International Trade: Lecture 5

Transcription

1 International Trade: Lecture 5 Alexander Tarasov Higher School of Economics Fall 2016 Alexander Tarasov (Higher School of Economics) International Trade (Lecture 5) Fall / 24

2 Trade Policies Chapters 7 and 8 from the textbook. There are many various reasons for trade policies (import tariffs, quotas, export subsidies, etc.) Early stage of development (to foster the growth of domestic industries): import substitution the approach was heavily criticized for protecting inefficient domestic industries BUT! The "infant industry" protection Many countries later switched to export promotion (through export subsidies, for instance) WTO: a movement towards freer trade Alexander Tarasov (Higher School of Economics) International Trade (Lecture 5) Fall / 24

3 In This Course We will discuss the potential theoretical implications of different trade policies we will distinguish between small and large open economies import tariffs, quotas, export subsidies We will briefly talk about the "infant industry" protection Then, I will review the recent empirical literature on the effects of trade policies Alexander Tarasov (Higher School of Economics) International Trade (Lecture 5) Fall / 24

4 Summary Import tariff: a small open economy loses a large economy may gain due to the positive terms of trade effect Quota there exists an equivalent tariff in case of perfect competition if the quota rents go to the domestic country, the quota is completely equivalent to the tariff if the quota rents go to foreign producers (VER, voluntary export restraint), the economy loses more than in case of the equivalent tariff under imperfect competition or in models with quality, quota is not equivalent to tariff! Alexander Tarasov (Higher School of Economics) International Trade (Lecture 5) Fall / 24

5 Summary Export subsidy: a small open economy loses a large economy loses even more due to the negative terms of trade effect Export tax: a small open economy loses a large economy may gain due to the positive terms of trade effect in case of the export tax, the home price decreases! (the case of wheat exports in Russia) Alexander Tarasov (Higher School of Economics) International Trade (Lecture 5) Fall / 24

6 Infant Industry Protection The idea behind is that a tariff in one period leads to an increase in output, which in turn results in a reduction of future costs of production we protect now to be more productive in the future some scope for temporary intervention It is quite an old idea! Potentially, a better policy is to directly aim at what makes young firms less productive (different subsidies) We need good case studies (which hard to find) to understand the implications of the infant industry protection. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 5) Fall / 24

7 Infant Industry Protection A good example is a rail industry in the US (Head 1994 "Infant industry protection in the steel rail industry"): the growth of the American steel industry between the Civil War and World War I Why is it a good case? 1. The United States was initially disadvantaged: England had an 8 year head start (1859 vs. 1867) and a 100 percent import share between 1862 and The initial U.S. price was $166 per ton. The same year, 1867, a ton of British rails cost $ at U.S. ports and only $90.67 in Liverpool. 2. The United States ultimately obtained a comparative advantage: In 1913, the year the duty was eliminated, steel rails were priced at $28.00 in the United States and $32.23 in England. For the next half century, the United States thoroughly dominated world steel production. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 5) Fall / 24

8 Infant Industry Protection 3. Substantial evidence of industry-wide learning-by-doing: The Bessemer process, a novel and challenging technology, made mass production of steel rails possible. There were a variety of improvements introduced by the plant engineers that appear to have resulted from learning-by-doing. 4. Government intervened in a visible and temporary manner: The U.S. government confined its intervention to a specific duty on imported rails. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 5) Fall / 24

9 Infant Industry Protection Was it successful? On the one hand: the domestic industry did grow up and the duty was eventually removed the duty led to long-run reductions in domestic prices the overall effect on welfare appears to have been positive, though consumers did not gain much Alexander Tarasov (Higher School of Economics) International Trade (Lecture 5) Fall / 24

10 Infant Industry Protection On the other hand: the experience of the U.S. steel rail industry provides no clear support for the use of protection practiced by countries pursuing import-substitution development strategies the basic resource endowment (iron ore and coal) of the United States gave the American industry a latent comparative advantage American market was large and growing = many domestic firms, high level of competition and innovation There are many other cases where protection has failed Alexander Tarasov (Higher School of Economics) International Trade (Lecture 5) Fall / 24

11 Russia sanctions "Collateral damage: The impact of the Russia sanctions on sanctioning countries exports" ( The authors distinguish between three periods: a conflict period in which tensions started to grow between December 2013 and February 2014; a period of "smart sanctions" starting in March 2014; a third period, starting in August 2014 with the implementation of economic sanctions in the form of trade restrictions and financial sanctions, and Russian counteraction in the form of an embargo on certain food and agricultural products Alexander Tarasov (Higher School of Economics) International Trade (Lecture 5) Fall / 24

12 Russia sanctions They estimate the impact of the three different periods on exports of embargoed and non-embargoed products in a gravity framework. Between December 2013 and June 2015, global losses totalled $60.2 billion, on average $3.2 billion per month the composition of these losses is very heterogeneous EU member states bear 76.7% of all lost trade and 78.1% of non-embargoed one Germany is bearing 27% of the global lost trade, while France accounts for 5.6%, the UK 4.1%, and the US just 0.4%. particularly noteworthy is that 83% of this lost trade can be considered collateral damage, being exports of non-embargoed products or of embargoed products before the actual implementation of the Russian counter-sanctions. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 5) Fall / 24

13 Russia sanctions Alexander Tarasov (Higher School of Economics) International Trade (Lecture 5) Fall / 24

14 Evidence of the Effects of Trade Policies Handbook of Commercial Policy, Volume 1A, Chapter 3 Effects on product prices: perfect competition or CES preferences: tariff reductions lead to a proportional decrease in the prices of imported products reduction of trade barriers exerts competitive pressure on the domestic producers of final products with variable markups, these changes imply lower markups and lower prices: procompetitive effect of trade liberalization the reduction of trade barriers affects products that are used as intermediate inputs in domestic production The above considerations lead to the qualitatively unambiguous conclusion: a reduction of trade barriers should lead to lower prices in the importing country. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 5) Fall / 24

15 Evidence of the Effects of Trade Policies What about evidence? The evidence is quite scant. Topalova (2010) and De Loecker, Goldberg, Khandelwal, and Pavcnik (2016), both on India. Both studies found that domestic prices decline approximately 10% as a result of India s trade liberalization. They also could identify the procompetitive effect of trade liberalization: a decline in markups arising from the exposure of domestic producers to intensified competition. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 5) Fall / 24

16 Effects of Trade Policies in the Data Growth and Poverty Much of the literature on the effects of trade policy on the outcomes focuses on its short-run and static effects. There are good reasons to believe that the long-run effects are orders of magnitude larger than the short-run effects. The long-run effects are substantially harder to pin down empirically. The (scant) evidence on long-run effects of trade policy on aggregate growth and poverty. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 5) Fall / 24

17 Effects of Trade Policies in the Data Growth Many economists believe (based on economic theory) that reductions in trade barriers promote economic growth. But! Robust evidence on this relationship at the aggregate level has been elusive. Even if, there is a positive relationship between trade policy and economic growth, the causality is not clear: does trade policy lead to higher economic growth or do countries at a certain level of development choose to implement more liberalized trade policy? do countries with less restrictive trade policy in general have economic institutions in these economies that are associated with higher growth? Alexander Tarasov (Higher School of Economics) International Trade (Lecture 5) Fall / 24

18 Effects of Trade Policies in the Data Growth Researchers have recently used microlevel data on trade policy from trade liberalizations during the 1980s and 1990s to make progress on the effects of trade policy on aggregate growth. Estevadeordal and Taylor (2013) find that countries that liberalized trade policy during the 1980s and 1990s (in part driven by the Uruguay round of the WTO negotiations) observed higher growth rates in GDP per capita over this period relative to countries that did not liberalize Their argument: decline in import tariffs on capital goods increases incentives for firms to invest, which in turn increases steady state growth. lower tariffs on intermediate inputs increase productivity, and subsequently steady state growth. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 5) Fall / 24

19 Effects of Trade Policies in the Data Poverty The effects of trade policy (via economic growth) on poverty are even more difficult to quantify empirically than the relationship between trade policy and growth. Lack of availability of household survey data with information on consumption and income from many low-income countries is a problem! Household surveys are increasingly available and the World Bank Research Department has made substantial progress on measurement of poverty across time and space. Nonetheless, the poverty measures do not span periods of trade liberalization for a large share of countries the relationship between trade policy and poverty across countries remains empirically elusive. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 5) Fall / 24

20 Effects of Trade Policies in the Data Labor Markets The effects of trade policy on labor market outcomes depend on relevant labor market frictions within a country (as we discussed before). The effect of trade policy on workers earnings and employment vary with industry affiliation and local labor market conditions.. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 5) Fall / 24

21 Effects of Trade Policies in the Data Labor Markets Trefler (2004) documents contractions in employment in Canadian industries subject to larger declines in tariffs induced by the CUFTA. Large-scale unilateral tariff liberalizations in developing countries: relative poverty declined by less in areas that had higher concentration of industries that lost protection as a result of import tariff declines. McLaren and Hakobyan (2012) find declines in location-specific wages of US workers due to tariff reductions implemented as part of NAFTA. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 5) Fall / 24

22 Effects of Trade Policies in the Data Labor Markets Autor, Dorn and Hanson (2013): The effect of rising Chinese import competition between 1990 and 2007 on US local labor markets. Rising imports cause higher unemployment, lower labor force participation, and reduced wages in local labor markets that house import-competing manufacturing industries. Import competition explains one-quarter of the aggregate decline in US manufacturing employment. Transfer benefits payments for unemployment, disability, retirement, and healthcare also rise sharply in more trade-exposed labor markets. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 5) Fall / 24

23 Effects of Trade Policies in the Data Labor Markets McCaig (2011): lowered import tariffs by a major trade partner on exports from a low-wage country. the consequences of the US Vietnam Bilateral Trade Agreement on Vietnamese households. McCaig finds that declines in US import tariffs on Vietnamese exports led to bigger poverty reductions in provinces in Vietnam that had a higher prereform concentration of industries that experienced larger tariff cuts. Alexander Tarasov (Higher School of Economics) International Trade (Lecture 5) Fall / 24

24 Trade and Military Conflicts Martin, Mayer and Thoenig (2008): Bilateral trade reduces the probability of having a conflict A rise in trade with the rest of the world increases this probability! Globalization can lead to more military conflicts! Seitz, Zakharenko and Tarasov (2015): More trade between enemies can lead to substantial welfare gains caused by lower spending on arms and a lower probability of a conflict: the gains from trade can be twice as high as the "standard" gains Alexander Tarasov (Higher School of Economics) International Trade (Lecture 5) Fall / 24