You are on page 1of 8

INTERNATIONAL ECONOMICS:

Trade Policy, Part 2

ECO 122 (International Economics) Lecture Ms. Marissa Maricosa A. Paderon Assistant Professor, Economics Department Ateneo de Manila University

Issues in Trade & Development


Free trade vs protectionism  Outward- and inward-oriented industrialization


Free trade versus Protectionism


Free Trade - began by Adam Smith as an ideal trade policy Rationale for free trade: j allows both parties to optimize use of its resource endowments j efficient resource allocation on an international level j increased product specialization j increased product choice for consumers j accelerate economic growth j transfer of technology
3

Free trade versus Protectionism


Static arguments for protection j The existence of distortions in the domestic economy in both the consumer markets and factor (raw material, labor, capital) markets. j Domestic desires for increased employment j The need for national security. j Governments revenue requirements. Strategic or dynamic reasons for protection j countering strategic behavior j infant industries j spillover effects
4

The Narrow and Broad Arguments for Free Trade by Paul Krugman
The Narrow Economic Argument for Free Trade (theory of domestic distortions) by Jagdish Bhagwati (1971)
Example: distortion (wage differential between unionized & nonunionized industries)
1st best policy: wage subsidy  2nd best policy: production subsidy  3rd best policy: trade policy


The Narrow and Broad Arguments for Free Trade by Paul Krugman
Broad (political-economy) Argument for Free Trade Paul Krugman (1993). Free trade is a pretty good, if not, perfect policy. While an effort to deviate from it in a sophisticated way will probably end up doing more harm than good.

Outward- and inward-oriented industrialization Outward orientation means providing similar incentives to production for domestic & export markets.  Inward orientation means biased production for domestic rather than export markets.


Thank you!

You might also like