Free Trade or Protection?: A Pragmatic Analysis

185 Pages·1985·17.639 MB·English

by  H. Peter Gray (auth.)

FREE TRADE OR PROTECTION?
The assumption of static equilibrium is crucial to the analysis underlying
the argument for free trade. Given some innate capacity for change, the
free-trade doctrine can be extended to conditions of slow evolutionary
change. Given that the degree of dislocation and the social costs of ad
justment are positively related to a disturbance, this book considers the
efficiency of commerical policy as a means of slowing the rate of adjust
ment (reallocation). The analysis requires a model using heterogeneous
factors of production with industry-specific attributes. The use of com
mercial policy to suppress change is counterproductive.
Three types of disturbance are examined: reversible changes when
major industries temporarily lose their international competitiveness;
dislocation when a large shock induces change too rapid for the economy's
capacity to adjust; and possible chronic unemployment of low-skilled
workers caused by market failure in a fully integrated, free-trade world.
The policy implications are considered in both a North-South and a
North-North context.
H. Peter Gray is Professor of Economics and Finance, School of Business,
Rutgers University, New Jersey. Born in Cheltenham, England, in 1924,
he was educated at Queens' College, Cambridge, and then went into
business with Dexion Ltd. in London. In 1953 he emigrated to Canada
to open the firm's Canadian manufacturing subsidiary; ~,e later enrolled
in the PhD program in economics at the University of California, Berkeley,
where he was awarded his doctorate in 1963. In addition to a year's
fellowship at the Brookings Institution, he has taught at Wayne State
University, Detroit, and at Thammasat University, Bangkok. In 1968 he
became chairman of the Department of Economics at Douglass College,
Rutgers University, and from 1982 to 1984 was Director of the under
graduate program of the newly formed School of Business at Rutgers,
of which he is now a member.
Professor Gray is the author of International Travel: International
Trade, The Economics of Business Investment Abroad, An Aggregate
Theory of International Payments Adjustment, A Generalized Theory
of International Trade and International Trade, Investment and Payments.
FREE TRADE OR
PROTECTION?
A Pragmatic Analysis
H. Peter Gray
Professor of Economics and Finance
Rutgers University
Palgrave Macmillan
ISBN 978-0-333-36201-3 ISBN 978-1-349-06983-5 (eBook)
DOI 10.1007/978-1-349-06983-5
© H. Peter Gray 1985
Softcover reprint of the hardcover 1st edition 1985
All rights reserved. For information, write:
St. Martin's Press, Inc., 175 Fifth Avenue, New York, NY 10010
Printed in Hong Kong
Published in the United Kingdom by The Macmillan Press Ltd.
First published in the United States of America in 1985
ISBN 978-0-312-30374-7
Library of Congress Cataloging in Publication Data
Gray, H. Peter.
Free trade or protection?
Bibliography: p.
Includes index.
1. Free trade and protection. I. Title.
HF1713.G585 1985 382.7 85-11930
ISBN 978-0-312-30374-7
To those economists who recognise the need for
and do not shun the difficulty of analyses of
reactions to evolution, institutional change and
substantial changes in underlying conditions
Contents
Preface ix
1 THE PRESENT NEED TO RECONSIDER THE FREE-TRADE
DOCTRINE 1
2 THE ARGUMENT FOR FREE TRADE AND ITS
UNDERL YING ASSUMPTIONS 8
Conclusion 19
3 'DOMESTIC INEFFICIENCY' AND CONDITIONAL
PROTECTION 22
I Domestic efficiency 23
II The dynamics of domestic inefficiency and conditional
protection 31
III Summary 44
4 THE PROBLEM OF THE RA TE OF ADJUSTMENT 46
I Canterbery's vita theory 50
II Labour market congestion 54
III Senile industry protection 63
IV Reinforcing disturbances 66
5 THE POSSIBILITY OF PERMANENT UNEMPLOYMENT 70
I Permanent unemployment with homogeneous labour 72
II Permanent unemployment with heterogeneous labour 77
III Inequalities in subsistence income 83
IV Summary 87
6 IMPASSE IN NORTH-SOUTH POLICY FORMULATON 90
I The evolution of social costs and political pressures 91
II Neglecting to confront the clash of interests 95
III The division of adjustment strains 102
IV Policy options 109
V Conclusion 112
vii
viii Contents
7 SOUTHERN DEMANDS AND A CONSTRUCTIVE
ALTERNATIVE 114
I A new international economic order? 116
II A constructive alternative 121
III Political considerations 125
IV Conclusion 127
8 FREE TRADE AMONG THE INDUSTRIALISED
NATIONS? 129
I Transitory losses of international competitiveness 130
II Unequal sharing of the burden of chronic adjustment
costs 134
III Long-run growth considerations 135
IV A variant on binding free trade 140
V Conclusion 141
9 SUMMARY AND CONCLUSIONS 143
Appendix A: Canterbery's Vita Theory of
Income Distribution 150
Appendix B: The Legal Institutional
Environment for Protection in the US 154
Notes and References 161
Bibliography 166
Index 172
Preface
For many years I have had the growing impression that the discipline
of economics has sought to solve problems which were capable of
solution in an elegant way: the art-form lay in restricting the number
of assumptions needed for a mathematically-precise solution. This set
of problems is to be contrasted with those which provide untidy
solutions at best but do reflect the complexities of the world around
us. Very little attention is paid in economics to consideration of the
different types of disturbances or shocks which can impinge on an
economy and of how the appropriate policy response (including
passivity) might vary according to the kind of disturbance. Some of
this failure to concern itself with different types of disturbances can be
traced to the infatuation of the discipline with cyclical problems
following the Great Depression and with the refinement of Keynes's
General Theory. The success of so-called Keynesian policies in the 20
years after the Second World War could have produced a tranquil
state of mind among economists: in the language of this book,
problems of resource reallocation which arose were 'benign' because
the changes came so slowly that they were well within the capacity of
the system to adjust without serious dislocation.
If one ignores disturbances, one works in a domain of steady-state
equilibrium and this is the arena in which the debate of free trade or
protection has traditionally been conducted. In such an arena, free
trade always wins. But the reality of our world is one in which
disturbances come in different shapes and sizes and at different
frequencies. A tranquil world of minor disturbances can quickly
change to a state of turbulence in which major reallocations of
resources are forced on national economies: recent events have shifted
a world of virtual tranquillity or suppressed changes to one in which
changes must be accommodated. This is a very different arena and in
this arena the relative merits of free trade or protection take on new
perspectives: indeed, the perspective changes according to the kind of
disturbance with which the system is afflicted.
At the risk of taking liberties with the concepts of Jan Tinbergen
ix
x Preface
(1970), it is possible to present the issues considered in this book as a
consideration of the policies which can best accommodate qualitative
change. Tinbergen distinguishes between quantitative and qualitative
policies: qualitative policies involve the changing of some aspect of
economic structure, while quantitative policies involve changes in
certain parameters within the same economic structure. Tinbergen's
analysis seems to limit his consideration of qualitative policies to those
required to bring about a change which follows from the emergence of
a new general interest function for the economy (1970, pp. 68-73).
This book is concerned with a more difficult problem: what policies
should be used to best adapt an economy with an unchanging general
interest function to a new set of economic conditions in world
markets? To quote Tinbergen: 'the scientific treatment of qualitative
policy meets with great difficulties' (1970, p. 72).
My
interest in commercial policy and in the process of adjustment
began many years ago with a thought about the possibility of the need
for phase-out protection. (I learned while writing this book that
Ricardo had broached the same issue about 150 years earlier!) Phase
out protection only becomes a matter of concern when some factors
are industry- or product-specific. This was an outgrowth of a concern
with the limitations of a body of trade theory based on generic factors
of production. From this standpoint came my concern with the
creation of a theory of international trade which would be broad
enough to allow for the existence of industry-specific factors, intra
industry trade and multinational corporations. Any theory of
international trade which does not encompass the existence of
multinational corporations is misleading and the dynamic features of
multinationals require that international trade theory not be confined
to a domain of steady-state, long-run general equilibrium.
The other seed from which this book sprang is Canterbery's vita
theory of income distribution which addresses itself to the problems of
skill-levels and skill acquisition. The vita theory proved to be the
Rosetta Stone which enabled me to formulate all my misgivings about
the interaction of rapid changes in trade patterns and the rate of
employment in industrialised nations. I am greatly indebted to E. Ray
Canterbery for his endless patience in explaining the subtleties of his
theory. I am also particularly indebted to Ingo Walter with whom I
have had ongoing discussions about international trade and
commercial policy spread over many years. Detlef Lorenz and
Thomas A. Pugel have both contributed to my understanding of this
arcane area of economics.