Introduction: Trade can affect growth

1. Introduction: Trade can affect growth

6. Introduction: Role of new technology • Example: The Green Revolution • The process of technological development of agricultural techniques that began in the northern Mexican state of Sonora in 1944 • It has since spread throughout the world. • Goal: to increase the efficiency of agricultural processes so that the productivity of the crops increased, and to help developing countries face their growing populations' needs. • Technologies fell into two major categories • One side effect of the Green Revolution • Some net food importing countries became net food exporting countries

7. Introduction: Trade affects growth • Economic Growth ⇒ Trade • But also Trade ⇒ Economic growth • We have seen again and again how there are gains from trade • But not everyone believes it • Many countries still fear that a reduction in trade barriers will be harmful • 1950-1960s: many developing countries persued inward oriented policies of import substitution • Fear also stemmed from beliefs that the prices of primary products were too low and they could not compete with developed country levels of protection • Fair claim • Question: what are the effects of economic growth on trade?

8. Problems faced by primary product exporters • A better distinction may be to talk about problems faced by “primary product” exporters • Countries that export primarily ‘primary products’ (agriculture and natural resources) as opposed to manufactured goods.

9. Problems faced by primary product exporters • 1st Problem: Volatility of export earnings • export earnings on these goods may be more vulnerable to changes in international prices.

11. Problems faced by primary product exporters • Price volatility can necessarily mean that export earnings are going to be a problem. • Why? • Effect on standard of living. • Countries are more likely to reduce their investment. • This has impacts on long run growth • Impacts on their import purchasing power. • Volatility in key prices is especially critical

12. Problems faced by primary product exporters 2ndProblem: Curse of natural resources: • The resource curse is a theory that an abundance of easily obtainable natural resources may in fact encourage internal political corruption, underinvestment in domestic human capital, and a decline in the competitiveness of other economic sectors, thereby actually hurting prospects for growth and democratization. • Countries who suffer from this condition may be classified as rentierstates • rentierstate is a state that derives all or a substantial portion of their national revenues from the rent of indigenous resources to external clients. • revenues from natural resources (commonly state-owned) are already substantial.

13. Problems faced by primary product exporters • What to do? • International commodity stabilization programs • Commodity futures markets • Problem: futures markets don’t exist for all commodities • Product diversification

14. Problems faced by primary product exporters • 3rd Problem: deteriorating terms of trade • What is worse than price volatility? Price decline

15. Problems faced by primary product exporters • Policies pursued by developing countries • Many primary product exporters pursed policies of import substitution • Free-trade zones • Export lead growth

16. Technology and Trade • HO says differences in factor endowments (but same technology) • But what about country differences in production technology? • Technical differences can skew production toward products in which the country has a relatively better technology. • Countries experience technological change – but at different times and rates and sectors. • Where does technology come from? Mostly through organized efforts called R&D. • This technology can be spread internationally through trade: Diffusion

17. Technology and Trade: The Product Cycle • Start: Imitation Lag Hypothesis (M.V. Posner,1960) • Relax assumption of HO of same technology • Two countries: US, China • Suppose US invents a new product • Imitation lag: product will not be produced immediately by firms in China • 1st: Needs to acquire the knowledge & know-how to produce the product • 2nd: Needs to purchase new inputs, install equipment and bring the product to market • Demand lag: product may not be accepted immediately in China • Consumers will take time to substitute from old version to new version of product • Net lag: Imitation-demand lag=time US has to export to China

18. Technology and Trade: The Product Cycle • The Product Cycle builds on Imitation Lag Hypothesis (Raymond Vernon, 1966) • Relax more assumptions of HO • Concerned with the life cycle of a typical new manufacturing product. • Hypothesis: new products pass through a series of stages in the course of their development • Comparative advantage of producers in innovating countries will change as the product moves through this cycle. • 4 product life cycles depict innovative country trade position

19. Technology and Trade: The Product Cycle • Product development and sale in the innovative country’s market • “New Product Stage” • Locating production close to buyers • No international trade takes place

20. Technology and Trade: The Product Cycle • Growth in innovative country’s exports as foreign demand is cultivated • “maturing product stage” • General standards for the product emerge • Mass production techniques are beginning to be adopted • Economies of scale start to be realized • Foreign demand is driven from other developed countries • Innovative country begins to export

21. Technology and Trade: The Product Cycle • Decline in innovating country exports as foreign production abroad begins to serve foreign markets • “standardized product stage” • Foreign demand growth warrants production in the foreign markets • Product has become more standardized • Shift from a high skill intensive product to a low skill intensive product • Production may shift to developing countries • Innovating country exports decline

22. Technology and Trade: The Product Cycle • Innovative country becomes a net importer as foreign prices fall • The pattern of trade switches, in part due to differences in labor costs • US applies their abundant high skilled labor toward innovative products and imports low the final good now produced with low skilled labor • Factor endowments and factor prices still play a role

23. Openness to trade affects growth • Closed trade ⇒ can cut itself off from technological diffusion. • Trade provides access to new and improved products. • Openness to trade can also have an impact on the incentive to innovate. • Trade can provide additional competitive pressure on the country’s firms. • Trade provides a larger market