State-Centered Approach to Trade Politics

International Political EconomyProf. Tyson Roberts

Lecture goals

• State vs. society based model• Infant industry argument• Strategic trade argument• Strong vs. weak states

Assumptions of society- vs. state-centered approach

Society-centered State-centeredGovernment intervention in trade…

always reduces state welfare

sometimes promotes state welfare

Trade policy reflects…

balance of power among societal interests

goals of national decision makers

Determinants of trade patterns

• Standard economic theory can explain why the US sells cars to Colombia and Colombia sells coffee to US …– Factor endowments => comparative advantage

• But cannot explain why Japan, US, and Germany sells cars to one another

Infant industry protection

• If barriers to entry are low, new/small firms move to profit opportunities

• If barriers to entry are high, established firms have advantage over new firms:

• Economies of scale• Economies of experience

Car industry

• Car exporters tend to have large populations – Large labor base, large domestic market =>

economies of scale• Car exporters tend to be developed– Large capital base => economies of scale

• Car companies tend to have specialties in some areas and weaknesses in others– Economies of experience: Japan (efficiency), US

(muscle), Germany (driving experience), Italy (style)

An argument for protection

• Industrial policy (tariffs, subsidies, etc.) enable infant industries to attain scale & experience until able to compete globally– 19th Century US & Germany– 20th Century Japan & Korea

• Private capital markets may fail to finance viable investments– Private firms cannot always capture experience– Inefficient capital markets (undeveloped or crisis)

An argument against protection

• Private capital markets in theory should finance viable investments

• Weak states may protect industries who do not warrant protection and never withdraw protection

State Strength

• Definition: – the degree to which national policymakers, a

category that includes elected and appointed officials, are insulated from domestic interest-group

• Examples:– Based on trade policy re: sugar, steel, tires, etc.,

would you say the US is strong or weak?

Weak State governments in the US: Special interests can more easily capture

politicians when hidden from the public eye

Having a “strong state” isn’t always a good thing

Globalization’s uneven impact on development in 19th Century (Rodrik)

• Continental Europe and Settler Colonies able to adopt industrialization techniques developed in Europe

• Non-settler colonies & periphery countries slower to industrialize exported commodities and import manufactures – delayed/reversed industrialization

Specialization in sugar enriched countries such as Haiti in the short run but undermined long-run growth

Strategic trade theory

• Some sectors are oligopolistic– Economies of scale & experience => limited

number of firms can survive in market – Firms that achieve necessary scale & experience

can earn excess returns– First mover advantage

Number of firms in US Car Industry over time

Market share of PC platforms by Operating System over time

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Impact of industrial policy in high-tech industriesPayoffs with no subsidy

European Firm

Produce Not Produce

American Firm Produce -5, -5 100, 0

Not Produce 0, 100 0, 0

What is expected outcome? (i.e., Nash Equilibrium)

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Impact of industrial policy in high-tech industriesPayoffs with no subsidy

European Firm

Produce Not Produce

American Firm Produce -5, -5 100, 0

Not Produce 0, 100 0, 0

What is expected outcome? (i.e., Nash Equilibrium)

Answer: Only one country will have a firm that produces in high tech.(1) American firm Produce, European Not, or (2) American Firm Not, European Firm Produce

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Impact of industrial policy in high-tech industriesPayoffs with European subsidy

European Firm

Produce Not Produce

American Firm Produce -5, 5 100, 0

Not Produce 0, 110 0, 0

What is expected outcome with subsidy? (i.e., Nash Equilibrium)

Was subsidy beneficial for Europe?

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Impact of industrial policy in high-tech industriesPayoffs with European subsidy

European Firm

Produce Not Produce

American Firm Produce -5, 5 100, 0

Not Produce 0, 110 0, 0

What is expected outcome with subsidy? (i.e., Nash Equilibrium)American Firm Not, European Firm Produce

Was subsidy beneficial for Europe? Yes – now they are sure to control the high tech industry

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Examples of Government Intervention

• Commercial Aircraft (US vs. Europe)• Semiconductors (US vs. Japan)• Automobiles (e.g., South Korea, US)• HDTV (Japan vs. Europe vs. US)• Solar power (Germany vs. US)

Some DARPA contribution areas

Military• Stealth fighter• M-16 Assault rifle• Ballistic missile defense • Sensors for anti-submarine

warfare

Civilian• Internet• Software innovations such

as parallel processing• Digital imaging & x-ray• Semiconductor research• (HDTV – aborted)

Competing Policy re: HDTV/DTV• 1960s-1980s:

– Public-private cooperation in Europe, Japan => US behind• Late 1980s/Early 1990s

– Proposal that DARPA fund HDTV R&D in US => private companies delay own spending on R&D; proposal withdrawn

– US HDTV policy delayed by conflicting interests – consumers, broadcasters, electronics industry

• 1997-2001:– Korea: Government decides standard, begins broadcasting in

DTV• 2005

– US: Deadline set to cease analog broadcasts & consumer subsidies => DTV adoption

Korean Japanese

First mover advantage does NOT guarantee successEconomies of scale & experience in one sector can be

exploited to enter new sectors Competition enables better technologies to win market share

Conclusions

• In general, protectionist policies (esp. tariffs but subsidies as well) have a net negative effect on national welfare

• For some industries, under some conditions, government intervention may produce net benefits– Economies of experience (and scale)– Private market failures and inefficiencies

(including moments of crisis)

Conclusions

• Government intervention is particularly dangerous captured by special interests in a weak state or narrow political elite in a strong state

• In general, economists argue that social welfare is best served by promoting efficient institutions (political, financial, etc.) and other public goods (such as infrastructure and pure R&D)

• More on government’s role in the economy in the next two lectures