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International Trade Policy

Terms in this set (69)

1. Median voter theorem ==> predicts that democratic politic parties choose policy which is in favor of the majority of the voters (I.e. Median voters) >> means parties will choose similar tariff (one minimal smaller/higher than the other) >> so a policy based on the majority interests.. A policy that inflicts large losses for minority (import-competing producers) but also large benefits for majority (consumers) >> BUT! Free trade helps everybody a little, while protection helps few people a lot ==> A trade policy will lead to large benefits for minority & small losses for majority (e.g. Sugar quota USA) ==> means in case of trade policies, this model leads to wrong predictions

2. Collective action theorem from Mancur Olson ==> describes political activity as a public good that leads to a collective action problem >> conflict between selfish individual interest & cooperative group interest >> consumer as a group have incentive to advocate free trade but each individual consumer has no incentive because his benefits are not high enough compared with time & costs; further policies that impose large losses for whole society are only small losses for each individual ==> Solution is when group is small enough that for each member gains are larger if the preferred policy is followed

3. Combination of both ==> actual trade policy based of combination of both theorems >> politicians win elections partly because they advocate popular policies in favor of median voters interests & because they advocate interests of fund sponsor groups who don't have collective action problem & exchange for money (to fund the campaigns) ==> this way, politicians will often deviate from the popular policy of the median & opt for the interests of their sponsors
Mexico's economic history is characterized by a shift from a closed and inward economic orientation To an open and outward set of policies which began from the mid-1980s.
Between the end of WW11 and 1980s, MEX followed inward-oriented import substitution industrialization (ISI) policies which targeting the development of manufacturing sectors that can compete against imported goods. With the ISI policies MEX supported the development of more sophisticated industrial goods by subsidies, tax breaks, low-interest loans & high protectionist trade barriers. This means ISI was using the 'infant industry' argument for its action. But, why protecting this industry if there are such a strong protectionist walls? MEX major weakness of that time was the poor macroeconomic management which included:
- governments misallocation of resources & overestimated technical ability to identify market failures & their solutions
- the overvaluation of exchange rates which raised foreign prices of domestic goods >> indirectly & unintentionally it made exports relatively less profitable
- the focus on urban areas which lead to income inequalities, rent-seeking & corruption
Overall, through the protection the industrial sectors never became competitive under ISI & MEX was never accomplishing its main goal - economic growth. Furthermore, it found itself deeply in debt & with limited capacity to export.

1982 the debt crisis of MEX began which was the result not just from the countries ISI policies but mostly caused by heavy borrowing from from foreign banks, weak tax systems, and rising interest rates that made debt service more expensive (whole Latin America >> "Lost decade"). MEX was heavily borrowing because it wanted to support its oil production. Unfortunately, the oil price decreased significantly and US interest rate grow rapidely. The weak export performance because of ISI policies & the low oil prices worsened the ability to pay off the foreign debt.

Summarized, MEX suffered a long period of crisis suffered by international trends & a series of domestic policy mistakes.

Solution for debt crisis required multiple policy changes, such as firm privatization, control of federal budget, reduced restrictions on trade & foreign investments, and open markets for more competition. With the new president (1988), the 'Brady Plan' for intern. debt relief was introduced (1989), which promised modest amount of debt relief in return for domestic policy reforms. Additionally, new president proposed the free trade agreement with the US ==> NAFTA
1900-1960: Latin America was one of the fastest-growing regions of the world

1930/50-1980: inward-oriented Import substitution industrialization
> before: LA was depending on agricultural export sector, which were mostly developed & controlled by foreign capital > brought wealth to relatively small number of people => WWI & Great Depression disrupted export flow
> goal to achieve economic growth; government's role was to encourage & protect development of domestic rising industries that country don't need to rely on imports
> protection through high trade barriers & support through tax breaks, subsidies & low interest loan rates => government borrowed heavily from foreign banks to support these infant industries
> ISI series of stages > gradual leveling of production from simple consumer goods to complex industrial products
> Criticism for ISI the same as by MEX
> Many economists are convinced that ISI policies only partly created the economic crisis of the '80s.. Mostly caused by misguided macroeconomic policies which are blamed on populist political movements made by the governmental leaders >> movements using expansionary fiscal & monetary policies to reach specific goals without regard of inflation risks, budget deficits, and foreign exchange constraints

From 1982: Debt crisis/"Lost decade" began
>> main causes: a collapse of oil prices; this undermined ability to earn revenues it needed to service its debt (especially MEX); an increase in intern. interest rates (especially US) made it even more difficult because debt rose
> Solution: increase of capital flow to finance debts & attract new higher investments >> important policy proposal was the 'Baker Plan' (1985), which is renewed lending program by commercial banks (introduced through James Baker) >> BUT! Most banks involved, wanted to lower their exposure to the region, not increase it
>> Restoring capital was not enough, because of that introduction of 'Brady Plan' (1989) >> there was a need for deep reform in the economies of Latin America >> Idea by Nicolas Brady: countries required to reform their economies to obtain debt relief >> this plan didn't end the crisis but was significant step
> after that more open and market-oriented policies

1980s-1990s: the "neoliberal model" and the "Washington Consensus" of 1989 >> policy prescriptions for reform of the government finances & the management of the economy >> these reforms resulted in a return of growth to most countries; however, many problems still persisted: not stable economies, falling prices, poverty & high inequality in income ==> means 'Next generation of reforms' needed

1990s-2000s: Second reforms, which took into account the region's institutions & addressed problems of social & economic inequality (politically very difficult); thats why, they created opportunities for excluded groups >> greater emphasis on primary education & health care (parents which sent their kids to school were monetary granted, also for regular medical check-ups)

Today: recent economic crisis put many reforms 'on hold', but the Latin American countries developed to very open countries aimed at export orientation
1. Unbalanced trade
> competition created by the rapid growth of China's exports has generated pressures for protectionism in a number of countries
> China uses the process of "sterilization" to keep the Chinese currency (renminbi) from rising in value (keep it low) >> Central bank counteracts the money inflows so that they don't affect the exchange rate or domestic prices >> normally, the large export surplus & inflows of FDI create high demand for renminbi (drive value of currency up), but the central bank intervenes to supply the additional money demand & takes large portions of the newly created money off the market by selling bonds ==> "sterilize" the inflows of dollars > kind of currency manipulation

2. Environmental pressure
> China has 16 of the 20 most polluted cities in the world >> large coal deposits >> will become a major producer of carbon dioxide
> future economic success is likely to depend significantly on its ability to respond to the negative effect of environmental destruction created by growth

3. State capitalism
> market forces are used and relied on, but when a market outcome is thought to be harmful or less beneficial to the national interests, the state intervenes (e.g. Highly subsidizing certain industries)
> this has creates significant trade tensions with the US and the EU, where this method is viewed as unfair trade practice

4. Political reform &. Protest
> in China the communist party controls all political processes >> main goals: maintain stability
> however, with the rise in income & prosperity and the growth in independent, non-governmental sources of wealth and political influences, they have to take into account the impact of their decisions on these other, newer bases of power
> moreover, Chinese population has rising expectations
> in this respect, freer markets & access to information make it more challenging for the communist party to maintain social control

BRICs success (especially China's) will add pressures to limit their participation in the world markets >> bilateral agreements with voluntary export restraints (export quotas). Large populations in the BRICs countries still live in poverty >> losers & winners >> rising social protest & dissatisfaction in China >> China's growing inequality is seen as potential threat to the current system