Showing papers on "Free trade published in 1989"

Is Bilateralism Bad

Abstract: In the 1980s the process of trade liberalization through multilateral negotiation seems to have run aground. In its place there have been a number of bilateral and regional moves toward liberalization. Some have been concerned that these local deals may, by undermining the multilateral process, actually reduce world trade and welfare. This paper develops a simple model of the effects of regional trading blocs, and shows that consolidation of the world into a smaller number of such blocs may indeed reduce welfare, even when each bloc acts to maximize the welfare of its members. Indeed, for all plausible parameter values world welfare is minimized when there are three trading blocs. More complex versions of the model offer softer results, but the main thrust is still to validate concern over the effects of bilateral and regional trade deals.

The Political Economy of Trade Policy

Abstract: International trade seems to be a subject where the advice of economists is routinely disregarded. Economists are nearly unanimous in their general opposition to protectionism, but the increase in U.S. protection in recent years in such sectors as automobiles, steel, textiles and apparel, machine tools, footwear and semiconductors demonstrates that economists lack political influence on trade policy. The type of protectionism chosen does not follow economists' advice, either. A frequently asked question on undergraduate trade exams is why a small country's welfare losses are less when it curtails imports with a tariff rather than by negotiating "voluntary" export-restraint agreements (VEAs) with foreign suppliers. Even though generations of students have correctly pointed out that the equivalent of the domestic tax revenues raised by a tariff is transferred as a windfall gain to foreign countries when VEAs are introduced, these agreements are now the preferred means by which countries pursue protectionism. Moreover, if the purpose of protection is to redistribute income to producers, production subsidies (financed by lump-sum taxes) dominate both tariffs and import quotas on efficiency grounds, since the consumption costs of protection are avoided. Yet governments generally prefer to assist industries by providing import protection rather than production subsidies. Economists have tended to attribute such disregard for their policy conclusions to a lack of economic education. However, while many consumers still do not seem to

Is Bilateralism Bad

Abstract: In the 1980s the process of trade liberalization through multilateral negotiation seems to have run aground. In its place there have been a number of bilateral and regional moves toward liberalization. Some have been concerned that these local deals may, by undermining the multilateral process, actually reduce world trade and welfare. This paper develops a simple model of the effects of regional trading blocs, and shows that consolidation of the world into a smaller number of such blocs may indeed reduce welfare, even when each bloc acts to maximize the welfare of its members. Indeed, for all plausible parameter values world welfare is minimized when there are three trading blocs. More complex versions of the model offer softer results, but the main thrust is still to validate concern over the effects of bilateral and regional trade deals.

Measurable Dynamic Gains from Trade

Abstract: Productive factors such as human and physical capital are accumulated and trade can affect the steady-state levels of such factors. Consequently, trade liberalization will have dynamic effects on output and welfare as the economy moves to its new steady state, in addition to its usual static effects. The output impact of this dynamic effect is measurable and appears to be quite large. The welfare impact of this dynamic effect is also measurable. The size of this dynamic gain from trade depends on the importance of external scale economies.

European trade policy, 1815–1914

Abstract: The analysis of European trade policy in the nineteenth century is of particular interest. The nineteenth century saw both the flourishing of liberalism in theories of international trade, and the development of modern protectionism. This chapter centres on the movement towards free trade in the United Kingdom, and therefore covers the period from 1815 to 1846, a period which saw the establishment of British economic supremacy. The liberalism of British commercial policy continued during the years 1846-60. The two small, highly industrialized countries (Belgium and Switzerland) gradually achieved something close to a total free trade system. The chapter concerns the development of institutions for the promotion of foreign trade, and also discusses European colonial trade policies. It considers the position of the socialist and labour parties with regard to trade policy. The chapter finally deals with the trade policies of independent and semi-independent countries outside Europe.

EXPORT PROCESSING ZONES: The Economics of Enclave Manufacturing

Abstract: Export processing zones (EPZs) are economic enclaves within which manufacturing for export occurs under virtual free trade conditions. Many developing countries have established EPZs in hopes of reaping economic gains through employment, foreign exchange earnings, and technology transfer. This article studies the benefits and costs of EPZs in Indonesia, the Republic of Korea, Malaysia, and the Philippines and reviews the relationship between the welfare effects of EPZs and the host country's economic policies. When the domestic economy is distorted, the EPZ confers limited welfare gains. Nevertheless, EPZs are far from the "engines of development" that some countries had initially hoped they would become. Copyright 1989 by Oxford University Press.

Between free trade and protectionism: strategic trade policy and a theory of corporate trade demands

Abstract: Conventional theories of the political economy of trade argue that industries in import-competing businesses favor protectionism, while multinational firms and export-dependent corporations advocate unconditional free trade. However, many multinational industries have recently advocated “strategic” trade policies: that is, they are willing to support free trade at home only if foreign markets are opened or foreign governments reduce subsidies to their firms. If demands for strategic trade policy were adopted by the United States, they could represent a threat to the General Agreement on Tariffs and Trade (GATT) and the multilateral trading system. This article seeks to explain the emergence of these new corporate trade demands and thereby broaden theories of the political economy of trade. The article begins with the widely supported position that multinational and export-oriented firms prefer unconditional free trade. Building on concepts from theories of industrial organization and international trade, the article then hypothesizes that rising economies of scale and steep learning curves will necessitate that these firms have access to global markets via exports. If growing dependence on world markets is combined with foreign government subsidies or protection, the trade preferences of firms will shift from unconditional free trade to demands that openness at home be contingent on openness overseas. The manner in which firm demands then get translated into industry demands will vary with the industry's structure. If the industry consists of firms with symmetric strategies, it will seek strategic trade policy; but if the industry is highly segmented, it will turn toward protectionism. The article concludes with a preliminary test of these hypotheses in four brief studies of the politics of trade in the semiconductor, commercial aircraft, telecommunications equipment, and machine tool industries.

Bipolarity, multipolarity, and free trade

Abstract: Recent literature typically attributes the relative scarcity of open international markets to the prisoner's dilemma structure of state preferences with respect to trade. I argue that the prisoner's dilemma representation does not reflect the most critical aspect of free trade agreements in an anarchic international system: security externalities. Explicit consideration of these effects suggests that a bipolar international political system has an advantage relative to its multipolar counterpart with respect to the opening of markets among states. Less credible exit threats and stronger incentives to engage in altruism within its alliances explain the advantage of a two-power system. The real income gains that motivate free trade are also the source of the security externalities that impede it. Their ability to internalize these effects makes military alliances the natural basis of agreements to open international markets. The evolutionary prospects of alliances vary, however: ones that are the products of bipolar systems are more likely to evolve into free trade coalitions than are their multipolar counterparts. I argue that less credible exit threats and stronger incentives to engage in alliance altruism explain the advantage of a two-power system. Several important limits of the argument should be made clear immediately. I argue at the systemic level: I attempt to isolate the political and economic incentives for free trade that occur at the level of the international system. I do not, therefore, consider the impact of unitlevel factors on the pursuit of these incentives. For example, neither the role of special interest groups nor the organization of domestic exchange via hierarchies instead of markets is considered (Doyle 1986); Frieden 1988; Ruggie 1982). The conditions I assume are those of standard international trade theory (Ethier '1983), and illustrative rather than systematic empirical referents are used. These restrictions are appropriate given my purpose: to demonstrate analytically the advantage of a bipolar international political system with respect to free trade.

Theory of Customs Unions

Abstract: Before the theory of second-best was developed (Meade, 1955a; Lipsey and Lancaster, 1956–7), it used to be the accepted tradition that customs union (CU) formation should be encouraged. The rationale for this was that since free trade maximised world welfare and since CU formation was a move towards free trade, CUs increased welfare even though they did not maximise it. This rationale certainly lies behind GATT article XXIV (see Appendix to Chapter 1) which permits the formation of CUs and free trade areas (FTAs) as the special exceptions to the principle of non-discrimination, provided the intra-area dismantling of tariffs applies to a substantial part of the partners’ trade.

Rational Hegemons, Excludable Goods, and Small Groups: An Epitaph for Hegemonic Stability Theory?

Abstract: In defining international free trade as a public good, “hegemonic stability theory” posited early in the 1970s that its reliable supply depended upon a distribution of international power analogous to that within a privileged group. More recently, however, critics have challenged three assumptions fundamental to hegemonic theory: its premises of free trade, public goods, and privileged groups. They have concluded that hegemony is not necessary for, and indeed may be antithetical to, a stable world economy based on market exchange.The author argues that the critics overstate their case. The assumptions they attack allow hegemonic theory to represent analytically several critically important barriers to free trade among states. Among these are the existence of strategic interdependence among the actors and the prevalence of informational asymmetries. The most significant flaw in hegemonic theory is its neglect of the essence of the domain to which it applies: the politics of inter-state trade in an anarchic world.

Openness, outward orientation, trade liberalization and economic performance in developing countries

Abstract: This paper provides a critical review of the existing empirical literature that deals with the relationship between trade orientation and economic performance Using a model that avoids the shortcomings of most current measures of trade orientation, the author finds strong support for the hypothesis that, other things being equal, countries with a less distorted external sector grow faster than countries with a more distorted external sector

Pro-Competitive Effects of Trade Reform: Results from a CGE Model of Cameroon

Abstract: How likely is trade liberalization to produce efficiency gains in the presence of imperfect competition, scale economies, and higher-than-average wages in the modern sectors -- all common features of developing economies? These features create a potential conflict to the extent that traditional notions of comparative advantage would lead us to expect that the modern sectors will be squeezed with liberalization. In this paper we investigate the issue by using an applied general equilibrium model calibrated to Cameroonian data. Under perfect competition, the traditional expectations are borne out: manufacturing sectors on the whole contract, and the cash crops sector (mainly coffee and cocoa) is the main beneficiary; the welfare effect is a wash since the beneficial consequence of expanded imports is offset by labor being pulled away from the modern, high-wage sectors. By contrast, under imperfect competition (in the modern sectors only), trade liberalization produces welfare gains of the order of 1 to 2 percent of real income. The key is the pro-competitive effect of liberalization: domestic firms now perceive themselves as facing a higher elasticity of demand, which spurs them to increase production. Therefore, the modern sectors do much better in terms of output than in the perfectly competitive benchmark. The introduction of scale economies amplifies these results. Under reasonable circumstances imperfect competition will make liberalization more desirable, even in the absence of firm entry and exit.

The impact of ideas on trade policy: the origins of U.S. agricultural and manufacturing policies

Abstract: Since the close of World War II, the United States has supported contradictory trade policies. In manufacturing, the United States has fostered a liberal trade regime, spurning government involvement in market transactions. In agriculture, it has sanctioned policies of import restrictions, export subsidies, and import fees. This variation is rooted in decisions that were made in the 1930s and institutionalized in the 1940s. In the wake of the Great Depression, policymakers concluded that state intervention helped agriculture and hurt industry. This article argues that the choice of government policy and its appropriateness to the economic problems faced by each sector reflect the accepted knowledge at the time. Neither liberalization nor subsidization was inevitable; both were economically viable options. However, central decision-makers made choices that were often based on inaccurate beliefs about the utility of different policy options.

The second face of hegemony: Britain's repeal of the Corn Laws and the American Walker Tariff of 1846

Abstract: One challenge facing hegemonic stability theory is to specify the processes by which hegemonic countries construct and maintain a liberal international economic order. Earlier studies have focused on direct coercion or ideological manipulation by the hegemon as a principal technique for manipulating the trade policies of other countries. This article explores a different “face” of hegemony. Specifically, we contend that by altering relative prices through the exercise of their international market power, hegemonic leaders influence the trade policy preferences of their foreign trading partners. We examine this argument in the case of the American Walker Tariff of 1846. American tariff liberalization was intimately related to Britain's repeal of its Corn Laws. In the antebellum United States, Northern protectionist and Southern free trade proclivities were fixed; Western grain growers held the balance of power. By allowing access to its lucrative grain market, Britain altered the economic and political incentives of Western agriculturalists and facilitated the emergence of the free trade coalition essential to the passage of the Walker Tariff.

The Impact of Macroeconomic Policies on the Level of Taxation and the Fiscal Balance in Developing Countries

Abstract: In recent years the taxation level in many developing countries has changed dramatically over relatively short periods. These changes are too large and too sudden to be attributed fully to a deterioration in tax administration or to changes in the traditional determinants of tax levels. They can be attributed, to a considerable extent, to the connection between tax levels and macroeconomic policies--in particular, exchange rate, import substitution, trade liberalization, inflation, public debt, and financial policies. Thus, more attention should be paid to these relationships, and tax reform should aim to neutralize some of their effects.

Is free trade passé after all

Abstract: me express first my great pleasure at being awarded the Bernhard Harms Prize. In the field of international economics, it is now recognized as the profession's most notable award. I feel honored to join today the distinguished economists who have preceded me as recipients of this prestigious prize. It would be logical for me to celebrate this occasion by addressing the great issue that led Adam Smith to give simultaneous birth to both Economics and International Economics. This is the issue of free trade or what we now call the theory of commercial policy. For, this is undoubtedly the area to which I have given my reflection and research in the last three decades: here lie certainly my own comparative advantage and indeed the reason for today's ceremonial occasion. But the subject deserves scrutiny also because the question of free trade has now returned to center stage. This is not simply because, since the 1970s, protectionist demands have increased: as certainly the beleagured executives and administrations of the European Community and the United States know. It is also because the resistance to the supply of protection by these executives may have been imperilled by careless and incomplete assessments of recent developments in the theory of commercial policy itself.

Trade Policies for International Competitiveness

Abstract: Once unquestionably the world's leading economic and industrial power, the United States now views with growing dismay the impressive industrial efficiency, vigorous work ethics, and large American holdings of various other nations. Is the United States truly lagging in its ability to compete effectively in world markets? Concern over this question has been voiced in both the business and government sectors, as well as by academic economists. A recent conference, sponsored by the National Bureau of Economic Research, explored the effects of trade policies on a nation's ability to compete in international markets. In "Trade Policies for International Competitiveness," Robert C. Feenstra collects seven papers from the conference, each accompanied by discussants' comments, and adds a helpful introduction. Some of the issues considered by contributors are effects of macroeconomic and strategic foreign policies on competitiveness; the recent influx of foreign direct investment in the United States, primarily from Japan; the extent to which Japanese trade patterns are a reflection of underlying factor and endowments rather than trade barriers; and the market structure of Canadian industries, including applications for ongoing U.S.-Canadian free trade negotiations. Topical and provocative, these papers will be of value to economists, policymakers, and those in the business world.

A database for trade liberalization studies

Abstract: Studies of global changes in trade and domestic agricultural policies require a global database. This report presents such a database for 22 commodities and 36 regions of the world. The database includes elasticities of supply and demand as well as quantity and price data for 1984 and 1986. Summary measures of support to agriculture are given in the form of producer and consumer subsidy equivalents.

The Irish Case of Dependency: An Exception to the Exceptions?

Abstract: The dependency approach has recently been criticized by authors who quote the "exceptional" East Asian cases The Irish case is used to refute these new modernizationist arguments on two counts. (1) Countries such as Ireland, not the East Asian countries, have regimes with characteristics that tend to set dependency relations in motion. These characteristics include radical free trade, free enterprise, andforeign industrial domination. (2) Because of these characteristics, Ireland has endured economic stagnation and tendencies toward higher inequality. Irish economic growth under foreign-dominated industrialization was slowed by decapitalization and by the absence of linkages between foreign and domestic industry. Time-series models show that foreign penetration and free trade are related to slower economic growth, because of slower investment-growth and other reasons. Inequality increased primarily because of rising unemployment. Although social welfare programs reduced the effects of direct-income inequality, their effects have been reduced by regressive taxation and austerity programs.

Uncertainty and the choice of trade policy in oligopolistic industries

Abstract: This paper investigates the design of trade policies in an uncertain world. Governments in each of two countries select between direct quantity controls and subsidies in an attempt to shift profits in favour of domestic, imperfectly competitive firms. The equilibrium of this bilateral policy game depends critically on the variability of the environment. In a world of certainty, both governments would choose to regulate the behaviour of their firms through direct quantity controls. With a sufficient amount of uncertainty, both governments regulate their firms through subsidies. This result reflects an important tradeoff between the strategic advantages of direct quantity controls and flexibility gained by the use of subsidies

Lessons of Financial Liberalization in Asia: A Comparative Study

Abstract: This paper provides an empirical examination of financial liberalization in five Asian countries: Korea, Malaysia and Sri Lanka, which have been relatively successful, the Philippines, which has not done well, and Indonesia, which has a mixed record. The experiences of these countries are contrasted with those of the Southern Cone countries of Latin America: Chile, Argentina and Uruguay. The paper answers some of the question raised about the nature, content and scope of financial liberalization strategy and policies of developing countries. Pertinent lessons are drawn for those countries which desire to strengthen their liberalization process as well as for those which will undertake similar programs for the first time.

The political economy of integration in the European Community

Abstract: Organizational stepping stones the structure and operation of EU institutions free trade, the customs union and internal market agriculture and fisheries industrial and technological policies energy, transport and environmental policy regional and social problems and policies monetary integration fiscal policy - taxation and the EU budget world-wide trading links enlargement and integration prospect and retrospect.