13. Trade, tariffs & growth

13. Trade, tariffs & growth

1. comparative advantage (Ricardo)

   • countries trade to profit from their CA
     • countries differ in productivity of their labour when producing different goods and a country that is relatively efficient at producing something should export it.
     • Absolute advantage not important
       • it is not whether a country is better at producing a particular good, but if it is relatively better in comparison with other goods.
       • opportunity cost
         • producing a good diverts labour from producing other goods which are lost (OC). In absence of trade it is necessary to produce all goods. 
         • trade -> production of best goods -> X to buy the others
           • specialization

2. Heckscher-Ohlin Theorem

   • CA based on abundance of factors of production (not labour productivity)
     • capital abundand countries will X industrial products, while land-abundand countries will X agricultural produce.
     • Factor-price equalisation Th
       • free trade will make factors and commodity prices converge
     • Rybczynski Th
       • when amount of a factor of production ^, the production of goods produced intensively using that factor will also ^.
       • mass migration made industrial production ^
     • Stolper-Samuelson Th
       • relative prices of factors are driven by the relative prices of output goods.
       • conflicts within nation
         • opening trade -> price of X goods ^, IM v. Suppose CA in capital goods, this means that capitalists will win and farmers will lose.
       • conflicts btw nations
         • countries protecting their agriculture are hurting countries that have a comparative advantage in it.
         • protectionism as zero-sum game
           • each country's gain/loss is balanced by other countries' gains/losses.

3. XIX c. INTER-SECTORAL TRADE

   • goods from different sectors traded among countries.
   • XX c. INTRA-SECTORAL TRADE
     • countries exported similar goods to those they imported (1/3 of trade in 50s with other countries, then 1/2 at end of XX c.)
     • economies of scale
       • at firm level it results in imperfect competition -> many firms producing differentiated goods, each having a monopoly in a specific good. But as trade expands new firms enter the competition offering both cheaper goods and more variety.
       • trade mainly on industrial products -> income elasticity of demand for industrial goods > agricultural
         • as income ^, shift towards industrial goods.
         • trade btw industrialised/less developed still INTER-SECTORAL
         • countries can X &IM in the INTRA-SECTORAL but specialise in certain areas (CA)
   • not only CA but also trade policy important
     • US & CN protected their manufacturing and became increasingly self-sufficient (if economies of scale occur at the level of the industry it can provide a reason for protection)
     • infant industry protection

4. trade -> specialisation, efficient allocation of resources (Y^)

   • technology embedded in K equipment -> trade enables tech transfer
     • Traditional growth theory: SOLOW MODEL (tech. exog.)
       • New growth th: tech endogenous & non-rival -> spreading: trade fosters growth
         • tech change liked to R&D spending
           • R&S linked to expected return on investment, high competition can imply less spending since any advantage will be eroded by competitors due to its exclusiveness. 
           • trade also negative impact on growth -> patents (incentive to invest)
             • impact of protection depends on what is protected
               • if protection towards agriculture, capital goods become cheaper thus stimulating investment. If protection towards manufacture, it can speed up of relocation of labour from lower-productivity agriculture to higher-productivity manufacturing, resulting in higher growth rates. Opposite directions.
               • agriculture VS manufacturing
                 • infant-industry protection
                   • protectionism justified by economies of scale and learning by doing.
                   • dynamic gains: advantages of removing protection
                     • incorrect protection -> government support dependence/less competitiveness