LECTURE 5: TRADE AND TARIFFS

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LECTURE 5 TRADE AND TARIFFS
1. COMPARATIVE ADVANTAGE 2. TRADE
STRATEGIES 3. TYPES OF PROTECTIONISM 4. WHY DO
STATES USE PROTECTIONISM? 5. HEGEMOMIC
STABILITY 6. NORTHS INSTITUTIONAL MODEL
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INTERNATIONAL TRADE
1. THE BASIS OF BOTH DOMESTIC AND INTERNATIONAL
TRADE IS SPECIALIZATION 2. SPECIALIZATION
FOCUS ON WHAT YOU DO BEST AND TRADE WITH OTHER
SPECIALISTS FOR WHAT YOU DONT PRODUCE 3.
COMPARATIVE ADVANTAGE SPECIALIZATION AND TRADE
WITH MAKE EVERYONE BETTER OFF 4. EXAMPLE TWO
COUNTRIES AND TWO GOODS
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COMPARATIVE ADVANTAGE EXAMPLE
WHEAT IRON UK 100 250 US 200 150 WHEAT IRON UK
10,000 25,000 US 20,000 15,000 --------- -------
-- WORLD 30,000 40,000 PRODUCTION CONSUMPTION
WHEAT IRON WHEAT IRON UK 0 50,000 16,000 30,000 U
S 40,000 0 24,000 20,000 --------- --------- ----
----- ---------- WORLD 40,000 50,000 40,000 50,000
PRODUCTIVITY AMOUNT PRODUCED PER WORKER
(A)
AMOUNT PRODUCED AND CONSUMED ASSUMING 200 WORKERS
IN EACH COUNTRY WITH 100 PRODUCING EACH GOOD
(B)
(C)
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COMPARATIVE ADVANTAGE HIGHLIGHTS
1. TOTAL PRODUCTION AND CONSUMPTION IS LESS IN NO
TRADE WORLD 2. BOTH COUNTRIES ARE BETTER OFF
AFTER TRADE 3. ABSOLUTE ADVANTAGE DOES NOT
MATTER EVEN IF THE UK WERE MORE EFFICIENT AT
PRODUCING WHEAT AND IRON THE US WOULD STILL
BENEFIT FROM TRADE 4. EXCHANGE RATE IS NOT
CRITICAL (e.g., 16K OF WHEAT FROM 20K OF
IRON) 5. ONLY CASE OF NO TRADE IF RELATIVE
PRODUCTIVITY IS IDENTICAL (e.g., 100/200 AND
200/400)
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COMPARATIVE ADVANTAGE EXAMPLE 2
WHEAT IRON UK 225 250 US 200 150 WHEAT IRON UK
22,500 25,000 US 20,000 15,000 --------- --------
- WORLD 42,500 40,000 PRODUCTION CONSUMPTION W
HEAT IRON WHEAT IRON UK 4,500 45,000 23,500 27,000
US 40,000 0 22,000 18,000 --------- --------- --
------- ---------- WORLD 44,500 45,000 44,500 45,0
00 (UK puts 180 workers into iron production and
20 into wheat production)
PRODUCTIVITY AMOUNT PRODUCED PER WORKER
(A)
AMOUNT PRODUCED AND CONSUMED ASSUMING 200 WORKERS
IN EACH COUNTRY WITH 100 PRODUCING EACH GOOD
(B)
(C)
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COMPARATIVE ADVANTAGE EXAMPLE 3
WHEAT IRON UK 200 400 US 100 200 WHEAT IRON UK
20,000 40,000 US 10,000 20,000 --------- --------
- WORLD 30,000 60,000 PRODUCTION CONSUMPTION
WHEAT IRON WHEAT IRON UK 10,000 60,000 20,000 40,0
00 US 20,000 0 10,000 20,000 --------- ---------
--------- ---------- WORLD 30,000 60,000 30,000 60
,000 (UK puts 150 workers into iron production
and 50 into wheat production
PRODUCTIVITY AMOUNT PRODUCED PER WORKER
(A)
AMOUNT PRODUCED AND CONSUMED ASSUMING 200 WORKERS
IN EACH COUNTRY WITH 100 PRODUCING EACH GOOD
(B)
(C)
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TRADE STRATEGIES
1. FREE TRADE UNCONDITIONALLY
COOPERATIVE KEEP HOME MARKETS OPEN
REGARDLESS 2. FAIR TRADE CONDITIONALLY
COOPERATIVE TIT-FOR-TAT STRATEGY 3. MANAGED
TRADE MANIPULATE TRADE ON SECTOR BY SECTOR
BASIS 4. MERCANTILISM MAXIMIZE EXPORTS AND
MINIMIZE IMPORTS ACROSS THE BOARD 5.
AUTARCHY REJECT INTERNATIONAL TRADE ENTIRELY
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TYPES OF PROTECTIONISM
1. TARIFFS AND QUOTAS 2. NON-TARIFF BARRIERS
(NTBs) a) VOLUNTARY EXPORT RESTRAINTS
(VER) b) ORDERLY MARKETING AGREEMENTS
(OMA) c) SUBSIDIZING d) HEALTH, SAFETY, AND
LABELING REQUIREMENTS e) BUREAUCRATIC
HARASSMENT f) SOCIAL NORMS
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SUPPLY AND DEMAND
PRICE
SUPPLY
P
DEMAND
0
0
Q
QUANTITY
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PRODUCTION, CONSUMPTION, AND TRADE BEFORE THE
IMPOSITION OF A TARIFF
PRICE
DOMESTIC SUPPLY
P1
IMPORTS
DOMESTIC DEMAND
0
0
Q1
Q2
QUANTITY
DOMESTIC CONSUMPTION
DOMESTIC PRODUCTION
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IMPACT OF A TARIFF
PRICE
DOMESTIC SUPPLY
P2
A
B
C
D
P1
IMPORTS
DOMESTIC DEMAND
0
Q3
Q4
0
Q1
Q2
QUANTITY
DOMESTIC PRODUCTION
DOMESTIC CONSUMPTION
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WHY IS THERE SO MUCH PROTECTIONISM?
1. DOMESTIC INTEREST GROUPS CONCENTRATED
INTERESTS 2. SOURCE OF GOVERNMENT REVENUE 3.
INFANT INDUSTRY ARGUMENT 4. STRATEGIC
INDUSTRIES 5. HEGEMONIC STABILITY THEORY 6.
RETALIATION (e.g. DUMPING)
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INFANT INDUSTRY ARGUMENT
LONG RUN AVERAGE COST
SWITZERLAND
THAILAND
QUANTITY
Q1
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HEGEMONIC STABILITY THEORY
1. Picks up Where Power Transition Leaves Off 2.
Kindlebergers The World in Depression (1973) 3.
Decline of Britain As Hegemon in 1930S A.
Collapse of International Economic System B.
Rise of Fascism and World War II 4. Hegemonic
Stability Theorists Create General Theory
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HYPOTHESES FROM HEGEMONIC STABILITY THEORY
1. A Rising Hegemonic Power Should Be Associated
With The Creation of International Regimes, a
Decline in International Conflict, and an
Expansion of International Trade. 2. A
Declining Hegemonic Power Should Be Associated
With The Collapse of International Regimes, a
Rise in International Conflict, and a Decline in
International Trade.
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EVALUATING COMPETING THEORIES
HEGEMONIC STABILITY THEORY
H1 RISING HEGEMON --()--gt OPENNESS OF TRADING
SYSTEM H2 DECLINING HEGEMON--(-)--gtOPENNESS OF
TRADING SYSTEM
INTERNATIONAL BUSINESS CYCLE THEORY
H1 ECONOMIC EXPANSION --()--gt OPENNESS OF
TRADING SYSTEM H2 ECONOMIC CONTRACTION
--(-)--gtOPENNESS OF TRADING SYSTEM
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EVALUATING COMPETING THEORIES
INTERNATIONAL BUSINESS CYCLE
CONTRACTION
EXPANSION
RISING HEGEMON DECLINING HEGEMON
OPENING, OPENING CLOSING, OPENING
OPENING, CLOSING CLOSING, CLOSING
HEGEMONIC STABILITY THEORY
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MEASURING VARIABLES(i.e., OPERATIONALIZATION)
1. Hegemonic Power Hegemons GNP/Total Great
Power GNP 2. Openness of Trading System Sum of
Imports Exports As Percent of GNP for Great
Powers 3. Economic Expansion/Contraction Change
in GNP of Great Powers by Year
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HEGEMONIC STABILITY THEORYA TEST USING
INTERNATIONAL TRADE
Relative Power
Amount of Free Trade
1840
1860
1880
1900
1920
1940
1960
1980
2000
Expansion
Contraction
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SUMMARIZING THE GRAPHICAL TEST
HEGEMONIC STABILITY THEORY PREDICTIONS OPENING
CLOSING CLOSING OPENING OPENING CLOSING
INTERNATIONAL BUSINESS CYCLE PREDICTIONS OPENING
CLOSING OPENING CLOSING OPENING OPENING
TIME PERIOD 1820-1873 1873-1896 1896-1913 191
8-1940 1945-1960 1960-1995
ACTUAL OPENING CLOSING OPENING CLOSING OPENIN
G OPENING
LEGEND CORRECTLY PREDICTED PERIODS SHOWN IN BOLD
TEXT
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FINAL POINTS ON EVALUATINGHEGEMONIC STABILITY
THEORY
1. Correlation Is Not Enough Process Tracing
Required 2. Should You Throw Out Hegemonic
Stability Theory? 3. Focus on Evidence Which
Supports and Refutes Argument 4. Single Versus
Multiple Causes 5. Many Ways to Test
Theories -- Different Operationalizations --
Different Dependent Variables
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USING ANALOGIES
1. Why Do People Use Historical Analogies? 2.
Are the Declines of Britain and the U.S.
similar? 3. Lake Argues No Because of Many
Differences a) Structure of International
System b) Position of Hegemonic Power c)
Trajectories of Decline d) Free Trade versus
Fair Trade e) International Regimes f)
Portfolio versus Foreign Direct Investment
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NEO-CLASSICAL MODEL
PERFORMANCE
CHANGE IN RELATIVE PRICES

• TOTAL
• PER CAPITA
• DISTRIBUTION

CHANGE IN BEHAVIOR
-- BASIC MODEL EQUILIBRIUM SHOCK
ADJUSTMENT NEW EQUILIBRIUM -- ASSUMES
RAPID CHANGE, SPONTANEOUS INNOVATION, AND
EFFICIENT OUTCOMES
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NORTHS INSTITUTIONAL MODEL
PERFORMANCE
CHANGE IN RELATIVE PRICES

• TOTAL
• PER CAPITA
• DISTRIBUTION

CHANGE IN BEHAVIOR
STATE CONSUMPTION
STATE
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ASSIGNING PROPERTY RIGHTS
1. Without Private Returns, No Incentive to
Innovate. 2. Goal Set Social Gains Equal to
Private Gains. 3. Assigning Property Rights
Isnt Always Good Guilds -- Guilds Exploit
Monopoly Position -- Guilds Resist
Innovation 4. Why Grant a Monopoly to Guilds or
Trading Companies?
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TRANSACTION COSTS
1. Transaction Costs Tied to Exchange 2.
Examples A. Locate Buyer B. Medium of
Exchange C. Shipping Costs D. Insurance
Costs E. Monitoring Compliance and Quality 3.
Two Key Points -- Influences All Exchanges --
Domestic As Well As International
Transaction Costs
Development
Specialization
Exchange