inr ch. 7--international trade

The most direct cost of protection

is to consumers of the protected good.... tariffs & quotas raise the domestic price of imported goods and may lead to price increases for similar domestically produced goods

In the S-S framework: If labor is scarce, laborers will be ___. If labor is abundant, laborers will ___.

protectionist support free trade

3 groups stand to lose

(1) consumers of the imported good --consuming industries (2) exporters (3) citizens in general

Regional institutions

*regional trade agreements (RTA's)* agreements among 3 or more countries in a region to reduce barriers to trade among themselves

Who wins; who loses from the redistributive effect of protection?

*wins* producers *loses* consumers

Ricardo-Viner (or specific factors) approach and the difference from H-O

a model of trade relations that emphasizes the sector in which factors of production are employed rather than the nature of the factor itself. this differentiates it from the H-O approach, for which the nature of the factor--labor, land, capital-- is the principal consideration

What's so good about trade?

actors engage in trade to realize the benefits of specialization. modern societies = based on specialization--some ppl farm, some manufacture, etc.--and on trade among these ppl w/ different specialities.

Reduction in barriers after 1945

after 1945- the Western world under American leadership moved gradually to reduce trade barriers among the developed nations. in terms of global trade relations over time, we see a pattern in which mercantilist closure gave way to freer trade, then to interwar closure, then to liberalization after 1945 and further liberalization leading to globalization after 1980

Imports are___ Exports are__

imports are *gains from trade* exports are *its costs*

The redistributive effect of protection

income is redistributed from domestic consumers to the protected domestic industry

Institutions and trade

institutions help mitigate all problems standing in the way of interstate trade, they set standards of behavior, they gather info. they reduce costs to govt's by making *joint decisions* *reciprocity* in IN trade, a mutual agreement to lower tariffs & other barriers to trade..it involves implicit or explicit arrangement for 1 govt to exchange trade policy concessions w/ another

Different electoral systems

most industrial countries = parliamentary

Representation through poly. institutions

poly. institutions that are more closely tied to narrow interests are more likely to favor trade protection than institutions that reflect broader interests. democracies reflect broad interests, dictatorships are restrictive.

Why do countries trade what they do?

principle of C.A. suggests that countries will produce and export what they do best. Heckscher-Ohlin theory attempts to explain

Political party types

societies differ in the ways their partisan, electoral, and legislative institutions represent the interests of their citizens, & these differences are likely to affect the way trade policy is made

Why are some industries protected and some not?

virtually all developed countries protect agriculture, whereas they have relatively open trade in manufactured products. land = scarce in most developed countries--relative to capital & skilled labor: explains why their farmers are protectionist

The benefits and costs of trade barriers

virtually all tools of trade protection (Tariffs, etc.) make imports more expensive, allowing domestic producers to sell more of their products, to raise their prices or both.

Who would we expect to support/oppose trade barriers?

we would expect owners of the scarce factors of production in a country to be protectionist & owners of the abundant factors to favor free trade. in countries w/ abundant land, farmers should support trade: in countries where land is scarce, farmers should support protection

Compensation & trade policy

although trade liberal. might hurt some ppl in the first place, the overall gains to the nat'l economy are large enough that the losers can be fully compensated for their losses & benefits will still be there for the rest of society

Domestic institutions & trade policy

an important question about domestic institutions has to do with whether they favor particularistic interests, in which case they would incline toward protectionism, or whether they favor broad economic and consumer interests, in which case they would incline toward less protectionist policies.

Organization of interests

an organization reflecting the concerns of broad groups--such as all workers--is more likely to ignore the demands of specific groups or industries in contrast, interests that are organized into narrower groups are more likely to pursue the particular goals of such special interests.

Heckscher-Ohlin (H-O) trade theory

the theory that a country will export goods that make extensive use of the factors of production in which it is well endowed. thus, a labor-rich country will export goods that make intensive use of labor

Protectionism

the use of specific measures to shield domestic producers from imports, one of the most common govt policies worldwide.

Stolper-Samuelson (S-S) theorem

theory that the protection benefits the scarce factor of production. this view flows from the H-O approach: if a country imports goods that make intensive use of its scarce factor, then limiting imports will help that factor. so, in a labor-scarce country, labor benefits from protection & loses from trade liberalization.

Why do govt's restrict trade?

trade barriers usually reflect domestic concerns trade policy typically reaches the public consciousness, the media, when some nat'l producers complain that there is too much or too little trade in the goods they produce

Wages of unskilled workers in the US

trade puts unskilled American workers in direct competition w/ unskilled workers in poor countries w/ much lower wages--this makes the wages of americans worse off. clear implication of H-O approach: trade will tend to make wages, profits, and other earnings more similar across countries. process is called factor price equalization--for the prices of factors of production tend to become more equal. wages of unskilled workers in the US has been stagnant or declining since early 1970s

4 factors of production

(1) land- an essential input into agricultural production (2) labor- typically understood to refer to undifferentiated & unskilled labor (3) capital for investment- which refers both to the machinery & equipment w/ which goods are produced (4) human capital- which refers to skilled labor, so called bc the labor has been enhanced by investment in training & education

Overcoming problems of strategic interaction

(1) small numbers: makes it easier for govt's to monitor each others behavior (less likely to be free riding among small groups of countries) *hegemonic stability* (2) information: failures arise due to the fears of hidden actions, such as the fear that 1 govt may use its superior knowledge of its own domestic conditions to take advantage of other govt's (3) repeated interactions-b/w govt's on a continuing basis provides a reason to avoid cheating (4) linking concessions: govt's may also facilitate trade agreements by doing this

Comparative v. absolute advantage

*comparative* the ability of a country/firm to produce a good/service more efficiently than other goods/services, such that its resources are most efficiently employed in this activity. --implies that a nation gains most by specializing in producing & exporting what it produces most efficiently. *absolute* the ability of a country or firm to produce more of a good/service than other countries/firms using the same amount of effort and resources

GATT/WTO

*general agreement on tariffs and trade*: an IN institution in which member countries committed to reduce barriers to trade & to similar trading conditions to all other members. replaced by WTO *world trade organization*: institution to succeed the GATT & to govern IN trade relations. WTO encourages & polices the multilateral reduction of barriers to trade, and oversees resolution of trade disputes

MFN

*most favored nation* a status established by most modern trade agreements guaranteeing that the signatories will extend to each other any favorable trading terms offered in agreements w/ 3rd parties

Types of trade restrictions

*trade barriers* impediments to the importation of foreign goods *tariff* most common barrier, a tax on imports levied at the border and paid by the importer. *quantitative restriction, or quota* limits the quantity of a foreign good that can be sold domestically *non-tariff barriers to trade* such as regulations targeted at foreign goods or requirements that govt's purchase from nat'l producers.

Political economy of sugar

FLS p. 283

How well does H-O explain trade patterns?

H-O theory determines national comparative advantage and what countries produce and export. the pattern of specialization leads to analogous trade patterns--poor countries w/ little capital import the capital-intensive products they need. industrial countries are rich in capital & skilled labor--they export manufactured goods that make intensive use of these endowments. developing countries are rich in land, raw materials, or unskilled labor--they export agricultural products, minerals, or labor-intensive manufacturers.

Prisoner's Dilemma and trade negotiations

PD suggests it can be hard for actors to achieve a mutually beneficial outcome when there is no way to guarantee that all parties to the agreement will cooperate

Adam Smith, The Wealth of Nations & Specialization

Smith wrote in his text, the wealth of nations, made specialization (the division of labor) the centerpiece of his argument. pin example specialization increases productivity and productivity fuels economic growth

1934

congress granted president authority to negotiate certain trade agreements w/ other countries...prior to this only congress had made trade policy. this institutional arrangement empowers the president @ the expense of congress, & many observers believe that it has allowed the pres. to impart a pro-trade bias instead of the protectionist bias favored by congress. bc of this, the US moved toward more liberal trade policies

Noneconomic factors that affect trade

countries that are geographically close will trade more since transport costs are lower diplomatic & military relations b/w nations also influence trade patterns. countries who's govt's are hostile to one another are likely to trade little whereas those on friendly terms are likely to trade more. most important = national trade policies--undertaken to address the interests of domestic constituencies.

Which should be less protectionist, democracy or dictatorship and why?

democracies = less protectionist than dictatorships democratic developing countries are much more likely to liberalize their trade than dictatorships are.

Free trade as the ideal policy, even if pursued unilaterally

principle of comparative advantage has clear implications for free trade. trade barriers are harmful to the economy as a whole. free trade induces a country to follow its C.A., and economic logic implies that it is the ideal policy--true even if free trade is pursued unilaterally.