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0321316762_IM_11 - Chapter 11 Controversies in Trade Policy...

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Chapter 11 Controversies in Trade Policy T Chapter Organization Sophisticated Arguments for Activist Trade Policy Technology and Externalities Imperfect Competition and Strategic Trade Policy Case Study: When the Chips Were Up Globalization and Low-Wage Labor The Anti-Globalization Movement Trade and Wages Revisited Labor Standards and Trade Negotiations Environmental and Cultural Issues The WTO and National Independence Case Study: The Shipbreakers of Alang Summary T Chapter Overview While the text has shown why, in general, free trade is a good policy, this chapter considers two controversies in trade policy that challenge free trade. The first regards strategic trade policy. Proponents of such activist government trade intervention argue that certain industries are desirable and may be under funded by markets or dominated by imperfect competition and warrant some government intervention. The second controversy regards the recent debate over the effects of globalization on workers, the environment, and sovereignty. While the anti-globalization arguments often lack sound structure, their visceral nature demonstrates that the spread of trade is extremely troubling to some groups. As seen in the previous chapters, activist trade policy may be justified if there are market failures. One important type of market failure involves externalities present in high-technology industries due to their knowledge creation. Existence of externalities associated with research and development and high technology make the private return to investing in these activities less than their social return. This means that the private sector will tend to invest less in high technology sectors than is socially optimal. While their may be some case for intervention, the difficulties in targeting the correct industry and understanding the quantitative size of the externality make effective intervention complicated. To address this market failure of insufficient knowledge creation, the first best policy may be to directly support research and development in all industries. Still, while it is a judgment call, the technology spillover case for industrial policy probably has better footing in solid economics than any other argument.
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52 Krugman/Obstfeld • International Economics: Theory and Policy, Seventh Edition Another set of market failures arises when imperfect competition exists. Strategic trade policy by a government can work to deter investment and production by foreign firms and raise the profits of domestic firms. An example is provided in the text which illustrates the case where the increase in profits following the imposition of a subsidy can actually exceed the cost of a subsidy to an imperfectly competitive industry. While this is a valid theoretical argument for strategic policy, it is nonetheless open to criticism in choosing the industries which should be subsidized and the levels of subsidies to these industries. These criticisms are associated with the practical aspects of insufficient information and the
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