Kroman

As we have seen, the theory of international trade policy, like the theory of international
trade itself, has a long intellectual tradition. Experienced international economists
tend to have a cynical attitude toward people who come along with "new" issues in
trade—the general feeling tends to be that most supposedly new concerns are simply old
fallacies in new bottles.
Every once in awhile, however, truly new issues do emerge.This chapter describes two
controversies over international trade that arose in the 1980s and 1990s, each raising
issues that previously had not been seriously analyzed by international economists.
First, in the 1980s a new set of sophisticated arguments for government intervention
in trade emerged in advanced countries. These arguments focused on the"high-technology"
industries that came to prominence as a result of the rise of the silicon chip. While
some of the arguments were closely related to the market failure analysis in Chapter 9,
the new theory of strategic trade policy was based on different ideas, and created a
considerable stir.
Second, in the 1990s a heated dispute arose over the effects of growing international
trade onworkers in developing countries—and whether trade agreements should include
standards for wage rates and labor conditions. This dispute often widened into a broader
debate about the effects of globalization; it was a debate played out not just in academic
journals but also, in some cases, in the streets.
ophisticated Arguments for Activist Trade Policy
Nothing in the analytical frameworkdeveloped in Chapters 8 and 9 rules out the desirability
of government intervention in trade. That framework does show that activist government
policy needs a specific kind of justification; namely, it must offset some preexisting
domestic market failure. The problem with many arguments for activist trade policy is precisely
that they do not link the case for government intervention to anyparticular failure of the
assumptions on which the case for laissez-faire rests.
The problem with market failure arguments for intervention is how to know a market
failure when you see one. Economists studying industrial countries have identified two
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CHAPTER II Controversies in Trade Policy 277
kinds of market failure that seem to be present and relevant to the trade policies of advancedcountries. One of these is the inability of firms in high-technology industries to capture the
benefits of that part of their contribution to knowledge that spills over to other firms. The
other is the presence of monopoly profits in highly concentrated oligopolistic industries.
Technology and Externalities
The discussion of the infant industry argument in Chapter 10 noted that there is a potentialmarket failure arising from difficulties of appropriating knowledge. If firms in an industry
generate knowledge that other firms can also use without paying for it, the industry is in
effect producing some extra output—the marginal social benefit of the knowledge—that is
not reflected in the incentives of firms. Where such externalities (benefits that accrue to
parties other than the firmsthat produce them) can be shown to be important, there is a
good case for subsidizing the industry.
At an abstract level this argument is the same for the infant industries of less-developed
countries as it is for the established industries of the advanced countries. In advanced countries,
however, the argument has a special edge because in those countries there are important
high-technologyindustries in which the generation of knowledge is in many ways the
central aspect of the enterprise. In high-technology industries, firms devote a great deal of
their resources to improving technology, either by explicit spending on research and development
or by being willing to take initial losses on new products and processes to gain
experience. Such activities take place in nearly all...