Global Trade Policy

Questions and Answers

Pamela J. Smith

• Publisher: Wiley-Blackwell
• Year: 2013
• ISBN:
  9781118357705
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Trade & Tariffs
• Index: Politics & International Relations

Using a unique, question-based format, Global Trade Policy offers accessible coverage of the key questions in trade and policy; it charts the changing policy landscape and evolving institutional arrangements for trade policies, examines trade theory, and provides students with an economic framework to better understand the current issues in national and international trade policy.

• Uses a unique, question-based format to explore the questions and current debates in international trade policy and their implications
• Explores trade theory to help guide discussions of trade policy, including traditional theories of inter-industry trade, as well as newer theories of intra-industry and intra-firm trade
• Examines the national and international effects of widely used policies designed to directly and indirectly affect trade, and considers the evolving institutional arrangements for these
• Charts the changing policy landscape from traditional trade policies – such as tariffs, quantitative restrictions, and export subsidies – to those including intellectual property rights, labor, the environment, and growth and development policies
• Covers national as well as global perspectives and their interaction, helping to explain opposing views on trade policy and liberalization
• Includes applied exercises enabling students to explore open-ended and realistic questions of policy debate, making it ideal for classroom use; an instructor's manual and a range of other resources are available at www.wiley.com/go/globaltradepolicy

Part One

Trade Theory as Guidance to Trade Policy

1

Preliminaries

Trade Theory

1.1 What Are the Core Questions Asked by International Trade Economists?

The field of international economics within the economics discipline explores transactions that occur across national borders. Flows across national borders include movements of goods, services, factors of production, and financial assets. Flows of goods, services, and factors of production are considered to be “real” movements and fall under the subfield of international trade. Flows of financial assets are considered to be “nominal” movements and fall under the subfield of international finance. These two subfields are the primary branches of the field of international economics. This book focuses on international trade – real flows of goods, services and factors of production across national borders. Furthermore, it focuses specifically on the policy dimensions of international trade, that is, policies that alter international trade in some way.

We begin our study of international trade policy with the basics of trade theory in Part One. The topics of trade theory address three primary dimensions of trade. The first dimension is the patterns of trade. That is, why do countries export and import what they do? The second dimension is gains from trade. That is, who wins and who loses from trade? The third dimension is protectionism. That is, what are the effects of adding or removing policies that distort trade? Our goal in exploring these questions is to show how trade theory can provide guidance to trade policy.

1.2 How Can Trade Theory Provide Guidance to Trade Policy?

Trade theory provides guidance to trade policy in a direct way. Trade theories that explain the patterns of trade and gains from trade typically compare two hypothetical states – autarky and free trade. Autarky is a state of no trade, which cannot be observed in our current reality. Free trade is a state of trade that is undistorted by policies, which also cannot be observed in our current reality. Trade theories typically predict the patterns and gains from trade when we move from the hypothetical state of autarky to free trade or, conversely, when we move from the hypothetical state of free trade to autarky.

In reality, the state of trade lies somewhere in between these two hypothetical extremes. However, understanding the effects of moving between the two extremes in theory provides guidance for understanding trade policy in practice. That is, when barriers to trade are added, we take one step closer to autarky; and when barriers to trade are removed, we take one step closer to free trade. In other words, the direction of the effects of moving from autarky to free trade corresponds with the effects of liberalizing policy barriers to trade. Similarly, the direction of the effects of moving from free trade to autarky corresponds with the effects of adding protectionist policies.

Trade theory also provides guidance to trade policy in several indirect ways. For example, analysis of the patterns of trade involves exploring the sources of comparative advantage. Understanding the sources of comparative advantage is a prerequisite to designing policies that seek to alter the patterns of trade. For example, if we know that an abundance of skilled labor provides a comparative advantage in services, then we can predict that countries abundant in skilled labor will export services. National policies that promote this comparative advantage would be those that seek to increase a country's abundance of skilled labor. Similarly, if we know that an abundance of forests provides a comparative advantage in paper products, then we can predict that countries abundant in forests will export paper products. National policies that promote this comparative advantage would be those that seek to increase a country's abundance of forests for use in manufacturing paper.

Second, analysis of the distribution of gains and losses from trade helps us to understand the economic incentives behind the sometimes contentious viewpoints on trade policy. This understanding is prerequisite to efforts to reach a consensus across divergent groups, and for designing redistribution policies. For example, if we know that trade liberalization will result in an uneven distribution of gains and losses across countries, and within countries, then policies can be adopted for redistribution purposes, or for assistance during the transition periods following liberalization. Furthermore, if we understand the distributional effects of trade, then this understanding can provide guidance as countries negotiate individual policy changes or changes in portfolios of policies. That is, this understanding is prerequisite to designing policies and policy portfolios where gains and losses are counterbalanced in some equitable manner.

Finally, analysis of the effects of alternative trade policy instruments and alternative policy arrangements is prerequisite for making optimal choices between these instruments and arrangements. For example, two policy instruments, (such as tariffs and quotas) may both be effective in achieving a goal (such as protection of a domestic industry). However, one of the two instruments may have fewer side effects in the form of new distortions or welfare losses. Similarly, two policy arrangements (such as customs unions and free trade areas) may both be effective in achieving a goal (such as trade liberalization). However, one of the two arrangements may be relatively more trade-creating while the other may be trade-diverting. Understanding such effects of policies and policy arrangements is a prerequisite to making optimal policy choices in a coordinated manner.

1.3 How Has International Trade Evolved over Time in Practice?

Before turning to our discussion of trade theory, it is important to note that the character of international trade in practice has evolved over time. The character of international trade theory has also evolved in response to the real-world changes in trade. In the remainder of this preliminary chapter, we describe these changes. First, we describe how trade has changed in practice. Then we described how the trade theory literature has evolved to address these changes. Finally, we describe how this book is organized in relation to this evolution.

So, how has international trade evolved over time? First, the volume and value of international trade have grown dramatically. From a global perspective, growth in international trade corresponds with an increase in the interconnectedness of national economies. However, from a national perspective the importance of international trade varies considerably. One way to assess the importance of trade to a particular country is to consider whether the country is open or closed in an economic sense. In a political sense, whether a country is open or closed refers to the degree to which the country institutes policy barriers to trade. The economic interpretation of openness is somewhat different. Countries that are open in an economic sense are those for which trade is a relatively large share of their overall economic activity. Countries that are closed to trade are those for which trade is a relatively small share of their overall economic activity. Countries that are relatively open to trade are more economically sensitive to changes in international markets, including policy changes.

Second, the composition of international trade has evolved over time. There is a long history of trade in agricultural and manufactured goods. However, in the last two decades, trade in services has grown dramatically, particularly since the 1980s. Trade in services is defined broadly to include all modes of conducting international transactions. For example, trade in services includes financial services, accounting services, insurance services, and technical assistance services. It also includes foreign investments in telecommunications and transportation. And it includes movements of people across borders for the purpose of education, medical, and educational services. The expansion of trade in services is due in large part to advances in information technologies and telecommunications.

Third, the character of the firm has changed. In the past, firms were characterized as national firms that were associated with the geographic location of production. However, with the emergence of foreign direct investment, the location of the production of subsidiaries no longer corresponds with the location of ownership of the firm. Further, with the emergence of multinational firms, both the location and ownership of firms can span multiple countries throughout the world. This new character of firms is also associated with movements across countries of factors of production. For example, a parent firm may transfer factor inputs such as knowledge capital or labor to subsidiaries located in other countries.

Fourth, along with the changes in the character of firms, the type of international trade has evolved over time. Types of trade include inter-industry trade, intra-industry trade, inter-firm trade, and intra-firm trade. Inter-industry trade occurs when countries trade dissimilar goods with one another. Intra-industry trade occurs when countries trade different varieties of similar goods with one another. Inter-firm trade occurs between different national firms. Intra-firm trade occurs when the trade across countries occurs within the same multinational firm. For example, if a country exports manufactured goods to another country in exchange for agricultural goods, this is inter-industry trade because the goods are distinct. However, if a country exports one variety of electronics to another country in exchange for a different variety of electronics, this is intra-industry trade. If this trade occurs between different national firms with ownership in the different countries, then this is inter-firm trade. However, if the trade occurs between a parent firm and a subsidiary, or two firms under the same multinational umbrella, then this is intra-firm trade.

Early patterns of trade were predominantly inter-industry and inter-firm. However, the predominance of intra-industry trade has increased, particularly since the 1970s and 1980s. And intra-firm trade has increased with the rise of f...