Chapter-5 A State-Centered Approach to Trade Polit

Chapter-5: A State-Centered Approach to Trade Politics §

1. What is the state-centered approach?

   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

2. What is a state-centered approach base on?

   • A state-centered approach is based on two central assumption, both of which contrast sharply with the assumptions embodied in the society-centered approach.

3. What are those two assumptions?

   • The first assumption concerns the impact of protectionism on aggregate social welfare which the state-centered approach argues that under certain circumstances trade protection can raise social welfare. (In short it is about the impact of protectionism on aggregate social welfare)
   • The second assumption concerns where governments can operate independently of interest group pressures which the state-centered approach argues that under specific circumstances governments are relatively unconstrained by interest-group demands. (In short it is about policy maker’s goals are dependent of competing interest group’s demand)

4. What’s the difference between society-centered approach and society-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

5. What is the standard model?

   • The standard model is the model that rules out such welfare-increasing government intervention by assumption. In the standard model, society does best by removing all forms of trade protection and by specializing in its comparatively advantaged industry.

6. What are two reasons why an industry may not be efficient in the short run, but be efficient in the long run?

   • Economies of scale arise when the cost of production varies with the size of output, that is, when the unit cost of producing falls as the number of units produced rises.
   • Economies of experience arise when efficient production requires specific skills that can only be acquired through production in the industry.

7. What are the criticisms of the infant-industry case for protection?

   • The critique of government intervention fails to hold in two circumstances. First, a firm may be reluctant to borrow from private markets when the problem it faces arise from economies of experience. Second, a firm that has paid for their training will be unable to achieve economies of experience and cannot repay the loan.
   • The critique of subsides also fails to hold if the private capital market is inefficient and therefore wont loan to a firm entering an infant industry.

8. What is the policy that governments has adopted to promote the development of infant industries?

   • The policy that governments has adopted to promote the development of infant industries is industrial policy.

9. What is industrial policy? What does the use of the policy based on?

   • Industrial policy is the use of a broad assortment of instruments, including tax policy, subsidies, traditional protectionism, and government procurement practices, in order to channel resources away from some industries and direct them toward those industries that the state wishes to promote. The use of the policy is based on long term economic development objectives defined in terms of boosting economic growth, improving productivity, and enhancing international competitiveness.

10. What is state strength?

    • State strength is the degree to which national policymakers, a category that includes elected and appointed officials, are insulated from domestic interest-group pressures.

11. What is strategic-trade theory?

    • Strategic-trade theory is the theory providing the theoretical justification for industrial policy in high-technology industries. It expands on the basic insight of the infant-industry case for protection. Like the infant-industry case, strategic-trade theory asserts that government intervention can help domestic firms achieve economies of scale and experience in order to become efficient and competitive in global markets.

Key Terms

• Economic of Experience: arise when efficient production requires specific skills that can only be acquired through production in the industry. It requires season manager, skilled workers, and reliable suppliers of equipment and material.
• Economic of Scale: arise when the cost of the production varies with the size of output, that is, when the units of cost production varies with the size of outputs, that is , when the unit cost of producing falls as the number of units produced rise.
• Industrial Policy: the use of board assortment of instruments, including tax policy, subsidies (including the provision of state credit and finance), traditional protectionism, and government procurement practices, in order to channel resource away from some industries and direct them toward those industries that the state wishes to promote.
• Infant-Industry Case for Protection: welfare-increasing government intervention by assumption. Society does best by removing all form of trade protection and by specializing in its comparatively advantaged industry.
• Oligopoly: is an industry dominated by a small number of firms.
• Rents:
• State Strength: is the degree to which national policymakers, a category that includes elected and appointed officials, are insulated from domestic interest group pressures.
• Strategic-Trade Theory: the basic insight of the infant-industry case for protection.
• For infant industry case, strategic trade theory assert that government intervention can help domestic firms achieve economic scale and experience in order to become efficient and competitive in global markets.
• For classical infant industry case, strategic trade theory asserts that many high-tech industries are characterized by oligopolistic competition.