Dynamic gains from Trade

6 Key excerpts on "Dynamic gains from Trade"

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  eBook - PDF

  Government Intervention in Globalization

  Regulation, Trade and Devaluation Wars

  • C. Peláez(Author)
  • 2008(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  89 Introduction In a rare consensus, economists tend to agree, with important exceptions, that there are benefits from trade in the form of more efficient resource allocation. The first section below provides the important analysis of the gains from trade. The relaxation of the conditions of the first-best of efficiency leads to the analysis of distortions or market failures that motivate more analysis. The main principle is to correct domestic distortions with domestic policy instruments, allowing the economy to obtain the benefits from trade. It is difficult to relate empirically trade openness and economic growth. The US uses antidumping and safeguard sanctions that many con- sider to be disguised protectionism. One of the most debated issues in policy is whether employment and wages of less skilled workers in advanced countries decline because of trade in goods produced by cheap labor, which are exported by developing countries. In 2004, the issue of losses of services jobs to offshore locations received dispropor- tionate attention in the press and public debates. The summary provides some conclusions. The gains from trade The basic analysis of the desirability of international trade focuses on the gains from trade. It is one of the first analyses of welfare economics: the wellbeing of the state of free trade of goods and services with other nations versus the state of no trade. There is the important proposition that some trade is better than no trade. Even trade with restrictions such as quotas and tariffs is better than no trade. A quota is a quantitative 6 International Trade of Goods and Services 90 Government Intervention in Globalization limit on imports, which are purchases from other countries, or exports, which are sales to other countries.

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  International Economic Policies and Their Theoretical Foundations

  A Sourcebook

  • John M. Letiche(Author)
  • 2014(Publication Date)
  • Academic Press

    (Publisher)

  110 JOHN M. LETICHE, ROBERT G. CHAMBERS, AND ANDREW SCHMITZ UPDATE By John M. Letiche Since the preceding article was written, in all categories of gains-from-trade analysis the literature has become more technical, providing further impetus to the trend away from simple models based on overly restrictive assumptions. Techniques of intertemporal optimization and general equilibrium theory increasingly have been used with considerable mathematical sophistication. The analysis has concentrated on three different types of gains from trade: (1) those resulting from a country's contemporary trade of goods and services for foreign goods and services; (2) from intertemporal trade that entails the exchange of goods and services for foreign assets, i.e., for claims to future goods and services; and (3) from trade of assets of one country for foreign assets possessing different properties of risk and function. As for the first category, new significant contributions have been made to gains-from-trade theory by distinguishing between interindustry and intraindustry trade. Under competitive conditions, interindustry trade is assumed to be determined by comparative advantage; under imperfectly competitive conditions, intraindustry trade is assumed to be determined by economies of scale and differentiated products. To deal with conditions of long-run equilibrium, the literature has developed two models of intra-industry trade based on assumptions including increasing returns to scale in manufacturing sectors. The first case applies to external economies of scale in manufacturing at the industry level but not at the firm level. Average unit cost is thus assumed to be decreasing with the size of the industry; large firms, however, PART II. TERMS OF TRADE AND GAINS FROM TRADE 111 have no advantage over small firms. For simplicity, productivity in the second industry, say agriculture, is assumed to be the same in both countries before and after the opening of trade.

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  Trade Policy and Global Poverty

  • William R. Cline(Author)
  • 2004(Publication Date)
  • Peterson Institute for International Economics

    (Publisher)

  If we place the median ratio of imports to value added at, say, 0.3 for these sectors, the implica-tion is that a 33 percent rise in the openness indicator elicits a 6 percent rise in output in this part of the economy over a decade. For other sectors, however, there is no statistically significant relationship. Moreover, these medium-growth (and medium-technology) sectors account for only about 3 percent of GDP for developing countries. The World Bank (2002a) has developed a computable general-equilibrium (CGE) model that incorporates the influence of trade on pro-ductivity growth. As set forth in chapter 3, when this dynamic effect is in-cluded, the World Bank’s Global Economic Prospects (WBGEP; World Bank 2002a) model boosts the estimate of the impact of free trade by 2015 from $355 billion static gains annually (in 1997 prices) to $832 billion annually, or from 0.9 percent of global product to 2.1 percent (World Bank 2002a, 168–69). The study cites the following arguments for why these dynamic productivity effects should occur (p. 181): (1) Higher incomes from the static trade liberalization gains lead to higher saving and investment. (2) Tariffs are often imposed on investment goods, so liberalization will tend to boost investment. (3) Incorporating economies of scale and imperfect competition increases welfare gain estimates above the static estimates. 234 TRADE POLICY AND GLOBAL POVERTY 11. Easterly seems to reject the GMM approach summarily because he considers that it re-quires “the rather dubious assumption that the lagged right-hand side variables do not themselves enter the growth equation” (2003, 41). (4) Opening trade increases the extent to which domestic firms can take advantage of new technologies and foreign research and development, and move toward international standards (which they call an “endoge-nous growth” or “productivity” effect).

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  eBook - ePub

  Handbook of International Economics

  • G.M. Grossman, Kenneth Rogoff(Authors)
  • 1997(Publication Date)
  • North Holland

    (Publisher)

  i of the intermediate goods.

  How does this trade affect the long-run rate of innovation in each country? The answer is that, just as in the model of horizontal product differentiation with international knowledge stocks, each country enjoys a faster rate of technological progress with trade than without.31 Trade stimulates technological progress, because the instantaneous probability of a research breakthrough is greater when two countries' would-be inventors are attempting to achieve it than when only one set of researchers is doing so. In other words, the research activity again is characterized by a dynamic scale economy and international trade again enlarges the size of the relevant economy. In the model of horizontal product differentiation, international knowledge spillovers were necessary for world trade to generate a scale economy in research. But here such international spillovers are an inherent feature of the environment. They occur naturally whenever one country succeeds in making the rath improvement of some input i , whereupon researchers there and abroad cease their efforts to make that discovery and begin to pursue instead the (m + l)st improvement.

  If there are instead two final-goods sectors, the determinants of the pattern of interindustry trade also are the same as before. Suppose, for example, that state-of-the-art inputs are produced with unskilled labor and human capital, and that these factors are also used to conduct R&D and to produce a traditional, consumption good Y . Again, let R&D be the most human-capital-intensive activity and production of the traditional good, the least so. Then the country that has a relative abundance of human capital will specialize relatively in R&D. Firms located in this country will win a disproportionate share of the technology races and so come to hold leadership positions in a disproportionate share of the intermediate input markets. The human-capital-rich country becomes a net exporter of the technology-intensive intermediates in the steady state, and a net importer of the technologically-unsophisticated, traditional good. As in the previous cases with international knowledge spillovers, the initial conditions have no bearing on the long-run trade pattern [see Grossman and Helpman (1991a , ch. 7), and Dinopoulos et al. (1993)

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  The Economics of Industrial Development

  • John Weiss(Author)
  • 2010(Publication Date)
  • Routledge

    (Publisher)

  trade costs ).

  The basis for the potential gains from international trade is specialisation in the production of goods which a country can produce relatively cheaply, that is specialisation along the lines of comparative advantage . Since the comparison is between costs of goods within one country, there must always be something in which that country has a comparative advantage, in that a good is cheap relative to everything else that the country can produce. A majority of the goods that are sold on world markets are a form of manufactured product; hence, how far countries can take advantage of the potential gains from trade will have a large impact on their manufacturing sectors.

  Gains from trade

  Drawing on international trade theory, many have argued that unlike the arguments in Chapter 2 , it is not meaningful to distinguish between broad sectors, like manufacturing or agriculture. In this view, it is far more important to differentiate between activities that produce goods that can be bought and sold on the world market (tradable sectors ) and those that focus exclusively on the domestic market (non-tradable sectors ).1 In addition, within tradables, given the vast range of possible products, there will be only a limited number in which an economy has a comparative advantage.

  This reasoning is associated with Neoclassical or market-based views of development that stress the importance of specialising on the basis of an economy’s comparative advantage. Hence, it is not manufacturing per se that is important, but within manufacturing the goods that a country can produce relatively efficiently and thus export successfully to the rest of the world. There are different explanations for comparative advantage differences between countries corresponding to different theories of trade. Cost differences can arise though differential access to technology (Ricardian models), different resource endowments (Heckscher-Ohlin models) or increasing returns to scale (New Trade Theory

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  The Political Economy of International Trade

  • Ken Heydon(Author)
  • 2019(Publication Date)
  • Polity

    (Publisher)

  4 explain how trade liberalisation introduces uneven innovation responses among firms, reallocating resources to exporting firms with higher productivity levels and pushing weaker firms out of the market.

  Recent empirical work5 has confirmed the continued relevance of Ricardo’s foundational insight, suggesting that a focus on areas of comparative advantage in US agriculture lifted real output per worker by 79 per cent between 1880 and 1997.

  Because, as we shall see, preferential trade agreements (PTAs) have come to play the central role in trade diplomacy, much of the measurement of the potential gains from trade is focused on such agreements. It has thus been found, on the basis of computerised general equilibrium (CGE) modelling, that liberalisation under the Transatlantic Trade and Investment Partnership (TTIP) would yield a permanent increase in EU GDP of 0.5 per cent.6

  Another way of measuring the gains from trade is through the effects on domestic prices. Other recent work suggests that imports from China have lowered the US manufacturing price index by eight per cent.7

  If trade and trade opening are so demonstrably beneficial why do they face such resistance?

  Trade involves winners and losers: The theory and the empirical testing

  Trade causes domestic and international prices, including wages, to converge, thus changing relative prices within economies and the returns to different factors of production.

  The most widely cited theoretical work building on this observation is the Heckscher–Ohlin–Stolper–Samuelson (HOSS) model. Elaborating on Ricardo’s theory of comparative advantage, Eli Heckscher and Bertil Ohlin postulated that countries will export products that use their abundant factor of production and import products that use the countries’ scarce factors. Building in turn on this work, Wolfgang Stolper and Paul Samuelson established that free trade increases the returns to the abundant factor within an economy and decreases the returns to the scarce factor.8 In practical terms, what this means is that trade will tend to favour skill- and capital-intensive activities in advanced economies and labour-intensive activities in developing countries. Like all theories, these propositions have not been without criticism; there has for example been some evidence of skilled labour making relative gains in developing countries, as we shall see in Chapter 2 . Nevertheless, the broad lines of the theory hold firm as an indicator of the likely effects of trade and the expectation that unskilled labour in the advanced economies is likely to be among the losers from market opening.9

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