Does Regionalism Affect Trade Liberalization Towards Non-Members?
Introduction: Trade can affect growth
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Transcript of Introduction: Trade can affect growth
Introduction: Trade can affect growth
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
Introduction: Role of new technology
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?
Introduction: Trade affects growth
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.
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.
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
Problems faced by primary product exporters
2nd Problem: 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 rentier states rentier state 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.
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
Problems faced by primary product exporters
3rd Problem: deteriorating terms of trade◦ What is worse than price volatility? Price decline
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
Problems faced by primary product exporters
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
Technology and Trade
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
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
Technology and Trade: The Product Cycle
1. Product development and sale in the innovative country’s market• “New Product Stage”• Locating production close to buyers • No international trade takes place
Technology and Trade: The Product Cycle
2. 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
Technology and Trade: The Product Cycle
3. 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
Technology and Trade: The Product Cycle
4. 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
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