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.
