Advanced International Trade Theory and Policy
Advanced International Trade Theory and Policy ECON 433
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Date Created: 11/01/15
Advanced International Trade Lecture 24 Prof Tybout December 5 2006 Outline Globalization taking stock Openness and growth Mechanics of commercial policy Note Problem set posted due December 12 Relevant readings Verrill Lucas Globalization taking stock Growing importance of trade flowsipartly reflecting fragmentation of production Even fastergrowing foreign direct investment and more generally capital mobility Other types of integration International repercussions of local policies eg environmental Cultural intermingling and increasingly shared knowledge base Static effects of Globalization Generally integration increases the total size of the pie Gains from specialization Gains from exchange Scale economy exploitation Expanded menu of product varieties Special cases where exceptions occur are very unlikely to reverse this basic result Static effects of Globalization But there are losers as well as winners The scarce factors in any country lose from opennessoutsourcing The factors specific to importcompeting industries tend to lose The fact that unskilled labor is relatively scarce in the US means that it tends to lose from openness On the other hand unskilled labor is relatively plentiful in the poor countries so it tends to benefit there Since these people are much poorer than unskilled labor in the advanced economies worldwide inequality is probably reduced by globalization Dynamic effects of globalization In which openness facilitates gro Trade gives producers access to an capital and intermediate goods Growth is not well understood It is possible to construct models wth everexpanding menu of Trade can act as a conduit for knowledge transmission Trade eliminates the need for duplicating inventions so research is focused on new contributions to the global stock of knowledge Trade may also reduce the domestic cost of human capital in countries Wnere it is a scarce factor and thus make RampD cheaper Dynamic effects of globalization It is also possible to construct models where trade retards growth Producers become more efficient by producing goods learning by doing The scope for learning1 bi doing varies across sectors e computer chips and 5 ip 9 uilding versus bucket manufacturing f trade shifts production toward industries with lots of learning potential growth accelerates if it shifts production away from these sectors growth slows down Trade and learning by doing Start with the Ricardian model two sectors X and Y constant returns to scale and labor is the only input The production technology is Q hXLX Q hyLy and the labor force L is allocated between Xand Yproduction Lx Ly L Preferences are given by the utility function u cgzcyyz so consumers will spend half oftheir income on each good Trade and learning by doing Autar roduction and rices Trade and learning by doing The learning mechanism Assume that productivity growth occurs through learning by doing The more labor allocated to a sector the more rapidly labor productivity grows in that sector Ahx h Ahy Lx xLy6y Also assume that learning is more important in the Y sector than in the X sector 6lt6 3 y Trade and learning by domg Autarky growth Thus for example if demand is such that an equal amount of labor is allocated to both sectors the production possibility frontier will become increasingly steep over time Y next year this year X Trade and learning by doing Trading eguilibrium Now consider opening to trade and suppose that world prices are such that the economy has a comparative advantage in X production Thereafter the economy produces only X and labor productivity grows at the rate Growth in the open economy i1le l1sz Growth after infant industry protection Suppose instead the economy had remained closed until its comparative advantage shifted to Y This could be accomplished by inducing enough labor movement into Y production W Pr h Then upon opening the economy would grow at the rate Numerical example of the learning by doing model Assume oA hxLx0002 A h vL 0004 hx hy y L10 Initially 2 h y1 Numerical example continued How many units of good Y are consumed per unit of good X in autarky at this point in time How fast is output per worker growing in the X sector In the Y sector What is the shareweighted growth in output per worker in this economy Lx AM Ly LXLy hx LxLy hy Numerical example continued PW Suppose world prices are V 1 Py What will happen to this economy s growth rate when it opens to trade h PW If it waited until h ygt PXW then opened to trade how would x y things have been different Trade and learning by doing Does the effect emphasized by the model seem plausible Does this constitute a case for protecting the learning industry Evidence on Trade and Growth The famous Gang of 4 countries experienced spectacular gBowth with relatively outwardoriented policies during the 1960 s Some other countries experienced very slow growth with inwardoriented policies eg India China N Korea Africa But economists don t agree on whether openness was the cause ofthe rapid growth in E Asia or was part of a generally sensible economic package Nor do they agree on what constitutes an open economy Evidence on Trade and Growth Sachs and Warner 1995 An economy is not open if average tariff rate exceeds 40 TAR NTBs covered more than 40 of imports NTB socialist economic system SOC state monopoly of major exports MON black market premium exceeds 20 during either the decade of the 70s or the 80s BMP Evidence on Trade and Growth Sachs and Warner continued Growth during 197089 Continuously closed versus continuously open economies Always Not always open open Average growth rate gt 30 11 4 Average growth rate lt 30 4 70 Evidence on Trade and Growth Sachs and Warner continued Open developing countries grew particularly fast 445 percent Open developed countries grew respectany 229 percent Closed countries grew 74 developed and 69 developing respectively SampW suggest that the failure of rich and poor countries to converge in per capita incomes might be blamed on those poor countries that remained closed during this time period Looking at 15 countries that switched from being closed to being open after World War II average growth rate durin the closed period was 045 percent during he open period i was 388 percent regressions show OPEN to be strongly associated with growth even when the standard set of control variables is included Evidence on Trade and Growth Dani Rodrik and Fernando Rodri uez 2000 counterthat Two variables essentially drive the SampW openness index are black market premia and export taxes The rest including the commercial policy variables can be excluded from the analysis without changing the results much at all The export tax variable is basicall an index for troubled African economies S Wtake his index rom a Worl Bank study that identifies only African countries under structural adjustment programs with state marketing boards BMP is correlated with a wide range of macro problems not simply trade protection These problems tend to be associated with low growth So what do SampW really show That African countries in need of structural adjustment programs and countries with ongoing macro crises tend to grow slowly The mechanics of commercial policy There are 3 possible ways to initiate changes in trade policy Legislative action Discretionary presidential action Legalistic procedures Legislative and presidential action Legislative action Congress can directly legislate protection for particular sectors Set procedures and give authority to Executive branch Discretionary Presidential action subject to congressional approval Engage in multilateral negotiations with VVTO members Negotiate bilateral or regional agreements outside the VVTO Q9 VERs for autos legalistic procedures first pursued no legal cause for action u pressure for te ion con inued so Reagan instituted VERs in 1981 and renewed each year until 1987 Legalistic procedures Legalistic procedures Section 301 o This code allows domestic producers to petition the government to open foreign markets The law provides for no specific remedy government is free to use whatever tools it considers appropriate Legalistic procedures Antidumping laws Commerce department investigates complaints to determine if goods are being dumped that is sold in the US below the price at which it is sold abroad or below production cost or both Meanwhile the lTC investigates the extent of injury to domestic producers plaintiffs If dumping and injury are found the Commerce Department assesses duties A dumping finding often results in VERs The dumping parties can usually avoid the duties by simply raising their prices Legalistic procedures Comments on antidumping laws The most widespread impediment to trade worldwide probably the most costly form of protection Tariffs have been scaled back findings of dumping have become increasingly easy to obtain Commerce Dept almost always finds dumping Only 3 negative rulings out of 400 cases during the 1990s The best available information is used to determine costs of production In onethird of its calculations forei n firms haven t provided information or Commerce has ignore the information provided Domestic competitors are happy to fill in the missing information Recentl the Commerce dept has gone to imputing value or foreign prices ratherthan using market information or firms accounts This has given it the discretion to be especiall generous to domestic plaintiffs Average dumping margins are 95 percent when facts available are used Average duty to make imports fairly traded is about 60 percent Ridiculous Legalistic procedures Comments on antidumping laws continued The ITC finds injury in about 50 percent of the cases There is no concrete formulaitheyjust know it when they see it Eyeball charts and tables to determine if profits and employment are down lf imports are also up it must be injury Beyond that no formal analysis is attempted Political pressure matters a lot industries that produce in the districts of Congressional oversight committee members fare substantially better The EU is less likely to be found in violation than Japan and nonmarket economies Steel does really well Legalistic procedures Antidumping cases are commonplace A sampling from the US ITC web site yesterday On September 21 2006 a petition was filed with the Commission and Commerce by Sunkist alleging material injury by lemon juice imports from Argentina and Mexico The Commission determines that Revocation of the anti dumping duty order on fresh garlic from China would be likely to lead to a continuation or recurrence of material injury The Commission determines that an industry in the United States is materially injured by reason of imports from China India and Indonesia of certain lined paper school supplies that have been found by Commerce to be sold in the United States at less than fair value Legalistic procedures Questions concerning antidumping aws39 What pricing incentives does the foreign firm have What pricing and hiringfiring incentives do import competing firms have What are the net welfare effects Standard picture without the benefit of the tariff revenues Estimates for 1993 place the losses at 2 billion to 4 billion annually Legalistic procedures Countervailing duties The Commerce department determines whether a foreign product has been subsidized If so it responds with a CVD In principle there must be injury in order for action to be taken Legalistic procedures Esca e clause section 201 Trade concessions can be withdrawn ifthey produce unforeseen injury to the domestic industry The injured industry petitions the lTC which determines whether real injury has occurred If it finds injury it recommends action assistance or protection to the President President takes recommendations determines action subject to Congressional approval Escape clauses are permitted by the VVTO in fact each country can have its own definition The reimposition of protection cannot last more than 3 years and the exporting country is justified in taking retaliatory action Legalistic procedures Case study Section 201 in action In March 2002 the US government placed tariffs of up to 30 on steel imports The US government cited section 201 ofthe Fair Trade Law in support of the measure However the EU Japan China South Korea Brazil New Zealand Switzerland and Norway challenged the ruling calling on the VVTO to investigate the tariffs In May 2003 the VVTO ruled that the tariffs violate VVTO rules This ruling was upheld in 2004 after an appeal by the US Calculations by USITC staff suggest losses by users of 601 million and gains by producers of 240 million Source SteelConsuming Industries Competitive Conditions With Respect To Steel Safeguard Measures Investigation No 332452 34 Legalistic procedures Case study Section 201 in action again After the phaseout of the MFA was completed in January of 2005 Chinese apparel flooded the US market The US invoked section 201 as a justification for re imposing quantitative restrictions The Chinese announced they will retaliate
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