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State-Centered Approach to Trade Politics

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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-centered State-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 19th Century US & Germany 20th 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: Examples:
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 Campante, 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.

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

13 Globalization’s uneven impact on development in 19th 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 Education level, quality of institutions.

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 Produce Not Produce American Firm -5, -5 100, 0 0, 100 0, 0 What is expected outcome? (i.e., Nash Equilibrium)

19 Impact of industrial policy in high-tech industries Payoffs with no subsidy
European Firm Produce Not Produce American Firm -5, -5 100, 0 0, 100 0, 0 What 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, or American Firm Not, European Firm Produce

20 Impact of industrial policy in high-tech industries Payoffs with European subsidy
European Firm Produce Not Produce American Firm -5, 5 100, 0 0, 110 0, 0 What is expected outcome with subsidy? (i.e., Nash Equilibrium) Was subsidy beneficial for Europe?

21 Impact of industrial policy in high-tech industries Payoffs with European subsidy
European Firm Produce Not Produce American Firm -5, 5 100, 0 0, 110 0, 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

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) 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.

23 Some DARPA contribution areas
Military Civilian Stealth fighter M-16 Assault rifle Ballistic missile defense Sensors for anti-submarine warfare 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 NOTE: All HDTV is digital, not all DTV is HDTV

25 Korean Japanese

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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