Trade, Policy, and International Adjustments

310 Pages·1991·5.56 MB·English

by  Akira Takayama, Michihiro Ohyama and Hiroshi Ohta (Eds.)

Trade, Policy, and
International Adjustments
Edited by
Akira Takayama
Department of Economics
Southern Illinois University
Carbondale, Illinois
Michihiro Ohyama
Department of Economics
Keio University
Tokyo, Japan
Hiroshi Ohta
Department of Marketing & International Business
Kobe University of Commerce
Kobe, Japan
Academic Press, Inc.
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Library of Congress Cataloging-in-Publication Data
Trade, policy, and international adjustments / edited by Akira
Takayama, Michihiro Ohyama, Hiroshi Ohta.
p. cm. ~ (Economic theory, econometrics, and mathematical
economics)
Includes bibliographical references and index.
ISBN 0-12-682230-1 (alk. paper)
1. International trade. 2. Commercial policy. 3. International
economic relations. 4. Economics-Mathematical models.
I. Takayama, Akira, date. II. Ohyama, Michihiro, date.
III. Ohta, Hiroshi, date. IV. Series.
HF1379.T73 1991
337~dc20 90-38702
CIP
PRINTED IN THE UNITED STATES OF AMERICA
91 92 93 94 9 8 7 6 5 4 3 2 1
Contributors
Numbers in parentheses indicate the pages on which the authors' contributions begin.
Hideyuki Adachi (244), Department of Economics, Kobe University, Kobe
657, Japan
Winston W. Chang (36), Department of Economics, State University of New
York at Buffalo, Buffalo, New York, 14260
Fumio Dei (77), School of Business Administration, Kobe University, Kobe
657, Japan
Jonathan Eaton (60), Department of Economics, Boston University, Boston,
Massachusetts 02215
Wilfred J. Ethier (3), Department of Economics, University of Pennsylvania,
Philadelphia, Pennsylvania 19104
Toyonari Ide (108), Department of Economics, Fukuoka University,
Fukuoka 814-01, Japan
Ronald W. Jones (95), Department of Economics, University of Rochester,
Rochester, New York 14627
Sumio Kakimoto (155), Department of Economics, Chukyo University,
Nagoya 466, Japan
Seiichi Katayama (285), Research Institute for Economics and Business
Administration, Kobe University, Kobe 657, Japan
Murray C. Kemp (19), Department of Economics, University of New South
Wales, Kensington, New South Wales 2033, Australia
Jae-Cheol Kim (36), Department of Management Science, Korea Advanced
Institute of Science and Technology, Cheongryang, Seoul, Korea
Ngo Van Long (265), School of General Studies, Australian National
University, Canberra, A.C.T. 2601, Australia
Sugata Marjit (95), Department of Economics, Jadapur University, Calcutta,
India
Leonard J. Mirman (60), Department of Economics, University of Virginia,
Charlottes ville, Virginia 22901
Kazuo Nishimura (275), Institute of Economic Research, Kyoto University,
Kyoto 606, Japan
Hiroshi Ohta (222), Department of Marketing and International Business,
Kobe University of Commerce, Kobe 651-21, Japan
vu
Vlll CONTRIBUTORS
Michihiro Ohyama (195), Department of Economics, Keio University, Tokyo
108, Japan
Makoto Okamura (285), Department of Economics, Tezukayama Univer-
sity, Tezukayama 7-1, Nara 631, Japan, and Department of Economics,
University of Florida, Gainesville, Florida 32611
Koji Shimomura (19), Research Institute for Economics and Business Ad-
ministration, Kobe University, Kobe 657, Japan
Katsuhiko Suzuki (173), School of Economics, Kwansei Gakuin University,
Nishinomiya 669, Japan
Akira Takayama (108), Department of Economics, Southern Illinois Univer-
sity, Carbondale, Illinois 62901
Makoto Tawada (285), Department of Economics, Nagoya City University,
Nagoya 467, Japan
Shigemi Yabuuchi (155), Department of Economics, Aichi University, Toyo-
hashi 441, Japan
Preface
The theory of international economics has grown very rapidly recently.
International trade theory was established as an authentic discipline of
economics by the 1930s after contributions by such scholars as Gottfried
Herberler, Jacob Viner, Bertil Ohlin, and Frank Graham. After World
War II, its importance in economics was firmly established by the 1960s
through contributions by such scholars as Paul Samuelson, James Meade,
and Harry Johnson. The "Rochester School" represented by Lionel
McKenzie and Ronald Jones and the "Australian School" represented by
Murray Kemp have been important in the later development of the pure
theory. With the advent of flexible exchange rates in the 1970s, this topic,
which involves money, exchange rates, and open macro models, has
appropriately assumed a prominent role in the growing field of interna-
tional economics.
From the days of Adam Smith, international economics has developed
through its repercussions with heated contemporary issues. Fortunately, its
evolution has been determined through the effort of renowned scholars in
each era such as Smith, Hume, Ricardo, Mill, Marshall, and Keynes.
Consequently, its popularity has furthered remarkably the overall develop-
ment of economics, leading to an even greater understanding of the
discipline.
Economists are now equipped with a variety of theoretical and empirical
tools to analyze questions in international economics and other areas.
Here, we assemble illustrations of such new contributions to the field.
Confining ourselves to theoretical issues, the topics we cover in this
volume range from recent issues, pure theory, and macroeconomics to
mathematical methods.
Assigning a more detailed summary to a separate section, we might
briefly sketch the contributions assembled here.
This volume is divided into four parts. Part I takes up studies on recent
issues in international trade and commercial policies. Ethier analyzes
voluntary export restrictions. Kemp and Shimomura discuss the question
of trade versus aid. Chang and Kim discuss the problem of newly industri-
alizing countries (NICs) competing with developed countries. Eaton and
Mirman analyze the effect of asymmetry of information and consequent
IX
X PREFACE
signal jamming on the competition between a home firm and a foreign
firm. Dei analyzes multinational corporations.
Part II takes up recent topics in the pure theory of international trade.
Jones and Marjit show an application of a geometric technique to a
multidimensional problem concerning the Stolper-Samuelson theorem.
Ide and Takayama analyze the economy with variable returns to scale and
show that Marshallian stability plays a key role in economic theory
involving a long-run analysis of resource allocation. Yabuuchi and
Kakimoto discuss the problem of immiserizing growth under international
factor mobility and variable returns to scale. Suzuki analyzes the recent
topic of monopolistic competition and intra-industry trade from the view-
point of a continuum of differentiated goods to investigate the question of
the choice between free and controlled trade.
Part III is concerned with macro problems of international economics.
Ohyama clarifies the basic analytical framework for monetary economies,
and he shows that the recent theory of exchange rates can be integrated
into the pure theory of international trade. Ohta discusses the symmetry
theorem between tariffs and quotas in the context of a monetary economy
under flexible exchange rates. Adachi analyzes our experience of the
stagflation era in the 1970s and the ensuing disinflation era in the 1980s by
constructing a world model of two sectors, the primary good sector and the
industrial sector.
Part IV deals with mathematical methods and international trade the-
ory. Long shows an interesting application of the Hopf bifurcation theory
to the theory of international capital mobility. Nishimura is concerned
with the factor price equalization theorem under a multidimensional
context. Katayama, Okamura, and Tawada are concerned with the stability
conditions in which parts of markets are adjusted instantaneously.
Finally, we would like to mention an important reason for our collabora-
tion in the present volume. We wish to honor Professor Yasuo Uekawa on
his retirement from the Kobe University of Commerce in March 1990,
after completing 20 years of service at the University. Professor Uekawa's
background is somewhat unique. In 1944, young Uekawa was admitted to
the Military Academy of Japan (analogous to West Point in the United
States) after very stiff competition. He soon found himself trained as a
Kamikaze pilot and had to face his death every day. Weathering the
trauma of postwar Japan, he was able to obtain a university degree from
the Kobe University and enrolled in its graduate program in economics.
With the strong support of the late Professor Kazuo Mizutani and others,
he was eventually able to go to the University of Rochester in 1963 for
formal training. The Rochester Ph.D. program in economics was new at
the time, having only begun in 1958. Nevertheless, the program contained
excellent young professors such as Lionel McKenzie, Ron Jones, Dick
PREFACE XI
Rosett, and Ed Zabel. The not-so-young Uekawa finished a very tough
program in three years. Rochester, even then, had able students, some of
whom are now contributing articles to this volume. Uekawa's first paper,
drawn from his doctoral thesis written under the guidance of Lionel
McKenzie, appeared as a lead article in Econometrica in 1971. Uekawa
was then "reborn" as a professional economist. He was an associate editor
of the Journal of International Economics during the years 1973-1980 and
1985-1987. He has been a member of the Executive Committee of the
Japan Association of Economics and Econometrics for the period of 1975
through 1981 and again from 1984 to the present. He was also a visiting
professor of economics at the University of New South Wales in Australia
during April 1971 through March 1972 and October 1985 through July
1986 and the Massachusetts Institute of Technology for the summers of
1976 and 1978.
As friends and/or students of Professor Uekawa, the contributors are
aware of the high standards that he sets for himself and his students. At
the Kobe University of Commerce he left many legends, such as a number
of his graduate students crying in bathrooms after hard training sessions.
In spite of this and his strong inclination to pure theory, almost half of
every 150 new undergraduate students in the University's Department of
Economics desired to be enrolled in his "stable" or seminar, though most
of such desires could not be met due to exogenous constraints. In any case,
a clear majority of graduate students have "suffered" under him. Our
hope here is that Professor Uekawa enjoys each contribution in this
collection.
AKIRA TAKAYAMA
MlCHIHIRO OHYAMA
HIROSHI OHTA
Outline
This book is divided into four parts: recent issues, pure theory, macro-
economics, and mathematical methods. Part I is concerned with recent
issues in international trade and commercial policies. It contains five
chapters. Ethier is concerned with voluntary export restrictions (VER),
which, during the last two decades, have become the most prominent
means by which protectionist initiatives have been implemented in the
industrial world. Ethier attempts to shed light on three questions. What
distinguishes those industries in which VERs can be expected to emerge?
If government policy is motivated by concern for industry welfare, what
will be the effect of VERs on national welfare? How is the behavior of an
economy affected if the government opts to attempt to negotiate VERs
when import-competing industries run into trouble? Ethier sorts out the
circumstances under which VERs might be expected to exist. His major
conclusion is that a VER might in fact prove a useful instrument even in a
world where policy is directed toward enhancing national welfare. He
found the complex sensitivity of welfare consequences to exogenous pa-
rameters a countervailing implication. His model is a partial equilibrium
type model in which n domestic and n* foreign firms compete and in
which the Cournot-Nash solution is the fundamental concept of equilib-
rium.
Kemp and Shimomura are concerned with the economics of foreign aid,
and their chapter is a sequel to Kemp (Economics Letters, 1984)1 and
Kemp-Kojima (1ER, 1985), for example. Country a can help country ß by
adjusting its border taxes ("trade") or by adjusting its net transfers to ß
("aid"). It is asked which mixture of aid and trade achieves a's objective
with minimum cost in terms of foregone «-utility. It is shown that the
answer depends on the initial levels of the border taxes, on the amount of
the initial net transfers, and on the extent to which a seeks to help ß.
Chang and Kim address the question of export rivalry between a firm in
a newly industrializing country (NIC) and another in a developed country.
The chapter is motivated by the rapid expansion of exports in NICs.
Exports from NICs are often finished products (such as VCRs) that are
References cited in this outline are found in their respective chapters.
xiii
XIV OUTLINE
produced with sophisticated parts which can be made only by advanced
countries (such as Japan). The chapter uses a Bertrand type of duopoly
model between a firm in an NIC and a firm in a developed country. The
former can produce a low-quality final product by using its own intermedi-
ate input or a medium-quality final product by using an intermediate input
supplied by the latter which can also produce a high-quality final product
for export. Using a partial equilibrium model, Chang and Kim analyze the
pricing strategies and the choice of product pattern in achieving the Nash
equilibria. Their chapter also analyzes the optimal tariff policy of both
countries. It is concluded that the optimal policy for the government of the
advanced economy is no intervention in her exports of the middle product
to the NIC. This is because its producer is assumed to have the monopoly
power over the pricing of that product. To the extent that the NIC's
producer has the monopoly power over the pricing of the low-quality
product, the NIC's government should maintain a free trade policy on this
good. The NIC's government can impose a tariff on her import of the
intermediate goods from the advanced country to counter its monopoly
power. Novel features of the chapter by Chang and Kim are the competi-
tion in quality-differentiated products and intermediate input linkage in
trade. These features appear to be original in the trade literature, and
these are in some respect more realistic in portraying trade rivalry be-
tween advanced countries and NICs than the usual models of trade
without them.
Eaton and Mirman show an interesting application of a recent develop-
ment in the theory of industrial organization on asymmetry of information
and signal jamming to the theory of international trade. Their basic
message stems from a simple but important premise: domestic firms know
more about their local markets than do foreign firms. Consider two firms,
the home firm H and the foreign firm F, and two markets, the home
market H and the international market /. The two markets are segmented
in that the price in each market is determined separately. The supply to
the home market H is done only by firm H as market H is protected,
while the two firms H and F compete in market /. The rivalry is
formalized as a two-period model of Cournot competition. Even though
the two firms do not compete in market H, the home firm has an incentive
to influence the foreign firm's beliefs about its local demand, making it
think that demand in the home market is low. The major result is that
whether the home market is large or small, the incentive to signal jam
raises the exports of the informed firm (H) and lowers its domestic sales.
It then follows that the first period profit of firm F decreases and (under a
reasonable condition) that of firm H increases. The incentive to signal jam
creates the appearance of predatory dumping. Eaton and Mirman also
conclude that while signal jamming by one firm can act to its own benefit,
OUTLINE XV
the overall effect is to increase total sales in the international market and
to lower international price.
Dei is concerned with multinational corporations (MNCs). His chapter
follows Helpman (JPE, 1984, REStud, 1985) and Helpman and Krugman
(1985, MIT Press) which emphasized the role of headquarter services that
parent firms export to affiliates. While Helpman and Krugman utilized the
Heckscher-Ohlin-type model modified by Chamberlinian monopolistic
competition, Dei utilizes the Ricardian model with perfect competition.
His use of the Ricardian model attempts to focus on differences in
technology in a relatively simple framework. Helpman and Krugman
(1985) concluded that the relatively capital-rich country tends to be the
parent country of MNCs, if headquarter activities are the most capital
intensive. In contrast to this, Dei concludes that the determinants of the
emergence of MNCs are absolute advantage and demand conditions. The
world production transformation curve plays a key role in his analysis. On
this curve, there is the Ricardian point of complete specialization which is
found in the traditional case where no MNCs exist. To the right of this
kink, MNCs can emerge according to an absolute advantage.
Part II is concerned with the pure theory of international trade and
contains four chapters. Its first chapter is by Jones and Marjit. They are
concerned with obtaining a further insight into the multidimensional
version of the Stolper-Samuelson theorem by utilizing a simple geometric
technique. In the literature there have been a number of efforts to extend
the Stolper-Samuelson theorem beyond the original two-by-two mode.
For example, Uekawa (Econometrica, 1971, and McKenzie Festschrift,
1979) pointed out that some severe restrictions on the production struc-
ture are necessary to obtain the "strong Stolper-Samuelson (SSS) theo-
rem," where the SSS theorem under a multidimensional framework states
that an increase in any single commodity price causes one factor's return
to rise by a greater relative amount and all other factor returns to fall
(Chipman, 1ER, 1969). Jones and Marjit apply a two-dimensional geomet-
ric technique, which they call the "Learner {JPE, 1987) triangle," to obtain
an insight into the multidimensional case. They have shown that Kemp
and Wegge's (1ER, 1969) necessary condition for the SSS theorem is also
sufficient for the three-by-three case. Also, they have shown that the
"produced mobile structure" introduced by Jones and Marjit (1ER, 1985)
is sufficient for the SSS theorem to hold.
Ide and Takayama are concerned with variable returns to scale (VRS).
They point out that various paradoxical comparative statics results are
obtained under VRS with regard to the price-output response and the
Stolper-Samuelson and Rybczynski theorems. They then show that all
these paradoxes virtually disappear if and only if the equilibrium is
Marshallian stable. Furthermore, they show that the equilibrium is