Chapter 11

Why do countries implement trade policies?

Influenced by the desire to develop and protect their domestic manufacturing industry. This idea became popular post ww2. Policy encourages domestic industries by eliminating competition from foreign imports.

Main policies implemented by developed countries (3)

1. Export Subsidies 2. Trade Liberalization 3. Export Oriented Growth

Problems with Infant Industry Arguement

1. Mkt. failure justification- it could be wasteful to support the industries if they never develop 2. Problem of Appropriability

High tariffs would be the second best option when...

The country can't create better functioning laws or if the country can't establish property rights

Why do countries choose different trade policies?

They have different needs, but most importantly they have different per capita incomes.

Trade Liberalization

Policy adopted by middle and low income countries that is relatively free trade. Countries that adopt this policy see more growth than countries that adopted M-sub. Began in the 1980's because countries lost faith in M-sub.

Causality

Relationship between two variables where one influences the other. Did the high vol. of X what cause rapid economic growth?

Correlation

Two patterns developed in the same way, but one does not influence the other. High vol. of X and economic growth developed around the same time.

Import Substituting Industralization

A policy aimed to promote growth by restricting imports that competed with domestic products in lo and middle income countries. Hasn't been effective in every case. For example, Chile industrialized much faster than the rest of Latin America.

Export Oriented Growth

Adopting policies that promote exports in targeted industries. Became popular in Asia and the Asian countries that adopted this have seen growth in certain X sectors and in general.

Econ growth under trade lib....

At the same time that countries adopted the trade liberalization policy, the volume of goods traded on world markets began to increase. Economic growth could be attributed to the policy, or the fact that worldwide supply just increased.

What is export led growth and why is it so popular?

Export led growth became popular after countries lost faith in the infant industry argument and didn't see high enough returns from M-sub industrialization. Characteristics of the policy include high export and import volumes and relatively low trade restrictions. The Asian countries that followed this policy saw tremendous economic growth. They saw more growth than than the Latin American countries that used M-sub. It was popular because it appeared to work so well.

Problem of Appropriability

Forms aren't able to appropriate benefits of their investment in new industries because those benefits are public goods. Knowledge created when starting an industry may not be given solely to the new company because of lack of property rights. No way to protect what they just created, so everyone gets it

Which theory proved to be more effective among developing nations, M-sub industrialization or export led growth?

The countries that seem to have benefited most from international trade are the Asian countries who adopted the export led growth policy. Most of these countries employed some sort of infant industry protection in their early stages. It would have been difficult for these countries to compete internationally without some kind of government intervention. Success in Asian markets can certainly be contributed to other factors as well, but the Asian countries developed faster than the Latin American countries who adopted M-sub industrialization in the 50's and 60's.

Infant Industry Arguement

The justification for Import Sub. Industrialization. States that new manufacturing industries in developing countries can't compete with industries in developed nations, therefore the government funds them until they are able to compete internationally.

Japan protected inefficient high cost steel and automobile industries which now dominate world markets. Discuss the policy critically.

This is an example of an instance in which protectionism is helpful. Some economists believe that protectionism is always bad, but this is not the case. This doesn't mean that protectionist policy was solely responsible for their success though.

Ultimate goal of Import Substituting Industrialization (in late 50's/ 60's)

To promote economic growth by letting low and middle income countries develop their manufacturing industries