Labor Unions, Globalization, and Mercantilism

Transcription

1 Labor Unions, Globalization, and Mercantilism Wolf-Heimo Grieben (University of Konstanz, Germany) Fuat Şener (Union College, Schenectady, NY, USA) 44 th annual CEA Conference, Quebec City, Canada 28 th May /10 1. Mercantilism Thomas Mun (1664): The ordinary means therefore to increase our wealth and treasure is by foreign trade, wherein we must ever observe this rule: to sell more to strangers yearly than we consume of theirs in value. Mun, Thomas (1664): England s Treasure by Foreign Trade, chapter II. Krugman s (1991) interpretation of the GATT/WTO reciprocity principle: To make sense of international trade negotiations, one needs to remember three simple rules about the objectives of the negotiating countries: (1) Exports are good. (2) Imports are bad. (3) Other things equal, an equal increase in imports and exports is good. Krugman, Paul R. (1991): The Move Towards Free Trade Zones, in Policy Implications of Trade and Currency Zones. Symposium sponsored by the Federal Reserve Bank of Kansas City. Jackson Hole, WY, /10

2 Bagwell and Staiger (1999): [ ] A unilateral liberalization effort is unappealing [ ] as a consequence of the associated deterioration in the terms of trade [ ] while [ ] a negotiated mutual reduction in tariffs that conforms to the principle of reciprocity results in a higher trade volume without a terms-of-trade loss for either government. Bagwell, Kyle and Staiger, Robert W. (1999): An Economic Theory of GATT. American Economic Review, Vol. 89(1), Ethier (2007): For over four decades, successive GATT rounds have produced trade agreements that do not prevent terms-of-trade manipulation while theorists have produced theories of trade agreements in which such prevention is the sole object. Ethier, Wilfred J. (2007): The Theory of Trade Policy and Trade Agreements: A Critique. European Journal of Political Economy, Vol. 23(3), /10 2. Aim analyze the growth, employment and welfare effects of unilateral and bilateral trade liberalization in a North-South model analyze the role of Northern labor market rigidities in this context explain mercantilist behavior as result of the welfare effects of unilateral trade liberalization with Northern labor market rigidities 4/10

3 3. Model 2 countries: North and South continuum of industries ω [0, 1] North-South product cycle trade with positive import tariffs τ N, τ S R&D is driving endogenous long-run growth stochastic innovations improve quality of consumption goods successful innovator drives competitors from the market through limit pricing quality leader is monopolist on the world market expected monopoly profits determine innovation incentives of Northern quality follower firms scale effect is eliminated by endogenous rent protection activities of incumbent monopolists (lawyers, lobbyists) 5/10 development of industry shares: imitation rate μ innovation rate ι North: share n N South: share 1 n N innovation rate ι in the steady state: nn = ι ι + μ wage bargaining and minimum wage (or unemployment benefits) in the North unemployment bargained wage: w= α ( monopoly profit s) + ( 1 α) w min, α ( 0, 1) 6/10

4 4. Effects of unilateral trade liberalization τ N domestic supply price of Northern monopolist revenues in the North bargained wage rate w in the North production and R&D costs decline by less than revenues for constant w min monopoly profits R&D incentives innovation rate ι ( dynamic welfare loss) demand for R&D workers share of Northern industries n N demand for production workers unemployment static welfare loss via c N ( ) ( static welfare gain) 7/10 τ S revenues of the Northern monopolist in the South bargained wage rate w in the North production and R&D costs increase by less than revenues for constant w min monopoly profits R&D incentives innovation rate ι ( dynamic welfare gain) demand for R&D workers share of Northern industries n N demand for production workers unemployment static welfare gain via c N ( static welfare loss) ( ) 8/10

5 5. Results and Conclusions Result 1: Both countries prefer a maximum possible Northern import tariff τ N and a minimum possible Southern import tariff τ S! contradicts Krugman (1997): The economist s case for free trade is essentially a unilateral case: a country serves its own interest by pursuing free trade regardless of what other countries may do. Krugman, Paul R. (1997): What Should Trade Negotiators Negotiate About?. Journal of Economic Literature, Vol. 35(1), Result 2: Both Northern and Southern welfare gains from raising τ N and reducing τ S are increasing in w min and α. mercantilist behavior of the North is more pronounced for more rigid domestic labor market A more flexible Northern labor market raises growth... reduces unemployment... reduces incentives for mercantilist behavior! 9/10 Result 3 (numerical simulation): A bilateral trade liberalization of 5% increases the long-run growth rate by 2,5 % (from 1,59% to 1,63%),... increases the Northern bargained wage by 0,02%,... reduces the Northern unemployment rate by 26,7% (from 7,5% to 5,5%)... increases Northern steady-state welfare by 11,2%,... and increases Southern steady-state welfare by 2,2%. Mercantilism (due to labor market rigidities) threatens positive welfare effects from bilateral (multilateral) trade liberalization. 10/10