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The Free Trade Challenge

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Theoretical Arguments for an Interventionist Trade Policy[edit | edit source]

The terms of trade argument[edit | edit source]

Case of a large country (influences world prices for the good in question)

  • Introduction of a tariff reduces the world price of imports Improves the terms of trade (see Chapter 5)
  • This benefit may outweigh the costs associated with the distortions created by the tax Exists an optimal welfare-maximizing tariff
  • Higher national welfare with this optimal rate than with free trade *
  • Symmetrical reasoning for exports
  • Exists an optimal tax on exports that maximizes the national welfare of a large country - e.g. oil exports.

Limit of the argument:

  • Valid only for large countries (US, EU, some countries in a given sector) at the expense of foreign economies.
  • Predatory behaviour that interferes with trading partner relationships
  • Risk of retaliation

The market failure argument[edit | edit source]

Ex : Production externalities

  • Firms cannot appropriate the benefit of a positive externality (R&D investment) or do not take into account the cost of a negative externality (pollution);
  • social cost different from private cost (see Chapter 5).
  • National authorities intervene to stimulate production if positive externality (tax on imports) or restrict production if negative externality (tax on exports).
  • This social gain may exceed the costs associated with the usual distortions Again, there is an interventionist trade policy that maximizes the welfare of the economy.
  • Special case of the second-order optimum = an interventionist policy may be desirable (welfare-enhancing) in the event of market failure.

Limitation of the argument :

  • Trade policy is not necessarily the best instrument, better to deal directly with market failures (e.g. subsidy or production tax).
  • Difficult to identify market failures and therefore an interventionist policy may aggravate the problem instead of offsetting it.
Les externalités positives de production (ex. R&D).

The tariff makes it possible to reach the social optimum of production at point B, but it introduces a consumer loss. A production subsidy would have allowed to wait for B, and the gain of positive externality for the other producers without introducing a consumer loss. The subsidy is the optimal policy, and the tariff is only a "second best" (second best policy).

But subsidies are politically and administratively costly.

The argument of external economies of scale[edit | edit source]

Emerging Industry Argument (see Chapter 4)

a PvD with a potential advantage in a manufacturing sector may not be able to compete with older, better-established industries countries, from developed countries

Need for temporary trade protection of the industry concerned until it is productive enough to compete internationally

Historically, most developed countries began their industrialization without customs barriers.

This argument is all the more relevant if there are market failures (imperfection of the financial system, appropriateness problem).

Limit of the argument:

  • Requires an initial stock of physical and human capital...
  • Be sure there are strong enough economies of scale

Otherwise trade protection will not improve the competitiveness of the industry.

Imperfect Competition and Strategic Trade Policies[edit | edit source]

The Trade Policy Argument Strategic[edit | edit source]

Small number of competing firms with market power International competition among these firms to capture as much rent as possible

A government can intervene to change the rules of the game and transfer part of the annuities held by foreign companies to domestic companies (e.g. subsidy).

Example from Boeing and Airbus, Krugman and Obstfeld 2009, pages 275-278

Limit of the argument:

  • "Such a policy requires very detailed information, difficult to gather...
  • Risk of retaliation, trade war

Globalization in the face of social challenges[edit | edit source]

Effects of free trade on wages and working conditions[edit | edit source]

Refers to the principles of comparative advantage (see chapters 2 and 3)

Example of maquiladoras = factories located in Mexico close to the US border following the signing of NAFTA - K&O 2009, pages 282-284

Problem: if wages are low, refers to differences in productivity and if working conditions are poor, is this a deterioration?

Introduction of Social Clauses / Fair Trade[edit | edit source]

Article détaillé : Trade and geographical advantages.

Consumers willing to pay more if they know that the good has been produced in decent conditions / Certification system, e.g. Max Havelaar

Alternative: Explicit inclusion of social clauses in international trade agreements (especially since there is a fear of social dumping)?

Opposition from the developing countries who see this inclusion as a protective instrument for developed countries.[10]

Cultural Diversity[edit | edit source]

Cultural homogenization

Argument of market failures invoked to justify policies aimed at protéger national cultural specificities (France during UR, 1994)

Trade and environment[edit | edit source]

Any economic activity, whether production or consumption, is often a source of pollution.

Economic growth, by multiplying the volumes produced and consumed, should therefore always lead to more environmental damage.

Relationship Economic growth / pollutant emissions not linear

Environmental Kuznets curve

Économie internationale courbe de Kuznets environnementale 1.png

China is catching up with the US and the EU ....

Économie internationale émissions de dioxyde de carbone 1.png

Link global trade/environment?[edit | edit source]

Transport costs (multiplied by the verticalization of trade)

Geographic redistribution of the global industry

  • Pollution hotspots: location of the most polluting industries in the most lax countries in terms of environmental standards - e.g. Alang in India.
  • Some examples exist but it's hard to generalize...
Économie internationale étude de la Banque mondiale de 1998 1.png

E.g.: World Bank study of 1998

This study establishes that in 1986 the PvDs were already net importers of polluting goods, and the poorest countries were relatively the weakest exporters of polluting products.

In 1995, this trend became more pronounced: far from environmental dumping, there was a greater concentration of polluting production intended for export in the richest countries.

Geographical redistribution of the global industry?[edit | edit source]

Conclusions confirmed by other researchers such as Frankel and Rose (2003) or Antweiler, Copeland and Taylor (2001).

  • rich countries have high capital-labour ratios, and capital-intensive industries are often polluting
  • "this factor-based pollution-haven effect dominates the income-based pollution-haven effect"

However, for some groups of countries and some particular sectors, it can be observed that richer nations tend to import more and export less pollution-intensive goods (see survey in Frankel 2009).

but the phenomenon remains limited and differences in environmental standards have only a secondary effect on specialisation and trade.

Annexes[edit | edit source]

References[edit | edit source]