expensive,
it might be easier for domestic producers to
raise prices
Stimulus plus protection may cause inflation
18.1.6
More direct response to a trade problem –
Quotas – set limit on number of units to be
imported
Ex. Only so many cars allowed to be sold
Can invite retaliation as other restrict their
market to your goods
18.1.7
Most direct, “in your face” response – tariffs
Tariffs are taxes on imports
Can stop all imports with high enough tariffs
Almost invariably invites retaliation
Tariff wars can result
Some economists argue that the Great Depression
was so severe because of high tariffs that nations
imposed
In the U.S., this was called the Smoot-Hawley tariff
18.2.1 Trade policy – Historical
Background
Global economy emerges in the 1400s and
1500s with the rise of nation states
Dutch do extremely well with little homeland
to develop
Their wealth was based on success at trade
Many thinkers thought success at trade
would determine a nation’s wealth
The dominant view
at this time was trade was a zero sum gamemore for me means less of the pie for you
With winners and losers, nations tried to figure out
how to be the winner –
Mercantilism – 1700s and 1800s
Restrict imports, have strong navies to control
trade, get colonies for raw materials
Nations tried to sustain these advantages
1776 – Adam Smith writes
Wealth of Nations
Smith imagines a liberal society where
opportunities are not skewed by power,
competition exists and justice prevails
He sees a positive sum game
where constructive competition is good for
individuals and nations
Debunks mercantilism
18.2.2
Promise of free and open global economy – Pareto
optimality
Problems – justice of the distribution of initial
endowments and distortions of market power and
market failure
Plus, instead of one government, there are many
Interventionist hope for good government
intervention and
Non-interventionist hope for no intrusion
seem more remote
18.2.3
Mercantilist thinking still abounds
Protectionism is very popular politically
because job losses to imports do hurt people
Trade wars have no winners, however
Keynes wrote prior to to WWII that if
nations could just provide full employment through
their domestic policies, there was no need to
interfere with free international markets
18.2.4
Developing nations face challenges in a
global economy
Little financial capital
Some compete with cheap labor costs,
but with what many consider to be violations
of human rights
Financial capital is really
important to compete
With so little capital at home, these countries
must attract capital from the outside
Capital is mobile and fickle
The International Monetary Fund (IMF) is
the lender of last resort to make sure panics
don’t occur
www.imf.org
18.2.5
Some institutions have been established to set
global rules for international trade
Early effort – Global Agreement on Tariffs and
Trade (GATT)
Tried to encourage free and open global markets
Replaced by the WTO – World Trade Organization
www.wto.org
Some regional agreements
have been made
NAFTA – North American Free Trade Agreement –
U.S., Canada, Mexico functioning as a free trade
zone
Europe’s use of the common currency of the Euro
makes it a “United States of Europe” from a trade
perspective
Monetary policy is now in the hands of the
European Central Bank
Both NAFTA and the WTO
suffer from the fact that the participants are
sovereign nations which
can interpret differently and even ignore
certain provisions with regard to
workers’ right and environmental protections
Anyone who says it’s simple
is either simple minded, or
thinks you are