ipe quiz two

both the factor and sector models

-agree that raising and lowering tariffs redistributes income -they agree that these income consequences are the source of trade policy preferences -argue that trade policy preferences are determined by the income consequences of trade. -Trade raises the incomes of some groups and lowers the incomes of others. -Those who gain from trade prefer trade liberalization, whereas those who lose prefer protectionism. The two models offer distinctive conceptions of how trade's income consequences divide society

Oligopoly

In contrast to perfectly competitive markets, oligopoly defines a market dominated by a few producers. As a consequence, each firm has some influence over the price of the good it makes, whereas in perfectly competitive markets each producer is a price taker. -an industry dominated by a small number of firms. -ex. world auto industry and long distance commercial aircraft

who gains and loses from trade? SECTOR MODEL

-Labor and capital employed in industries that rely intensively on society's abundant factor (that is, the country's comparatively advantaged industries) both gain from trade. -In the advanced industrialized countries, this means that labor and capital employed in capital-intensive and high-technology industries, such as computers, pharmaceuticals, and biotechnology, gain from trade. (Exportoriented sector) -labor and capital employed in industries that rely intensively on society's scarce factor (that is, the country's comparatively disadvantaged industries) lose from trade. -In the advanced industrialized countries, this means that the incomes of owners of capital and workers employed in labor-intensive sectors such as apparel and footwear will fall as a result of trade (import-competing sector) sector model argues that trade politics is driven by competition between the import-competing and export-oriented sectors.

Industrial Policy

A broad assortment of instruments- government policies, including tax policy, government subsidies, traditional protectionism, and government procurement practices, used to channel resources away from some actors and industries and direct them toward those actors and industries the government wishes to promote. The use of such policies is typically based on long-term economic development objectives defined in terms of boosting economic growth, improving productivity, and enhancing international competitiveness. The specific goals are often determined by explicit comparisons to other countries' economic achievements.

export-oriented sector

A development strategy in which emphasis is placed on producing manufactured goods that can be sold in international markets. Adopted by the East Asian newly industrialized countries in the late 1950s to early 1960s after the gains from easy import substitution industrialization had been exhausted. During the late 1980s, this strategy and the apparent Asian success based on it provided the foundation for the "Washington Consensus." -sector model predicts that capital and labor employed in export-oriented industries will both -support globalization -supported fast-track authority, the approval of normal trade relations with China, NAFTA, and the FTAA. -workers in high-tech industries are predominantly high skilled, and on average, high skilled workers are more supportive of trade liberalization than low-skilled workers -both labor and capital employed in American high-technology industries will support globalization.

specific factors

A factor of production (labor, capital, or land) that is tied to a particular industry or sector and that cannot be easily or quickly moved to another sector. Indicates a low level of factor mobility.

Rents

A higher-than-normal return on an investment. Rents are created by barriers to entry, which can result from monopolistic or oligopolistic market structures or government policies.

sector model

A political model that argues that the politics of trade policy is characterized by competition between import-competing and export-oriented industries. Each industry has a distinct trade policy preference because international trade has a differential effect on the industries' incomes. Industries that rely heavily on the economy's scarce factor will be harmed by trade and therefore lobby for protection. Industries that rely heavily on the economy's abundant factor will benefit from trade and therefore lobby for trade liberalization -argues that trade politics are driven by competition between industries -Industries have distinct preferences because trade's income effects divide society along industry lines -Trade, therefore, pits the workers and capitalists employed in one industry against the workers and capitalists employed in another industry in the conflict over the distribution of national income. -argues that trade divides society across industry rather than factor lines because the assumptions it makes about factor mobility are different from the assumptions embodied in the factor model

factor model (class-based model of trade politics)

A political model that argues that the politics of trade policy is characterized by competition between labor and capital. Each of these two groups has a distinct trade policy preference because international trade has a differential effect on the groups' incomes. The scarce factor will be harmed by trade and therefore lobbies for protection. The abundant factor will benefit from trade and therefore lobbies for trade liberalization. -argues that trade politics are driven by competition between factors of production—that is, by competition between labor and capital, between workers and capitalists -Labor and capital have distinct trade policy preferences because trade's income effects divide society along factor lines -Whenever tariffs are lowered and trade expanded (or tariffs raised and trade restricted), one factor will experience rising income, whereas the other will see its income fall. -Trade, therefore, places labor and capital in direct competition with each other over the distribution of national income -suggests that the debate over trade policy is a conflict over the distribution of national income between American labor and American business. -The emergence of conflict between workers and capitalists is based on the assumption, embodied in our simple two-factor model, that American labor is homogeneous -Trade still reduces the income of low-skilled American workers; high-skilled workers, however, which are an abundant factor in the United States, would see their incomes rise.

Infant-Industry Case for Protection

A theoretical justification for protection that applies to cases in which a country's newly created firms (infants) could not initially compete against foreign producers in an established industry, but would be able to do so eventually if they were given time to mature -a short period of tariff protection will enable these industries to become efficient and begin to export. Once this point has been reached, the tariff can be removed. The long-run welfare gains created by the now-established industry will be greater than the short-run losses of social welfare imposed by the tariff. -logic of the infant-industry case for protection has been adopted by governments in many late-industrializing countries. A late-industrializing country is one that is trying to develop manufacturing industries in competition with established manufacturing industries in other countries

Reciprocal Trade Agreements Act (RTAA)

American trade legislation passed in 1934 under which Congress allowed the executive to reduce tariffs by as much as 50 percent in exchange for equivalent concessions from foreign governments. Created the institutional framework for reciprocal tariff reductions achieved under GATT following World War II. -transformed the large and heterogeneous group favoring liberalization into small groups of export-oriented industries that could more easily organize to pursue common goal -More balanced political pressure made politicians more willing to liberalize trade.

collective action problem

Applies to instances in which the action of a number of individuals is required to achieve a common goal. The problem arises because people will not voluntarily invest time, energy, or money to achieve a common goal, but will instead allow others to bear these costs. That is, each free rides on the efforts of others. Because all members of the interested group act in the same way, insufficient time, energy, and money are dedicated to the achievement of the goal, and the goal is therefore not achieved. In international political economy, it has been used to understand interest-group formation, and in particular, why consumer interests are under-represented in trade policy -I will let other consumers spend their money and time; that is, I will free ride -The incentive to free ride makes collective action in pursuit of a common goal very difficult.

Strategic-Trade Theory

Expands on the infant-industry case for protection by asserting that government intervention can help domestic firms gain international competitiveness in high-technology industries by providing means whereby those firms can overcome the competitive advantages enjoyed by established firms. The theory also suggests that governments can use trade policy to compete for valued industries. -asserts that many high-tech industries are characterized by oligopolistic competition; that is, they feature competition between only a few firms. The combination of economies of scale and experience on the one hand and oligopolistic competition on the other creates a theoretical rationale for government intervention to raise national income -suggests, therefore, that the location of high technology industries has little to do with cross-national differences in factor endowments and a lot to do with market structure and the assumptions we make about how production costs vary with the quantity of output.

society centered approach weaknesses

I) does not explain trade policy outcomes -tells us that trade politics will be characterized by conflict between the winners and losers from international trade -tells us who the winners and losers will be -does not help us explain which of these groups will win the political battle -we need to be able to evaluate the relative power of the competing groups -society-centered approach provides little guidance about how to measure this balance of power -better at explaining why trade politics are characterized by competition between organized interests than at telling us why one group outperforms another in this competition for influence II) implicitly assumes that politicians have no independent trade policy objectives and play no autonomous role in trade politics -Politicians are not simply passive recorders of interest-group pressures -politicians can actively attempt to shape the configuration of interest-group pressures that they face III) does not address the motivations of noneconomic actors in trade politics -Societal interest groups other than firms, business associations, and labor unions do attempt to influence trade policy -groups that focus on the environment or on human rights spend resources attempting to influence trade policy

ways electoral systems affects trade politics

I) electoral systems may play an important role in shaping how groups organize to pursue their trade policy objectives -majoritarian systems may encourage organization around the common sector-based interests -majoritarian electoral institutions may create strong incentives for individuals to organize around narrow industry-specific interests. -PR systems may encourage organization around factors -PR systems may create incentives for individuals to organize for political action around factoral interests II) Electoral systems may also affect the level of protection adopted by governments in the two systems. -governments in countries with PR systems to maintain lower tariffs (and other trade barriers) than governments in countries with majoritarian electoral systems. The logic behind this hypothesis asserts that the small groups that benefit from protection can more easily influence policy in majoritarian than in proportional systems -minority interests can construct legislative majorities more easily in majoritarian than in PR systems.

collective action helps us understand three important characteristics of trade politics

I) helps us understand why producers rather than consumers dominate trade politics. -consumers have strong reason to free ride because theres a lot of them -contributions to consumer interest group less than underlying common interest in free trade -small # of firms -can more easily organize to lobby for their interests II) suggests that trade politics will exhibit a bias toward protectionism -tariff provides large benefits to the few firms producing in the protected industry. -trade politics is dominated by import competing industries demanding protection. III) helps us understand why governments rarely liberalize trade unilaterally, but have been willing to do so through negotiated agreements -Reciprocal trade agreements make it easier for export-oriented industries to overcome the collective action problem

state centered approach weaknesses

I) lacks explicit microfoundations -asserts that states act in ways that enhance national welfare -What incentive does the state have to act in ways that do in fact enhance national welfare? -Why then would autonomous state actors enrich society when they might just as easily enrich themselves? -develop microfoundations—an explanation that sets out the incentive structure that encourages state officials to adopt policies that promote national welfare -provides little justification for its central assertion that states will regularly act in ways that enhance national welfare. II) the assumption that states make policy independent of domestic interest-group pressure is misleading. -highly autonomous states do not stand above all societal interests -Interest groups need not dictate policy, as the society-centered approach claims, but they do establish the parameters in which policy must be made -the society-centered approach assumes too little room for autonomous state action, the state-centered approach assumes too much state autonom III) strategic-trade theory itself, which provides the intellectual justification for government intervention in high-technology industries, has considerable weaknesses -is as much a prescriptive theory—one used to derive policy proposals—as it is an explanatory theory. As such, it has some important limitation -claim that government intervention can improve national welfare is not particularly robust -strategic-trade theory does not provide unambiguous support for the claim that government intervention in high-technology industries can raise national income -even if we assume that strategic-trade theory is correct, it is not easy for governments to identify sectors in which intervention will raise national income

factor-price equalization (Stolper-Samuelson Theorem)

In open economies, international trade will cause the price of the factors of production to equalize. In a two-country world, the price of each country's scarce factor will fall, whereas the price of each country's abundant factor will rise. Eventually, the price of labor will be the same in both countries and the price of capital will be the same in both countries. -over time, factor incomes in the United States and China will equalize. That is, wages for American workers will fall and wages for Chinese workers will rise until wages in the two countries are the same. The return to capital in the two countries will also equalize. The return to Chinese capital will fall and the return to American capital will rise until the return to capital in the two countries is the sam

who wins?

In the absence of intervention by any government, the firm that is the first to enter a particular industry will win, and in doing so effectively deter subsequent entry by potential rivals. Thus, such industries offer a first-mover advantage. This first-mover advantage arises from economies of scale and experience. -Government intervention may have a powerful effect on the willingness of a latecomer to enter the industry. That is, targeted government intervention may enable late entrants to successfully challenge first movers. By doing so, government intervention shifts the excess returns available in a particular industry from a foreign country to the national economy.

Economies of Scale

Reductions in the unit cost of producing a good caused by increases in the number of goods produced. Economies of scale often arise from knowledge acquired in production. The existence of economies of scale in certain industries can provide a justification for welfare-enhancing industrial policy, as well as a rationale for strategic trade theory.

factors in factor model

SCARCE FACTOR -trade causes the scarce factor's income to fall -scarce factors want to minimize trade -Scarce factors thus demand high tariffs in order to keep foreign products out of the home market. -In the United States and other capital abundant countries, the factor model predicts that workers (the scarce factor) will prefer protectionist trade policies -In developing countries, the factor model predicts that labor will prefer liberal trade policies ABUNDANT FACTOR -trade causes the abundant factor's income to rise -abundant factors want to maximize trade -Abundant factors thus prefer low tariffs in order to capture the gains from trade -In the United States and other capital abundant countries, the factor model predicts that owners of capital (the abundant factor) will prefer liberal trade policies -In developing countries, the factor model owners of capital will prefer protection

import-competing sector

The group that represents the owners of capital and workers employed in labor-intensive sectors in advanced industrialized countries. In other words the scarce factor group. -Does not have the comparative advantages -Intensive in using the production factor scarce domestically -oppose globalization -opposed free-trade agreements with South Korea and Singapore, has been very critical of the American decision to grant China permanent normal trade status, and does not support further opening of the U.S. market to foreign textiles through multilateral trade negotiation -labor and capital employed in textile and apparel are both skeptical of globalization.

Economies of Experience

The cost of producing a good fall as workers and managers gain the specific skills as a consequence of producing the good. Often referred to as "moving down the learning curve."

State Strength

The degree to which policymakers are insulated from interest-group pressures when making policy decisions. Typically seen to range from weak states, wherein policy making is easily influenced by interest groups to strong states, where interest groups cannot readily access policymakers. STRONG STATE -policymakers are highly insulated from such pressure -high degree of centralization of authority, a high degree of coordination among state agencies, and a limited number of channels through which societal actors can attempt to influence policy -characteristics of political institutions make it easier for strong states to formulate long-term plans embodying the national interest. -Strong states also may be more able than a weak state to remove protection once an infant industry has matured. -In addition, strong states may be more able to implement industrial policies that redistribute societal resources, because policymakers need worry less that policies that redistribute resources from one domestic group to another will have a negative impact on their position in power. -ex. Japan and France WEAK STATE -policymakers are fully exposed to such pressures -decentralized authority, a lack of coordination among agencies, and a large number of channels through which domestic interest groups can influence economic policy. -In weak states, policymakers must respond to the particularistic and often short-run demands of interest groups -ex. US

Factor mobility

The ease with which factors of production (labor and capital) can move from one industry to another. All factors are mobile in the long run, but many are relatively immobile in the short run. Different assumptions about the mobility of factors underlie two different political theories of trade politics. The factor model assumes a high degree of factor mobility, whereas the sectoral model assumes that at least one factor is immobile in the short run FACTOR MODEL -assumes that factors are highly mobile; labor and capital can move easily from one industry to another. -Thus, capital currently employed in the apparel industry can be quickly shifted to the computer industry. -Similarly, workers currently engaged in apparel production can easily shift to computer production. -When factors are mobile, people's economic interests are determined by their factor ownership. Workers care about what happens to labor, whereas capitalists care about the return to capital. SECTOR MODEL -assumes that factors are not easily moved from one industry to another. Instead, factors are tied, or specific, to the sector in which they are currently employed -Capital currently employed in apparel production cannot easily move to the computer industry. -When factors are immobile, trade affects the incomes of all factors employed in a given industry in the same way -When factors are immobile, it makes little sense to speak of the interests of a unified labor or capital class.

veto player

a political actor whose agreement is necessary in order to enact policy In the U.S. context, each branch of government might be a veto player. Whether each branch is a veto player in fact depends upon the preferences of the individuals that control each branch -The central expectation of veto player theory is that the difficulty of moving policy from the status quo increases in line with the number of veto players in the political system -suggests that political systems with many veto players will find it difficult to alter tariffs in response to societal pressure for change -tariffs will be relatively easy to change in political systems with few veto players -The number of veto players in the political system shapes the government's ability to raise or lower tariffs in response to changes in the relative power of protectionist and liberalizing demands emanating from organized groups.

A Society-Centered Approach to Trade Politics

argues that a government's trade policy objectives are shaped by politicians' responses to interest groups' demands. -suggests that the Trump administration's determination to renegotiate NAFTA and other free-trade agreements is a response to specific demands made by important domestic economic groups of workers and firm -argues that the British decision to leave the European Union (Brexit) reflects the economic interests of workers as voters who have been or fear that they will be displaced as a result of trade between Britain and the other European Union economies -To understand the political dynamics of this competition, it emphasizes the interplay between organized interests and political institutions -based on the recognition that trade has distributional consequences -These distributional consequences generate political competition as the winners and losers from trade turn to the political arena to advance and defend their economic interests -argues that trade policy reflects interest-group demands, it devotes considerable attention to the source, content, and organization of these demands

A state-centered approach

based on two central assumptions, both of which contrast sharply with the assumptions embodied in the society-centered approach. -The first assumption concerns the impact of protectionism on aggregate social welfare. -The society-centered approach argues that protectionism reduces social welfare by depriving society of the gains from trade and by employing society's resources in comparatively disadvantaged industries, but the state-centered approach argues that under certain circumstances trade protection can raise social welfare. -The second assumption concerns whether governments can operate independently of interest group pressures. The society-centered approach argues that national policy reflects the balance of power among competing interest groups, but the state-centered approach argues that under specific circumstances governments are relatively unconstrained by interest-group demands. -As a consequence, a government's trade and economic policies embody the goals of national policymakers rather than the demands of domestic interest groups. The state-centered approach combines these two assumptions to suggest that under a specific set of circumstances, governments will intervene in the domestic economy with tariffs, production subsidies, and other policy instruments in ways that raise aggregate social welfare. -The economic justification for the state-centered approach rests on the claim that targeted government intervention can increase aggregate social welfare.

Majoritarian

electoral systems that combine single member districts and first-past-the-post elections. Great Britain, for example, is divided into 650 constituencies, each of which elects a single member of parliament -incentives created by majoritarian electoral systems -To win elections in such systems, candidates must satisfy the demands of their districts' residents. Each electoral district is relatively small and likely to be dominated by one or two major industries. -The wages paid in these industries will in turn play a large role in supporting the rest of the district economy—the retail and service-sector businesses that provide jobs for many other people in the community. -Such electoral systems create incentives for elected officials to represent the interests of the owners of and workers in the industries that dominate economic activity in their districts.

Proportional representation (PR)

electoral systems that employ multimember districts to distribute legislative representation in proportion to the share of the popular vote each party attracts. Norway, for example, is divided into 19 constituencies, each of which elects between 4 and 17 representatives to the Norwegian parliament -PR systems do not link political representation tightly to the interests of small and undiversified electoral districts. In the extreme case, for example, a PR system has a single national constituency. -In such systems, electoral success requires the construction of electoral coalitions that appeal to broad rather than narrow interests. -Consequently, PR systems seem to produce political parties based on class or factor interests.

China in the Factor Model

produces: shirts and computers factors of production: labor and capital China: lot of labor ($) & little capital ($$$$$) export: labor intensive good (shirts) import: capital intensive good (capital) China imports computers from Us -> demand for Chinese computers falls -> Chinese firms makes less computers -> computer manufacturers liquidate capital invested in computer firms -> lay off employees China exports shirts to US -> demand for Chinese shirts rises -> Chinese shirts firms expand -> computer firms demand more capital and labor -> absorbs capital and labor released from computer industry TRADE WITH US CAUSES WAGES EARNED BY CHINESES WORKERS TO RISE AND THE RETURN TO CHINESE CAPITAL TO FALL

United States in the Factor Model

produces: shirts and computers factors of production: labor and capital US: lot of capital ($) and little labor ($$$$$) export: capital intensive good (computer) import: labor-intensive good (shirt) US import shirts from China -> demand for US shirts falls -> US firms make less shirts -> firms liquidate capital invested in shirt factories -> lay off workers China's demand for US computers rises -> US computer firms expand -> computer firms demand more capital and labor -> employ capital and labor released by shirt industry TRADE WITH CHINA CAUSES RETURN TO CAPITAL TO RISE AND WAGES TO FALL -trade reduces the income of American workers, these workers, and the organizations that represent them, have an incentive to oppose further liberalization and to advocate more protectionist policies. -critical of globalization -prevent passage of fast-track authority -critical of NAFTA and TPP -trade raises the return to American capital, American businesses should be strong supporters of globalization -supportive of globalization -supports NAFTA and the FTAA -supports China's entry into the WTO

labor and capital imbalance

shirt industry (labor intensive): lot of labor & little capital shirt industry shrinks: releases lot of labor & less capital shirt industry expands: needs more labor & less capital computer industry (capital intensive): lot of capital & less labor computer industry expands: needs more capital & less labor computer industry shrinks: releases lots of capital & little labor price of capital and labor will change UNITED STATES -more capital demanded than released -> price of capital rises -people who own capital earn a higher return than before trade with china -less labor demanded than released -> price of labor falls -workers earn less than before trade with china CHINA -more labor demanded than released -> price of labor rises -less capital demanded than released -> price of capital falls

who gains and loses from trade? FACTOR MODEL

trade raises the income of society's abundant factor and reduces the income of society's scarce factor -Abundant American capital and abundant Chinese labor both gained from trade. -Scarce American labor and scarce Chinese capital both lost.