University of Papua New Guinea International Economics Lecture 15: Trade Policy – Challenges

The University of Papua New Guinea Slide 1 Lecture 15: Trade Policy – Challenges Michael Cornish Overview –Links for the Group Assignment –Graph: Developing countries opening to trade Globalisation and low-wage labour Globalisation and culture Globalisation and the environment The WTO and national independence

The University of Papua New Guinea Slide 2 Lecture 15: Trade Policy – Challenges Michael Cornish Links for the Group Assignment The Bank of Papua New Guinea Monetary Policy Statements –See: statementshttps:// statements WTO, trade profile: – PFView.aspx?Country=PG&Language=Fhttp://stat.wto.org/CountryProfile/WSDBCountry PFView.aspx?Country=PG&Language=F

The University of Papua New Guinea Slide 3 Lecture 15: Trade Policy – Challenges Michael Cornish Links for the Group Assignment United Nations, trade profile: – =5393&type=country%20pageshttp://comtrade.un.org/pb/FileFetch.aspx?docID =5393&type=country%20pages The World Bank, trade profile: – ANU Development Policy Blog: – assessment-of-trade-performance / assessment-of-trade-performance /

The University of Papua New Guinea Slide 4 Lecture 15: Trade Policy – Challenges Michael Cornish Links for the Group Assignment PLUS: –Simply google “papua new guinea trade policy” !! –I found lots of good resources!

The University of Papua New Guinea Slide 5 Lecture 15: Trade Policy – Challenges Michael Cornish Links for the Group Assignment Import cover: –Sometimes called the import ratio –It is the ratio of a country’s total imports to that country’s total foreign exchange reserves –Also see:

The University of Papua New Guinea Slide 6 Lecture 15: Trade Policy – Challenges Michael Cornish Year of trade liberalisation: South Korea: 1962China: 1978India: 1991

The University of Papua New Guinea Slide 7 Lecture 15: Trade Policy – Challenges Michael Cornish Free trade v. protectionism The (bad) arguments for protection: Infant-industry argument –Argument is that industries need time to establish, so that they can compete with overseas firm –But can governments pick winners? How do we know if the industry is an are of comparative advantage? –And does the ‘infant’ ever grow up? Elite capture of protectionist policies

The University of Papua New Guinea Slide 8 Lecture 15: Trade Policy – Challenges Michael Cornish Free trade v. protectionism The (bad) arguments for protection (cont.): The dumping argument –Foreign firms may dump cheap products on a country that undercut local businesses and drive them out of business, allowing the foreign firms to capture the industry –But in practice, few foreign firms have enough power to dominate a market where there more foreign competition is allowed!

The University of Papua New Guinea Slide 9 Lecture 15: Trade Policy – Challenges Michael Cornish Free trade v. protectionism The (bad) arguments for protection (cont.): Saves jobs –International trade does destroy jobs, but it creates jobs too – price signals reallocate labour to where they are more efficient!

The University of Papua New Guinea Slide 10 Lecture 15: Trade Policy – Challenges Michael Cornish Free trade v. protectionism The (bad) arguments for protection (cont.): Allows rich countries to compete with cheap foreign labour –Wages are related to productivity when there is free competition –Rich countries have higher average productivity… so they don’t need protection to compete!

The University of Papua New Guinea Slide 11 Lecture 15: Trade Policy – Challenges Michael Cornish Free trade v. protectionism The (bad) arguments for protection (cont.): Prevents rich countries from exploiting developing countries –Trading with developing countries increases the demand for their products, thus leading to increases in wages… –None of this is to justify exploitation, but the alternative may be to deprive impoverished people of their livelihoods!

The University of Papua New Guinea Slide 12 Lecture 15: Trade Policy – Challenges Michael Cornish

The University of Papua New Guinea Slide 13 Lecture 15: Trade Policy – Challenges Michael Cornish

The University of Papua New Guinea Slide 14 Lecture 15: Trade Policy – Challenges Michael Cornish

The University of Papua New Guinea Slide 15 Lecture 15: Trade Policy – Challenges Michael Cornish

The University of Papua New Guinea Slide 16 Lecture 15: Trade Policy – Challenges Michael Cornish Free trade v. protectionism The (bad) arguments for protection (cont.): Penalises lax environmental standards –Often, poor countries need to increase their income in order to improve their capacity to undertake environmental protection »The Environmental Kuznets Curve –Not trading with developing countries denies them this chance to increase protection!

The University of Papua New Guinea Slide 17 Lecture 15: Trade Policy – Challenges Michael Cornish Environmental Kuznets Curve

The University of Papua New Guinea Slide 18 Lecture 15: Trade Policy – Challenges Michael Cornish Free trade v. protectionism Conclusion Overall, the empirical evidence points toward free trade being the much better choice But whilst free trade creates more winners… …it does also create losers

The University of Papua New Guinea Slide 19 Lecture 15: Trade Policy – Challenges Michael Cornish Free trade v. protectionism Losses to the losers are highly concentrated, whilst the benefits to the winners (usually consumers) are thinly spread –Consumers are usually not even aware how they are benefitting!! Compelling argument that economic losers should be compensated so that they can adjust to the new economic reality –E.g. Provision of training