Chapter 11

25/11/2023
Chapter 11:
INTERNATIONAL Controversies in
TRADE Trade policy
Lecturer: Tran Huong Linh
WHERE ARE WE?

Here we are!
PART 1 PART 2 PART 3 PART 4
Introduction & International International International

overview trade theories trade policies trade integration
Tran Huong Linh, FIBE - UEB
● Introduction ● The Ricardian Model ● Tariff ● VN Integration in WTO

● Overview of ● The Heckscher-Ohlin ● Non-tariff barriers ● VN Integration in ASEAN
International Trade Model ● Political economy of ● VN Integration into FTAs
● The Standard Trade Model Trade policy
● Modern Trade Theories ● Trade policy in
developing countries
● Controversies
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WHAT WE EXPLORE TODAY
1. Arguments for “activist”

trade policies
• Externality or appropriability problem
• Strategic trade policy with imperfect competition
2. Arguments concerning

trade and people
• Trade and labor
• Trade and culture
3. Arguments concerning
trade and environment
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1.
Arguments 1.1 Externality or appropriability
problem
for “activist” 1.2 Strategic trade policy with
trade policies imperfect competition
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Arguments for an
Activist Trade Policy
● An activist trade policy: Government policies actively
support export industries through subsidies.
● Arguments for activist trade policies: Market failure.
Two kinds of market failure seem to be present and relevant
to the trade policies of the developed countries

○ Externalities or an appropriability problem
○ Imperfect competition that results in revenues that

exceed all (opportunity) costs: “excess” profits.
⇒ High-tech industries meet these two conditions
Technology and Externalities
● Firms that invest in new technology create knowledge that other

firms can use without paying: an appropriability problem.
○ An appropriability problem is an example of an externality

(ngoại ứng)
⇒ The high-technology firms are unable to capture the benefits of their

contribution to knowledge that spills over to other firms.
● A good case for subsidizing the high-technology industries

⇒ Governments may want to use activist trade policies to actively
encourage investment in technology when externalities in new
technologies create a high marginal social benefit.
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When considering whether a government should subsidize

high technology industries, consider:
The ability of The

Externalities

governments economic
may occur
to subsidize importance
across
the right of
countries
activity externalities
● Much activity by high technology firms has

nothing to do with generating knowledge
(etc. subsidizing equipment purchases or
The ability of
governments non-technical workers)
● Knowledge and innovation are created in
to subsidize
industries that are not usually classified as

the right
activity high tech.
● The US: Instead of subsidizing specific
industries, subsidize R&D through the tax
code.
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The ● It is difficult to determine the quantitative

economic importance that externalities have on the
importance economy.
of
● Therefore, it is difficult to say how much to
externalities
subsidize activities that create externalities.

Externalities ● No individual country has an incentive to
may occur subsidize industries if all countries could take
across advantage of the externalities generated in a
countries country.
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Imperfect Competition
and Strategic Trade Policy
● Imperfectly competitive industries are typically dominated by a

few firms that generate monopoly profits or excess profits (or
excess returns).
● In an imperfectly competitive industry, government subsidies

can shift excess profits from a foreign firm → a domestic
firm.
Let’s use a simple example to illustrate this point.
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Imperfect Competition Figure 1. Two
and Strategic Trade Policy Airlines

Competition
Example (called the Brander-Spencer analysis):
Two firms (Boeing and Airbus) compete in the international

■
market but are located in two different countries (U.S. and EU).
■ Both firms are interested in manufacturing airplanes, but each

firm’s profits depends on the actions of the other.
■ Each firm decides to produce or not depending on profit levels.
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Example (called the Brander-Spencer analysis):
Suppose Boeing enters the market first and it decides to

produce before Airbus enters.
Produce Don’t Produce
Produce -$5B -$5B $100B $0B
Don’t
$0B $100B $0B $0B
Produce
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What should
and Strategic Trade Policy the EU do to
help Airbus?
■ If Boeing produces first, then Airbus will not find it
profitable to produce (and vice versa)
⇒ The predicted outcome depends on which firm
invests or produces first.

Produce -$5B -$5B $100B $0B
Don’t
$0B $100B $0B $0B
Produce
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What should
help Airbus?
■ A subsidy of $25B by the EU (if Airbus produces)
can alter the outcome by making it profitable for
Airbus to produce regardless of Boeing’s action.
Produce -$5B $20B $100B $0B
Don’t
$0B $125B $0B $0B
Produce
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25/11/2023
What should
help Airbus?
■ If Boeing expects that the EU will subsidize Airbus
→ Boeing will be deterred from entering the
industry.
■ Thus, the subsidy of 25 will generate profits of 125 for
Airbus.

■ The subsidy raises profits more than the amount of the
subsidy itself because of its deterrent effect on foreign
competition.
Government policy to give a domestic firm a strategic

advantage in production is called a strategic trade policy.
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Criticisms of this analysis include:
Practical use Strategic

of strategic trade policy
Foreign
trade policy could be

requires more retaliation
manipulated
information could also
by politically
about firms result.
powerful
than is likely groups.
available.
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25/11/2023
● The predictions differ if the numbers of entries are

Practical slightly different.
use of
strategic ● If governments or economists are not exactly right
trade policy when predicting the profits of firms, a subsidy policy
requires may turn out to be a costly misjudgment.

more For example,
information
about firms What if Boeing has a better and unique technology
than is → Even if Airbus produces, Boeing still finds it
likely profitable to produce.
available.
→ Airbus, however, cannot produce profitably if
Boeing enters.
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Example:
When Boeing has an advantage, a subsidy of $25B from the EU
does not deter Boeing from producing and it costs more than the
profit that it generates for Airbus ($5B only!)
Produce $5B $5B $125B $0B
Don’t
$0B $125B $0B $0B
Produce
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25/11/2023
From the example, we can see:

● The subsidy no longer raises profits by more
than the subsidy because it failed to deter
foreign competition.

● Thus, it is not at all evident that a subsidy
would be worthwhile ⇒ a terrible idea.
● It could waste resources that could be used
elsewhere in the economy.
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● Strategic trade policies: Beggar-thy-neighbor

policies that increase our welfare at the other
Foreign countries’ expense.
retaliation
● If the EU subsidies Airbus, the U.S. could
could also
subsidise Boeing,
result.
→ COULD deter neither firm from producing, start a

trade war and waste taxpayer funds.
Strategic trade policy could be manipulated

by politically powerful groups. Like any trade policy
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2.
Arguments
concerning 2.1 Trade and Labor
trade and people 2.2 Trade and Culture
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Trade and Labor

22
22
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Trade and Labor

Benefits of Trade:
Job Creation and poverty alleviation

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Trade and Labor

However,
Some have opposed free trade because trade hurts workers
of both the developing and developed countries
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Trade and Labor
In the developing countries

■ There is an increase manufactured exports from low-and-
middle income countries.
■ Compared to rich country standards, workers who produce
these goods are paid lower wages and may work under
poorer conditions

⇒ Free trade or globalization does not help workers
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Trade and Labor
In the developing countries

One example of this situation is the maquiladora sector: Mexican
firms that produce for export to the U.S.
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Trade and Labor
In the developed countries

■ Jobs would be destroyed in labour-intensive
industries and capital employed
■ Opponents of the North American Free Trade
Agreement (NAFTA) have argued that it is now easier

for employers to replace high wage workers in the US
with low wage workers in Mexico.
■ Example: US and China
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Trade and Labor

Example: While global integration is usually “win-win” between
countries, it can still cause losses for tens of millions of workers in
the US economy.
China export to US US import from China
Export and Import apparel and electronics financial service and aircraft
What happened? This exchange increases capital’s price and decreases wages for the
broad working and middle-class, leading to rising inequality and wage
pressure for many Americans.
Impact on wages in 1973 - 2006: global integration lowered the wages of U.S. workers by 4%
the US College-educated workers saw 3% gains from trade
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Trade and Labor

Counter-argument: we cannot conclude that trade hurts
workers.
■ Ricardian model predicts that while wages in Mexico
should remain lower than those in the US because of low
productivity in Mexico, they will rise relative to their pre-

trade level.
■ H-O model predicts that unskilled workers in the U.S. will
lose from NAFTA, but it also predicts that unskilled workers
in Mexico will gain.
Without free trade, the “low wages” can be even lower.

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Trade and Culture
Benefits of Trade
Help Absorb world
countries cultural
reach their achievements and
goals of
cultural quintessence
development quickly and
faster.
selectively
Introduce culture Through comparing and

and heritage of one learning, improve their
country to a wider
culture, ensure a
range of
international successful cultural
partners integration with the world
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Trade and Culture

32
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Trade and Culture
However,
■ Some activists believe that trade destroys
culture in other countries.
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25/11/2023
Trade and Culture
Counter-argument:
■ This belief neglects the principle that
we should allow people to define their
culture through the choices that they
make, not through standards set by

others.
■ And any economic change, not just
trade, leads to changes in everyday life.
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3.
Arguments
concerning
trade and
environment
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25/11/2023
Trade and Environment

Many critics have opposed free trade because they
argue that globalization is bad for the environment.

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37
Example: The heavy logging of SEA forests carried out

to produce forest products for sale to Japanese and
Western markets.
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25/11/2023
Compared to rich country standards, environmental

standards in low and middle income countries are lax
and weak ⇒ Worsen the environment

Environmental Performance Index 2020 39
39

Counter-arguments:
■ Bad environment in developing countries are also due to
pollution haven (giả thuyết về nơi ẩn giấu ô nhiễm)
■ Because rich countries usually have strict environmental

regulations and poor countries do not
→ environmentally hazardous activities may be moved to

poor countries.
A pollution haven is a place where an economic activity that is

subject to strict environmental controls in some countries is
moved to (sold to) other countries with less strict regulation.
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Trade may also have environmentally beneficial effects

Lead to international pressures
to increase environmental Facilitate the spread of
standards (NAFTA), or to environmentally friendly
beneficial technological and technology
managerial innovations. 41
41
Trade can improve the quality of

education
⇒ awareness of environmental
protection
Trade liberalization will

remove the subsidies
⇒ positive effect on
environmental protection
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READING MATERIALS
Must-read
CHAPTER 12 - Krugman, P. R., Obstfeld, M., Meltiz, M. J.
(2012). International Economics: theory and policy (9th
ed.). Boston, MA: Addison-Wesley.
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Preparation
Read: CHAPTER 13 (Course book)
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25/11/2023

Lecturer: Tran Huong Linh

WHERE ARE WE?

PART 1 PART 2 PART 3 PART 4

Introduction & International International International

● Introduction ● The Ricardian Model ● Tariff ● VN Integration in WTO

WHAT WE EXPLORE TODAY

1. Arguments for “activist”

Tran Huong Linh, FIBE - UEB

Tran Huong Linh, FIBE - UEB

○ Imperfect competition that results in revenues that

⇒ High-tech industries meet these two conditions

Technology and Externalities

● Firms that invest in new technology create knowledge that other

○ An appropriability problem is an example of an externality

⇒ The high-technology firms are unable to capture the benefits of their

contribution to knowledge that spills over to other firms.

● A good case for subsidizing the high-technology industries

Technology and Externalities

When considering whether a government should subsidize

The ability of The

Tran Huong Linh, FIBE - UEB

Technology and Externalities

● Much activity by high technology firms has

industries that are not usually classified as

Technology and Externalities

The ● It is difficult to determine the quantitative

Tran Huong Linh, FIBE - UEB

● Imperfectly competitive industries are typically dominated by a

● In an imperfectly competitive industry, government subsidies

Let’s use a simple example to illustrate this point.

Imperfect Competition Figure 1. Two

and Strategic Trade Policy Airlines

Example (called the Brander-Spencer analysis):

Two firms (Boeing and Airbus) compete in the international

Tran Huong Linh, FIBE - UEB

■ Both firms are interested in manufacturing airplanes, but each

■ Each firm decides to produce or not depending on profit levels.

Suppose Boeing enters the market first and it decides to

Produce Don’t Produce

Produce -$5B -$5B $100B $0B

Tran Huong Linh, FIBE - UEB

Produce -$5B -$5B $100B $0B

Produce Don’t Produce

Produce -$5B $20B $100B $0B

Tran Huong Linh, FIBE - UEB

Government policy to give a domestic firm a strategic

Practical use Strategic

trade policy could be

● The predictions differ if the numbers of entries are

Tran Huong Linh, FIBE - UEB

Produce Don’t Produce

Produce $5B $5B $125B $0B

From the example, we can see:

Tran Huong Linh, FIBE - UEB

● Strategic trade policies: Beggar-thy-neighbor

→ COULD deter neither firm from producing, start a

Strategic trade policy could be manipulated

trade and people 2.2 Trade and Culture

Trade and Labor

Trade and Labor

Tran Huong Linh, FIBE - UEB

Trade and Labor