State-Centered Approach to
Trade Politics
International Political Economy
Prof. Tyson Roberts
Lecture goals
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State vs. society based model
Infant industry argument
Strategic trade argument
Strong vs. weak states
Assumptions of society- vs. statecentered approach
Society-centered
Government
intervention in
trade…
Trade policy
reflects…
State-centered
always reduces state sometimes
welfare
promotes state
welfare
balance of power
goals of national
among societal
decision makers
interests
Determinants of trade patterns
• Standard economic theory can explain why
the US sells cars to Colombia and Colombia
sells coffee to US …
– Factor endowments => comparative advantage
• But cannot explain why Japan, US, and
Germany sells cars to one another
Infant industry protection
• If barriers to entry are low, new/small firms
move to profit opportunities
• If barriers to entry are high, established firms
have advantage over new firms:
• Economies of scale
• Economies of experience
Car industry
• Car exporters tend to have large populations
– Large labor base, large domestic market => economies
of scale
• Car exporters tend to be developed
– Large capital base => economies of scale
• Car companies tend to have specialties in some
areas and weaknesses in others
– Economies of experience: Japan (efficiency), US
(muscle), Germany (driving experience), Italy (style)
An argument for protection
• Industrial policy (tariffs, subsidies, etc.) enable
infant industries to attain scale & experience
until able to compete globally
– 19th Century US & Germany
– 20th Century Japan & Korea
• Private capital markets may fail to finance
viable investments
– Private firms cannot always capture experience
– Inefficient capital markets (undeveloped or crisis)
An argument against protection
• Private capital markets in theory should
finance viable investments
• Weak states may protect industries who do
not warrant protection and never withdraw
protection
State Strength
• Definition:
– the degree to which national policymakers, a
category that includes elected and appointed
officials, are insulated from domestic interestgroup
• Examples:
– Based on trade policy re: sugar, steel, tires, etc.,
would you say the US is strong or weak?
Weak State governments in the US:
Special interests can more easily capture
politicians when hidden from the public eye
Having a “strong state” isn’t always a
good thing
Globalization’s uneven impact on
development in 19th Century (Rodrik)
• Continental Europe and Settler Colonies able
to adopt industrialization techniques
developed in Europe
• Non-settler colonies & periphery countries
slower to industrialize exported commodities
and import manufactures – delayed/reversed
industrialization
Specialization in sugar enriched countries such as Haiti
in the short run but undermined long-run growth
Strategic trade theory
• Some sectors are oligopolistic
– Economies of scale & experience => limited
number of firms can survive in market
– Firms that achieve necessary scale & experience
can earn excess returns
– First mover advantage
Number of firms in US Car Industry
over time
Market share of PC platforms by
Operating System over time
Impact of industrial policy in high-tech
industries
Payoffs with no subsidy
European Firm
American Firm
Produce
Not Produce
Produce
-5, -5
100, 0
Not Produce
0, 100
0, 0
What is expected outcome? (i.e., Nash Equilibrium)
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Impact of industrial policy in high-tech
industries
Payoffs with no subsidy
European Firm
American Firm
Produce
Not Produce
Produce
-5, -5
100, 0
Not Produce
0, 100
0, 0
What is expected outcome? (i.e., Nash Equilibrium)
Answer:
Only one country will have a firm that produces in high tech.
(1) American firm Produce, European Not, or
(2) American Firm Not, European Firm Produce
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Impact of industrial policy in high-tech
industries
Payoffs with European subsidy
European Firm
American Firm
Produce
Not Produce
Produce
Not Produce
-5, 5
100, 0
0, 110
0, 0
What is expected outcome with subsidy? (i.e., Nash Equilibrium)
Was subsidy beneficial for Europe?
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Impact of industrial policy in high-tech
industries
Payoffs with European subsidy
European Firm
American Firm
Produce
Not Produce
Produce
Not Produce
-5, 5
100, 0
0, 110
0, 0
What is expected outcome with subsidy? (i.e., Nash Equilibrium)
American Firm Not, European Firm Produce
Was subsidy beneficial for Europe?
Yes – now they are sure to control the high tech industry
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Examples of Government Intervention
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Commercial Aircraft (US vs. Europe)
Semiconductors (US vs. Japan)
Automobiles (e.g., South Korea, US)
HDTV (Japan vs. Europe vs. US)
Solar power (Germany vs. US)
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Some DARPA contribution areas
Military
• Stealth fighter
• M-16 Assault rifle
• Ballistic missile defense
• Sensors for anti-submarine
warfare
Civilian
• Internet
• Software innovations such
as parallel processing
• Digital imaging & x-ray
• Semiconductor research
• (HDTV – aborted)
Competing Policy re: HDTV/DTV
• 1960s-1980s:
– Public-private cooperation in Europe, Japan => US behind
• Late 1980s/Early 1990s
– Proposal that DARPA fund HDTV R&D in US => private
companies delay own spending on R&D; proposal
withdrawn
– US HDTV policy delayed by conflicting interests –
consumers, broadcasters, electronics industry
• 1997-2001:
– Korea: Government decides standard, begins broadcasting
in DTV
• 2005
– US: Deadline set to cease analog broadcasts & consumer
subsidies => DTV adoption
Korean
Japanese
First mover advantage does NOT guarantee success
Economies of scale & experience in one sector can be
exploited to enter new sectors
Competition enables better technologies to win market share
‘Made in USA’ Smartphone Operating Systems =
64% Share from 5% Five Years Ago
Smartphone Operating System Market Share, 2005 vs. 2011E
Market Share of Smartphone OS
100%
80%
Other OS
iOS
60%
Android
Windows Mobile
40%
BlackBerry OS
Linux
Nokia Symbian
20%
0%
2005
2011E
Source: Morgan Stanley Research, Gartner.
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Conclusions
• In general, protectionist policies (esp. tariffs
but subsidies as well) have a net negative
effect on national welfare
• For some industries, under some conditions,
government intervention may produce net
benefits
– Economies of experience (and scale)
– Private market failures and inefficiencies
(including moments of crisis)
Conclusions
• Government intervention is particularly
dangerous captured by special interests in a weak
state or narrow political elite in a strong state
• In general, economists argue that social welfare is
best served by promoting efficient institutions
(political, financial, etc.) and other public goods
(such as infrastructure and pure R&D)
• More on government’s role in the economy in the
next two lectures