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International trade and investment lecture 11
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International trade and investment lecture Krugman, P.R., Obstfeld, M. and Melitz, M.J. (2018), International Trade. Theory and Policy, 11th edition Week 7
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Justify activist trade policy in developed countries:● Knowledge and technology spill-over effects that cannot be appropriated.
→ Production can generate social benefits in the form of knowledge and
technology spillover effects that then later will become available at no
cost to other producers.
● Presence of excess returns in highly concentrated industries. The market failure here
is the lack of competition. This market failure could favour the use of so-called
strategic trade policy.
→ Strategic trade policy can shift excess returns in imperfectly competitive
industries that are currently earned by the foreign country from the
foreign to the domestic country.
This type of policy alters trade flows and can increase welfare of the domestic
country: strategic trade policy. The market failure that is the lack of competition and
thus the presence of excess returns.
Guidelines externalities:
1. The use of trade policy via tariffs is at most second-best since it is not
necessarily direct and it creates distortions on the consumption side. →
But easy to apply ; brings in income rather than expenditures ; consumers
often do not even notice it.
2. Better are production subsidies since they do not create distortions on the
consumption side.
3. The support should directly target the externalities that cannot be appropriated.
Successful strategic trade policy increases domestic welfare if the excess returns outweigh
the costs of the production subsidy.
“International trade based on low wages hurts workers in the developing world”
- Imposing trade restrictions out of this concern, according to the theorem of Stolper-
Samuelson, would drive down real wages in the labour-abundant developing world.
That certainly would not improve labour conditions.
- Introducing trade restrictions that are based on minimum labour standards not being
met only affects production for the world market but does not affect production for the
local market. It would superior to focus action on achieving minimum labour
standards within a specialised labour organisation that affects total production.
“International trade agreements should allow for trade restrictions if products in developing
nations are produced without respecting minimum labour standards.”
- According to theorem of Stolper-Samuelson, would drive down real wages in the
labour-abundant developing world.
“The World Trade Organisation infringes upon national sovereignty: the issue of legitimacy”.
Reply:
- The WTO is not a staff-driven, technical and supranational body: it is member-driven.
The members have voluntarily agreed upon taking on a code of conduct.
“The developed nations’ attitude is asymmetric: they desire more liberalisation in goods in
which they have a comparative advantage, but they keep on restricting trade in agricultural
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