Showing papers on "Free trade published in 1986"

Optimal Trade and Industrial Policy Under Oligopoly

Abstract: We analyze the welfare effects of trade and industrial policy under oligopoly, and characterize optimal intervention under a variety of assumptions about market structure and conduct. When all output is exported, optimal policy with a single home firm depends on the difference between foreign firms' actual responses to the home firm's actions and the responses that the home firm conjectures. A subsidy often is indicated for Cournot behavior, but a tax generally is optimal if firms engage in Bertrand competition. If conjectures are "consistent," free trade is optimal. With domestic consumption, intervention can raise national welfare by reducing the deviation of price from marginal cost.

Strategic Trade Policy and the New International Economics

Abstract: This volume of original essays brings the practical world of trade policy and of government and business strategy together with the world of academic trade theory. It focuses in particular on the impact of changes in the international trade environment and on how new developments and theory can guide our trade policy.Contents: New Thinking about Trade Policy, Paul Krugman (Sloan School of Management, MIT). Rationales for Strategic Trade and Industrial Policy, James A. Brander (University of British Columbia). Strategic Export Promotion: A Critique, Gene M. Grossman (Woodrow Wilson School, Princeton University). Government Policy and the Dynamics of International Competition in High Technology, Michael Borrus, Laura d'Andrea Tyson, and John Zysman (all at the University of California, Berkeley). What Should Trade Policy Target? Barbara Spencer (University of British Columbia). Credit Policy and International Competition, Jonathan Eaton (University of Virginia). Industrial Policy: An Overview, Geoffrey Carliner (National Bureau of Economic Research). Japan's Industrial Strategy, Kozo Yamamura (University of Washington). U.S. Trade and Industrial Policy, William R. Cline (Institute for International Economics). Strategic Behavior and Trade Policy, Alvin K. Klevorick (Yale University) and William Branson (Princeton University). The New Political Economy of Trade Policy, J. David Richardson, (University of Wisconsin). Trade Policy: An Agenda for Research, Avinash K. Dixit (Woodrow Wilson School, Princeton University).Paul Krugman is Professor of Economics at MIT. A former member of the staff of the Council of Economic Advisers, Krugman is also coauthor, with Elhanan Helpman, of Market Structure and Foreign Trade (MIT Press 1985).

Strategic Trade Policy and the New International Economics

Abstract: This volume of original essays brings the practical world of trade policy and of government and business strategy together with the world of academic trade theory. It focuses in particular on the impact of changes in the international trade environment and on how new developments and theory can guide our trade policy.

World Hunger: Twelve Myths

Abstract: How U.S. foreign aid may hurt rather than help the hungry or poor in third world countries is discussed. Findings show that over-crowded countries have resources necessary for people to free themselves from hunger; per capita food production can increase while at the same time more people go hungry. Myths are presented which prevent us from understanding how we can alleviate world hunger. Some of these are 1) There is simply not enough food; 2) Nature is to blame; 3) The free can end hunger; 4) We benefit from their hunger; 5) Free trade is the answer; and 6) Too hungry to revolt. A number of organizations and publications are listed as sources that can help to go beyond the myths of hunger and to discover effective action for change

World development report 1986

Abstract: This is the ninth in an annual series assessing development issues. The world economy is entering its fourth year of growth since the recession of 1982. Yet the recovery is hesitant with many developing countries facing serious problems of adjustment. The recent decline in oil prices, interest rates, and inflation will provide a stimulus to developed and developing countries alike. But many debtor countries, particularly oil exporters, will find it hard to maintain growth in the near term. The effects of the recovery have been much weaker for many low-income Sub-Saharan countries. Part I of the report explores the policies required to restore growth in the developing world. It stresses the importance of developed countries maintaining the policies that have both reduced inflation and moderated distortions in their markets. Of concern however is the increase in international trade restrictions, if countries are to attain sustainable growth, the reform of domestic institutions must be accompanied by an effort towards international freer trade. Part 2 suggests that the gradual liberalization of trade should be a high priority for international action in agriculture. An examination of the policy options in developing countries suggests that economic stability and growth could be greatly enhanced by focusing on improved pricing and trade policies.

Export Incentives and Export Performance in Developing Countries: A Comparative Analysis

Abstract: A comparative evaluation of export incentives and their effects on exports and economic performance in 11 major developing countries that possess an industrial base is presented. Argentina, Brazil, Columbia, and Mexico provide various subsidies to exports, but preclude the use of imported inputs in export production whenever domestic substitutes are available. Korea, Singapore, and Taiwan provide a free trade regime for exports, with some subsidies. Israel and Yugoslavia used to promote exports but are deemphasizing this policy. India and Chile pursue import substitution policies. Several conclusions regarding export policy can be made. The greater the emphasis on exportation, the better the economic growth. Growth is most rapid in countries that conform to the ideal system of incentives which provides a free trade regime for exports and ensured stability in the incentive system over time. Factors limiting the expansion of primary exports have been on the supply rather than the demand side. The major consideration hampering expansion of exports is that an adverse response to the world recession of 1974 and 1975 may lead to developing countries again turning to import substitution. 46 references.

Industrial organization and international trade

Abstract: This paper reviews recent work on the relationship between industrialorganization and international trade. Five strands in the theoreticalliterature are discussed. First is the role of economies of scaleas a cause of intra-industry trade, modelled using monopolistic competition.Second is the effect of tariffs and quotas on domestic marketpower. Third is the analysis of dumping as international price discrimination.Fourth is the potential strategy role of government policy as anaid to domestic firms in oligopolistic competition. Finally, the paperdiscusses recent work that may provide a new argument for protectionism.A concluding section discusses recent efforts at quantification of newtrade theory.

The political economy of trade: institutions of protection

Abstract: D omestic support for a liberal commercial policy in the U.S. rests on a commonly accepted set of rules and norms. These rules and norms, best characterized as a defense of free and fair trade, arise from two different traditions. The first originated as a political reaction to high trade barriers preceding the Great Depression. Central decision makers took as a lesson from the depression period that short-term political forces should not determine the level of state intervention into the market. The second, to protect against unfair trade, emanates from a long history of state support for industries that claim foreign producers are pursuing unfair predatory practices. Established in statute before the Depression, these rules did not fundamentally change in the postwar period. Together, these decision rules are used to interpret American trade protectionism.

The Doctrine of Economic Neutrality of the IMF and the World Bank

Abstract: According to their articles of agreements the International Monetary Fund and the World Bank are only allowed to take economic considerations into account when making a decision. This essay argues that this stance — here labelled the doctrine of economic neutrality — constitutes the main ideology of the IMF and the World Bank. The two major assumptions of the doctrine — that politics can be kept out of the Fund and the Bank, and that decisions can be made on neutral, economic grounds in these two orga nizations — are examined in detail and rejected as false. The essay ends with a suggestion about the real function of the doctrine of economic neutrality: to provide an ideological smokescreen for the powerful Western nations to intervene in favor of free trade capitalism in the domestic affairs of third world coun tries.

Trade and industrial policy under imperfect competition

Abstract: Trade and industry Anthony Venables and Alasdair Smith The textbook model of international trade is set in a world of perfectly competitive markets where products are homogenous and economies of scale are absent. Yet empirical evidence of two-way trade in similar products and of the importance of scale economies suggests this model is unrealistic. This paper examines the implications of imperfect competition for trade and industrial policy and evaluates the robustness of the conventional recommendation of free trade. Although policy design should be sensitive to the degree of competition, some general and intuitive principles emerge. Good policies target and promote activities which imperfect competition had previously overrestricted. Since trade affects the degree of competition in domestic and foreign markets, it is important that trade, industrial, and anti-trust policy should be complementary. To quantify these insights, the paper develops empirical models of two industries, refrigerators and footwear, which are then used to compare the effects of trade policy (tariffs or export subsidies), with or without foreign retaliation, and industrial policy (a production subsidy). Free trade is rarely the best policy. Whilst some forms of subsidy benefit some or even all countries, reciprocal tariffs are likely to harm the world economy. A strong rationale remains for negotiated and reciprocal reductions in trade barriers.

Saving Free Trade: A Pragmatic Approach

Abstract: American Supporters of free trade are on the defensive. Record U.S. trade deficits are fueling demands from industry, Congress, and the public for tariffs, import quotas, and other protectionist measures that could reverse Americas long-standing commitment to open markets and sacrifice much of the economic progress experienced in recent years. In Saving Free Trade: A Pragmatic Approach, Robert Z. Lawrence and Robert E. Litan analyze both the allure of protectionism and the problems associated with free trade, proposing reasonable, cost-effective ways of helping industries, workers, and communities battered by intense import competition. The book focuses on the escape clause of the U.S. Trade Act of 1974, meant to provide domestic industries temporary shelter from severe import competition, and the trade adjustment assistance program, designed to provide direct aid to companies, workers, and communities injured by imports. The authors analyze the assumptions and implication of the many current congressional attempts to amend the provisions of the escape clause and the assistance program. They then set forth their own proposals, including new definitions of import injuries, modifications of provisions for providing relief for beleaguered companies, new standards for compensating and retaining displaced workers, and a plan for insuring communities against severe losses to their tax bases if local industries fail because they can no longer compete. Saving Free Trade provides a detailed but nontechnical introduction to the complex implications of amending trade policy and shrewd, innovative proposals for improving Americas ability to adapt to rapid changes in world markets.

A Quantitative Assessment of the Economic Impact on Canada of Sectoral Free Trade with the United States

Abstract: This paper attempts to measure the impact on Canada of a Canada-United States 'sectoral free trade arrangement' involving five manufacturing sectors. The analysis is based on a quantitative general equilibrium model, with particular focus on the technology, industrial structure, and conduct within the manufacturing industries in Canada. The results of the paper indicate that there are surprisingly large benefits to a sectoral free trade agreement. While the real income gains are much smaller than with a bilateral free trade arrangement involving all industrial sectors, they are on the order of 37 per cent of value added in the sectors considered. Une evaluation quantitative de l'impact economique sur le Canada d'un libre-echange sectoriel avec les Etats-Unis. Ce memoire tente de mesurer l'impact sur le Canada d'un accord de libre-echange sectoriel Canada-Etats-Unis impliquant cinq secteurs manufacturiers. L'analyse est fondee sur un modele d'equilibre general quantitatif et met l'accent sur la technologie, ainsi que sur la structure et les comportements industriels intra-sectoriels dans les industries manufacturieres au Canada. Les resultats de cette analyse montrent que des benefices etonnamment importants peuvent emaner d'un accord de libre-echange sectoriel. M8me si les accroissements de revenu sont bien plus faibles que ceux qui seraient engendres par un accord de libre-echange bilateral impliquant tous les secteurs industriels, ils atteignent un ordre de grandeur de 37% de la valeur ajoutee dans les secteurs impliques.

Endogeneous Protection, Factor Returns and Resource Allocation

Abstract: We consider a Heckscher-Ohlin-Samuelson trade model with two lobbies, representing the interests of factor owners, and two political parties. The lobbies contribute resources to politics, equating their returns to political and economic activity at the margin, while the parties maximize their probability of election, trading off general voter dissatisfaction with protection against the electioneering resources that favorable policies attract from the lobbies. The equilibrium level of protection of a factor and its expected rate of return increase with its relative endowment. If this relative endowment is high (low) then the factor will be better (worse) off than under free trade but at intermediate factor endowment ratios, both factors will be worse off. Under parameter changes making lobbies more sensitive to the commodity price, the lobbies contribute more resources to politics and can both be worse off even though the parties are proposing lower trade distortions.

Protectionism: Trade Policy in Democratic Societies

Abstract: Should international trade be organized by governments, or should it be left to the interplay of markets? If it is managed, who should manage it? And in whose interests?

Issues in medium-term macroeconomic adjustment

Abstract: Four years after the onset of the world debt crisis, the issue is how to restore growth. The answer is structural adjustment, both macro and micro. At the macro level, adjustments have to be made to the structure of aggregate demand and supply to restore growth while generating the needed trade surpluses. This means primarily real exchange rates that are maintained at appropriate levels and an emphasis on investment. At the micro level, it is argued that most developing countries need to liberalize trade, allow the price system to operate, develop financial systems, reform taxes, and improve the efficiency of public enterprises, perhaps by selling them. The article discusses the nature of those two types of reforms and the policy and research issues relevant to World Bank analysis of growth programs.

Liberalization of Capital Movements and Trade: Real Appreciation, Employment and Welfare

Abstract: A two-period, two-sector optimizing model is used to study the effects of liberalization of trade and capital movements on the real exchange rate, unemployment, and welfare. The mechanism creating unemployment is assumed to be real wage rigidity caused by wage indexation. Due to this distortion, neither free trade nor free capital mobility is in general optimal. It is shown that in the short run liberalization leads to real appreciation while in the long run the picture is not as clear especially regarding trade liberalization.

Risk aversion, terms of trade uncertainty and social-consensus trade policy

Abstract: DEPARTURE from free trade by a small competitive economy can be viewed in terms of conflict or consensus. The conflict perspective, as for example taken in Pincus (1975), Cassing (1981), Hillman (1982), Findlay and Wellisz (1982), Mayer (1984), and Cassing and Hillman (1985), recognizes the diverse interests of the different domestic groups who stand to lose or gain from free trade and emphasises the lobbying by countervailing coalitions to influence the trade policy decisions of politically conscious governments. The alternative consensus perspective notes that trade policy can provide opportunities for risk spreading when insurance markets do not exist; for example, the insurance characteristics of trade policy have been observed by Corden (1974), Hillman (1977), Cassing (1980) and Baldwin (1982). Newbery and Stiglitz (1984) and Eaton and Grossman (1985) have provided more formal demonstrations that risk-averse individuals may benefit from trade intervention which reduces terms of trade variability. This paper presents a further approach of the latter consensus view. Given sufficient risk aversion, the mobile and immobile factors identified in a specific-factors or Ricardo-Viner model are both shown to exhibit an ex-ante preference for reduced relative price variability under terms of trade uncertainty. For a given realization of the terms of trade, factors specific to different sectors are of course in conflict with regard to trade policy, while in the absence of specification of consumption preferences the stance of mobile factors is ambiguous; however, both the conflict and the ambiguity with regard to departure from free trade can disappear if the terms of trade have not been specified. The different groups of factor owners will still differ on the precise ex-ante specification of the departure from free trade for realized terms of trade, although this dissention also disappears if uncertainty is extended to individuals' factor designations.1

Trade unions and optimal labour contracts

Abstract: The recently revived literature on wage and employment determination under trade unionism, has, in our opinion, contributed important insights into the functioning of especially European labour markets. It suffers, however, from a potentially serious deficiency: with a few exceptions it neglects completely the issue of risk-shifting between workers and employers.3 In particular, it disregards entirely the possibility of such risk-shifting in economies characterized by more or less encompassing trade unions and centralized wage setting, as e.g. the Scandinavian countries, the Netherlands and Austria. A typical feature of trade unions in these countries is that they are not only concerned with wage setting, but strive in various ways to increase their member’s welfare at the expense of the employers, by reducing their members’ exposure to risk. For instance, unions demand limits to the employers’ right to require overtime or co lay off workers, or they demand occupational safety rules, work injury insurance, health insurance, etc. An actual employment contract hence not only entitles the worker to a certain wage and the employer to a certain number of working ho urs in return, but is really a package of rights and responsibilities for both parties. Increases in the amount of insurance such a package provides are sometimes explicitly declared to be obtained through foregone wage increases. While risk-shifting hence is of prime importance to real world unions, the formal trade union literature is almost entirely concerned with wage and employment setting under certainty.