Overview of Section II:
International Trade Policy
Section II of the text is comprised of four chapters: Chapter 8 The Instruments of Trade Policy Chapter 9 The Political Economy of Trade Policy Chapter 10 Trade Policy in Developing Countries Chapter 11 Controversies in Trade Policy
n Section II Overview
Trade policy issues figure prominently in current political debates and public policy discussions. The
first two chapters of this section of the text are concerned with the instruments of trade policy and
the arguments for free trade and managed trade. The second two chapters consider
these concepts in the context of specific sets of countries that face common problems. Throughout, the use of case studies provides the student with real world examples that clearly illustrate the theoretical arguments.
Chapter 8 discusses various instruments of trade policy including tariffs, quotas, voluntary export restraints, and local content requirements. The effects of these policies on prices and trade volumes are determined in the context of a partial equilibrium framework. The chapter reviews the analytical tools
of consumer and producer surplus, and uses these tools to consider the welfare effects of various protectionist measures. The specific incidents of trade
restrictions presented as case studies include import quotas on sugar entering United States markets, voluntary export restraints on Japanese autos, and oil import quotas.
Chapter 9 presents the set of ideas known as the political economy of trade theory. These ideas enable
you to understand why certain trade restrictions exist, despite the force of general economic arguments which suggest that they reduce aggregate welfare. Possible
motivations for trade restrictions are identified as those which increase national welfare, such as the optimum tariff, and those which foster either income
redistribution or the preservation of status quo. While sometimes politically popular, these motivations for trade restrictions ignore the possibility of retaliation and usually fail tests based upon basic welfare analysis. Trade agreements of the 1990s are discussed, including the Uruguay Round, and distinctions
are made between Free Trade Areas and Customs Unions as well as between trade creation and trade diversion.
Chapter 10 considers the possible uses of trade policies to promote the growth of developing economies. The chapter reviews the relative successes of different development strategies. It examines arguments for and the results of import-substituting industrialization. It also discusses the decline of import-substituting industrialization and the increase in trade liberalization in developing countries since the mid-1980s. The chapter concludes with a discussion of export led growth and the experience of the high performing Asian economies.
Chapter 11 considers recent controversies in trade policy. The first part of the chapter considers the
notion of strategic trade policy, which first arose in the 1990s. Strategic trade policy refers to the use of trade (and other) tools for channeling resources to sectors targeted for growth by industrial country governments. The chapter presents some commonly voiced arguments for intervention in particular sectors of the economy, and then shows how these arguments are critically flawed. The second part of the chapter introduces more sophisticated arguments for strategic trade policy. The most persuasive of these is the existence of some form of market failure. The third part of the chapter considers the impact of rising trade on workers in developing countries, and more broadly, the debate over globalization. This debate has been
argued in academia and policy circles, but also on the streets of Seattle, Genoa, and other cities hosting global economic summits. Finally, the chapter considers links between trade and the environment.