Chapter 11
Controversies in Trade Policy
Slide 11-2Copyright? 2003 Pearson Education,Inc.
Chapter Organization
Introduction
Sophisticated Arguments for Activist Trade Policy
Globalization and Low-Wage Labor
Summary
Slide 11-3Copyright? 2003 Pearson Education,Inc.
Introduction
Two controversies over international trade arose in
the 1980s and 1990s.
In the 1980s a new set of sophisticated arguments for
government intervention in trade emerged in advanced
countries.
– These arguments focused on the,high-technology”
industries that came to prominence as a result of the rise
of the silicon chip.
In the 1990s a dispute arose over the effects of
growing international trade on workers in developing
countries.
Slide 11-4Copyright? 2003 Pearson Education,Inc.
Sophisticated Arguments for
Activist Trade Policy
There are two kinds of market failure that seem to be
present and relevant to the trade policies of advanced
countries:
Technological externalities
The presence of monopoly profits in highly
concentrated oligopolistic industries
Slide 11-5Copyright? 2003 Pearson Education,Inc.
Technology and Externalities
Externalities
– Firms in an industry generate knowledge that other
firms can also use without paying for it.
In high-tech industries firms face appropriability
problems.
– Example,In electronics,it is common for firms to
“reverse engineer” their rivals’ designs.
Sophisticated Arguments for
Activist Trade Policy
Slide 11-6Copyright? 2003 Pearson Education,Inc.
The Case for Government Support of High-
Technology Industries
– Subsidize the activity with externalities,not all activities
in an industry,
– For instance,R&D (as opposed to manufacturing) should be
subsidized.
How Important Are Externalities?
– Externalities are hard to measure empirically.
– Problems of appropriability at the level of the nation (as
opposed to the firm) are less severe but still important
even for a nation as large as the United States.
Sophisticated Arguments for
Activist Trade Policy
Slide 11-7Copyright? 2003 Pearson Education,Inc.
Imperfect Competition and Strategic Trade Policy
In some industries where there are only a few firms in
effective competition:
– The assumptions of perfect competition will not apply.
– Firms will make excess returns (profits).
– There will be an international competition over the
excess returns.
– A subsidy from the government to domestic firms can
shift the excess returns from foreign to domestic firms.
Sophisticated Arguments for
Activist Trade Policy
Slide 11-8Copyright? 2003 Pearson Education,Inc.
The Brander-Spencer Analysis,An Example
– There are only two firms (Boeing and Airbus)
competing,each from a different country (United States
and Europe).
– There is a new product,150-seat aircraft,that both firms
are capable of making.
– Each firm decides either to produce the new product or
not.
Sophisticated Arguments for
Activist Trade Policy
Slide 11-9Copyright? 2003 Pearson Education,Inc.
Airbus
Boeing
-5
-5
0
0
0
100
0
100
Produce
Produce
Don’t produce
Don’t produce
Equilibrium outcome is A= 0 and B=100,Airbus does not produce
and Boeing produces.
Table 11-1,Two-Firm Competition
Sophisticated Arguments for
Activist Trade Policy
Slide 11-10Copyright? 2003 Pearson Education,Inc.
Airbus
Boeing
20
-5
0
0
0
100
0
125
Don’t produce
A subsidy of 25 to Airbus given by Europe results in A=125,B=0.
Table 11-2,Effects of a Subsidy to Airbus
Sophisticated Arguments for
Activist Trade Policy
Produce
Produce
Don’t produce
Slide 11-11Copyright? 2003 Pearson Education,Inc.
Problems with the Brander-Spencer Analysis
– Insufficient information to use the theory effectively
– The exact payoffs of the firms cannot easily be obtained.
– Industries in isolation
– A policy that succeeds in giving U.S,firms a strategic
advantage in one industry will tend to cause strategic
disadvantage elsewhere.
– Foreign retaliation
– Strategic policies are beggar-thy-neighbor policies that
increase our welfare at other countries’ expense.
Sophisticated Arguments for
Activist Trade Policy
Slide 11-12Copyright? 2003 Pearson Education,Inc.
Airbus
Boeing
-20
5
0
0
0
125
0
100
Don’t produce
Equilibrium outcome is A=0 and B=125; Boeing produces
and Airbus does not.
Sophisticated Arguments for
Activist Trade Policy
Table 11-3,Two-Firm Competition,An Alternative Case
Produce
Produce
Don’t produce
Slide 11-13Copyright? 2003 Pearson Education,Inc.
Airbus
Boeing
5
5
0
0
0
125
0
125
Don’t produce
A subsidy of 25 to Airbus given by Europe results in A=5,B=5.
Sophisticated Arguments for
Activist Trade Policy
Table 11-4,Effects of a Subsidy to Airbus
Produce
Produce
Don’t produce
Slide 11-14Copyright? 2003 Pearson Education,Inc.
Globalization and Low-Wage Labor
The rise of manufactured exports from developing
countries is one of the major shifts in the world
economy over the last generation,
The workers who produce these goods are paid low
wages and work under poor conditions.
Slide 11-15Copyright? 2003 Pearson Education,Inc.
The Anti-Globalization Movement
It became a highly visible presence chronologically:
– 1980s
– Alleged threat of competition from Japan in the United States
– Early 1990s
– Substantial concern in both the United States and Europe over
the effects of imports from low-wage countries on the wages of
less-skilled workers at home.
– Second half of the 1990s
– Alleged harm that world trade was doing to workers in the
developing countries.
– 1999
– Demonstrations disrupted the meeting of the World Trade
Organization in Seattle.
Globalization and Low-Wage Labor
Slide 11-16Copyright? 2003 Pearson Education,Inc.
Trade and Wages Revisited
Activists argue that globalization makes workers in
developing-country export industries worse off.
– Example,Wages in Mexico’s maquiladoras were below
$5 per day,and conditions were appalling by U.S,
standards.
Economists argue that despite the low wages earned by
workers in developing countries,those workers are
better off than they would be if globalization had not
taken place.
Globalization and Low-Wage Labor
Slide 11-17Copyright? 2003 Pearson Education,Inc.
Globalization and Low-Wage Labor
Table 11-5,Real Wages
Slide 11-18Copyright? 2003 Pearson Education,Inc.
Labor Standards and Trade Negotiations
International trade agreements can improve wages and
working conditions in poor countries by incorporating:
– A system that monitors wages and working conditions
and makes the results of this monitoring available to
consumers.
– Formal labor standards
– They are conditions that export industries are supposed to meet
as part of trade agreements.
– They have considerable political support in advanced countries.
– They are strongly opposed by most developing countries.
Globalization and Low-Wage Labor
Slide 11-19Copyright? 2003 Pearson Education,Inc.
Environmental and Cultural Issues
Environmental standards in developing-country export
industries are much lower than in advanced-country
industries.
The incorporation of environmental standards in trade
agreements can cause:
– Improvements in the environment
– Potential export industries in poor countries to shut
down
Globalization has led to a homogenization of cultures
around the world.
– Example,McDonald’s is now found almost everywhere.
Globalization and Low-Wage Labor
Slide 11-20Copyright? 2003 Pearson Education,Inc.
The WTO and National Independence
Free trade and free flow of capital has undermined
national sovereignty.
WTO monitors not only the traditional instruments of
trade policy,but also domestic policies that are de
facto trade policies.
Globalization and Low-Wage Labor
Slide 11-21Copyright? 2003 Pearson Education,Inc.
Summary
New arguments for government intervention in trade
emerged in the 1980s and 1990s.
In the 1980s the new theory of strategic trade policy
offered reasons why countries might gain from
promoting particular industries.
In the 1990s a new critique of globalization emerged,
focused on the effects of globalization on workers in
developing countries.
Slide 11-22Copyright? 2003 Pearson Education,Inc.
Summary
There are two sophisticated arguments for activist
trade policies:
Governments should promote industries that yield
technological externalities.
Brander-Spencer analysis.
With the rise of manufactured exports from
developing countries,a new movement opposed to
globalization has emerged.
Low wages paid to export workers.
Controversies in Trade Policy
Slide 11-2Copyright? 2003 Pearson Education,Inc.
Chapter Organization
Introduction
Sophisticated Arguments for Activist Trade Policy
Globalization and Low-Wage Labor
Summary
Slide 11-3Copyright? 2003 Pearson Education,Inc.
Introduction
Two controversies over international trade arose in
the 1980s and 1990s.
In the 1980s a new set of sophisticated arguments for
government intervention in trade emerged in advanced
countries.
– These arguments focused on the,high-technology”
industries that came to prominence as a result of the rise
of the silicon chip.
In the 1990s a dispute arose over the effects of
growing international trade on workers in developing
countries.
Slide 11-4Copyright? 2003 Pearson Education,Inc.
Sophisticated Arguments for
Activist Trade Policy
There are two kinds of market failure that seem to be
present and relevant to the trade policies of advanced
countries:
Technological externalities
The presence of monopoly profits in highly
concentrated oligopolistic industries
Slide 11-5Copyright? 2003 Pearson Education,Inc.
Technology and Externalities
Externalities
– Firms in an industry generate knowledge that other
firms can also use without paying for it.
In high-tech industries firms face appropriability
problems.
– Example,In electronics,it is common for firms to
“reverse engineer” their rivals’ designs.
Sophisticated Arguments for
Activist Trade Policy
Slide 11-6Copyright? 2003 Pearson Education,Inc.
The Case for Government Support of High-
Technology Industries
– Subsidize the activity with externalities,not all activities
in an industry,
– For instance,R&D (as opposed to manufacturing) should be
subsidized.
How Important Are Externalities?
– Externalities are hard to measure empirically.
– Problems of appropriability at the level of the nation (as
opposed to the firm) are less severe but still important
even for a nation as large as the United States.
Sophisticated Arguments for
Activist Trade Policy
Slide 11-7Copyright? 2003 Pearson Education,Inc.
Imperfect Competition and Strategic Trade Policy
In some industries where there are only a few firms in
effective competition:
– The assumptions of perfect competition will not apply.
– Firms will make excess returns (profits).
– There will be an international competition over the
excess returns.
– A subsidy from the government to domestic firms can
shift the excess returns from foreign to domestic firms.
Sophisticated Arguments for
Activist Trade Policy
Slide 11-8Copyright? 2003 Pearson Education,Inc.
The Brander-Spencer Analysis,An Example
– There are only two firms (Boeing and Airbus)
competing,each from a different country (United States
and Europe).
– There is a new product,150-seat aircraft,that both firms
are capable of making.
– Each firm decides either to produce the new product or
not.
Sophisticated Arguments for
Activist Trade Policy
Slide 11-9Copyright? 2003 Pearson Education,Inc.
Airbus
Boeing
-5
-5
0
0
0
100
0
100
Produce
Produce
Don’t produce
Don’t produce
Equilibrium outcome is A= 0 and B=100,Airbus does not produce
and Boeing produces.
Table 11-1,Two-Firm Competition
Sophisticated Arguments for
Activist Trade Policy
Slide 11-10Copyright? 2003 Pearson Education,Inc.
Airbus
Boeing
20
-5
0
0
0
100
0
125
Don’t produce
A subsidy of 25 to Airbus given by Europe results in A=125,B=0.
Table 11-2,Effects of a Subsidy to Airbus
Sophisticated Arguments for
Activist Trade Policy
Produce
Produce
Don’t produce
Slide 11-11Copyright? 2003 Pearson Education,Inc.
Problems with the Brander-Spencer Analysis
– Insufficient information to use the theory effectively
– The exact payoffs of the firms cannot easily be obtained.
– Industries in isolation
– A policy that succeeds in giving U.S,firms a strategic
advantage in one industry will tend to cause strategic
disadvantage elsewhere.
– Foreign retaliation
– Strategic policies are beggar-thy-neighbor policies that
increase our welfare at other countries’ expense.
Sophisticated Arguments for
Activist Trade Policy
Slide 11-12Copyright? 2003 Pearson Education,Inc.
Airbus
Boeing
-20
5
0
0
0
125
0
100
Don’t produce
Equilibrium outcome is A=0 and B=125; Boeing produces
and Airbus does not.
Sophisticated Arguments for
Activist Trade Policy
Table 11-3,Two-Firm Competition,An Alternative Case
Produce
Produce
Don’t produce
Slide 11-13Copyright? 2003 Pearson Education,Inc.
Airbus
Boeing
5
5
0
0
0
125
0
125
Don’t produce
A subsidy of 25 to Airbus given by Europe results in A=5,B=5.
Sophisticated Arguments for
Activist Trade Policy
Table 11-4,Effects of a Subsidy to Airbus
Produce
Produce
Don’t produce
Slide 11-14Copyright? 2003 Pearson Education,Inc.
Globalization and Low-Wage Labor
The rise of manufactured exports from developing
countries is one of the major shifts in the world
economy over the last generation,
The workers who produce these goods are paid low
wages and work under poor conditions.
Slide 11-15Copyright? 2003 Pearson Education,Inc.
The Anti-Globalization Movement
It became a highly visible presence chronologically:
– 1980s
– Alleged threat of competition from Japan in the United States
– Early 1990s
– Substantial concern in both the United States and Europe over
the effects of imports from low-wage countries on the wages of
less-skilled workers at home.
– Second half of the 1990s
– Alleged harm that world trade was doing to workers in the
developing countries.
– 1999
– Demonstrations disrupted the meeting of the World Trade
Organization in Seattle.
Globalization and Low-Wage Labor
Slide 11-16Copyright? 2003 Pearson Education,Inc.
Trade and Wages Revisited
Activists argue that globalization makes workers in
developing-country export industries worse off.
– Example,Wages in Mexico’s maquiladoras were below
$5 per day,and conditions were appalling by U.S,
standards.
Economists argue that despite the low wages earned by
workers in developing countries,those workers are
better off than they would be if globalization had not
taken place.
Globalization and Low-Wage Labor
Slide 11-17Copyright? 2003 Pearson Education,Inc.
Globalization and Low-Wage Labor
Table 11-5,Real Wages
Slide 11-18Copyright? 2003 Pearson Education,Inc.
Labor Standards and Trade Negotiations
International trade agreements can improve wages and
working conditions in poor countries by incorporating:
– A system that monitors wages and working conditions
and makes the results of this monitoring available to
consumers.
– Formal labor standards
– They are conditions that export industries are supposed to meet
as part of trade agreements.
– They have considerable political support in advanced countries.
– They are strongly opposed by most developing countries.
Globalization and Low-Wage Labor
Slide 11-19Copyright? 2003 Pearson Education,Inc.
Environmental and Cultural Issues
Environmental standards in developing-country export
industries are much lower than in advanced-country
industries.
The incorporation of environmental standards in trade
agreements can cause:
– Improvements in the environment
– Potential export industries in poor countries to shut
down
Globalization has led to a homogenization of cultures
around the world.
– Example,McDonald’s is now found almost everywhere.
Globalization and Low-Wage Labor
Slide 11-20Copyright? 2003 Pearson Education,Inc.
The WTO and National Independence
Free trade and free flow of capital has undermined
national sovereignty.
WTO monitors not only the traditional instruments of
trade policy,but also domestic policies that are de
facto trade policies.
Globalization and Low-Wage Labor
Slide 11-21Copyright? 2003 Pearson Education,Inc.
Summary
New arguments for government intervention in trade
emerged in the 1980s and 1990s.
In the 1980s the new theory of strategic trade policy
offered reasons why countries might gain from
promoting particular industries.
In the 1990s a new critique of globalization emerged,
focused on the effects of globalization on workers in
developing countries.
Slide 11-22Copyright? 2003 Pearson Education,Inc.
Summary
There are two sophisticated arguments for activist
trade policies:
Governments should promote industries that yield
technological externalities.
Brander-Spencer analysis.
With the rise of manufactured exports from
developing countries,a new movement opposed to
globalization has emerged.
Low wages paid to export workers.
