Wk6: Trade policies in developing countries Flashcards
Discuss the case for and against free trade
The political argument for free trade says that it is the best policy even though there are better policies in principle as any policy deviating from it would be manipulated by groups and lead to decreased national welfare. Free trade allows firms to take advantage of economies of scale. Protected markets limit the gains from external economies of scale by inhibiting the concentration of industries as the scale of production becomes inefficient. However, for a large country, a small tariff will increase national welfare through terms of trade gains but be limited by the counteracting economic efficiency loss. This similarly exists for export taxes, there is an optimum rate that maximises national welfare. An argument against free trade is that some countries may benefit from export taxes and protectionism such as the US at the expense of other countries. The second argument is that domestic failures may exist that cause free trade to be a suboptimal policy (i.e. underemployment, not defined property rights and underutilization of capital). This second argument is an example of the theory of the second-best as government intervention that distorts market incentives is merely offsetting consequences of other market failures. If the best policy doesn’t work then other government intervention is next best. Government policies to address market failure are likely to be met by powerful opposition.
How is trade policy determined?
Models of governments maximising political success as opposed to national welfare
1. median voter theorem (court voter in the middle of the ideological spectrum)
2. Collective action
3. Model combining the first two
Whilst this may govern how parties have elected the funds in government campaigns can come from groups with special interest policy
Describe median voter Theorem
Predict that democratic political parties pick their policies to court the voter in the middle of the ideological spectrum. Assumptions are that there are two political parties and objective of each party is to get elected by majority vote.
Outline what collective action is
Whilst as a group there is an incentive to advocate free trade, individual consumers have no incentive as their benefit is relatively small compared to the cost of time in advocating free trade. However, groups suffering large losses from trade such as unemployment, have an individual incentive to advocate for free trade policy
Outline the history of International negotiations of trade policy for multinationals and why they are good.
Since 1944 much of the reduction in tariff barriers in the US have come from trade negotiations (GATT, WTO).
Multilateral negotiations mobilize exporters to support free trade if they believe the market will expand. Multilateral negotiations also help deter trade wars caused by countries adopting protection.
Describe Preferential Trading Agreements (PTA)
PTA’s trade agreements between countries in which they lower tariffs for one another but not the rest of the world. Generally not allowed by the WTO. The two types include Free Trade area (allows members free trade whilst having own trade policy for non members) and Custom unions (agreement allows free trade among members and requires a common external trade policy for non-members). Preferrential trade agreements may reduce national welfare through the importation of expensive goods with no tarrif revenue. PTA’s increase national welfare through trade creation (high domestic costs are replaced by low imports) not trade diversion (low cost imports from nonmembers diverted to high cost imports from member nations)
What are the types of protection imposed by governments (4)
The export subsidy (specific or ad valorem which is payment for the proportion of value exported), import quota, voluntary export restraint, local content requirement, The export subsidy can be specific (payment per unit) or ad valorem (payment of a proportion of the value exported. Export subsidy increases producer surplus but reduces the terms of trade. An import quota is a quantitative restriction on imported goods.
The effects of protectionism
For each trade policy, the price of goods rise in the home country through home producers supplying more or consumers demand less and lose. Furthermore, the world price will fall when home is a “large” country that affects world prices
Describe what Import- substituting industrialization is
It was a trade policy adopted by many low to middle-income countries, aimed at encouraging local industries. The principle justification is the infant industry argument. The problems with infant industry argument are these industries may not ever have a comparative advantage, may never grow up, no justification for market intervention unless there is market failure.
Describe the Infant industry argument.
The infant industry argument is that protectionism protects infant industries from the large economies of scales possessed by MNEs and as a result, they cannot compete. The problems with infant industry argument are these industries may not ever have a comparative advantage, may never grow up, no justification for market intervention unless there is market failure. Two arguments for infant industries and market failures include “imperfect financial asset markets” and the problem of “appropriability”
Explain the Trade and Growth in ASIA and explain why its unique.
Similar liberalisation of trade in Asia and Latin America yielded different results. Asia’s greater growth may be caused by high saving rate. This growth of trade has also contributed to ASIA’s reputation of low labour in manufacturing creating a significant ethical issue in regards towards the working environment.
