Chapter 5: State-Centered Approach to Trade Politics §

(F) Day of the week: Wednesday Class: IS302 Created Time: December 2, 2020 1:48 PM Database: Class Notes Database Date: December 2, 2020 1:48 PM Days Till Date: Passed Last Edited Time: June 26, 2021 8:44 PM Type: Presentation Notes, Reading Notes

1. Introduction §

Bombardier V.S. Boeing: dispute between Canada and U.S. aircraft producers

Canada selling to US for 1/4 production price

⇒ 300% tariff to Bombardier

The State-centered Approach: national policymakers intervene in the economy in pursuit of objectives that are determined from domestic interest groups’ narrow self-interested concerns.

• One state’s use of it’s tariffs to benefit it’s domestic industries instead
• the conflict is between two export oriented firms battling over global market share

Difference from Society-centered Approach:

2. States and Industrial Policy §

Society-centered Approach ≠ States-centered Approach

Impact of Protectionism on social welfare

• Society-Centered: Reduce social welfare
• States-Centered: Raise Social welfare

Government’s relations with Interest Groups

• Society-Centered: national policy reflects the balance of power among competing interest groups
• States-Centered: government is unconstrained by interest groups’ demands

2.1. The Infant-Industry Case for Protection §

Government Intervention: The long-run welfare gain will be better than the short-run.

Industries are inefficient in the beginning but after maturity, the industry can export and the tariff can be removed.

Why?

$\bullet$ Economic of Scale: the more of the same product you produce creates $\{\begin{array}{l}\text{lower price}\\ \text{better quality}\end{array}$

You cannot create lots of the product if it’s inferiors than your competition

• When infant industry reach economic of scale ⇒ welfare gain
• Economies of Experience: skilled labor in a new industry can only be acquired by producing the products in the industry. Long run gain is more
  • Moving Down the Learning Curve: Over time skills and experience will lower costs

Protectionism on infant industry is needed in the beginning but can be removed after it’s competitive.

3. States Strength: The Political Foundation of Industrial Policy §

3.1. Industrial Policy §

The policy which government adopt to develop domestic infant industries

• Tax Policy
• Subsidies
• Protectionism
• Government Procurement: have government use domestic products over imported

to enhance international competition from a non-competitive industry

3.2. States Strength §

The Degree of market independence of a country from another’s influence

Strong

1. Centralized Authority
2. High level of Coordination
3. Limited influences from interest groups

Weak

1. Decentralized Authority
2. Low level of cooperation
3. High level of influence from interest groups

✊ It’s faster for stronger states to make un-rivaled decisions either whether/when to protect or liberalize certain industries

Japan used Industrial policy “The Administrative Guidance”

• Shift resources from one industry to another
• Give incentive & subsidized

United States

• Have divided government

  (Republican vs Democrats)

• Interest groups have bigger influence

4. Industrial Policy in High Technology Industries §

High technology is important for developed countries

4.1. Strategic-Trade Policy §

1. Economic Theories justified the use of industrial policy in high-tech industries

   The First Mover Advantage: States which join the market industry first will have the advantage and win

   • Later states will have to use industrial policy to develop it’s infant industry or lose
   • First Mover has Economic of Scale and Economic of Experience

Oligopolistic Market: only have one monopoly without a close rival or competition

The market can only support one monopoly company at a time

• If one company rise, another must fall (Zero-Sum)

4.2. Impact of Industrial Policy in High-Tech Industries §

1. Government intervention: could help to establish high-tech industries in international market by subsidies & incentives
2. Government Policies:

5. Strategic Rivalry in Semiconductors and Commercial Aircraft §

5.1. Strategic Rivalry in Semiconductors §

US had dominated this industry

• Funded for 80% of all R&D in US
• Provided a critical market

Japanese joined later, therefore protected

• Protectionism, stopped US imports
• require Japanese government to use domestic products, instead of imported

5.2. Strategic Rivalry in Commercial Aircraft §

US’s Boeing and Douglas was dominant

Europeans’ Airbus protected ⇒ grew