Tài liệu TRADE:INSTITUTIONS AND IMPACT- Why and how do countries trade? pdf

Ari KokkoTRADE: INSTITUTIONS AND IMPACT Why and how do countries trade?. Ari KokkoGains from trade: the simple view • Clear gains if countries are strong in different areas: absolute a

Ari Kokko

TRADE:

INSTITUTIONS AND IMPACT

Why and how do countries trade?

Outline and schedule

Why do countries trade?

• Get goods and services that cannot be produced at home

• To accumulate gold

• Get cheaper goods and services

• Efficiency and growth

• Different theories and policies for different motives

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Gains from trade:

the simple view

• Clear gains if countries are strong in

different areas: absolute advantages

• Less obvious - but undisputed - gains even

if one country is “better” in all areas:

comparative advantages

Absolute advantages

Motorbikes Rice Vietnam 20 10

Labor requirements for one unit of output

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Comparative advantages

Motorbikes Rice Vietnam 20 10

Labor requirements for one unit of output

Comparative advantages

‹Trade is profitable as soon as relative prices differ between countries

‹Why are there differences in relative prices?

‹Classical and neoclassical theory:

– technology differences (Adam Smith 1776 / David Ricardo 1815)

– differences in factor endowments (Heckscher-Ohlin 1930)

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Policy conclusions:

neoclassical theory

ƒ Free trade and specialization is optimal

ƒ pattern of comparative advantages is given by nature

ƒ all industries are equally “desirable”

ƒ International framework should support development of free trade

ƒ unilateral liberalization more difficult because

of protectionist interest groups and lack of coordination

Institutions:

Bretton-Woods solutions

‹Four cornerstones of international economy after WWII to support growth of free trade

– International Bank for Reconstruction and Development

– International Monetary Fund – International Trade Organization

– Price stabilization fund

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But why is world trade

not free?

• Protectionism leads to higher prices, lower consumption, and lower welfare both at home and abroad

• …so why is there still a lot of protectionism?

Unequal gains from trade

at the micro level

• Interest groups matter: trade benefits some groups but hurts others

• trade raises the rewards of a country’s abundant factor of production and reduces the rewards of the scarce factor (Stolper-Samuelson theorem)

• the groups that lose may oppose free trade

• the transition to free trade may have troublesome social consequences

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Shortcomings in neoclassical

trade theory

‹What if the assumptions of the neoclassical theory aren’t true?

– all industries are not equally valuable: better to produce micro chips than potato chips

– comparative advantages can be created:

economies of scale and agglomeration effects

Modern trade theory

‹Economies of scale

– Bigger is better – Hard to manage in free trade environment if American and Japanese companies will always

be stronger

‹Need to manipulate comparative advantages

– Strategic trade policy?

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Why strategic trade policy may be useful in theory

• The location of industries with scale economies / agglomeration effects may be determined by history and chance Strategic policy intervention may decide where the next cluster is located

• Protection of the local market and support to exporters may influence the location decisions

of firms

• FDI of central importance

Instruments of active trade policy

• Tariffs and quotas

• Domestic product standards, product regulations, and other NTBs

• Subsidies for R&D, investments, production, labor training education, etc

-what we often call industrial policy

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Problems with strategic trade policy

• Will hurt other industries

• Not consistent with WTO: trade partners may retaliate

• Domestic interest groups will spend lots of money to be next in line for protection

• Policy alternative: become a big country

Institutions for modern trade

policy

• Regional integration

• FDI policy

• Industrial policy

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Course outline

• First part: WTO and “traditional” trade policy

Global trade institutions GATT and WTO

WTO and developing countries Trade policy reform

Export-led growth in East Asia Trade disputes

Vietnamese trade policy WTO accession

Course outline, cont’d

• Second part: “Modern” trade policy topics

Strategic trade policy options Regional integration: principles Regional integration: cases Foreign direct investment Effects of FDI

From trade policy to industrial policy