IPE Lecture Reading
Reading 5 Chapter 5: A State-Centered Approach to
Trade Politics
A state-centered approach to trade politics argues national policymakers intervene in the economy
in pursuit of objectives determined independently from domestic interest groups self interested
concerns
Suggests such intervention may raise aggregate social welfare
States and industrial policy
A state centered approach is based on two central assumptions that contract with the assumptions of
the society centered approach
Impact of protectionism on aggregate social welfare
Society centered approach Protectionism reduces social welfare by depriving society of
gains from trade and employing society s resources in comparatively disadvantaged
industries
State centered approach Under certain circumstances trade protection can raise social
welfare
Can governments operate independently of interest group pressures?
Society centered approach National policy reflects the balance of power among competing
interest groups
State centered approach Under certain circumstances governments are relatively
unconstrained by interest group demands a government s trade and economic policies
embody the goals of national policymakers rather than the demands of domestic interest
groups
The state centered approach suggests under specific circumstances governments will intervene in
the domestic economy with tariffs production subsidies and other policy instruments in ways that
raise aggregate social welfare
The infant-industry case for protection
The economic justification for the state-centered approach rests on the claim that targeted
government intervention can increase aggregate social welfare
Standard model of trade
Society does best by removing all forms of trade protection and speciali ing in its competitively
advantaged industry
Protection deprives society of welfare gains from trade
Nothing makes it difficult for factors currently employed in comparatively disadvantaged
industries to move into the comparatively advantaged sector
Factors of production will move into comparatively advantaged industries because it is
profitable
Returns in these industries are higher than returns in comparatively disadvantaged industries
, Pro ec ionism make socie orse off b pre en ing fac ors from mo ing o of lo re rn and
in o high re rn ind s ries
Go ernmen in er en ion can raise social elfare
The infan ind r ca e for pro ec ion arg es here are cases in hich ne l crea ed firms ill no
be efficien ini iall b co ld be efficien in he long r n if gi en ime o ma re
A shor period of ariff pro ec ion ill enable hese ind s ries o become efficien and begin o
e por he ariff can hen be remo ed
Long r n elfare gains crea ed b he no es ablished ind s r ill be grea er han he shor r n
losses of social elfare imposed b he ariff
Reasons an ind s r ma no be efficien in he shor r n b co ld be efficien in he long r n
Economie of cale
Arise hen he cos of prod c ion aries i h he si e of o p hen he ni cos of
prod cing falls as he n mber of ni s prod ced rises
Firms in ind s ries i h scale economies can prod ce efficien l and begin o e por once
he prod ce eno gh o p o achie e he a ailable scale economies
In an open econom firms m s compe e agains es ablished foreign prod cers ha
ha e alread achie ed economies of scale
A ne firm ill s r ggle selling i s higher cos o p in he face of compe i ion from
lo er cos firms
Ne firms ill ne er reach he le el of o p necessar o achie e economies of scale
Tariffs migh be elfare impro ing in s ch cases
Imposing a ariff co ld deli er he domes ic marke o he infan domes ic firm
The domes ic firm co ld sell i s earl high cos o p o domes ic cons mers and
e en all prod ce eno gh o achie e economies of scale
Af er hich he firm co ld compe e agains foreign prod cers i ho needing ariff
pro ec ion he ariff can hen be remo ed
Economie of e perience
Arise hen efficien prod c ion req ires specific skills ha can onl be acq ired hro gh
prod c ion in he ind s r
Some imes prod c ion req ires seasoned managers skilled orkers and reliable s ppliers
These skills are lacking in an infan ind s r
Cos l o prod ce he earl ni s of o p
O er ime managemen skills impro e orkers become more efficien reliable s ppliers are
fo nd
Cos s of prod c ion fall as e perience is gained
A ariff can allo he infan ind s r o reali e he cos sa ings a ailable from economies of
e perience and achie e grea er efficienc
Once i has done so i can e por and he ariff can be remo ed
Cri ici m of he infan ind r ca e for pro ec ion
Economis s are skep ical abo he claim ha go ernmen in er en ion is he bes response o
he problems highligh ed b he infan ind s r arg men
Economis s arg e a s bsid is a more efficien approach o he problems confron ed b infan
ind s ries
S bsidies help he domes ic ind s r co er he gap be een prod c ion cos s and
Reading 5 Chapter 5: A State-Centered Approach to
Trade Politics
A state-centered approach to trade politics argues national policymakers intervene in the economy
in pursuit of objectives determined independently from domestic interest groups self interested
concerns
Suggests such intervention may raise aggregate social welfare
States and industrial policy
A state centered approach is based on two central assumptions that contract with the assumptions of
the society centered approach
Impact of protectionism on aggregate social welfare
Society centered approach Protectionism reduces social welfare by depriving society of
gains from trade and employing society s resources in comparatively disadvantaged
industries
State centered approach Under certain circumstances trade protection can raise social
welfare
Can governments operate independently of interest group pressures?
Society centered approach National policy reflects the balance of power among competing
interest groups
State centered approach Under certain circumstances governments are relatively
unconstrained by interest group demands a government s trade and economic policies
embody the goals of national policymakers rather than the demands of domestic interest
groups
The state centered approach suggests under specific circumstances governments will intervene in
the domestic economy with tariffs production subsidies and other policy instruments in ways that
raise aggregate social welfare
The infant-industry case for protection
The economic justification for the state-centered approach rests on the claim that targeted
government intervention can increase aggregate social welfare
Standard model of trade
Society does best by removing all forms of trade protection and speciali ing in its competitively
advantaged industry
Protection deprives society of welfare gains from trade
Nothing makes it difficult for factors currently employed in comparatively disadvantaged
industries to move into the comparatively advantaged sector
Factors of production will move into comparatively advantaged industries because it is
profitable
Returns in these industries are higher than returns in comparatively disadvantaged industries
, Pro ec ionism make socie orse off b pre en ing fac ors from mo ing o of lo re rn and
in o high re rn ind s ries
Go ernmen in er en ion can raise social elfare
The infan ind r ca e for pro ec ion arg es here are cases in hich ne l crea ed firms ill no
be efficien ini iall b co ld be efficien in he long r n if gi en ime o ma re
A shor period of ariff pro ec ion ill enable hese ind s ries o become efficien and begin o
e por he ariff can hen be remo ed
Long r n elfare gains crea ed b he no es ablished ind s r ill be grea er han he shor r n
losses of social elfare imposed b he ariff
Reasons an ind s r ma no be efficien in he shor r n b co ld be efficien in he long r n
Economie of cale
Arise hen he cos of prod c ion aries i h he si e of o p hen he ni cos of
prod cing falls as he n mber of ni s prod ced rises
Firms in ind s ries i h scale economies can prod ce efficien l and begin o e por once
he prod ce eno gh o p o achie e he a ailable scale economies
In an open econom firms m s compe e agains es ablished foreign prod cers ha
ha e alread achie ed economies of scale
A ne firm ill s r ggle selling i s higher cos o p in he face of compe i ion from
lo er cos firms
Ne firms ill ne er reach he le el of o p necessar o achie e economies of scale
Tariffs migh be elfare impro ing in s ch cases
Imposing a ariff co ld deli er he domes ic marke o he infan domes ic firm
The domes ic firm co ld sell i s earl high cos o p o domes ic cons mers and
e en all prod ce eno gh o achie e economies of scale
Af er hich he firm co ld compe e agains foreign prod cers i ho needing ariff
pro ec ion he ariff can hen be remo ed
Economie of e perience
Arise hen efficien prod c ion req ires specific skills ha can onl be acq ired hro gh
prod c ion in he ind s r
Some imes prod c ion req ires seasoned managers skilled orkers and reliable s ppliers
These skills are lacking in an infan ind s r
Cos l o prod ce he earl ni s of o p
O er ime managemen skills impro e orkers become more efficien reliable s ppliers are
fo nd
Cos s of prod c ion fall as e perience is gained
A ariff can allo he infan ind s r o reali e he cos sa ings a ailable from economies of
e perience and achie e grea er efficienc
Once i has done so i can e por and he ariff can be remo ed
Cri ici m of he infan ind r ca e for pro ec ion
Economis s are skep ical abo he claim ha go ernmen in er en ion is he bes response o
he problems highligh ed b he infan ind s r arg men
Economis s arg e a s bsid is a more efficien approach o he problems confron ed b infan
ind s ries
S bsidies help he domes ic ind s r co er he gap be een prod c ion cos s and
