Class Notes 8
Here is a summary of what we discussed in class today.
1. What are the benefits of trade?
The story of comparative advantage: A doctor, even one who is very good at typing, would be better off hiring someone else to do typing for her--even if this person is less good at typing than the doctor, they would both benefit from the trade.
- culture enrichment (destruction?)
- politics: friendly relations between countries
- security: countries that trade with each other tend to go to war less (though the causality may run the other way)
- get more things, more cheaply: Comparative Advantage
Developing countries ask rich countries for "Trade, not Aid." Why? Receiving aid can keep you dependent, while trade can lead to development.
Tweaked comparative advantage story: If a doctor hires a young intern to do the typing, they might be both better off if she lets the intern learn some doctoring along with doing the typing. Eventually, with practice, the intern will become a doctor too, and they can hire someone else to do the typing.
2. How can trade help countries develop?
From Dani Rodrik's paper: "whether trade liberalization promotes growth depends on whether the forces of comparative advantage push the economy's resources in the direction of activities that generate long-run growth (via externalities in research and development, expanding product variety, upgrading product quality, and so on) or divert them from such activities."
Rules should allow benefits and minimize downsides.
There is too much talk from people "born on third base" about how to get a home run.
Rodrik: instead of making everybody have the same rules and focusing on market access, the WTO should be an interface for different rules in different countries. Each country should address its needs in a unique way, and "kindle the animal spirits of domestic investors."
For example (3 strategies for development used in past but now against the rules):
Not all of the requirements for being a developed economy need to be put in place at once. In fact, �Most of institutional development occurs alongside economic development, not as a prerequisite to it.�
- import-substituting industrialization (protecting domestic producers with import tariffs), also called the "infant industries" argument. It's better to protect finished goods more than capital goods--these need to be allowed in to help producers produce. And the targeted infant industry should be realistically one that could grow into a mature industry.
- "outward-oriented" industrialization: raising return to private investment, through credit subsidies, tax incentives, educational policies, establishment of public enterprises, export inducements, duty-free access to inputs & capital goods, & gov�t coordination of investment plans. �governments in Korea and Taiwan freely resorted to unorthodox strategies: they protected the home markets to raise profits, implemented generous export subsidies, encouraged their firms to reverse-engineer foreign patented products, and imposed performance requirements such as export-import balance requirements and domestic content requirements on foreign investors (when foreign companies were allowed in). All of these strategies are now severely restricted under the WTO agreements.�
- two-track strategy (China, Mauritius-EPZ)
�The only systematic relationship [between trade and development] is that countries dismantle trade restrictions as they get richer. That accounts for the fact that today�s rich countries, with few exceptions, embarked on modern economic growth behind protective barriers, but now have low trade barriers.�
Rodrik's five principles:
3. What are some of the downsides to trade?
- Trade is a means to an end, not an end in itself.
- Trade rules have to allow for diversity in national institutions and standards.
- Non-democratic countries cannot count on the same trade privileges as democratic ones. (Because people may not freely be choosing exploitation.)
- Countries have the right to protect their own institutions and development priorities.
- But countries do not have the right to impose their institutional preferences on others.
We should always remember that �countries� encompass competing interests. Within a country there might be great inequality, corruption, exploitation. What the elites/government end up agreeing to or negotiating may not be in the best interests of everyone in the country or indeed the �country� as a whole.
4. Fair trade: a non-government way to minimize downsides.
An example of trade circumventing entrenched interests and international agreements: Fair Trade. Governments may be forced by agreements to treat all imports of a certain good the same, but consumers can and do demand different treatment for goods made with unknown (suspect) practices and those made with known, desired practices concerning treatment of producers and the environment.
Read about the history of Guatemala and coffee production there.
And here are some sources of information about child labor in the cocoa industry.
There are lots of videos you can watch about fair trade. See this list.
The one I meant to show in class is from Consumers International. I recommend the first 8 minutes, minutes 13-15, and from 19:50 to the end. The last bit makes this point: consumers have both rights AND responsibilities.
Fair Trade provides:
- competition (to the current system and models)
- contracts/agreements (more trustworthy)
- minimization of externalities
- stability (with minimum prices guaranteed)
- DEVELOPMENT (organizational, toward organic standards, higher quality standards, own production & processing, product differentiation, etc.) (not to mention schools, roads, medical)
In some ways the fair trade minimum price is analogous to what economists call an "efficiency wage", that is, when an employer pays above the prevailing wage to get more loyalty and effort from employees. It creates tension, especially with those who would like to work at that wage but happen not to work for that employer. But it's a perfectly acceptable business practice.
- it's costly for farmers to join.
- Not everyone can get in.
- The various labels are confusing for consumers, and they might not understand what fair trade means or where the premium price they're paying is going.
- The high minimum price may lead to overproduction.
Take-home point: For trade to benefit countries, it should support not only efficiency and consumer choice but also development.