Part 2

INTERNATIONAL TRADE POLICY

Chapter 6

Histories of Trade Policies——Free trade VS Protectionism

Chapter 6

International Trade Policies

FREE TRADE PROTECTIONISM

The Trade Policy pendulum

Free trade VS Protectionism

Chapter 6

Mercantilism (16th century)Trade surplus.Protectionism

“Laissez-Faire” (from early 19th century on)

Great Depression: Neo-MercantilismProtectionism up in the US,UK,France etc.

Trade Liberalisation after World War IIGATTWTO (Chapter 9)

New protectionism

The “Pendulum” of trade policy:Between Free Trade & Protectionism

Chapter 6Mercantilism: mid-16th

century

1. Definition2. Background3. Main ideas &Policies 4. Hume’s Criticisms to

Mercantilism

Chapter 6

Definition1. 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.

Chapter 6

Background1. 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

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

Chapter 6

Policies Of Mercantilism1. 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.

Chapter 6David Hume （ 1711-177

6 ）

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

Chapter 6Hume’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.

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' 

Chapter 6Trade theories support Free Trad

e

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

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

Chapter 6

18_07

April

1930

2,739

1931

1932

1933

May

June

JulyJanuary

February

March

August

SeptemberNovember

December

October

1,839 992

1,206

Contracting Spiral of World Trade

Chapter 6New 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 protectionismEstablished by the Japanese government in 1958 for the comprehensive implementation of trade policyIn its first decades, JETRO promoted Japanese exports to meet the needs of the nation's postwar economy

Chapter 6Arguments for

Protectionism

ProtectEmployments

and Jobs

NationalSecurity Retaliation

ProtectConsumers

ProtectInfant Industry

DependencyTheory

FurtherForeign Policy

Objectives

Chapter 6

InfantIndustry

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

1789-1795 His report on manufactures

began commercial and

industrial development in the new nation

Chapter 6

ProtectEmployments

and Jobs.Most common political argument.

Chapter 6

Chapter 6

Ross Perot -- during the 10/15/1992 Presidential DebateRoss Perot -- during the 10/15/1992 Presidential DebateRoss Perot -- during the 10/15/1992 Presidential DebateRoss Perot -- during the 10/15/1992 Presidential Debate

“NAFTA will cause a giant sucking sound as jobs go south”

Chapter 6

ProtectConsumers

Battleground for biotechnology such as hormone-treatedbeef and genetically altered crops.

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.

Chapter 6National 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.

Chapter 6National 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?

Chapter 6

RetaliationRisky strategy. If governmentfails to heed warnings and imposes its own higher tariffs, the result is higher tariffs allaround and a correspondingeconomic loss.

Chapter 6Retaliation

US Trade Sanctions

0

5

10

15

20

25

1993 95 97 99

NewSanctions

Afghanistan ItalyBurma LibyaCanada NigeriaChina N. KoreaCuba PakistanIndia Saudi ArabiaIran SudanIraq SyriaYugoslavia

A Partial List of TargetsA Partial List of TargetsA Partial List of TargetsA Partial List of Targets

Chapter 6

FurtherForeign Policy

Objectives

Used to build relations withother countries or to punish rogue states.

Chapter 6

Bush’s Foreign, as well as Trade, Policy?Bush’s Foreign, as well as Trade, Policy?Bush’s Foreign, as well as Trade, Policy?Bush’s Foreign, as well as Trade, Policy?

Chapter 6

Public Public reaction in reaction in the United the United

States meant States meant to “punish” to “punish” France -- for France -- for

not not supporting a supporting a preemptive preemptive

war in Iraq -- war in Iraq -- by not by not

purchasing purchasing French made French made

products products meant the meant the people who people who promoted it promoted it suffered the suffered the

most!most!

Public Public reaction in reaction in the United the United

States meant States meant to “punish” to “punish” France -- for France -- for

not not supporting a supporting a preemptive preemptive

war in Iraq -- war in Iraq -- by not by not

purchasing purchasing French made French made

products products meant the meant the people who people who promoted it promoted it suffered the suffered the

most!most!

Chapter 6

Chapter 6

so-called “rogue so-called “rogue states”states”

Policy is unilateral Policy is unilateral and easily defeated and easily defeated by other countries by other countries

ignoring itignoring it

so-called “rogue so-called “rogue states”states”

Policy is unilateral Policy is unilateral and easily defeated and easily defeated by other countries by other countries

ignoring itignoring it

Chapter 6

Chapter 6

Dependency theory Dependency theory was developed by the

Argentine economist Raul Prebish He believed that the international econo

mic system was divided into a "Center" and a "Periphery".

The destiny of “Periphery”

colonialism DistortedEconomic structure

Unbalanced growth IT Reinforcingthe bad development path

Chapter 6

Dependency theory Prebisch argued that with distorted national i

nstitutions 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.

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.

Chapter 6

Prebish’s Policy Suggestion Prebisch argued that protectionism iprotectionism i

n traden trade and import-substitution straimport-substitution strategiestegies 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