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Part 2 I NTERNATIONAL T RADE P OLICY. Chapter 6 Histories of Trade Policies ——Free trade VS Protectionism.

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Presentation on theme: "Part 2 I NTERNATIONAL T RADE P OLICY. Chapter 6 Histories of Trade Policies ——Free trade VS Protectionism."— Presentation transcript:


2 Chapter 6 Histories of Trade Policies ——Free trade VS Protectionism

3 Chapter 6 International Trade Policies FREE TRADE PROTECTIONISM The Trade Policy pendulum Free trade VS Protectionism

4 Chapter 6  Mercantilism (16th century) Mercantilism  Trade surplus.Protectionism  “ Laissez-Faire ” (from early 19th century on) “ Laissez-Faire ”  Great Depression: Neo-Mercantilism Great Depression  Protectionism up in the US,UK,France etc.  Trade Liberalisation after World War II  GATT  WTO (Chapter 9)  New protectionism New protectionism The “ Pendulum ” of trade policy: Between Free Trade & Protectionism

5 Chapter 6 Mercantilism: mid-16 th century 1. Definition Definition 2. Background Background 3. Main ideas &Policies Main ideas Policies 4. Hume’s Criticisms to Mercantilism Hume’s Criticisms to Mercantilism

6 Chapter 6 Definition 1. Between 1600 and 1800 most of the states of western Europe were heavily influenced by a policy usually known as mercantilism. 2. Mercantilism is a collection of policies designed to keep the state prosperous by economic regulation.

7 Chapter 6 Background 1. Increase in Commercial Activity due to discovery of new trade routes 2. Emphasis on the quest for gold and silver 3. New social classes: world-wide merchants 4. Rise of Nation-States: Spain, Holland, England, France

8 Chapter 6 Main Ideas Of Mercantilism 1. Nation’s Wealth = Country’s holdings of precious metals 2. Export is a gain (gain precious metals); import is a loss (lose precious metals) 3. Trade is a “Zero-sum Game”: one country’s gain is the loss of another country

9 Chapter 6 Policies Of Mercantilism 1. Build up the power of a nation- state: strong army, strong navy, and merchant marine 2. Maintain a positive trade balance: export > import: a. Custom-free export; b. Reducing the import of luxury goods; c. Encouragement of imports with the purpose of re-export.

10 Chapter 6 David Hume ( )  One of the greatest philosophers in Western history, as well as an accomplished historian and economist.  deny the the inflow of gold specie could be sustainable—— the Price-Specie-Flow Mechanism

11 Chapter 6 Hume’s Criticisms to Mercantilism 1. Increased exports leads to inflation and higher prices. 2. Increased imports lead to lower prices. 3. Result: Country A sells less because of high prices and Country B sells more because of lower prices. 4. In the long run, no one can keep a trade surplus.

12 Chapter 6 “ Laissez-Faire ”—— Free trade  Intellectual arguments for free trade promoted by:  Adam Smith and David Ricardo  Free trade as government policy:  Britain ’ s (1846) repeal of the Corn Laws  Britain continued a free trade policy  Rest of the world practiced Mercantilism  “ Beggar-thy-neighbor ” policies. It’s no good to anyone. Robert Peel stated: 'We must make this country a cheap country for living'

13 Chapter 6 Trade theories support Free Trade 1. Most trade theories argue for free trade 2. Even recent revisions of strategic trade theory suggest that free trade should be supported, if nothing else, simply out of fear of an all-out retaliatory trade war

14 Chapter 6  Great Depression  U.S. stock market collapse  Smoot-Hawley Tariff Act (1930)  U.S. had positive trade balance with world  Act imposes tariffs to protect U.S. firms  Response of other nations was to impose their own retaliatory barriers  U.S. exports tumbled deepening the Depression  Trade restrictions ultimately led to World War II Great Depression: Neo -Mercantilism

15 Chapter 6

16 New protectionism: Disturbing Trends Pressures for greater protectionism:  Japan ’ s economic success:  World ’ s second largest economy & World ’ s largest exporter  Strong supporter for trade protectionism  The U.S. ’ s persistent trade deficit  Turn to protectionism Established by the Japanese government in 1958 for the comprehensive implementation of trade policy In its first decades, JETRO promoted Japanese exports to meet the needs of the nation's postwar economy

17 Chapter 6 Arguments for Protectionism Protect Employments and Jobs National Security Retaliation Protect Consumers Protect Infant Industry Dependency Theory Further Foreign Policy Objectives

18 Chapter 6 Infant Industry  Infant industry is the oldest economic argument for government intervention, dating to 1792 and Alexander Hamilton.  Protect developing country’s new industry from developed countries better established industries.  Problem: When do infant industries grow up? Alexander Hamilton Secretary of the Treasury His report on manufactures began commercial and industrial development in the new nation

19 Chapter 6 Protect Employments and Jobs. Most common political argument.

20 Chapter 6

21 Ross Perot -- during the 10/15/1992 Presidential Debate “ NAFTA will cause a giant sucking sound as jobs go south ”

22 Chapter 6 Protect Consumers Battleground for biotechnology such as hormone-treated beef and genetically altered crops.

23 Chapter 6 National Security Often argued that steel, aerospace and electronics industries must be protected for security of nation. But argument is sometimes abused; the shoe industry has lobbied for protection on national security grounds.

24 Chapter 6 National Security Argument  Mosquito netting will be needed in the event of war in the tropics.  We must produce the netting during the war.  Our equipment, ordinarily used to produce lace, can be used to manufacture mosquito netting.  Our industry is threatened by imported lace.  Therefore, Congress should protect US lace makers with a tariff.

25 Chapter 6 National Security Argument  If you assume all premises are true, the conclusion does not follow. If production is vital, then a production subsidy would be more efficient. A tariff would make us poorer, not stronger.  Once revised to recommend a subsidy, the argument is probably not sound  Modern wars are brief. A stockpile of netting may be necessary, but not production capacity  Is the industry really threatened?

26 Chapter 6 Retaliation Risky strategy. If government fails to heed warnings and imposes its own higher tariffs, the result is higher tariffs all around and a corresponding economic loss.

27 Chapter 6 Retaliation US Trade Sanctions Afghanistan Italy Burma Libya Canada Nigeria China N. Korea Cuba Pakistan India Saudi Arabia Iran Sudan Iraq Syria Yugoslavia A Partial List of Targets

28 Chapter 6 Further Foreign Policy Objectives Used to build relations with other countries or to punish rogue states.

29 Chapter 6 Bush’s Foreign, as well as Trade, Policy?

30 Chapter 6 Public reaction in the United States meant to “punish” France -- for not supporting a preemptive war in Iraq -- by not purchasing French made products meant the people who promoted it suffered the most!

31 Chapter 6

32 so-called “rogue states” Policy is unilateral and easily defeated by other countries ignoring it so-called “rogue states” Policy is unilateral and easily defeated by other countries ignoring it

33 Chapter 6

34 Dependency theory  Dependency theory was developed by the Argentine economist Raul Prebish  He believed that the international economic system was divided into a "Center" and a "Periphery".  The destiny of “Periphery” colonialism Distorted Economic structure Unbalanced growth IT Reinforcing the bad development path

35 Chapter 6 Dependency theory  Prebisch argued that with distorted national institutions and economic structures, Third World countries were defenseless to the distortionary development implied by trade- induced interaction with heavily-financed First World monopolistic capitalism.  As a result, Third World countries were being dragged into a state of "dependency" upon the First World, becoming the producers of raw material for First World manufacturing development - a "center- periphery" relationship.

36 Chapter 6 “Center” and “Periphery”  “Center” composed of highly industrial countries: U.S., U.S.S.R., Europe, etc.  “Periphery” composed of less/under- developed countries;These countries were dependent on the center countries.  Trade Pattern:  The center countries export industrial products which are highly flexible, while the Periphery countries’ exports are usually raw or semi-processed materials which are less flexible.

37 Chapter 6 Prebish’s Policy Suggestion protectionism in tradeimport-substitution strategies  Prebisch argued that protectionism in trade and import-substitution strategies were acceptable, indeed necessary if these countries were to enter a self-sustaining development path.  Prebisch's thesis was similar to modern Neo-Marxian theory

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