Question

Write a paper based on this Economic Policy Topic List (you can't pick a topic outside this list – all these topics have been addressed by economists and there is a very large literature on these topics, it's up to you to do your research and do the work):

a) Global Warming (think any questions related to whether or not the government should implement policies to reduce global warming, whether the government should subsidize green energies, whether the government should implement a carbon tax, etc.)

b) Globalization (think any questions related to Free Trade or Protectionism)

c) Health Insurance (think questions related to the Affordable Care Act, a Single-Payer System, or complete

privatization of health insurance markets)

d) Immigration (think any questions related to the wage impact of immigration, the fiscal impact of

immigration, the institutional impact of immigration, the impact of immigration on innovation, etc.)

e) Minimum Wage

f) Poverty and Income Inequality

GUIDELINES: FORMAT, HOW TO SUBMIT, DEADLINES

Format

It's a Microsoft Word, Apple Pages, or PDF document (PDF is preferred).

Length is between 1,200 - 2,500 words (reference list not included).

Font: Times New Roman, Font Size: 12 points, Double Space, Margins: 1 inch (left, top, right, bottom), keep

footnotes at a minimum.

Your paper must have a cover page with Title of the Paper & Abstract summarizing what you did in your paper

(50-150 words) - it doesn't count toward word count. DON'T PUT ANYWHERE Your name, Your student ID number, Course title, Course section, CRN #, Professor's Name. The reason for that is that for assessment and evaluation purposes, we want you to be anonymous. Don't worry, when it comes to your grade, your paper will be graded by me using the scoring rubric below and hyperlinked below in PDF. Assessment uses exclusively the General Studies Learning Outcomes listed below using the rubrics included below BUT there is no grade attached to it. What matters for grade purposes is the SCORING rubric, which I included below and that you can see when you click on the assignment as well.

The paper sequence is to your choosing but your sections/sub-sections must be titled and you must have an Introduction, a Conclusion, and a Reference List.

Answer 1

I have tried to do the formatting as mentioned but it won't reflect here and I am unable to do upload a word doc so you may have to do the formatting as suggested in the question.

Globalization and the Myth of Free Trade

Abstract

This paper will argue that the deficiency lies within the theory of free trade itself, in the very principle of comparative cost upon which it is founded. From this point of view, it is not the real world that is "imperfect" because it fails to live up to the theory, but rather the theory that is inadequate to the world that it tends to explain. Indeed, I will argue that globalization has been working out as would be expected from the point of view of what I will call the classical theory of "competitive advantage". That is to say, it generally favors the developed over the developing, and the rich over the poor.

I. Introduction

In today’s world some countries have progressed more compared to others to face inequality and poverty. So is it the role of International trade that has helped countries to move ahead on the road of economic development? The benefit of access to international resources cannot be denied but it does create some damage of its own too. So how can an economy make a right trade off?

The answer is aptly given by Mike Moore, the former Director General of the World Trade Organization (WTO): "the surest way to do more to help the poor is to continue to open markets" (Agosin and Tussie, 1993 p. 9). Thus the powerful countries are pressing the developing world to adopt wholesale trade liberalization, on the grounds that the best way to raise global living standards is to maximize trade (Rodrik 2001, pp. 5,10).

But the Washington Consensus and its variants has attacked this theory on theoretical and empirical claims. It states that the evidence does not support the claim that trade liberalization leads to faster growth. Further it is ascertained that not just today but even in the past, most of the economic growth through trade has come with selective trade and industrialization policies. So much so that there "are no examples of countries that have achieved strong growth rates of output and exports following wholesale liberalization policies" (Agosin and Tussie, 1993, p. 26; Rodrik 2001, p. 7) Relying heavily on trade protection and subsidies, ignored patent laws and intellectual property rights has helped countries to their economic advantage. Even the IMF mentioned that "there is no proof in the data that financial globalization has benefited growth" in developing countries (IMF, Prasad, Rogoff, Wei, and Kose, 2003, pp. 5-6).

With this, we come to a question to know where is the problem that Global Trade Liberalization doesn’t fulfill its claim for Economic Growth?

II. The theoretical foundations of trade policy

The theory underlying the policy of trade liberalization

This part of the paper will trace out the fundamental role played by the theory of comparative costs in current policies of trade liberalization, and will discuss the many empirical problems this theory encounters.

The basic economic theory states that trade and financial liberalization will lead to increased trade, accelerated economic growth, more rapid technological change, and a vastly improved allocation of national resources away from inefficient import-substitutes toward more efficient exportable goods. It does mention that it will lead to rise in unemployment but this will be temporary and should be addressed by appropriate social policies until the benefits of free trade are realised. From a policy point of view, this means that best path to economic development involves opening up the country to the world market: the elimination of trade protection, the opening up of financial markets, and the privatization of state enterprises.

But the basic problem with this claim is actually based on two crucial premises: the premise that free trade is regulated by the principle of comparative costs; and the premise that free competition leads to full employment in every nation.

For over 200 years, economic theory has insisted that a 'nation' would always stand to gain from trade if it were to export some portion of the goods it could produce comparatively more cheaply at home, in exchange for those it could get comparatively more cheaply abroad. It is the comparative costs of production, which are said to be relevant here, not the absolute costs. Implicit in this presentation is the claim that the market will then ensure that exports will be exchanged for an equivalent amount of imports, so that trade will be balanced (Dernburg 1989, p.3).

But it cant be considered valued unless it can be shown that free trade among market economies actually operated this way. In the world market it is not 'nations' which barter some goods for others, but rather myriad firms in different countries who buy and sell goods for money, all with the aim of earning profits on the export and import of a ever shifting variety of commodities. Therefore when (if) conventional trade theory seeks to appear more realistic, it moves to a second stage in the argument in which a quite different, positive claim, is substituted for the previous normative one. And here, it is argued that in free trade the terms of trade of a nation will always move in such a way as to eventually equate the values of exports and imports. Thus even when multitudes of profit-seeking firms are the actual agents of international trade, the end result is said to be the same as if each nation directly barters a particular quantity of exports for an equivalent value of imports (Dornbusch 1988, p.3). Since this applies equally to advanced and developing economies, no nation need fear trade due to some perceived lack of international competitiveness. In the end, free trade will make each nation equally competitive in the world market (Arndt and Richardson 1987, p. 12). Note that for this positive proposition to hold, it is necessary to claim that the terms of trade fall whenever a country runs a trade deficit and also that the trade deficit will diminish when terms of trade fall. Obviously, the opposite movements must occur in the case of a balance of trade surplus.

Finally, in order to complete the standard argument on the benefits of free trade, it is also necessary to assume that full employment is the norm in countries with competitive markets. Without this additional assumption, even automatically self-balancing trade would not necessarily lead to gains from trade for the nation as a whole.

The theory of comparative advantage lies downstream of the theory of comparative costs. Since these two are frequently confused, it is worth looking at their difference. We have noted that the principle of comparative costs claims that the terms of trade of every nation will automatically adjust so as to balance international trade. In such a process, each nation will find that its cheapest goods, the ones in which it is presumed to specialize, are those in which it has the lowest relative (i.e. comparative) costs. The Hecksher-Ohlin-Samuelson (HOS) model of comparative advantage takes this principle of comparative costs for granted, as it does the notion that full employment obtains in both nations. It then seeks to locate differences in national comparative costs in differences in national factor endowments, on the usual assumption of "perfect competition, international identity of production functions and factors, nonreversibility of factor intensities, international similarity of preferences, [and] the constant returns-to-scale" (Johnson 1970, pp. 10-11). Two well-known conclusions emerge. First, that within a system of free trade, nations with capital-intensive factor endowments will have lower comparative costs in capital-intensive goods. Hence they will have a "comparative advantage" in the production of such goods, and will tend to specialize in them. And second, that international trade by itself, without any need for direct flows of labor and capital, will tend to equalize real wages and profit rates across countries (the factor price equalization theorem).

To summarize. Three propositions are essential to the whole corpus of standard trade theory: the terms of trade fall when a nation runs a trade deficit; the trade balance improves when the terms of trade fall; and there is no overall job loss generated by any of these adjustments. All of these mechanisms are assumed to operate over some period short enough to be socially relevant2.

The trouble is that each of these three foundational claims of standard trade theory has been widely criticized for its theoretical and empirical deficiencies.

In addition to the empirical difficulties its inherits from the theory of comparative costs, it has the further problems that it fails to correctly predict trade patterns about half of the time, that technologies differ markedly across countries, and that real wages remain persistently unequal even across developed countries. As Magee (1980, p. xiv) puts it, the "history of postwar international trade theory has been one of attempting to patch up either the Ricardo [comparative costs] or Hecksher-Ohlin model to fit the facts as we know them". It is acknowledged among experts that this persistent failure of the most fundamental propositions of standard trade theory has undermined confidence in its whole structure (Arndt and Richardson 1987, p.12).

III. History and policy from the perspective of competitive advantage theory

To interpret the empirical evidence that trade liberalization does not automatically produce growth, and that growth does not automatically reduce poverty, we review the latest official response of the rich countries that the problem lies not in the basic theory, but in the lack of adequate institutions in the developing world (Rodrik 2001, pp. 5, 9, 10). From the point of view of this 'augmented' Washington Consensus view, successful integration into the world market requires the developing world to undertake further reforms that "include financial regulation and prudential supervision, governance and anti-corruption, legal and administrative reform, labor-market 'flexibility' and social safety nets". In return, the developed world is supposed to provide greater access to its own markets. As always, these reforms are driven by the aim of strengthening the integration of the developing countries into the world economy, on the premise that free trade will take care of the rest (op. cit., pp. 14-15).

For the trade policy, both the history and competitive advantage theory suggest that the most appropriate procedure would be to consider trade liberalization in a selective manner, as individual industries become sufficiently competitive in the world market. To accomplish this would require a great social push, along with clear standards and deadlines on meeting the standards of the world market (Agosin and Tussie, 1993, pp. 25, 28). Of course, none of this would be possible without major change in current WTO rules and international conditions attached to financial assistance. Development must be brought back to the center of the picture, and a whole range of institutions and practices considered as alternatives (Rodrik 2001). In the final analysis, "[t]rade is a means to an end, not an end in itself" (Rodrik 2001, p. 29).

This has long been the focus of the opposition to the Washington consensus, and it is precisely the right track. But, in my opinion, it needs to be freed from its residual dependence on the standard theory of trade and all of its trappings.

References

Globalization and the Myth of Free Trade

Agosin, Manuel R. and Diana Tussie, 1993. "Trade and Growth: New Dilemmas in Trade Policy -- An Overview", Ch. 1 in Trade and Growth: New Dilemmas in Trade Policy, St. Martin's Press.

Arndt, S.W. and Richardson J.D. 1987 (eds) Real-Financial Linkages among Open Economies, The MIT Press, Cambridge, Massachusetts.

Deraniyagala, Sonali and Ben Fine 2000, "New Trade Theory versus Old Trade Policy: A Continuing Enigma", Working Paper Series No. 102, School of Oriental and African Studies (SOAS), University of London.?Dernburg, T. F. 1989. Global Macroeconomics, Harper and Row, New York.

Grossman, Gene and Helpman, Elhahan 1990. ‘Comparative Advantage and Long Run Growth’, The American Economic Review, Volume 80, Issue 4: 796-815.

Countries: Some Empirical Evidence", Eswar Prasad, Kenneth Rogoff, Shang-Jin Wei, and M. Ayhan Kose, March 17.?Johnson, Harry G. 1970, "The State of Theory in Relation to the Empirical Analysis", pp. 9-21, in Vernon, Raymond (ed.) The Technology Factor 1n international Trade, National Bureau Of Economic Research, New York, Distributed By Columbia University Press New York and London

Krugman, Paul 1981. ‘Intraindustry Specialization and the Gains from Trade’, The Journal of Political Economy, Volume 89, Issue 5: 959-973.

Keynesian Perspectives, ed. Mark Glick, Edward Elgar, Great Britain?Rodrik, Dani 2001 The Global Governance of Trade: As if Trade Really Mattered, United

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Study, The Mexican Peso and the U.S. Dollar, unpublished Ph.D. dissertation, New

School for Social Research, New York.?Shaikh, Anwar 1999. "Real Exchange Rates and The International Mobility of Capital", Working

Edward J. Nell (ed.), Cambridge University Press, Cambridge, UK.?Stiglitz, Joseph E. Globalization and its Discontents, W.W. Norton and Company, New York. Stein, J.L.1995. "The Natrex Model, Appendix: International Finance Theory and Empirical Reality", in Fundamental Determinants of Exchange Rates, J.L. Stein and Associates,

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