Theory, Policy and Dynamics in International Trade

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That relieves some of the competitive pressure on domestic suppliers, and both they and the foreign suppliers gain at the expense of a loss to consumers, and to the domestic economy, in addition to which there is a deadweight loss to the world economy. When quotas were banned under the rules of the General Agreement on Tariffs and Trade GATT , the United States, Britain and the European Union made use of equivalent arrangements known as voluntary restraint agreements VRAs or voluntary export restraints VERs which were negotiated with the governments of exporting countries mainly Japan —until they too were banned.

Tariffs have been considered to be less harmful than quotas, although it can be shown that their welfare effects differ only when there are significant upward or downward trends in imports. The economics of international finance does not differ in principle from the economics of international trade, but there are significant differences of emphasis.

The practice of international finance tends to involve greater uncertainties and risks because the assets that are traded are claims to flows of returns that often extend many years into the future. Markets in financial assets tend to be more volatile than markets in goods and services because decisions are more often revised and more rapidly put into effect.

There is the share presumption that a transaction that is freely undertaken will benefit both parties, but there is a much greater danger that it will be harmful to others. For example, mismanagement of mortgage lending in the United States led in to banking failures and credit shortages in other developed countries, and sudden reversals of international flows of capital have often led to damaging financial crises in developing countries.

And, because of the incidence of rapid change, the methodology of comparative statics has fewer applications than in the theory of international trade, and empirical analysis is more widely employed. Also, the consensus among economists concerning its principal issues is narrower and more open to controversy than is the consensus about international trade.

A major change in the organisation of international finance occurred in the latter years of the twentieth century, and economists are still debating its implications. But in the United States government announced that it was suspending the convertibility of the dollar, and there followed a progressive transition to the current regime of floating exchange rates in which most governments no longer attempt to control their exchange rates or to impose controls upon access to foreign currencies or upon access to international financial markets.

The behaviour of the international financial system was transformed. Exchange rates became very volatile and there was an extended series of damaging financial crises. One study estimated that by the end of the twentieth century there had been banking crises in 93 countries, [38] another that there had been 26 banking crises, 86 currency crises and 27 mixed banking and currency crises, [39] many times more than in the previous post-war years.

The outcome was not what had been expected. In making an influential case for flexible exchange rates in the s, Milton Friedman had claimed that if there were any resulting instability, it would mainly be the consequence of macroeconomic instability, [40] but an empirical analysis in found no apparent connection.

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Neoclassical theory had led them to expect capital to flow from the capital-rich developed economies to the capital-poor developing countries - because the returns to capital there would be higher. Flows of financial capital would tend to increase the level of investment in the developing countries by reducing their costs of capital, and the direct investment of physical capital would tend to promote specialisation and the transfer of skills and technology. However, theoretical considerations alone cannot determine the balance between those benefits and the costs of volatility, and the question has had to be tackled by empirical analysis.

A International Monetary Fund working paper offers a summary of the empirical evidence. They suggest that net benefits can be achieved by countries that are able to meet threshold conditions of financial competence but that for others, the benefits are likely to be delayed, and vulnerability to interruptions of capital flows is likely to be increased. Although the majority of developed countries now have "floating" exchange rates , some of them — together with many developing countries — maintain exchange rates that are nominally "fixed", usually with the US dollar or the euro.

Some governments have abandoned their national currencies in favour of the common currency of a currency area such as the " eurozone " and some, such as Denmark, have retained their national currencies but have pegged them at a fixed rate to an adjacent common currency.

On an international scale, the economic policies promoted by the International Monetary Fund IMF have had a major influence, especially upon the developing countries. The IMF was set up in to encourage international cooperation on monetary matters, to stabilise exchange rates and create an international payments system. Its principal activity is the payment of loans to help member countries to overcome balance of payments problems , mainly by restoring their depleted currency reserves. Their loans are, however, conditional upon the introduction of economic measures by recipient governments that are considered by the Fund's economists to provide conditions favourable to recovery.

Their recommended economic policies are broadly those that have been adopted in the United States and the other major developed countries known as the " Washington Consensus " and have often included the removal of all restrictions upon incoming investment. The Fund has been severely criticised by Joseph Stiglitz and others for what they consider to be the inappropriate enforcement of those policies and for failing to warn recipient countries of the dangers that can arise from the volatility of capital movements.

From the time of the Great Depression onwards, regulators and their economic advisors have been aware that economic and financial crises can spread rapidly from country to country, and that financial crises can have serious economic consequences. For many decades, that awareness led governments to impose strict controls over the activities and conduct of banks and other credit agencies, but in the s many governments pursued a policy of deregulation in the belief that the resulting efficiency gains would outweigh any systemic risk s.

The extensive financial innovations that followed are described in the article on financial economics. One of their effects has been greatly to increase the international inter-connectedness of the financial markets and to create an international financial system with the characteristics known in control theory as "complex-interactive". The stability of such a system is difficult to analyse because there are many possible failure sequences. The internationally systemic crises that followed included the equity crash of October , [43] the Japanese asset price collapse of the s [44] the Asian financial crisis of [45] the Russian government default of [46] which brought down the Long-Term Capital Management hedge fund and the sub-prime mortgages crisis.

Measures designed to reduce the vulnerability of the international financial system have been put forward by several international institutions. The Bank for International Settlements made two successive recommendations Basel I and Basel II [48] concerning the regulation of banks, and a coordinating group of regulating authorities, and the Financial Stability Forum , that was set up in to identify and address the weaknesses in the system, has put forward some proposals in an interim report. Elementary considerations lead to a presumption that international migration results in a net gain in economic welfare.

Wage differences between developed and developing countries have been found to be mainly due to productivity differences [18] which may be assumed to arise mostly from differences in the availability of physical, social and human capital. And economic theory indicates that the move of a skilled worker from a place where the returns to skill are relatively low to a place where they are relatively high should produce a net gain but that it would tend to depress the wages of skilled workers in the recipient country.

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There have been many econometric studies intended to quantify those gains. From the standpoint of a developing country, the emigration of skilled workers represents a loss of human capital known as brain drain , leaving the remaining workforce without the benefit of their support. That effect upon the welfare of the parent country is to some extent offset by the remittances that are sent home by the emigrants, and by the enhanced technical know-how with which some of them return. One study introduces a further offsetting factor to suggest that the opportunity to migrate fosters enrolment in education thus promoting a "brain gain" that can counteract the lost human capital associated with emigration.

As evidence from Armenia suggests, instead of acting as a contractual tool, remittances have a potential for recipients to further incentivize emigration by serving as a resource to alleviate the migration process. Whereas some studies suggest that parent countries can benefit from the emigration of skilled workers, [55] generally it is emigration of unskilled and semi-skilled workers that is of economic benefit to countries of origin, by reducing pressure for employment creation.

Theories And Policies Of International Trade

The crucial issues, as recently acknowledged by the OECD, is the matter of return and reinvestment in their countries of origin by the migrants themselves: thus, government policies in Europe are increasingly focused upon facilitating temporary skilled migration alongside migrant remittances.

Unlike movement of capital and goods, since government policies have tried to restrict migration flows, often without any economic rationale. Such restrictions have had diversionary effects, channeling the great majority of migration flows into illegal migration and "false" asylum-seeking.

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Since such migrants work for lower wages and often zero social insurance costs, the gain from labour migration flows is actually higher than the minimal gains calculated for legal flows; accompanying side-effects are significant, however, and include political damage to the idea of immigration, lower unskilled wages for the host population, and increased policing costs alongside lower tax receipts.

The term globalization has acquired a variety of meanings, but in economic terms it refers to the move that is taking place in the direction of complete mobility of capital and labour and their products, so that the world's economies are on the way to becoming totally integrated. The driving forces of the process are reductions in politically imposed barriers and in the costs of transport and communication although, even if those barriers and costs were eliminated, the process would be limited by inter-country differences in social capital.

It is a process which has ancient origins [ citation needed ] , which has gathered pace in the last fifty years, but which is very far from complete. In its concluding stages, interest rates, wage rates and corporate and income tax rates would become the same everywhere, driven to equality by competition, as investors, wage earners and corporate and personal taxpayers threatened to migrate in search of better terms. In fact, there are few signs of international convergence of interest rates, wage rates or tax rates.

The text features an assessment of Ronald Jones, in whose honor the book is published. Would you like to tell us about a lower price? If you are a seller for this product, would you like to suggest updates through seller support? The papers in this collection give an overview of the latest work in international trade theory. The contributors include many of the most innovative contemporary theorists, and they provide an unrivaled introduction to the latest developments in one of the most dynamic subfields of economics.

Distinctive features of the book include a section on the role of historical and geographical considerations in international trade; an emphasis on dynamic aspects of trade; and an assessment of the work of Ronald Jones, in whose honor the book is published. Read more Read less. Book Description Written by many of the most innovative contemporary theorists, the papers in this collection provide an unrivaled introduction to the latest developments in international trade theory, one of the most dynamic subfields of economics.

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Write a customer review. What caused exports to increase more rapidly than production is that companies evolved from being domestically oriented to becoming multinational, and now many have evolved to become global. The first six rounds of GATT trade negotiations had reduced developed-country tariffs on industrial goods from the average of 40 percent after World War II to less than half that level by the end of the Kennedy Round in Additionally, international communications and transportation had improved enormously the first commercial jet crossed the Atlantic in , and the first satellite for commercial telecommunications was launched in As a result companies in some industries, such as electronics and chemicals, became multinational corporations and increasingly began to purchase and produce parts and materials in a number of countries.

Each time these parts and materials cross a border, an international trade transaction has occurred; and then, when the final good is exported, another international trade transaction has occurred. This trend has increased enormously during the past twenty-five years, and now this cross-border trade occurs in virtually all industries. Many products will have parts and materials from many countries; for example, a new suit may have cotton from West Africa that has been processed into fabric in Bangladesh, and sewn into a suit in China, with buttons imported from India.

And then the suit may be exported to the United States. Another example is the first Airbus jumbo jet , which had parts and components from more than 1, suppliers in twenty seven countries. Many companies today have global supply chains, procuring parts and materials worldwide. Each specific part or material in the value chain is sourced from the country that can produce the part most cheaply, whether because of its endowment of factors of production or because of special incentives, such as tax holidays.

Kei-Mu Yi of the World Bank notes that standard economic models account very well for the increase in world trade through the mids but cannot explain the growth of trade since then. Yi notes that tariff reductions have a far greater impact on these global supply chains than they do on traditional trade.

To take the suit example, assume that China, Bangladesh, and the United States each reduces its tariffs by 1 percent and that imported fabric and buttons account for half the cost of the suit made in China; then the cost of producing the suit in China will be reduced by 0. Coupled with the 1 percent U. If the suit had been wholly produced in China, the cost to the consumer would have been reduced by just the U.

The emergence of these extensive supply chains has enormous implications. This in turn means that standard trade statistics have limitations in how useful they are for understanding what is really happening in world trade. Traditional economic theory assumed that goods are traded between countries, but that factors of production e. However, recently capital, technology, and services have been increasingly flowing easily over national borders, and even labor is moving from country to country more frequently.

Accordingly, in recent rounds of multilateral negotiations and in U. In economic theory, if factors of production are fully mobile, the costs of all factors of production that could move across borders would result in equal costs in all trading countries. This would mean that the basis of comparative advantage for trade between countries would diminish and there would ultimately be less international trade. In reality, of course, there are reasons other than trade barriers why factors of production such as capital or labor may not move across borders, even when there are no barriers and higher returns could be gained in other markets.

Workers, for example, are reluctant to leave their homelands and family and friends, and investors are reluctant to invest in other markets where they have less familiarity. As a result, even eliminating all governmentally imposed barriers to trade in capital and labor would not lead to the complete equalization of costs between counties. Like trade in investment and capital, post—World War II economists did not conceive of trade in services. In fact, trade in services was almost considered an oxymoron by early economists, such as Adam Smith and David Ricardo, who assumed that services are not tradable.

This was also the view of trade negotiators for three or more decades after the GATT was launched. Geza Feketukuty, the lead U. The chairman of the committee. Not surprisingly, economic theory as it applies to services trade is still being developed. In general, economists today assume that the basic theory of comparative advantage as it applies to goods applies equally well to cross-border trade in services. Many types of services, such as telecommunications, are intimately interconnected to other economic activity.

Trade liberalization in these areas can have far-reaching economic effects.

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For example, lowering the costs and increasing the availability of telecommunications services can help manufacturers compete in global markets, it can enable farmers to learn the latest techniques, and it can help other services sectors, such as tourism, that can now reach the world market through the Internet. In contrast, liberalizing restrictions in some other sectors, such as tourism, may affect revenues and employment for the providers and the country but will have only a minimal impact on the competitiveness of other sectors within the country.

In other words, the liberalization of some services may have multiplier effects throughout the economy, whereas in other sectors the benefits will largely flow only to the affected sector. The classic Western model of trade was based on eighteenth-century economic realities. Factors of production were relatively fixed: Land was immobile although its fertility or usage might change , and labor mobility was highly restricted by political constraints.

For most of the century, the movement of capital across borders was limited by political barriers and a lack of knowledge of other markets. However, by the middle of the nineteenth century both capital and labor were flowing more freely between Europe and the Americas. Additionally, the production of most products at that time was subject to diminishing returns, which meant that as production increased, the costs of producing each additional unit increased.

In this world, the classic Ricardian model of trade provided a good explanation for trade patterns, such as which countries would produce what products. England would produce textiles based on its wool production and capital availability, and Portugal would produce wine based on its sunshine and fertile soil.

However, the world economy began to change in the twentieth century, as some products could be produced under conditions of increasing returns to scale. As a company produced more steel, production could be automated and the costs of each additional unit could be significantly reduced. And the same was true for automobiles and a growing number of other more sophisticated products. By the last twenty-five years of the twentieth century, the global economy was significantly different. Land and labor were still relatively fixed, although capital could again move more freely around the world.

However, technology was highly differentiated among countries, with the United States leading in many areas. An established company in an industry that required extensive capital investment and knowledge had an enormous advantage over potential competitors. Its production runs were large, enabling it to produce product at low marginal cost. And the capital investment for a new competitor would be large.

In this new world, the economic policies pursued by a nation could create a new comparative advantage. A country could promote education and change its labor force from unskilled to semiskilled or even highly skilled. Or it could provide subsidies for research and development to create new technologies. Or it could take policy actions to force transfer of technology or capital from another country, such as allowing its companies to pirate technology from competitors or imposing a requirement that foreign investors transfer technology.

The underlying reason for these significant departures from the original model is that the modern free-trade world is so different from the original historical setting of the free trade models. Today there is no one uniquely determined best economic outcome based on natural national advantages. Rather, there are many possible outcomes that depend on what countries actually choose to do, what capabilities, natural or human-made, they actually develop.

In the world of the late twentieth century, a country might be dominant in an industry because of its innate comparative advantage, or it might be dominant because of a strong boost from government policy, or it might be dominant because of historical accident.

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For example, the U. The capital costs of entry may be very large, and it is difficult for a new entrant to master the technology. Additionally, the industry normally has a web of suppliers that are critical to competitiveness, such as steel companies and tire manufacturers. However, if such an industry losses its dominance, it is equally difficult for it to reenter the market. A country with such a dominant industry benefits enormously economically. Because of its dominant position, such an industry may pay high wages and provide a stable base of employment.

Access to other markets plays an important role in this economic model where comparative advantage can be created. Without free trade, it becomes extremely costly for a government to subsidize a new entrant because the subsidy must be large enough both to overcome foreign trade barriers and to jump-start the domestic producer. Some of these outcomes are good for one country, some are good for the other, some are good for both.

But it often is true that the outcomes that are the very best for one country tend to be poor outcomes for its trading partner. Although country policies can lead to creation of a dominant industry, such an industry may not be as efficient as if it had occurred in another country. This example is less valid today, as China has become a major steel producer. Although there are many areas where government policies can create comparative advantage, there are still many areas where the classic assumptions of an inherent comparative advantage still hold.

The key is whether the industry is subject to constant or increasing costs, such as wheat, or decreasing costs, such as autos, aircraft, or semiconductors. The doctrine of mercantilism, which dominated thinking up to the end of the eighteenth century, is generally rejected by Western economists today. However, a number of countries—including Japan, South Korea, China, and some other countries in the Far East—have pursued a neomercantilism model in which they seek to grow through an aggressive expansion of exports, coupled with a very measured reduction of import barriers.

These countries seek to develop powerful export industries by initially protecting their domestic industry from foreign competition and providing subsidies and other support to stimulate growth, often including currency manipulation. The success of some countries pursuing a neomercantilist strategy does not refute the law of comparative advantage. In fact, the reason these countries are successful is that they focus on industries where they have or can create a comparative advantage. Thus Japan first focused on industries such as steel and autos, and later on electronics, where a policy of import protection and domestic subsidies could enable their domestic firms to compete in world markets, and particularly the U.

Neomercantilists generally focus on key industries selected by government, a strategy known as industrial policy. A successful industrial policy requires a farsighted government. Japan had an extremely competent group of government officials in the Ministry of Industry and Trade MITI , which oversaw its industrial policy and was basically immune from political pressures. Although MITI had many successes, it also made some missteps. For example, in their planning to develop a world-class auto industry in the s, MITI officials initially believed they had too many auto companies, and urged Honda to merge with another company.

Instead, Honda elected to invest in the United States and went on to become a leading auto producer. Countries pursuing the neomercantilist model have also generally promoted education and high domestic savings to finance their growing export industries. By contrast, the U.

Many economists argue that a neomercantilist strategy may be successful for a while but that over time such a strategy will not be effective. Basically this argument is that the complexities for governments in picking potential winners and identifying how to promote those industries are too great. For example, Japan was very successful with its neomercantilist strategy until the mids. However, since then the Japanese economy has been stagnating, and many economists believe that Japan will need to change its approach to stimulating domestic demand rather than focusing on export markets.

During the past ten years, South Korea and China have also pursued neomercantilist policies, and it remains to be seen if these are effective over the long term. Additionally, a number of economists argue that government intervention can be effective in promoting a specific sector but that industrial policies are not effective at the macro level of benefiting the economy as a whole.

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  8. In any case, Western economists and policymakers today almost universally reject the idea that the United States should adopt an industrial policy that picks winners and losers. Opponents of a possible U. Instead, the real debate among economists and policymakers is whether the United States should respond to foreign neomercantilist practices, and if so, how. Stephen Cohen and his colleagues say:.

    Free trade advocates argue that imposing import barriers, even if other countries do so, is tantamount to shooting oneself in the foot. Carried to its logical conclusion, this strategy recommends that the U. Others argue that the objective of free trade is to promote competition based on comparative advantage, which maximizes global efficiency. Practices such as subsidies or currency manipulation are a movement away from such competition and can produce a result where the less efficient producer dominates trade, thereby reducing total welfare.

    The theory of comparative advantage assumes a world where trade between countries is in balance or at least where countries have a trade surplus or deficit that it is cyclical and temporary. Except for unilateral transfers, all these elements are covered in our trade agreements. To give a real picture of how the nation is doing, the current account is often measured as a percentage of GDP; as a country grows, a larger surplus or deficit in the current account is not a source of concern because the economy can more readily absorb the impact.

    A surplus or deficit in the current account can be affected by the business cycle. Thus, if our economy grows rapidly, the demand for imports will expand as consumers can afford to buy more and businesses need parts and supplies for expansion. If it grows more rapidly than its trade partners, in short, that will have a negative impact on the U. Economists are not concerned with such cyclical trade deficits or surpluses. Additionally, they are not concerned if a deficit occurs because the country is borrowing heavily from abroad to finance investment that will be paid back later.

    Theory, Policy and Dynamics in International Trade Theory, Policy and Dynamics in International Trade
    Theory, Policy and Dynamics in International Trade Theory, Policy and Dynamics in International Trade
    Theory, Policy and Dynamics in International Trade Theory, Policy and Dynamics in International Trade
    Theory, Policy and Dynamics in International Trade Theory, Policy and Dynamics in International Trade
    Theory, Policy and Dynamics in International Trade Theory, Policy and Dynamics in International Trade
    Theory, Policy and Dynamics in International Trade Theory, Policy and Dynamics in International Trade

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