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International trade and investment summary 7
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International trade and investment summary Krugman, P.R., Obstfeld, M. and Melitz, M.J. (2018), International Trade. Theory and Policy, 11th edition Week 7
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CH 12 KrugmanEconomists studying industrial countries identified two kinds of market failure that seem to
be present and relevant to the trade policies of advanced countries:
(1) the inability of firms in high-technology industries to capture the benefits of that part of
their contribution to knowledge that spills over to other firms.
(2) the presence of monopoly profits in highly concentrated oligopolistic industries.
Excess returns = firms will make profits above what equally risky investments elsewhere in
the economy can earn. There will thus be an international competition over who gets these
profits.
While economic theory suggests that the minimum wage reduces the number of low-skill
jobs available, some reasonable economists argue that such effects are small and are
outweighed by the effect of the minimum wage in raising the income of the workers who
remain employed.
Politicians in advanced countries would set standards at levels that developing countries
could not meet, in effect pricing their goods out of world markets.
The biggest single beneficiary of globalization has arguably been China, whose export-led
economy has experienced incredible growth since 1980. Meanwhile, the single biggest
environmental issue is surely climate change: There is broad scientific consensus that
emissions of carbon dioxide and other greenhouse gases are leading to a rise in the Earth’s
average temperature.
Pollution haven= Thanks to international trade, an economic activity subject to strong
environmental controls in some countries can take place in other countries with less strict
regulation.
CH 17 Appleyard & Field
Free-trade area (FTA) = all members of the group remove tariffs on each other's
products, while at the same time each member retains its independence in
establishing trading policies with non- members. → members of an FTA can
maintain individual tariffs and other trade barriers on the "outside world." When
each member country sets its own external tariff, nonmember countries may find
it profitable to export a product to the member country with the lowest level of
outside protection and then through it to other member countries whose
protection levels against world are higher.
Without rules of origin by members regarding the source country of a product, there is
nothing preclude nonmember-countries from using this transshipment strategy to escape
some of the trade restrictions of more highly protected member countries.
Customs union = all tariffs are removed between members and the group adopts a common
external commercial policy toward nonmembers. Group acts as one body in the negotiation
of all trade agreements' with non members. The existence of the common external tariff
takes away the possibility of transshipment by nonmembers. The customs union is thus a
step closer toward economic integration than the FTA. Though, member nations give up
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