Chapter6 trade

Chapter6 trade - de Janvry and Sadoulet Chapter 6...

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de Janvry and Sadoulet 1 Chapter 6 International Trade and Industrialization Strategies 1 September 18, 2010 We explore in this chapter the role of trade in development strategies. To do this, we need to understand why countries trade, who gains and loses from trade, what are the policy instruments that can be used to promote trade, and how they affect both efficiency and the distribution of income. We can then see how these instruments can be used to construct industrialization strategies, each of which has particularly advantages and risks. 1. Gains from international trade: Why countries trade, but not everyone gains 2 When prices differ between countries, private traders can profit from exporting and importing. While this is the most basic impetus for trade, there is a more universal argument for international specialization based on aggregate efficiency. In principle, the world as a whole could benefit if each country specialized according to its relative efficiency, subject to many assumptions familiar from the microeconomic theory of perfect competition. Just like Adam Smith’s argument for microeconomic specialization in using the market to exchange, there could be aggregate benefits to an international division of labor and trade if this arises from real efficiency differences. While there are many practical obstacles to realizing such efficiency gains, let alone distributing the benefits, it is worth examining the potential to gain from trade since we see many examples of trade-induced prosperity around the world. We consider two economic units: the Home economy ( H ) and all other countries pooled into the Rest of the World ( W ). We consider two goods: Food ( F ) and manufacturing ( M ). 1 We thank David Roland-Holst for preparing a first draft of this chapter. 2 For a more exhaustive treatment of trade theory and issues, see Krugman and Obstfeld (2009). Take home messages for chapter 6 1. Trade based on country differences in endowments, in ways of doing things, and/or in policies is a source of efficiency gains at the national level, both static and dynamic, based on specialization, creating a powerful justification for nations to seek greater participation to international trade. 2. However, the benefits from trade are unequally distributed across countries and between producers, consumers, and government, with both gainers and losers. As a consequence, any move toward trade liberalization is a conflictive political proposition, and aggregate efficiency gains may be foregone to distributional concerns. 3. The domestic prices of tradable goods are affected by both trade and exchange rate policies. Indicators of protection characterize nominal, effective, and real protection. Taxation of agricultural exportables has declined substantially over the last 25 years. 4. Late-comer countries can achieve competitiveness when there are economies of scale in production
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Chapter6 trade - de Janvry and Sadoulet Chapter 6...

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