Presentation on theme: "State-Centered Approach to Trade Politics"— Presentation transcript:
1State-Centered Approach to Trade Politics International Political EconomyProf. Tyson Roberts
2Lecture goals State vs. society based model Infant industry argument Strategic trade argumentStrong vs. weak states
3Assumptions of society- vs. state-centered approach Society-centeredState-centeredGovernment intervention in trade…always reduces state welfaresometimes promotes state welfareTrade policy reflects…balance of power among societal interestsgoals of national decision makers
4Determinants of trade patterns Standard economic theory can explain why the US sells cars to Colombia and Colombia sells coffee to US …Factor endowments => comparative advantageBut cannot explain why Japan, US, and Germany sells cars to one another
5Infant industry protection If barriers to entry are low, new/small firms move to profit opportunitiesIf barriers to entry are high, established firms have advantage over new firms:Economies of scaleEconomies of experience
6Car industry Car exporters tend to have large populations Large labor base, large domestic market => economies of scaleCar exporters tend to be developedLarge capital base => economies of scaleCar companies tend to have specialties in some areas and weaknesses in othersEconomies of experience: Japan (efficiency), US (muscle), Germany (driving experience), Italy (style)
7An argument for protection Industrial policy (tariffs, subsidies, etc.) enable infant industries to attain scale & experience until able to compete globally19th Century US & Germany20th Century Japan & KoreaPrivate capital markets may fail to finance viable investmentsPrivate firms cannot always capture experienceInefficient capital markets (undeveloped or crisis)
9An argument against protection Private capital markets in theory should finance viable investmentsWeak states may protect industries who do not warrant protection and never withdraw protection
10State Strength Definition: Examples: the degree to which national policymakers, a category that includes elected and appointed officials, are insulated from domestic interest-groupExamples:Based on trade policy re: sugar, steel, tires, etc., would you say the US is strong or weak?
11Weak State governments in the US: Special interests can more easily capture politicians when hidden from the public eyeCampante, Filipe R., and Quoc-Anh Do Isolated Capital Cities, Accountability and Corruption: Evidence from US States.HKS Faculty Research Working Paper Series RWP12-016, John F. Kennedy School of Government, Harvard University.
12Having a “strong state” isn’t always a good thing
13Globalization’s uneven impact on development in 19th Century (Rodrik) Continental Europe and Settler Colonies able to adopt industrialization techniques developed in EuropeNon-settler colonies & periphery countries slower to industrialize exported commodities and import manufactures – delayed/reversed industrializationEducation level, quality of institutions.
14Specialization in sugar enriched countries such as Haiti in the short run but undermined long-run growth
15Strategic trade theory Some sectors are oligopolisticEconomies of scale & experience => limited number of firms can survive in marketFirms that achieve necessary scale & experience can earn excess returnsFirst mover advantage
17Market share of PC platforms by Operating System over time
18Impact of industrial policy in high-tech industries Payoffs with no subsidy European FirmProduceNot ProduceAmerican Firm-5, -5100, 00, 1000, 0What is expected outcome? (i.e., Nash Equilibrium)
19Impact of industrial policy in high-tech industries Payoffs with no subsidy European FirmProduceNot ProduceAmerican Firm-5, -5100, 00, 1000, 0What is expected outcome? (i.e., Nash Equilibrium)Answer:Only one country will have a firm that produces in high tech.American firm Produce, European Not, orAmerican Firm Not, European Firm Produce
20Impact of industrial policy in high-tech industries Payoffs with European subsidy European FirmProduceNot ProduceAmerican Firm-5, 5100, 00, 1100, 0What is expected outcome with subsidy? (i.e., Nash Equilibrium)Was subsidy beneficial for Europe?
21Impact of industrial policy in high-tech industries Payoffs with European subsidy European FirmProduceNot ProduceAmerican Firm-5, 5100, 00, 1100, 0What is expected outcome with subsidy? (i.e., Nash Equilibrium)American Firm Not, European Firm ProduceWas subsidy beneficial for Europe?Yes – now they are sure to control the high tech industry
22Examples 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)Aircraft & Semiconductors: US 1st mover adv., defense & R&D spending. Japan/Eur counters with protection & subsidies.Autos: South Korea protectionist policies & subsidies ended up successful; US investment in highways, intervention in oil politics, Chrysler bailout under Iaccocca, bailout by Obama.HDTV: Japan builds on semiconductor & electronics to lead in HDTV, sets early standards. US chicken and egg problem – consumers won’t buy TVs until HD content, broadcasters won’t broadcast until HDTVs. Eventually US govt forces transition, subsidizes converters.Solar: Germany creates market with guaranteed rates, also carbon tax. US can’t pass such policies, but can do guaranteed loans such as Solyndra.
23Some DARPA contribution areas MilitaryCivilianStealth fighterM-16 Assault rifleBallistic missile defenseSensors for anti-submarine warfareInternetSoftware innovations such as parallel processingDigital imaging & x-raySemiconductor research(HDTV – aborted)
24Competing Policy re: HDTV/DTV 1960s-1980s:Public-private cooperation in Europe, Japan => US behindLate 1980s/Early 1990sProposal that DARPA fund HDTV R&D in US => private companies delay own spending on R&D; proposal withdrawnUS HDTV policy delayed by conflicting interests – consumers, broadcasters, electronics industry:Korea: Government decides standard, begins broadcasting in DTV2005US: Deadline set to cease analog broadcasts & consumer subsidies => DTV adoptionNOTE: All HDTV is digital, not all DTV is HDTV
26First 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
27ConclusionsIn general, protectionist policies (esp. tariffs but subsidies as well) have a net negative effect on national welfareFor some industries, under some conditions, government intervention may produce net benefitsEconomies of experience (and scale)Private market failures and inefficiencies (including moments of crisis)
28ConclusionsGovernment intervention is particularly dangerous captured by special interests in a weak state or narrow political elite in a strong stateIn 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