2. International Trade.pdf

5~10 International Trade 1. Trade Is mutually beneficial 2. Why do all countries restrict trade? 3. International institutions and trade Trade is mutually beneficial - Heckscher-Ohlin trade theory ● ● A country that produces goods that they have an abundant supply of Trade of a percentage of gdp h...

5~10 International Trade 1. Trade Is mutually beneficial 2. Why do all countries restrict trade? 3. International institutions and trade Trade is mutually beneficial - Heckscher-Ohlin trade theory ● ● A country that produces goods that they have an abundant supply of Trade of a percentage of gdp has been growing a lot faster, trade is mutually beneficial ● Trade Is Mutually Beneficial: ○ Opportunities ○ New markets ○ More efficiency ○ Cheaper products Division of labor ○ Instead of self-sufficiency, each actor concentrates on and earns income from what he does best and trades for remaining needs. ○ Concentration on one activity allows for greater efficiency. Specialization: Each country can specialize in an area in which it has an advantage. ○ Agricultural production ○ Producing industrial goods ○ Producing natural resources ○ Generating high-technology, value-added products and services (e.g., financial services, intellectual property) Absolute advantage ○ One country is more efficient than another at one product. Comparative advantage ○ Even if a country is not the most efficient at a given product when compared to other countries, it should specialize in this field if that is what it does best. ○ The law of comparative advantage tell countries to produce what they can produce best given their resources. ● ● ● ● ● ● Adam Smith ○ Adam Smith on comparative advantage: ○ “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.” ○ He showed that division of labor and specialization of labor among workers improves productivity. Similarly, if individual countries specialize in the goods that they are best at producing, and trade in these goods, they gain economically. ○ Comparative advantage is determined by two things: ■ A country’s inherent endowments ■ The endowments of that country’s trade partners Factors of Production 1. Land: Can it be farmed or not; does it have natural resources or not? 2. Labor: Skilled versus unskilled (for example, engineer versus factory worker) 3. Capital: Human versus financial; different types of finance, technology, and equipment Trade is mutually beneficial - puzzle ● ● ● In general, any policies that hinder trade, hurt welfare and productivity Yet trade restrictions are the rule, not the exception Puzzle: if trade is mutually beneficial, then why do all countries restrict it? ○ At the country level wars are costly ○ In the domestic level: some benefit from wars, some benefit from it ○ Can apply it to different actors in a country Why do all countries restrict trade ● ● ● ● ● ● Trade restrictions: ○ Tariffs: taxes on the import or export of a good (eg. on foreign cars) ○ Quotas: limits on the volume of values of goods that can be traded (eg. in the 1980s the US restricted the number of Japanese cars that could be imported) ○ Nontariff barriers: barriers that are not taxes (eg. sanitation) ○ Subsidies: government payments to businesses producing goods and services to export ○ Prohibitions: some exports are prohibited. Often these are sensitive military technologies Trade barriers redistribute income from consumers and foreign producers to domestic producers Understanding protectionism vs. free trade requires understanding winners and losers of international trade Foreign trade hurt domestic producers If we restrict the import of agricultural products it redistributes the At the country level trade is beneficial, however it is restricted in consideration of different actors in a state Domestic preferences in trade policy ● ● ● Factor-based preferences (the Stolpher-Samuelson approach) ○ According to the Heckscher-Ohlin theorem, a country exports goods that are made with the country’s abundant factor ○ A country’s abundant factor benefits from free trade, thus prefers free trade; a country’s scarce factor loses from free trade, thus prefers protectionism ○ Those who win in free trade supports freer trade ○ Loosers seek more protection ○ SK. as a capital abundant country, import more capital on goods that are more labor intensive, less demand for labor intensive products in korea, while work force is abundant, price of labor goes down ○ If you are a labor abundant country it is reversed, there is a larger demand for, farmers get hurt from freer trade Specific factors-based preferences (the Ricardo-Viner approach) ○ Factor mobility: the ease with which labor and capital can move from one industry to another ○ The factor model assumes high factor mobility ○ When factors are tied (specific) to industry (sector), trade affects th incomes of all factors employed in a given industry in the same way ○ Previous model assumes that there is a high factor mobility , then export industries will flourish, the capital invested will benefit from freer trade ○ Trade policy preferences are divided in the pro ○ Trade policy preferences are divided by sectors in this appraoch Countries with more land can be flourishing in agriculture and be in freer trade(?) Winners and losers of free trade/protectionism ● ● ● ● ● Trade produces winners and losers Who benefits from protecntuion? ○ Domestic protected industries receive clear and concentrated benefits Three groups lose from protectionist policies ○ Consumers of imported goods ○ Foreign producers ○ Domestic exporters (who worry about traded retaliation) → if we prohibit imports of american goods, they will retaliate and restrict exports from south korea ○ Politicians who promote protectionism–when citizens are willing to punish them at the polls for such policies Compensation for the losers of free trade ○ Some gains from trade can be used to compensate the losers, weakening their opposition to free trade ○ Postwar western countries employ many types of compensation; for example, worker retraining programs and unemployment benefits Freer trade is wanted by export oriented sectors ● ● Protectionism is wanted by import competing sectors Those who used to work in labor intensive sectors, as the korean market expands, they lose jobs, therefore the korean government provides compensation Patterns of trade restrictions – advantages, collective, action, and policy change ● Some actors enjoy advantages in politcal power over trade policy ● Collective action problem ● Policy change as a public good for a group ● Generally, consumers are the largest groupand thus exercise less influence than producers ● Foreign porudcers have limited political clout. This leaves different producer groups to battle over trade policy … ● Producers dominate trade policies Patterns of trade restrictions – institutions ● Politcal institutions affect power over trade policy ● Insitutions can favor representation of narrow or broad interests ● Broader-based institutions empower large groups, check the power of smaller ones, and this promote liberalized trade ● Democracies are less protectionist than dictatorships ○ Presidents push for free trade agreements (even if they’re leftist, instead of promoting for workers) ■ Example, bill clinton who advocated for the workforce, but once he was elected, he signed a treaty for free trade ● The push for desired trade policies have to be filtered through different politcal institutions ○ The US predisent (national constituency) is less protectionist than the US Congress (local constituencies). Idaho’s representatives will push for policies that promote its potato producers. Iowa’s members of congress will push for policies to promote its corn producers. The president has to balance a wider range of producers’ and consumers’ interests Patterns of trade restrictions – international institutions and trade ● Interests: producers, consumers, importerts, exporters, capital, labor, land ● Interactions: trade policy of one country depends in part on politcies of other countries ○ International trade policies are a result of stratefic interaction amongst states ○ Prisoner’s dilemma ● Institutions: Can promote cooperation International institutions and trade - consumers ● Everyone wants to have consumers to sell to ● No on wants others to have access to their own consumers ● Mutual liberalization resembles a Prisoner’s dilemma ● The political incentives of most governments want to promote more exports while also wanting to protect domestic markets Prisoner’s dilemma of international trade ● If two countries, A and B, both act like mercantilists (protectionists) *IMPORT IMAGE FROM SLIDES* ● ● In theory you should be closing your market, as it is third best Rule making, monitoring, enforcement (punishment) ○ They should closely monitor and have punishments that are substantial to prevent breach of initial trade agreements International instituions and trade - GATT ● At the end of WWII, western countries formed the General Agreemnet on Tariffs and Trade (GATT) ○ GATT lowered barriers, but its goal was not to complete liberalization ○ Norms of reciprocity and national safeguards ○ Negotiating rounds addressed different issues or sectors WTO ● The World Trade Organization (WTO) replaced GATT in 1994 ● Differences between the two ○ WTO had larder membership; membership and WTO rules cover about 80 percents of all world trade ○ WTO can enforce its provisions; it can authorize sanctions for violatiors of rules; monitors compliance ○ WTO’s goal is complete liberalization of all trade ● Why the WTO? ○ With more members, a stronger institution was needed ○ GATT addressed the easiest issues, such as visible tariffs, yet stalled on more contentious ones, such as services and agriculture Selected RTAs ● Reasonal trade agreements ● WTOs rules ○ National treatment ■ When forgwing goods comes in it should be treated like domestically produced goods. Same regulations should be applied ○ Most favored antion principle ■ Every trading partner should be treated like the favored trading partner, no discrimination ■ There is an exception, only if there is a regional trade agreement (bilateral trade agreement) ○ Eg. EU, ASEAN Summing up ● Trade liberalization is good for a nation’s economy ● ● ● ● ● Trade creates winners and losers National institutions can shape outcomes over conflicting interests Trade involves strategic interaction International institutions facilitate cooperation Competition between domestic actors (importers and exporters) which ends up in a prisoner’s dilemma