International Trade Theory

National Interest

Protecting national interest is one of the primary reasons for conditioning trade Basic metric of national interest is Aggregate Economic Welfare

A reflection of the degree to which individual preferences are satisfied Goal is to maximize the satisfaction of all individual preferences Well functioning markets (those with perfect competition) achieve this goal

National Interest

Difficulties in market-based approach

Objections to the goal of making everyone better off according to each individual's own assessment The approach implementation should start with the current distribution of individual endowments Well-functioning markets differ from actual markets

Limiting Open Trade in Telecom Equipment

Terms of trade

Pure open trade not the best economic policy Production or consumption of a good in large scale will decrease its value Restricting exports and imposing import tariffs can counter the disadvantages of open trade

Positive External Effects

Open trade will not be optimal if prices do not accurately capture important information about the benefits and costs of a product

Protection of Infant Industries

As an infant industry grows, it will produce wealth for its host nation

Market Failures and Uncompensated Externalities

Geographic failures Failure to finance innovation

Positive External Effects contd...

Market Structure

Economies of Scope economies that arise from doing several, connected activities Eg: Product range of Motorola

Devices Barcode scanning, M2M Wireless modules, Two-way Radios, Micro kiosks, RFID, Wireless PCs Networks cellular, broadband, WLAN Systems APCO, Dispatch, disaster control systems Accessories Software & Services

Economies of Scope

Trade restrictions can reduce the number of competitors who might benefit by copying innovations

Reduced competition increases prospect for the innovating firm to benefit

Note:
Only information based economies of scope can directly create positive external effects. Trade restrictions in this case are the best corrective actions.

Economies of Scale

Scale economies will be particularly large where production is dependent on large investment in capital equipment Eg 1. Semiconductors most of the cost is incurred in R&D and high-end fixed equipment

Firms that are able to capture economies of scale will enjoy lower average costs than competitors and profits that significantly exceed normal returns

Economies of Scale contd...

Trade policies that regulate foreign competitors and facilitate a greater share of the profits for domestic firms are beneficial for national welfare. Case 1: Expansion with sensitivity to competition Two firms A and B in open competition- Firm A announces plans of expansion (to decrease its cost per unit). If B also expands, then both firms will earn lower profits than when only one of them expands.

Economies of Scale contd...

Case 2: With Trade restriction Firm A's government restricts imports Firm A captures the existing market share of Firm B, can produce more at lower cost Firm A can also compete more effectively in B's home market.

If the cost of restricting trade is less than the gain from the restriction, then national economic welfare will be increased. Should governments initiate the game, or should they do it in response?

Economies of Scale contd...

Concerns in protecting economies of scale

Protected firms get slack Protection is beneficial only when the scale is very significantly large at the global market Governments should be able to determine

how far economies of scale extend how much protection is worth what form of trade policy intervention is appropriate.

Further Reading

Indian Trade Policy http://business.gov.in/trade/foreign_trade.php U.S.A Trade Policy http://www.state.gov/e/eeb/tpp/ European Union Trade Policy http://ec.europa.eu/trade/ http://mythbhagat.blogspot.com/2009/03/freetrade-policies-and-its-impact-on.html