Question

There are two questions related to Trade Regulations and Industrial Policies - Respond to both questions by one paragraph for each.

1. Has industrial policy contributed significantly to Japan's economic growth?

2. Explain how advocates of strategic trade policy differ from the classical free traders in their treatment of externalities?

Answer 1

1.Has industrial policy contributed significantly to Japan's economic growth?

Ans…..

• China became the fastest growing nation of the world by having a robust industrial sector. Another country in which industrial policy has played an important role in making it one of the developed nations of the world is Japan. Japan invests heavily in research and development of the industrial sector and thus is one of the most industrialized nations of the world.
• The major industries in Japan include automobiles, consumer electronics, computers, semi conductors, iron and steel etc.These sectors are the most highly advanced and innovative in the world.They are world leaders in world production and technological advancements.
• The presumed success of Japanese post-war industrial policy has been used to advocate similar policies in other countries. Japan has benefited from a high domestic savings rate, an educated and highly motivated labor force, good labor management relations, a shift of labor from low-productivity sectors to high-productivity manufacturing, entrepreneurs willing to assume risks, and the like.
• These factors have enhanced Japan's transformation from a low-technology nation to a high-technology nation. It is debatable how rapidly this transformation would have occurred in the absence of an industrial policy.
• Although Japan has the most visible industrial policy of the industrial nations, the importance of that policy to Japan should not be exaggerated.

2. advocates of strategic trade policy differ from the classical free traders in their treatment of externalities

Ans……

• When the concept of strategic trade policy was formulated in the 1980’s, deeply entrenched notions of the desirability of free trade were undermined as new applications of the models of imperfect competition seemed to justify increased government intervention. There were two separate, but related theoretical justifications for the government to actively promote the interests of domestic firms.
• The first, established by Brander and Spencer, argued that the government could alter the strategic interaction in oligopolistic competition to shift profits to a domestic firm.1 The second, borrowing from the economic development literature of the postwar period,
• suggested that the government could promote key industries in order to capture the benefits of positive externalities.2 In both cases, perceived market failures provided intellectual justification for the government to make a strategic choice to increase national welfare.
• Advocates of strategic trade policy recognize that the classical argument for free trade considered externalities at length.
• The difference, they maintain, is that the classical theory was based on perfect competition and thus could not appreciate the most likely source of the externality, whereas modern theories based on imperfect competition can.
• The externality in question is the ability of companies to capture the fruits of expensive innovation. Classical theory based on perfect competition neglected this factor because large fixed costs arc involved in innovation and research and development, and such costs ensure that the number of competitors in an industry will be small.