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Globalisation Transationals and Economic Policy - Essay Example

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Aircraft manufacture is one industry that lends economy of scale and for which there is a great tendency for one dominant firm to take advantage of increasingly higher returns should it be the sole competitor in that industry. A country could raise more income if it favors a domestic aircraft manufacturer over a foreign firm…
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Globalisation Transationals and Economic Policy
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Download file to see previous pages 136-137). Assuming that Boeing has a headstart, the likely outcome is that of Airbus deciding not to produce the aircraft, in favor of 0 loss, rather than to enter the market against Boeing, in which both firms would each incur losses amounting to -5. However, once Europe decides to subsidize Airbus, the outcome of the game shifts in favor of Airbus, and it can decide to go head-on with Boeing in the market, earning profits while Boeing incurs losses. Moreover, should Boeing decide to not produce as it would be incurring 0 loss in this, Airbus by producing the aircraft would allow it to raise its profits from 0 loss in the previous scenario with no subsidy to 110 profits post-subsidy by Europe. Krugman further notes that out of this, 100 represents a gain of national income for Europe, and conversely, a loss of the same amount for America. This shows that under some circumstances, a country can lift its welfare by supporting its own firms against foreign competitors. At the same time, a domestic firm can lower the profits of other firms which wish to enter the domestic market.
Another reason for strategic trade policy as the case above is when viewed from the possibility of existence of external economies - one in which it has been observed that innovative firms, with huge investments in R&D fail to "appropriate fully the knowledge they create". This case is not evident in "perfectly competitive models" as when increasing returns is tied with economies of scale in markets with imperfect competition. The argument for strategic trade policy based on externalities however need not affect other countries' welfare negatively - as when governments choose particular industries or firms to support. However, this is not the case when externalities are at the national level, in which clearly free trade is at the mercy of a government's protectionist policies.
Pursuing a strategic trade policy is limited by at least three factors that make it a less desirable option. First, external economies are difficult to measure, measurement of which is needed to formulate interventionist policies (i.e. difficult to measure the exact external benefit of say, a $10 investment in R&D). Second, rent-seeking firms could water down the gains from interventionist policies. Third, a country's considerations for its economy overall adds greatly to the empirical difficulty of formulating strategic trade policies (that is, "a country cannot protect everything and subsidize everything").
The above considerations however, according to Krugman do not render the pursuit of strategic trade policy undesirable. In most cases, they point to caution as to the difficulties are due to empirical considerations - and yet, governments are not altogether, lacking in information.
In what sense, of any, is it appropriate to consider that international trade in today's world is free
International trade in today's world can be considered free to a certain extent by measuring the progress done compared to the past. For example one indicator suggests that the pace of international tra ...Download file to see next pages Read More
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