Chapter 1 Controversies in Trade Policy
Chapter 11 ▪ Controversies in Trade Policy
Chapter Organization Introduction Sophisticated Arguments for Activist Trade Policy Globalization and low-Wage Labor Summary Copyright C 2003 Pearson Education, Inc Slide 11-2
Copyright © 2003 Pearson Education, Inc. Slide 11-2 Chapter Organization ▪ Introduction ▪ Sophisticated Arguments for Activist Trade Policy ▪ Globalization and Low-Wage Labor ▪ Summary
Introduction Two controversies over international trade arose in the 1980s and 1990s In the 1980s a new set of sophisticated arguments for government intervention in trade emerged in advanced countries These arguments focused on the" high-technology industries that came to prominence as a result of the ri of the silicon chip In the 1990s a dispute arose over the effects of growing international trade on workers in developing countries Copyright C 2003 Pearson Education, Inc Slide 11-3
Copyright © 2003 Pearson Education, Inc. Slide 11-3 Introduction ▪ Two controversies over international trade arose in the 1980s and 1990s. • In the 1980s a new set of sophisticated arguments for government intervention in trade emerged in advanced countries. – These arguments focused on the “high-technology” industries that came to prominence as a result of the rise of the silicon chip. • In the 1990s a dispute arose over the effects of growing international trade on workers in developing countries
Sophisticated arguments for Activist Trade policy There are two kinds of market failure that seem to be present and relevant to the trade policies of advanced countries Technological externalities The presence of monopoly profits in highly concentrated oligopolistic industries Copyright C 2003 Pearson Education, Inc Slide 11-4
Copyright © 2003 Pearson Education, Inc. Slide 11-4 Sophisticated Arguments for Activist Trade Policy ▪ There are two kinds of market failure that seem to be present and relevant to the trade policies of advanced countries: • Technological externalities • The presence of monopoly profits in highly concentrated oligopolistic industries
Sophisticated arguments for Activist Trade policy Technology and Externalities e Externalities Firms in an industry generate knowledge that other firms can also use without paying for it In high-tech industries firms face appropriability problems Example: In electronics. it is common for firms to reverse engineer" their rivals designs Copyright C 2003 Pearson Education, Inc Slide 11-5
Copyright © 2003 Pearson Education, Inc. Slide 11-5 ▪ Technology and Externalities • Externalities – Firms in an industry generate knowledge that other firms can also use without paying for it. • In high-tech industries firms face appropriability problems. – Example: In electronics, it is common for firms to “reverse engineer” their rivals’ designs. Sophisticated Arguments for Activist Trade Policy
Sophisticated arguments for Activist Trade policy The Case for Government Support of High Technology Industries Subsidize the activity with externalities, not all activities in an industry For instance, R&D(as opposed to manufacturing) should be subsidized How Important Are Externa lities? Externalities are hard to measure empirically Problems of appropriability at the level of the nation(as opposed to the firm) are less severe but still important even for a nation as large as the United States Copyright C 2003 Pearson Education, Inc Slide 11-6
Copyright © 2003 Pearson Education, Inc. Slide 11-6 • The Case for Government Support of HighTechnology Industries – Subsidize the activity with externalities, not all activities in an industry. – For instance, R&D (as opposed to manufacturing) should be subsidized. • How Important Are Externalities? – Externalities are hard to measure empirically. – Problems of appropriability at the level of the nation (as opposed to the firm) are less severe but still important even for a nation as large as the United States. Sophisticated Arguments for Activist Trade Policy
Sophisticated arguments for Activist Trade policy Imperfect Competition and Strategic Trade policy In some industries where there are only a few firms in effective competition The assumptions of perfect competition will not apply Firms will make excess returns(profits) There will be an international competition over the excess returns a subsidy from the government to domestic firms can shift the excess returns from foreign to domestic firms Copyright C 2003 Pearson Education, Inc Slide 11-7
Copyright © 2003 Pearson Education, Inc. Slide 11-7 ▪ Imperfect Competition and Strategic Trade Policy • In some industries where there are only a few firms in effective competition: – The assumptions of perfect competition will not apply. – Firms will make excess returns (profits). – There will be an international competition over the excess returns. – A subsidy from the government to domestic firms can shift the excess returns from foreign to domestic firms. Sophisticated Arguments for Activist Trade Policy
Sophisticated arguments for Activist Trade policy The Brander-Spencer Analysis: An Example There are only two firms(Boeing and Airbus competing, each from a different country(United States and Europe) There is a new product, 150-seat aircraft, that both firms are capable of making Each firm decides either to produce the new product or Copyright C 2003 Pearson Education, Inc Slide 11-8
Copyright © 2003 Pearson Education, Inc. Slide 11-8 • The Brander-Spencer Analysis: An Example – There are only two firms (Boeing and Airbus) competing, each from a different country (United States and Europe). – There is a new product, 150-seat aircraft, that both firms are capable of making. – Each firm decides either to produce the new product or not. Sophisticated Arguments for Activist Trade Policy
Sophisticated arguments for Activist Trade policy Table 11-1: Two-Firm Competition Airbus boeing Produce Don’ t produce 5 Produce 5 100 100 0 Don’ t produce 0 0 Equilibrium outcome is a=0 and B=100: Airbus does not produce and Boeing produces Copyright C 2003 Pearson Education, Inc Slide 11-9
Copyright © 2003 Pearson Education, Inc. Slide 11-9 Airbus Boeing -5 -5 0 0 0 100 0 100 Produce Produce Don’t produce Don’t produce Equilibrium outcome is A= 0 and B=100: Airbus does not produce and Boeing produces. Table 11-1: Two-Firm Competition Sophisticated Arguments for Activist Trade Policy
Sophisticated arguments for Activist Trade policy Table 11-2: Effects of a Subsidy to airbus Airbus B oeing Produce Don’ t produce 20 Produce 5 100 125 Don’ t produce 0 0 a subsidy of 25 to airbus given by europe results in A=125, B=0 Copyright C 2003 Pearson Education, Inc Slide 11-10
Copyright © 2003 Pearson Education, Inc. Slide 11-10 Airbus Boeing 20 -5 0 0 0 100 0 125 Don’t produce A subsidy of 25 to Airbus given by Europe results in A=125, B=0. Table 11-2: Effects of a Subsidy to Airbus Sophisticated Arguments for Activist Trade Policy Produce Produce Don’t produce