Global Trade Policy: Questions and Answers

In Global Trade Policy, economist Pamela J. Smith explores the key questions raised about global trade and policy today —and the answers that emerge from economic research. During the past two decades, the character of global trade and policy has changed in unprecedented ways. Attention has turned from traditional trade policies —such as tariffs, quantitative restrictions, and export subsidies —to trade related policies including intellectual property rights, labor policies, environmental policies, and growth and development policies. The institutional arrangements for these policies continue to evolve with substantial international debate. Offering accessible coverage for students of economics, business, public policy, and applied economics, this book provides an economic framework for understanding the current policy debates in global trade. Readers are first given background knowledge of trade theory to help guide discussions of trade policy, including traditional theories of inter industry trade, as well as newer theories of intra industry and intra firm trade. They then examine the national and global effects of widely used policies designed to directly affect trade, the indirect impacts of newer trade related policies, and the institutional arrangements for these policies. The distinctive question based format provides an accessible structure for students to grasp the key issues in this field, and the inclusion of reading lists and applied exercises enable them to explore open ended and realistic questions of policy debate.

Acknowledgments xi List of Tables xv List of Figures xvii Preface xxi Part One Trade Theory as Guidance to Trade Policy 1 1 Preliminaries: Trade Theory 3 1.1 What Are the Core Questions Asked by International Trade Economists? 3 1.2 How Can Trade Theory Provide Guidance to Trade Policy? 4 1.3 How Has International Trade Evolved over Time in Practice? 5 1.4 How Has Trade Theory Evolved over Time? 6 1.5 How Is the Book Organized? 9 Further Reading 11 2 Inter–industry Trade 13 2.1 What Are the Effects of Trade in the Long Run, When Countries Differ in Technologies? 14 2.1.1 What are the production possibilities? 15 2.1.2 What are the relative costs and prices in autarky? 16 2.1.3 What are the world prices with trade and patterns of trade? 17 2.1.4 What are the gains from trade? 20 2.1.5 What are the effects of liberalizing trade policy? 22 2.2 What Are the Effects of Trade in the Long Run, When Countries Differ in Endowments? 24 2.2.1 How are endowments and outputs related? 28 2.2.2 How are goods prices and factor prices related? 29 2.2.3 What are the production possibilities? 32 2.2.4 What are the relative costs and prices in autarky? 32 2.2.5 What are the world prices with trade and the patterns of trade? 33 2.2.6 What are the gains from trade? 35 2.2.7 What are the effects of liberalizing trade policy? 37 2.2.8 How does factor mobility change the trade patterns? 38 2.3 What Are the Effects of Trade in the Short Run, When Countries Differ in Immobile Endowments? 39 2.3.1 What are the production possibilities? 40 2.3.2 What are the relative costs and prices in autarky? 42 2.3.3 What are the world prices with trade? 46 2.3.4 What are the patterns of trade? 47 2.3.5 What are the gains and income distribution effects of trade? 47 2.3.6 What are the effects of liberalizing trade policy? 50 2.4 Summary Remarks 51 Applied Problems 54 Further Reading 55 3 Intra–Industry and Intra–Firm Trade 57 3.1 What Is Intra–Industry Trade and Its Effects? 58 3.1.1 What are the patterns and gains from intra–industry trade? 60 3.2 What Is Intra–Firm Trade and Its Effects? 65 3.2.1 What are the patterns and motives for foreign direct investment? 66 3.2.2 How is trade related to foreign direct investment? 68 3.2.3 What are the patterns and motives for outsourcing and offshoring? 69 3.3 Summary Remarks 71 Applied Problems 74 Further Reading 76 Notes 78 Part Two Trade Policies and Their Effects 81 4 Preliminaries: Trade Policy and Welfare Considerations 83 4.1 What Are Traditional Trade Policies? 83 4.2 What Approaches Are Used to Examine Trade Policy? 84 4.3 What Are the Welfare Effects of Liberalizing Trade Policy? 85 4.4 How Is Part Two Organized? 88 Further Reading 89 Note 90 5 Tariffs 91 5.1 What Are Tariffs, Their Types and Purpose? 91 5.2 What Are the Effects of Tariffs? 92 5.2.1 Case 1: What are the effects of a tariff imposed by a large importer? 95 5.2.2 Case 2: What are the effects of a tariff imposed by a small importer? 100 5.2.3 Case 3: What are the effects of a tariff when export supply is inelastic relative to import demand? 103 5.2.4 How is the burden of the tariff allocated across countries and agents? 106 5.3 What Are the Effects of Tariff Liberalization? 107 5.4 How Protective Are Tariffs of the Domestic Industry? 109 5.4.1 How does tariff escalation affect the protection of the domestic industry? 110 5.5 Summary Remarks 111 Applied Problems 115 Further Reading 116 Notes 117 6 Export Subsidies 119 6.1 What Are Export Subsidies, Their Types and Purpose? 119 6.2 What Are the Effects of Export Subsidies? 120 6.2.1 Case 1: What are the effects of an export subsidy imposed by a large exporter? 122 6.2.2 Case 2: What are the effects of an export subsidy imposed by a small exporter? 127 6.2.3 Case 3: What are the effects of an export subsidy when export supply is elastic relative to import demand? 129 6.2.4 Case 4: What are the effects of an export subsidy imposed by a large country with a comparative disadvantage? 132 6.2.5 How is the burden of the export subsidy allocated across countries and agents? 136 6.3 What Are the Effects of Liberalizing Export Subsidies? 137 6.4 Summary Remarks 138 Applied Problems 142 Further Reading 143 Note 143 7 Quantitative Restrictions 145 7.1 What Are Quantitative Restrictions, Their Types and Purpose? 145 7.2 What Are the Effects of Quantitative Restrictions? 147 7.2.1 Case 1: What are the effects of an import quota imposed by a large importer? 149 7.2.2 Case 2: What are the effects of an export quota (or voluntary export restriction) imposed by a large exporter? 153 7.2.3 Case 3: What are the effects of a ban imposed between two large countries? 154 7.3 Summary Remarks 157 Applied Problems 160 Further Reading 160 8 Policy Comparisons 163 8.1 What Are Policy Equivalents, and Their Purpose? 163 8.2 What Are the Relative Effects of Policy Equivalents? 164 8.2.1 What are the relative effects of tariffs, quotas, and VERs? 164 8.2.2 What are the relative effects of bans? 168 8.2.3 What are the relative effects of export subsidies? 168 8.2.4 How do the policies compare? 169 8.3 What Are the Relative Effects of Liberalizing Policies? 172 8.4 What Are the Effects of Substituting Policies? 174 8.5 Summary Remarks 176 Applied Problems 180 Further Reading 182 Note 182 Part Three Trade–Related Policies 183 9 Preliminaries: Trade–Related Policies and Trade in Services 185 9.1 What Are Trade–Related Policies? 185 9.2 How Have Trade–Related Policies Evolved over Time in Practice? 186 9.3 How Have Trade Policies Toward Services Evolved over Time in Practice? 188 9.4 How Is Part Three Organized? 190 Further Reading 191 Notes 192 10 Intellectual Property Rights 193 10.1 What Are Intellectual Property Rights, Their Types, and Purpose? 193 10.2 What Are the Effects of Intellectual Property Rights? 196 10.2.1 What are the domestic effects of intellectual property rights? 196 10.2.2 What are the effects of country differences in intellectual property rights? 197 10.2.3 What are the relative effects of intellectual property rights on trade, foreign direct investment, and licensing? 200 10.3 How Have Intellectual Property Rights Evolved over Time in Practice? 202 10.4 What Are the Intellectual Property Rights Issues on the Policy Frontier? 206 10.5 Summary Remarks 208 Applied Problems 211 Further Reading 212 Notes 214 11 Environmental Policies 215 11.1 What Are Trade–Related Environmental Policies, Their Types and Purpose? 215 11.2 What Are the Effects of Trade Policy on the Environment? 216 11.3 What Are the Effects of Environmental Policy on Trade? 219 11.4 What Are the Implications of Using Trade Policy to Address Environmental Externalities? 221 11.4.1 Case 1: Can trade policy correct a negative production externality in a small exporter? 223 11.4.2 Case 2: Can trade policy correct a negative consumption externality in a small importer? 228 11.5 Summary Remarks 232 Applied Problems 235 Further Reading 237 Notes 238 12 Labor Policies 239 12.1 What Are Trade–Related Labor Policies, Their Types, and Purpose? 239 12.2 What Are the Effects of Trade Policy on Labor? 241 12.2.1 What are the long–run effects of trade on wages? 242 12.2.2 What are the short–run effects of trade on wages? 254 12.3 How Can the Gains and Losses from Trade Be Redistributed within Countries? 264 12.4 What Are the Effects of Labor Policy on Trade? 265 12.5 Summary Remarks 267 Applied Problems 270 Further Reading 271 Notes 272 13 Growth and Development Policies 273 13.1 What Are Trade–Related Development and Growth Policies, Their Types, and Purpose? 273 13.2 What Are the Effects of Trade on Development and Growth? 275 13.2.1 What are the effects of trade on country welfare? 275 13.2.2 What are the effects of trade on growth? 282 13.2.3 What are the effects of trade on income distribution? 286 13.3 What Are the Effects of Growth on Development (or Welfare) in the Presence of Trade? 287 13.3.1 What are the effects of economic growth on relative outputs? 288 13.3.2 What are the effects of output changes on the terms of trade? 288 13.3.3 What are the effects of terms of trade changes on welfare? 292 13.4 Summary Remarks 295 Applied Problems 298 Further Reading 299 Notes 301 Part Four Trade Arrangements 303 14 Regional and Multilateral Arrangements 305 14.1 What Are the Institutional Arrangements for Trade Policy? 306 14.1.1 What are the prominent multilateral arrangements for trade policy in practice? 308 14.2 What Are the Effects of Alterative Arrangements for Trade Policy? 310 14.2.1 What are the effects of regional liberalization? 311 14.2.2 What are the effects of multilateral liberalization? 315 14.2.3 What are the effects of country exclusion from multilateral arrangements? 317 14.3 Are Regional Arrangements Stepping Stones or Stumbling Blocks to Multilateral Liberalization? 321 14.4 Summary Remarks 323 Applied Problems 327 Further Reading 329 Notes 331 References 333 Index 339

Pamela J. Smith is Associate Professor of applied economics at the University of Minnesota and teaches international trade and policy at the graduate and undergraduate levels