Unit 2: Why Trade?

Part 8:  Industrial Policy-Driven Trade

Trade sometimes results from national industrial policies (laws and regulations) that produce different effects on the cost of making products in different nations. For example, if the US has strict environmental standards, then industries with toxic byproducts will find it expensive to comply and will look for nations with lesser standards in which to manufacture their products. On the other hand, a nation may offer free land or tax incentives to attract an industry that will provide training to its workers so that they can acquire the skills necessary for future economic growth. In either example, the specific industrial policy of one nation relative to another will influence which industries locate where and who will trade what with whom.

Industrial policy-driven trade is often targeted by its opponents as being unfair trade, not free trade. And as such, there are no net gains because policies, not relative productivity advantages, are driving it. Clearly, such trade cannot be what Smith and Ricardo had in mind when they talked of specialization resulting in mutually beneficial gains. Or could it? This is a very difficult question to answer. Why? Because even though American jobs are lost in these industries because of such policies, American consumers will now pay lower prices for these products (possibly by more than the dollar cost of the jobs lost). Plus, some American consumers might take the money they now have to spend and use it to buy a computer made in the US (which will create American jobs!).

As for the other nation, they may not have the luxury to care about the environment in the way a wealthy nation does. (They’re probably a lot more concerned with earning enough to buy food to get through this coming winter.) Plus, the skills learned today will translate into higher living standards tomorrow (and maybe then they will care about the environment). Actually, such an argument can even be used to explain the development of America over the last 250 years or so.

WEBLINK: To learn more about industrial policy driven-trade, a webcast of a talk given by Jagdish Bhagwati of Columbia University can be viewed by visiting the link below, CATO Institute Book Forum, Thursday, October 10, 2002:
Free Trade Today.....and Tomorrow

Two new books from Jagdish Bhagwati, one of the world’s leading trade economists, illuminate the trade debate today and point toward freer trade in the future. In Free Trade Today, Bhagwati defends free trade against the “American virus” of so-called fair trade and the related threat of sanctions against poor countries that fail to meet Western labor and environmental standards. He then offers a road map to a more open global economy. And in a new edited volume, Going Alone: The Case for Relaxed Reciprocity in Freeing Trade, with comments by Robert Litan, Brookings Institution, Bhagwati and other contributors make the case, from history and theory, that unilateral free trade at home can encourage freer trade abroad.