Tuesday, May 01, 2007

Thoughts on Trade: Effect on Prices, Output and the Relevant Moral Communities

As reported by Tyler Cowen of Marginal Revolution, there is currently an exchange of blog posts on International Trade among eminent economists. Following the chain of entries, i believe this latest round was started by Dan Drezner which is itself a reaction to a thought experiment by the recent Albert Hirchsmann prize awardee Dani Rodrik on Trade and Procedural Fairness. Basically, Drezner pointed out that Rodrik's thought experiment was incomplete. Rodrik responded by scoring Drezner on the claim that Free Trade Lowers Prices.

"Consider your typical Argentinian for example, who consumes a lot of wheat and beef. Since these are export products for Argentina, free trade implies a rise in the relative price of the Argentine consumption basket. (The gains from trade are still there, of course, but they derive from the usual allocative efficiency improvements, not from lower prices across the board.) And in the U.S., the Wal-Mart effect has to be qualified to take into account the fact that the relative price of the goods that the U.S. exports (including for example agricultural commodities) is higher than it would have been absent trade. Similarly, when the U.S. gets better market access abroad for its agricultural exports (a key demand under the Doha round), you can be sure that this will raise domestic prices for these goods, not lower them."

In the Philippine context, i guess it's similar to our experience in buying local products that are supposed to be for export or export quality.

To the above Tyler Cowen responds that the above discussion is not nearly as relevant as the output effect of trade:

"The real gain from trade is the additional output; it should not be surprising if the pecuniary externalities (higher and lower prices) should prove a wash rather than an additional net gain." [Emphasis mine]

More trade results in more economic growth (something which countries like South Korea and Taiwan took advantage of as i will discuss in my next entry) regardless of its effects in terms of greater inequality and poverty for some.

The discussion comes to a sort of full circle when Alex Tabarrok, also from Marginal Revolution reflects upon the question of what is the Relevant Moral Community to consider when discussing the winners and losers of trade. He makes a distinction between the individualist, nationalist and liberal internationalist viewpoints.

Along the way economist Greg Mankiw shares his thoughts on the various trade models, i.e. the Ricardian Model which emphasizes Comparative Advantage as the reason behind international trade, the Stolper-Samuelson_theorem and the Heckscher-Ohlin model. (Incidentally, my previous entries on Political Coalitions and Free Trade is based on the latter two models.) Mankiw still favors the first trade model:

"As a tentative conclusion, therefore, I am inclined to think that in a world with significant capital mobility, the Ricardian theory of trade is more useful than Heckscher-Olin."

Paul Krugman (as published in the Economist's View) blog, counters...

"For those who like their jargon, by the way, I'm basically saying that the right model for thinking about this has gone from many-good specific factors to Heckscher-Ohlin."

...and ends with a humble plea to Americans on which relevant moral community to consider:

"I don't have answers to this. The moral case for open markets is their importance to poor countries: America would do OK even in a highly protectionist world, but Bangladesh wouldn't. The domestic politics of trade, however, are now very hard, and getting harder."

Brad de Long, weighs in with his two-cents and by way of conclusion states:

"The narrow pure-economics case for freer trade is harder to make these days because it is less true than it was in the 1960s or the 1950s or the 1930s or the 1910s. But the broader political-economy case for freer trade is still strong and true."

Mark Thoma of the Economist's View blog has been keeping track of the discussions in more detail and depth so you can continue to follow it over there.

All i can say is that having the opportunity to listen in to these economists via their blogs, today is a great time to be alive.

1 comment:

mschumey07 said...

With our weak domestic foundation, our farmers are the biggest losers. Now we have become a dumping ground of surplus produce. Our soaps and shampoos are now produced outside, unlike before.

Our exporters are losing heavily too. The cost of production and the heavy taxation the government imposes has made our products expensive.

We entered globalization too soon We should have strengthened our domestic markets first. We all know who pushed for our entry to the WTO.