State-Centered Approach to

Trade Politics
International Political Economy
Prof. Tyson Roberts
 Lecture goals
• State vs. society based model
• Infant industry argument
• Strategic trade argument
• Strong vs. weak states
 Assumptions of society- vs. state-
centered approach
Society-centered State-centered
Government always reduces state sometimes
intervention in welfare promotes state
trade… welfare
Trade policy balance of power goals of national
reflects… 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 interest-
group
• 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
Produce Not Produce
American Firm 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
Produce Not Produce
American Firm 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
Produce Not Produce
American Firm Produce -5, 5 100, 0
Not Produce 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
Produce Not Produce
American Firm Produce -5, 5 100, 0
Not Produce 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
• 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 Civilian
• Stealth fighter • Internet
• M-16 Assault rifle • Software innovations such
• Ballistic missile defense as parallel processing
• Sensors for anti-submarine • Digital imaging & x-ray
warfare • 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

100%
Market Share of Smartphone OS

80%

Other OS
60% iOS
Android
Windows Mobile
40% BlackBerry OS
Linux
Nokia Symbian
20%

0%
2005 2011E

Source: Morgan Stanley Research, Gartner. 95

 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