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A State-Centered Approach to the Politics of Trade

A State-Centered Approach to the Politics of Trade. READING ASSIGNMENT: Oatley – Chapter 5. Plan. Two Approaches to the State What does the state want? How does the state get what it wants? Why would the state intervene?. Two Approaches to the State .

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A State-Centered Approach to the Politics of Trade

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  1. A State-Centered Approach to the Politics of Trade READING ASSIGNMENT: Oatley – Chapter 5

  2. Plan • Two Approaches to the State • What does the state want? • How does the state get what it wants? • Why would the state intervene?

  3. Two Approaches to the State • The state as a set of institutions that are “up for grabs” • Government action can (re)distribute or have negative effects • The state as actor, with its own interests and ideas • Government action can have positive welfare effects

  4. What does the state want? • Improve overall welfare • Increase its relative power

  5. How can the state get what it wants? • Industrial Policy • Tariffs • Subsidies • Investment

  6. Why does the state intervene? • Infant industries • Oligopolistic market structures • Strategic interests

  7. Infant-industry case • Long-run welfare gains created by a new industry will be greater than the short-run losses of social welfare • “infant” industries – like children who need the “protection” of their parents until they grow strong • Comparative advantages are DYNAMIC

  8. Fixed costs & Economies of scale • Economies of scale refers to the decreased per-unit-cost as output increases. • The initial investment of capital is diffused (spread) over an increasing number of units of output •  The marginal cost of producing a good or service decreases as production increases

  9. Example • Suppose an industry requires an initial investment (fixed cost) of $1000 • With 100 customers, the Average Fixed Cost is $10 • With 200 customers, the Average Fixed Cost becomes $5 • This results in a lower average total cost

  10. No economies of scale: • If costs increase proportionately to the quantity of all input factors • Diseconomies of scale: • If costs increase by a greater amount than the quantity of all input factors • Economies of scale: • If costs decrease by a greater amount than the quantity of all input factors

  11. Economies of experience • Efficient production requires specific skills that can only be acquired through production in the industry • Experienced management • Skilled workers • Network of suppliers

  12. Why can’t markets efficiently educate / train the workforce? • Trained people may leave the firm, taking their skills elsewhere • Missing market: • “Futures market for labor” • Externalities from education?

  13. Which industries to choose? • There is always a trade-off! • Economies of scale, economies of experience? • Small, organized interest groups? • Spillover externalities / national exclusivity

  14. Strategic Trade Theory • Oligopoly, market power • Barriers to entry • First mover advantages

  15. Suppose an industry where market-demand supports only one firm (high tech – e.g., aircraft) European firm US firm What are the two EQUILIBRIA?

  16. Whoever moves first wins! • http://www.youtube.com/watch?v=HaSdarhX3Xs&feature=related • http://www.youtube.com/watch?v=K4GAQtGtd_0&feature=related

  17. Now suppose the US moved first, but Europe offers a subsidy… European firm US firm

  18. Strategic/Security Interests • (Inter)dependence as vulnerability – anarchy creates an incentive for (some) autarky • Absolute vs. relative gains

  19. How autonomous is the state? • Centralized states – “strong” – promote national policy • Decentralized states – “weak” – subject to interest group pressure Alternative: # of veto players • Low – easy to change policy • High – policy stability more likely • Miracles & failures more likely with few veto players (high variance of performance) • Moderate performance more likely with many veto players (low variance of performance)

  20. Why are policies so stable in some countries but they change so often in others?

  21. Veto players mistake in book? • Pp.85-6: “However, the extent to which protectionism rises during recessions appears strongly shaped by veto players. Protection rises sharply during recessions in countries with few veto players but rises substantially less in countries with fewer veto players.” Tariffs should be “relatively easy to change in political systems with few veto players.” So if there were even fewer veto players, should that mean the tariffs would be even easier to change and so protection during recessions would rise substantially more, instead of less?

  22. Thank youWE ARE GLOBAL GEORGETOWN!

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