Tung_and_Wan_RIE - Comparative Advantages and Possible...

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1 Comparative Advantages and Possible Coordination Failure: An Explanatory Note An-Chi Tung and Henry Wan, Jr. * Abstract Most trade models today are specializations of, or variations on, the general equilibrium model of Arrow-Debreu-McKenzie, where no one’s action is conditioned on others’ previous action. Although that model does not deal with free-riding, trade literature has achieved much for a world under stable environment. Evidence from Asian high-tech sectors and findings of dynamic games argue for an augmented analysis of the world trade, involving new goods, new suppliers and rapidly changing technology. Here comparative advantage depends on industrial policy to control free-riding, encourage pioneers and launch industries. Distinctly different industrial policies shape international specialization among the nations. * Tung: Institute of Economics, Academia Sinica, Taipei, Taiwan ROC. Tel: 886-2-2782-2791 ext. 210; Fax: 886-2-2653-3593; E-mail: actung@econ.sinica.edu.tw . Wan: Department of Economics, Cornell University, Ithaca, NY 14853-7601, USA. Tel: 607-255-6211; Fax: 607-255-2818; E-mail: hyw1@cornell.edu .
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2 1. Motivation Trade has become increasingly important to the world economy. Ironically, it also becomes increasingly more challenging to explain, by means of the existing trade theory. This is possibly due to the nature of both the theory and the increased trade flows. Much of the trade today involves new goods, 1 fabricated by new processes, at new production sites, and governed by comparative advantages shaped by institutions and policy. However, neither institutions nor policy was what the present trade theory designed to analyze. To explain more of the major events in world trade – perhaps in terms of policies and institutions – is as much an opportunity as a challenge to augment the traditional theory. This task, in all likelihood, should be tackled by a combination of both empirical and analytic approaches: identifying issues from the former, and searching for applicable tools from the latter. This combined approach has been a specialty of Professor Shimomura. In his fruitful but unfortunately brief career, he frequently deployed theoretic tools for novel applied problems, studying, for example, how consumers’ habit becomes influenced by trade, with theoretic analysis (Kemp et al., 2001) The following section elaborates this view. To ascertain whether policy has impact on comparative advantage, the next section offers three empirical cases drawn from the electronics sector, an industry noted for constant and rapid innovation, in the Newly Industrialized Economies, where sustained rapid growth coincides with the export of goods not produced there before (Lucas, 1988). To decide what form of policy nurtures which type of industry, an in-depth scrutiny is directed to the policy package that shaped Taiwan’s semiconductor sector – what it excludes no less than what it includes. Deducing theoretic precepts from documented evidence, one then contrasts Taiwan’s target for structural
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Tung_and_Wan_RIE - Comparative Advantages and Possible...

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