Chapter 11 Controversies in Trade Policies ( 贸易政策的争论 )

Chapter 11 Controversies in Trade Policies (贸易政策的争论)

This chapter describes two controversies over international trade that arose in 1980s and 1990s, each raising issues that previously had not been seriously analyzed by international economist. • The new theory of strategic trade policy; • The effects of globalization.

Chapter Organization • Sophisticated Arguments for Activist Trade Policy • Globalization and Low-Wage Labor

Sophisticated Arguments for Activist Trade Policy The activist government policy needs a specific kind of justification that must offset some preexisting domestic market failure. Economist have identified two kinds of market failure that seem to be present and relevant to the trade policies.

一、Technological externalities（技术外部化） • What is the technological externalities? • Technological Externalities is that the firms in an industry generate knowledge that other firms can also use without paying for it.

Where such externalities can be shown to be important, there is a good case for subsidizing the industry. • Example: In high-tech industries firms face appropriability problems. Some of the benefits accrue to other firms that can imitate the ideas and techniques of the leaders. • In electronics, it is common for firms to “reverse engineer” their rivals’ designs.

The Case for Government Support of High-Technology Industries • While the government should subsidize high-technology industries, two questions arise: • The ability of government policy to target the right thing; • A general principle is that industrial policy should seek to subsidize the generation of knowledge that firms can not appropriate.

For instance, government should subsidize research and development wherever it occurs. If the government subsidize research and development, the problem here is one of definition. Who is to say whether paper clips and company cars were really supporting the development of knowledge.

In United States, research and development can be claimed by firms as a current expense and counts as an immediate deduction against the corporate profit tax. By contrast, investment in plant and equipment cannot be claimed as an immediate expense and can be written off only through gradual depreciation（逐渐折旧）.

The quantitative importance of the argument. The question of the appropriate level of subsidy for high technology depends on the answer to a difficult empirical problem: How quantitative is the technological spillover argument for targeting high-technology industries? Is the optimal subsidy 10,20, or 100 percent?

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.

二、Imperfect competition and strategic trade • policy • The background • During the 1980s a new argument for industrial targeting received substantial theoretical attention. • It locates the market failure that justifies government intervention in the lack of perfect competition.

This argument originally proposed by the economists Barbara Spencer and James Brander of the University of British Columbia.

James A. Brander The University of British Columbia Sauder School of Business 2053 Main Mall Vancouver, B.C., Canada V6T 1Z2

Barbara Spencer The University of British Columbia Sauder School of Business 2053 Main Mall Vancouver, B.C., Canada V6T 1Z2

Some ideas about the argument • There are a few firms in effective competition; • 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.

The Brander-Spencer Analysis: An Example • There are only two firms (Boeing and Airbus) competing, each from a different country (U.S. 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(Boeing—head start).

Table 11-1 below illustrates how the profits earned by the two firms might depend on their decisions. • Suppose Boeing is able to get a small head start. Airbus will find that it has no incentive to enter. So the United States earns the profits of 100.

Table 11-1: Two-Firm Competition Airbus Produce Boeing -5 0 Produce -5 100 100 0 0 0 Don’t produce Don’t produce Equilibrium outcome is A= 0 and B=100: Airbus does not produce and Boeing produces.

Now comes the Brander-Spencer point: The EU can reverse this situation. • Suppose the European government commits itself to pay its firm a subsidy of 25 if it enters. The result will be to change the table of payoffs to that represented in Table 11-2.

Airbus Produce Boeing 20 0 Produce -5 100 125 0 0 0 Table 11-2: Effects of a Subsidy to Airbus Don’t produce Don’t produce A subsidy of 25 to Airbus given by Europe results in A=125, B=0.

In Table 11-2, the subsidy raises profits (100) by more than the amount of the subsidy (25) itself, because of its deterrent effect on foreign competition.

Problems with the Brander-Spencer Analysis • There is insufficient information to use the theory effectively in the Brander-Spencer Analysis. • In that case, the exact payoffs of the firms cannot easily be obtained, we can see by Table 11-3.

In Table 11-3, Boeing is assumed to have some underlying advantage so that even if Airbus enters, Boeing will still find it profitable to produce. • Airbus can not produce profitably if Boeing enters.

Table 11-3: Two-Firm Competition: An Alternative Case Airbus Produce Boeing -20 0 Produce 5 125 100 0 0 0 Don’t produce Don’t produce Equilibrium outcome is A=0 and B=125; Boeing produces and Airbus does not.

Now suppose that the European government provides a subsidy of 25, which is sufficient to induce Airbus to produce. The new table of payoffs is illustrated as Table 11-4.

Airbus Produce Boeing 5 0 Produce 5 125 125 0 0 0 Table 11-4: Effects of a Subsidy to Airbus Don’t produce Don’t produce A subsidy of 25 to Airbus given by Europe results in A=5, B=5.

In these case: Airbus, which receives a subsidy of 25, earns profits of only 5. That is, we have reversed the result above, in which a subsidy raised profits by more than the amount of the subsidy. The reason for the difference in outcome is that this time the subsidy has failed to act as a deterrent to Boeing.

Other problems with the Brander-Spencer Analysis • Industries in isolation（分割的工业） • A policy that succeeds in giving U.S. firms a strategic advantage in one industry will tend to cause strategic disadvantage elsewhere, that means it will draw resources from other industries and lead to increases in their costs.

Foreign retaliation • Strategic policies are beggar-thy-neighbor policies that increase our welfare at other countries’ expense. These policies therefore risk a trade war that leaves everyone worse off

三、Case study • Strategic Trade Policy In Practice

The Strategic Trade Policy of Japan • Early Japanese strategic trade policy(50s-70s): • The government channeled funds into heavy • industries with high value added per worker • and away from traditional labor-intensive • industries such as textiles by strategic trade • Policy

The result of history: • Japan’s economy grew extremely rapidly. • The crucial question is whether Japan’s strategic trade policy was really the key to the rapid growth. There are another two reasons for it.

First, Japan’s economy rapid growth would have been made under laissez-faire. • Second, the dynamism of Japanese industry had its roots in factors other than strategic trade policy, such as the highest savings rate, effective education, good labor-management relationship, and so on.

More recently Japanese policy (after mid-1970s) : • After mid-1970s, Japanese policy aimed at • high technology(for example, semiconductor • chips), the tools of strategic policy have been • a combination of modest subsidies for • research and development. • How much effect did the new policies have? • The industries targeted since 1975 remain a • small part of Japan’s economy.

Japanese targeting of steel(1960-early 1970) • The Japanese government designated steel as a sector that should receive priority in growth. Japanese steel production tripled from 1963 -70.

The question is whether the resources used in steel yielded a higher payoff to society than they would have elsewhere(include marginal social Benefits, steel sector is not High -Tech sector). It acted a drag on Japan’s growth as a whole.

The European support of aircraft • In Europe, there was the joint development by Britain and France of a supersonic aircraft, the Concorde, in late 1960s.

In commercial terms the results were disastrous (high cost), but it have yielded technological spillovers to the next European attempt at aircraft production, the Airbus. • The Airbus have been subsidized by the member government of EU, it may be larger than all other such programs put together.

Airbus has succeeded in producing planes that • are commercially viable; in smaller size classes • Airbus passenger jets are comparable in • performance and operating costs with U.S. • planes, but it has depended on subsidies.

Has Airbus been a successful program? • It has earned less than the market return to capital. There are not strong technological spillovers to other sectors, the technology used in the airbus seems not very applicable elsewhere.

Each example illustrates an important point: strategic trade policy cannot be judged by asking whether the targeted industries grew, because an interventionist policy will not accelerate overall growth unless it corrects a market failure.

Globalization and Low-Wage Labor • 一、The background of issues • The rise of manufactured exports from developing countries is one of the major shifts in the world economy over the last generation. • A government official in developing country remarked to one of the authors, “we are not a banana republic, we are a pajama republic.”

The workers who produce these goods are paid very little and work under poor conditions by advanced-country standards. Should low wages and poor working conditions be a cause for concern? In the 1990s the anti-globalization movement attracted many adherents in advanced countries, especially on college campuses.

It’s fair to say that most economists have viewed the anti-globalization movement as at best misguided.

二、The Anti-Globalization Movement • （反经济全球化运动） • The Anti-Globalization Movement became a highly visible presence chronologically: • 1980s • The most complaints about international trade by citizens of advanced countries focused on the alleged threat of competition from advanced countries such as the Japan.

Early 1990s • There was 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 • A rapidly growing movement began stressing the alleged harm that world trade was doing to workers in the developing countries. • Such as the lower wages and poor working conditions in Third World factories. • It drawn considerable support from college students.

Chapter 11 Controversies in Trade Policies ( 贸易政策的争论 )