Free Trade
There are 2 main arguments against free trade.
CRITICISMS
I. The Infant Industry Argument
Trade may force a country to specialize in "bad" and non-technological industries. Then, since long run growth rate is tech-dependent, trade may lower long run growth. Note, this also assumes that technology is industry specific. So knowledge does not cross sectors.
Moreover, there is value in a nation learning to operate its own industries of choice. They gain more experience, become more efficient, and in the long run could become very good at the industry.
A common example: under free trade, perhaps Mexico would not be a large automobile manufacturer. But if Mexico adopted a variety of protectionist policies, then the industry could blossom. Then, this once sheltered industry would be able to withstand the rugged storm of the free market and compete in free trade.
II. Overspecialization Leads to Dependency and Bad Things
Basically, if a country specializes on a single natural resource good, then however world demand shifts affects greatly how the country does.
RESPONSES
I. Against the Infant Industry Argument
First, we assume that the government will be picking the "right" industry which will be sustainable in the future. Empirically this seems not to be the case. So at best, this is a questionable course of action - a gamble on governmental competence. Especially when governments make decisions through voting processes and series of negotiations, I doubt that they will necessarily select the right industry.
Second, import substitution serves to prevent competition. The impact is that prices rise a great deal, which is especially bad considering we are talking about developing countries that are already loaded with poor people. Empirically, these high costs tend to make the rest of the economy sluggish.
II. Against the Overspecialization Argument
Well, this is actually a solid argument. The response is essentially - don't be an idiot. Don't specialize essentially in only 1 natural resource. That is asking for it.
CRITICISMS
I. The Infant Industry Argument
Trade may force a country to specialize in "bad" and non-technological industries. Then, since long run growth rate is tech-dependent, trade may lower long run growth. Note, this also assumes that technology is industry specific. So knowledge does not cross sectors.
Moreover, there is value in a nation learning to operate its own industries of choice. They gain more experience, become more efficient, and in the long run could become very good at the industry.
A common example: under free trade, perhaps Mexico would not be a large automobile manufacturer. But if Mexico adopted a variety of protectionist policies, then the industry could blossom. Then, this once sheltered industry would be able to withstand the rugged storm of the free market and compete in free trade.
II. Overspecialization Leads to Dependency and Bad Things
Basically, if a country specializes on a single natural resource good, then however world demand shifts affects greatly how the country does.
RESPONSES
I. Against the Infant Industry Argument
First, we assume that the government will be picking the "right" industry which will be sustainable in the future. Empirically this seems not to be the case. So at best, this is a questionable course of action - a gamble on governmental competence. Especially when governments make decisions through voting processes and series of negotiations, I doubt that they will necessarily select the right industry.
Second, import substitution serves to prevent competition. The impact is that prices rise a great deal, which is especially bad considering we are talking about developing countries that are already loaded with poor people. Empirically, these high costs tend to make the rest of the economy sluggish.
II. Against the Overspecialization Argument
Well, this is actually a solid argument. The response is essentially - don't be an idiot. Don't specialize essentially in only 1 natural resource. That is asking for it.
posted by arun at 11:37 PM
4 Comments:
The "infant industry" argument seems to rely on the "learning period" assumption: the infant industries need to be protected for a certain period before they can be profitable. But there's no reason why this can't be done through the private sector with capital markets. Unless, of course, there are imperfections in the capital markets, but then it'd seem that the government ought to be spending their time improving the capital markets rather than protecting some infant industry (whose CEO's wife's second cousin is probably the brother of the Trade Minister...)
Have you seen the new Stiglitz book? I found it in the bookstore and flipped through it. It's on the Doha Round.
I think your points about MV and its strength in the humanities is actually right-on. People overlook it all the time, and I think that's unfortunate. Yeah, the math and science meme is overplayed and exaggerated. As for HES, as I said, I'm fairly ambivalent. HES doesn't have any requirements at all to take the courses, just pay the courses costs and you'll in. And it's true if they can handle HES class, they aren't exactly clueless. I think ES are good and Harvard should continue to have such a school. I guess the issue is just pawning off and playing it off as getting a degree from Harvard. And that's where I go, it doesn't affect me, and if criticism is to be leveled at them, it needs to be leveled at all people who do morally dubious things. It's just the purist meritocratic outlook that would be raising such an objection. Unfortunately, the world is not run this way; most people get jobs due to their connections, ranging from legit connections to cronyism.
Brief and to the point, I like :) (esp resp to point 2)
(well.. you did neglect the environmental stuff, the loss of national sovereignty to big MNCs stuff, the commercialization and Westernization of culture leading to an Amy Chua: "World on Fire"-esque cultural war and demonization, the international trade arena is not a fair field, etc... come on man, you and I both debated that topic come Senior year :D)
haha it was short. weird huh.
yes ben, we did debate that stuff.
it was that resolution that taught me that h.s. debators and college debate coaches basically don't know economics.
*shrug*
and for environmental stuff - talk to me seperately of advances bhagwati and co have made in calculating "environment protecting residuals". essentially - it becomes cheaper for companies (most) in the long run to build into their capital - stronger-than-current environemntally friendly standards because the cost of depreciation due to heightened standards in each period is too high to cope with. it's actually quite a cool argument/ empirical find.
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