International trade: friend or foe

1
International trade friend or foe?

• Introduction to International trade issues by
  Paul Frijters (15 mins)
• We should reduce our own trade barriers and
  those of others by Jayne Dillon (15 mins)
• Many trade barriers make sense and we and others
  should keep them by Tim Sharp (15 mins)
• Group Discussion

2
Trade flows have seen highs and lows before,
following changes in trade barriers
Source Maddison (2001),.
3
Australian stats
Oz figures
4
The Effects of a Tariff
Simple comparative advantage theory of trade
barriers
Domestic
supply
World
price
Domestic
demand
0
Quantity
QS1
Q
Q
QD1
of Steel
5
The Effects of a Tariff
Consumer surplus without tariff
Domestic
supply
World
Producer surplus without tariff
price
Domestic
demand
0
Quantity
QS1
Q
Q
QD1
of Steel
6
The Effects of a Tariff
Domestic
supply
Tariff
World
price
Domestic
demand
0
Quantity
Q
QS2
QS1
Q
Q
QD2
Q
QD1
of Steel
7
The Effects of a Tariff
Domestic
supply
Tariff
World
price
Domestic
demand
0
Quantity
Q
QS2
QS1
Q
Q
QD2
Q
QD1
of Steel
8
The Effects of a Tariff
Consumer surplus with tariff
Domestic
supply
Tariff
World
Producer surplus with tariff
price
Domestic
demand
0
Quantity
Q
QS2
QS1
Q
Q
QD2
Q
QD1
of Steel
9
The Effects of a Tariff
Consumer surplus with tariff
Domestic
supply
Government revenue
Tariff
World
Producer surplus with tariff
price
Domestic
demand
0
Quantity
of Steel
10
The Effects of a Tariff
Consumer surplus with tariff
Domestic
supply
Government revenue
Total surplus lost due to tariff
Tariff
World
Producer surplus with tariff
price
Domestic
demand
0
Quantity
of Steel
11
Thus

• Economists have by and large since Adam Smith
  argued that trade barriers are detrimental to all
  countries involved. Hence they as a group
  strongly supported the WTO trade liberalisations
  and strongly oppose the agricultural tariffs and
  subsidies of the rich countries (US, EU, Japan
  (rice)). The recent Doha round meant to reduce
  agricultural subsidies has however miserably
  failed and such subsidies seem only to be
  increasing in the EU and the US.
• Salient fact Australia also subsidises
  agriculture, via preferential access to water,
  direct bans on imports of bananas and other goods
  (theres a WTO case pending against Australias
  banana policy).
• Hence many economists would think the reaction to
  the hurricane in Queensland was wrong we should
  not be trying to resurrect the banana industry
  but try to use the opportunity to get rid of it
  and replace it with viable alternatives.

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However

• Economists recognise that the simple theory of
  comparative advantage is probably wrong because
  it is based on linear returns to scale (with
  non-linear returns to scale, long-run supply
  functions are downward sloping and the above
  analysis does not easily hold).
• The political economy of trade is left out of
  this but many economists have recognised that
  reliance on mineral trade may lead to corruption
  (i.e. if you can be rich by allowing your natural
  wealth to be sold, why put up with these
  liberally minded industrialists and
  businessmen?). This is partly why the IMF and the
  Worldbank have in recent decades changed their
  mantra from all trade is good to good
  government leads to good trade.
• Many OECD governments believe certain home
  industries need protecting (e.g. local content
  rules, airlines, software firms) and many have
  explicitly shielded specific industries for a
  while (such as the Americans supporting Boeiing
  and Europe Airbus).
• Whats going on and do we want still lower
  barriers, i.e. should we warmly welcome the
  explicit demise of the Australian banana industry
  and local film industry and its sugar industry,
  etc. ???

13
We should lift trade restrictions

• Jayne Dillon

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Theoretical underpinnings of comparative advantage

• History has demonstrated that nations
  specialising on a producing a particular product
  permits for an increase in welfare
• The product of comparative advantage involves
  producing at a lower opportunity cost relative to
  another nation

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An example of comparative advantage

• Two countries, Portugal and England
• Two products, wine and cloth
• If Portugal can produce both products more
  efficiently than England, what products should be
  specialised by nations and why??

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(No Transcript)
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Increasing returns to scale
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Adoption of technology

• Broadening economic boundaries may allow for the
  economy to become more prone to positive
  technological shocks
• Technological shocks may result in increased
  output per capita and capital per capita

19
Neoclassical growth model
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Technology adoption and skill shares

• Heckscher-Olin model from Fuentes and Gilchrist
  (2005)
• Demonstrates the effect of technological
  advancement upon the wage bill share of skilled
  and non skilled labour

21
Empirical evidence

• Quick facts
• Both nations are growing 2x as fast as the rest
  of the world
• China and India collectively hold 40 per cent of
  the global workforce
• WTO membership has encouraged Chinas trade
  growth
• gt50 per cent of Indias GDP is attributed to the
  services sector
• (Blazquez-Lidoy, Rodriguez and
• Santiso 2005).

22
The costs of protectionism

• Developed nations protecting industries costs the
  third world 100 bn per year
• Open economies allow for more equal distribution
  of power
• ? protectionism ? aid ? aggregate welfare

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The case against Free Trade, Tim Sharp

• Theory of Comparative Advantage applied to Less
  Developed Countries (see Germany and the US
  around the industrial revolution)
• Natural Resource Boom Problem (see Nigeria, a lot
  of Africa in fact, Bangladesh some South
  America)

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The Government

• Countries establish policies to restrict trade in
  order to protect homeland industries or new
  industries, to protect jobs, and to gain income
  for the government.
• From the example just seen Easy to see the
  government is better off by .
• But the world is worse off due to lost surplus I
  hear you cry!

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Does Comparative Advantage Exist?

• In Industries? Eg. Automobiles
• How about Cheap Economy Hatches?
• Also holds for things like Luxury Saloons and
  Expensive Red Sports Cars

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But Static vs. Dynamic CA

• Standard CA arguments we all know produce what
  youre best at.
• Which is, generally, for LDCs (a new term for
  me..), natural resources and agricultural
  products ? inherently volatile income ? problems
• These industries generally do not develop the
  technology and skills to compete as an
  industrialised economy ? Prevent development into
  industrial economy ? Poverty trap, rich get
  richer, poor (LDCs) get poorer.
• If instead we talk in terms of Dynamic CA
• Eg Currently, best at barley and copper. But if
  we have a tariff on imported toasters so that we
  can be competitive and spend 10 years producing
  cheap economy toasters, well gain technology in
  industrial production and have a CA in toasters
  regardless of tariffs. Tariffs can now be
  removed.
• On top of this, we now have another competitive
  industry besides barley and have positive spill
  over from technology improvements.
• In generalising this example, a government can
  protect infant industries, and use its
  from the tariff to support them, and thus develop
  an industrialised economy

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Static effect of tariff

• Static Welfare Effects of a Tariff Importing
  Country
• Consumer Surplus - (A B C D)
• Producer Surplus A
• Govt. Revenue C
• National Welfare - B D
• This is the same as before.
• Tariffs appear to be bad for the
• economy.

Or, if the government can find the money to fund
a subsidy (say, from a resource boom, to be
discussed soon), this can be less costly.
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Dynamic effect of tariff

• Assume a tariff exists for one arbitrary period.
  In the next period, increases in technology cause
  the supply curve to shift downwards
• Consumer Surplus 0
• Producer Surplus E
• Govt. Revenue 0
• National Welfare E
• Now, one period later, the
• economy is producing a surplus
• compared to the initial state

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In the long-run

• So, weve gained an E, but lost a B and D. At
  this stage were still worse off.
• But technology increases will remain for all
  future periods (and arguably, continue to
  increase exponentially as participation
  increases)
• So the country will continue to become more and
  more well-off every period.
• Certainly a good argument against free trade for
  LDCs isnt it?

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Gregory Thesis / Dutch Disease

• A Rapid expansion in sector causes upward
  pressure on currency
• B Increased economic activity draws labour
  resources and increases wages/costs.
• Competing exports become more expensive to
  produce (B) and more difficult to sell (A).
• ? All non-boom traded goods industries are
  quashed
• Qiang The Economy-Wide Effects of Expansion in
  the Minerals Sector - http//www.ecom.uwa.edu.au/
  __data/page/36742/Chapter5.YeQiang99.08.pdf

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Dutch Disease Diagnosis? dd

• Short-run Non-boom exporters leave the market
  (exchange-rate pressure, real wage pressure,
  attractiveness of non-traded goods sector)
• Long-run Stunted traded-goods sector slows
  technological progress ? Permanent decrease in
  GDP per capita
• Hahn and Mathews 1965
• Sweder van Wijnbergen Dutch Disease A Disease
  After All? His answer is yes

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Or Worse?

• What if the boom assets are owned by a small few
  (or government)? Or Gov. simply takes large rent?
• Coup time (or dictatorship time)!
• Corruption ensues
• This is bad
• Nigerian corruption 400 billion in 40 years
• This is same amount as all western aid to Africa
  in same time
• Mallam Nuhu Ribadu, the chairman of Nigeria's
  Economic and Financial Crimes Commission

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So free trade certainly looks bad in the case of
comparative advantage in having natural
resources

• Useful barriers?
• No trade with corrupt governments (say, Iraq)
• These countries should support their traded goods
  industries (i.e. tariffs etc)
• Export quotas for resource rich
• Others?

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Some extra ideas

• think about imposing limits on international
  integration to defend the legitimacy and
  diversity of social choices
• Pascal Lamy -the European Commissioner for Trade

Search Google for Good Trade Barriers and
get Free trade is good. Trade barriers are bad.
It is very simple But IS IT?
At the limit of integration???
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And of course.

• Is free trade really fair when goods and capital
  can freely cross borders, but labour cannot (visa
  req. etc)?
• Free trade simply transfers power to capital
  owners to amass wealth and more capital (and take
  capital from poor countries, creating a labour
  state)
• POWER TO THE PROLETARIAT!
• STOP GLOBALISATION!