INT’L TRADE LAW FREE TRADE PRO & CON Prof David K. Linnan USC LAW # 665 Unit Two

TRADE THEORY TRADE THEORY & POLICY (ECON) Idea of three ultimate drivers behind variety of theories & models: 1.Comparative advantage (factor endowments) 2.Economies of scale (inter & intra industry plus monopolistic competition, specialization) 3.Market structures CONSIDER LAW FIRM/LEGAL SERVICES MARKET AS DEMONSTRATION

APPLIED THEORY LINKS TO DEVELOPMENT POLICY 1.Link to ideas about econ growth & industrialization as development strategy too (open economies as encouraging growth, but why?) 2.Concept of changing economic advice over time (1950s-60s infant industries, 1970s-1997 export oriented development (MNC production platform oriented), date export oriented plus concepts like Thailand (general arguments about countries) 3.Put aside financial sector & nat’l accounts issues plus balance of payments for moment

MERCHANTILISM MERCHANTILISM OLD & NEW National Accounts Current & Capital Accounts Currencies

COMP ADVANTAGE Comparative Advantage (Ricardo) Goods Heckscher-Olin-Samuelson Model Factor Endowments & Specialization Exporting-Importing Factors of Production as Part of Trade

NEW TRADE THEORY Recent Monopolistic Competition Models (Krugman) Returns to Scale Trade Policy Inter-firm versus Intra-firm Trade & Supply Chain Organization

BENIES Efficiency Modeling Static Versus Dynamic Concept of Consumer Welfare & Problem Benefits are Broadly Dispersed but Costs Concentrated

COSTS OF ECON INTERMEDIATE GOODS PROBLEM AND EXPORTS Concept that intermediate goods, if higher cost, are incorporated into final goods raising their price Problem in that case with protectionism to preserve markets is that if tariffs are levied to preserve local market for intermediate good, destroys export market for higher cost final good in export competition with product incorporating lower cost intermediate product ARGUMENTS ABOUT TOTAL FACTOR PRODUCTIVITY & WHERE GROWTH COMES FROM PLUS WASHINGTON CONSENSUS

JURISPRUDENTIAL Jurisprudential argument for free trade is essentially that any subsidy such as a tariff leads to a redistribution of wealth (consumers to producers) which violates liberal precepts

EFFICIENCY EFFICIENCY IDEALS BEHIND FREE TRADE But issues whether assumptions such as displaced labor can be reintegrated in another job (47 year-old textile worker with 9 th grade ed, what to do when mill closes?) Parallel problem of community wide effects if heavy reliance on closing employer (tax base, high local unemployment, etc.) Problem of externalities not priced in market (e.g., lower environmental reg costs in Mexico combined with wind from South may put pollution into US)

MODELING? CHALLENGES TO COMPARATIVE ADVANTAGE Most are based on claims that market efficiency claims misleading Labor adjustment (unwilling to move, difficult to retrain, etc.) Externalities mean mispricing and so misallocation (environment, etc.)

EXPERIENCE CHALLENGES TO COMPARATIVE ADVANTAGE CONT’D Infant industry arguments-- short term protection for longer term viability (but some very old “infants”) Transitional or adjustment protection (idea behind “temporary” adjustment such as currency mispricing, but temporary protection can become quite permanent)

NEWER POLICY CHALLENGES TO COMPARATIVE ADVANTAGE CONT’D Fair trade and reciprocity arguments Strategic trade policy as other side of new trade theory monopolistic competition ideas

NON-EFFICIENCY I CHALLENGES TO COMPARATIVE ADVANTAGE CONT’D Sustainable development and community control ideas (ideals where efficiency isn’t everything)

NON-EFICIENCY II CHALLENGES TO COMPARATIVE ADVANTAGE CONT’D Economic Nationalism (whom you buy from matters) Sovereignty & National Security Concerns (preserving control & capacity)

NEXT WEEK Chapters 5 & 6 in Bahala Concentrate on MFN as core of GATT/WTO obligations Look at tariff bindings otherwise