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State-Centered Approach to Trade Politics International Political Economy Prof. Tyson Roberts.

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Presentation on theme: "State-Centered Approach to Trade Politics International Political Economy Prof. Tyson Roberts."— Presentation transcript:

1 State-Centered Approach to Trade Politics International Political Economy Prof. Tyson Roberts

2 Lecture goals State vs. society based model Infant industry argument Strategic trade argument Strong vs. weak states

3 Assumptions of society- vs. state- centered approach Society-centeredState-centered Government intervention in trade… always reduces state welfare sometimes promotes state welfare Trade policy reflects… balance of power among societal interests goals of national decision makers

4 Determinants of trade patterns Standard economic theory can explain why the US sells cars to Colombia and Colombia sells coffee to US … – Factor endowments => comparative advantage But cannot explain why Japan, US, and Germany sells cars to one another

5 Infant industry protection If barriers to entry are low, new/small firms move to profit opportunities If barriers to entry are high, established firms have advantage over new firms: Economies of scale Economies of experience

6 Car industry Car exporters tend to have large populations – Large labor base, large domestic market => economies of scale Car exporters tend to be developed – Large capital base => economies of scale Car companies tend to have specialties in some areas and weaknesses in others – Economies of experience: Japan (efficiency), US (muscle), Germany (driving experience), Italy (style)

7 An argument for protection Industrial policy (tariffs, subsidies, etc.) enable infant industries to attain scale & experience until able to compete globally – 19 th Century US & Germany – 20 th Century Japan & Korea Private capital markets may fail to finance viable investments – Private firms cannot always capture experience – Inefficient capital markets (undeveloped or crisis)

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9 An argument against protection Private capital markets in theory should finance viable investments Weak states may protect industries who do not warrant protection and never withdraw protection

10 State Strength Definition: – the degree to which national policymakers, a category that includes elected and appointed officials, are insulated from domestic interest- group Examples: – Based on trade policy re: sugar, steel, tires, etc., would you say the US is strong or weak?

11 Weak State governments in the US: Special interests can more easily capture politicians when hidden from the public eye

12 Having a “strong state” isn’t always a good thing

13 Globalization’s uneven impact on development in 19 th Century (Rodrik) Continental Europe and Settler Colonies able to adopt industrialization techniques developed in Europe Non-settler colonies & periphery countries slower to industrialize exported commodities and import manufactures – delayed/reversed industrialization

14 Specialization in sugar enriched countries such as Haiti in the short run but undermined long-run growth

15 Strategic trade theory Some sectors are oligopolistic – Economies of scale & experience => limited number of firms can survive in market – Firms that achieve necessary scale & experience can earn excess returns – First mover advantage

16 Number of firms in US Car Industry over time

17 Market share of PC platforms by Operating System over time

18 Impact of industrial policy in high-tech industries Payoffs with no subsidy European Firm ProduceNot Produce American FirmProduce-5, -5100, 0 Not Produce0, 1000, 0 What is expected outcome? (i.e., Nash Equilibrium) 18

19 Impact of industrial policy in high-tech industries Payoffs with no subsidy European Firm ProduceNot Produce American FirmProduce-5, -5100, 0 Not Produce0, 1000, 0 What is expected outcome? (i.e., Nash Equilibrium) Answer: Only one country will have a firm that produces in high tech. (1)American firm Produce, European Not, or (2)American Firm Not, European Firm Produce 19

20 Impact of industrial policy in high-tech industries Payoffs with European subsidy European Firm ProduceNot Produce American FirmProduce-5, 5100, 0 Not Produce0, 1100, 0 What is expected outcome with subsidy? (i.e., Nash Equilibrium) Was subsidy beneficial for Europe? 20

21 Impact of industrial policy in high-tech industries Payoffs with European subsidy European Firm ProduceNot Produce American FirmProduce-5, 5100, 0 Not Produce0, 1100, 0 What is expected outcome with subsidy? (i.e., Nash Equilibrium) American Firm Not, European Firm Produce Was subsidy beneficial for Europe? Yes – now they are sure to control the high tech industry 21

22 Examples of Government Intervention Commercial Aircraft (US vs. Europe) Semiconductors (US vs. Japan) Automobiles (e.g., South Korea, US) HDTV (Japan vs. Europe vs. US) Solar power (Germany vs. US) 22

23 Some DARPA contribution areas Military Stealth fighter M-16 Assault rifle Ballistic missile defense Sensors for anti-submarine warfare Civilian Internet Software innovations such as parallel processing Digital imaging & x-ray Semiconductor research (HDTV – aborted)

24 Competing Policy re: HDTV/DTV 1960s-1980s: – Public-private cooperation in Europe, Japan => US behind Late 1980s/Early 1990s – Proposal that DARPA fund HDTV R&D in US => private companies delay own spending on R&D; proposal withdrawn – US HDTV policy delayed by conflicting interests – consumers, broadcasters, electronics industry : – Korea: Government decides standard, begins broadcasting in DTV 2005 – US: Deadline set to cease analog broadcasts & consumer subsidies => DTV adoption

25 KoreanJapanese

26 First mover advantage does NOT guarantee success Economies of scale & experience in one sector can be exploited to enter new sectors Competition enables better technologies to win market share

27 Conclusions In general, protectionist policies (esp. tariffs but subsidies as well) have a net negative effect on national welfare For some industries, under some conditions, government intervention may produce net benefits – Economies of experience (and scale) – Private market failures and inefficiencies (including moments of crisis)

28 Conclusions Government intervention is particularly dangerous captured by special interests in a weak state or narrow political elite in a strong state In general, economists argue that social welfare is best served by promoting efficient institutions (political, financial, etc.) and other public goods (such as infrastructure and pure R&D) More on government’s role in the economy in the next two lectures


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