Contemporary issues in trade and trade policy
Creators: name: Ivus, Olena
Publisher: name: University of Calgary
Year: 2009

description: Bibliography: 101-105
description: International trade policy is often formulated to protect the interests of domestic producers. A wide variety of trade policy instruments are available to policy makers to achieve this goal. While the relative impact of the various instruments changes with time, trade policy formulation itself remains one of the more controversial and politically charged areas of governance. Trade policy has never been more complicated or evolving than at present, when it is being employed to deal with various globalized trends and foreign pressures. It is within this more dynamic framework of policy formulation that new questions about trade protectionism appear, and some older conclusions warrant fresh scrutiny. The three essays in this volume examine contemporary issues in international trade policy. The two major themes are trade-related intellectual property protection and trade protection in a state of uncertainty. The first two chapters of my dissertation investigate how a strengthening protections for intellectual property (IP) affects the flow of innovative products from developed to developing countries. With the development of the innovative technologies in key trade sectors, protection of IP plays an essential role in the current politics of international trade. The third chapter examines how trade policy should be formulated to protect a country's economy from disruptions in the rest of the world. Given the increasing interdependence of countries across the globe, understanding the welfare implications of uncertainty in a trade environment is undoubtedly a necessary condition for the formulation of effective trade policy. In the first chapter, I evaluate the impact of strengthening patent rights (PRs) in developing countries on developed countries exports over the 1962-2000 period. The empirical challenge is to credibly measure a causal effect from strengthened patent rights to trade flows by accounting for several econometric and data problems. To isolate exogenous variation in PR.s, I use colonial origin and the imposition of the 1994 agreement on Trade-Related Aspects of Intellectual Property Rights. I then identify the impact by examining the across-industry difference in sensitivity to patent protection. I find that the increase in PRs made in response to the TRIPs agreement added about $35 billion (2000 US dollars) to the value of developed countries' patent-sensitive exports into 18 developing countries. This amount is equivalent to a 8.6% increase in these developing countries' annual value of patent-sensitive imports. Stronger IPRs increased the value of exports into developing countries by increasing the quantity, rather than the price, of exports. In the second chapter, I employ theory to examine the relationship between the strength of intellectual property rights (IPRs), the volume of North South trade, and the world distribution of income. I develop a simple general equilibrium model of an innovating North and an imitating South. There is a continuum of industries each populated by a set of firms producing a unique product. Innovation in the North creates new product varieties, and if these new Northern products are exported to the South, they face some risk of imitation. Each Northern firm weighs the benefits of selling to the larger international market against the risk of imitation and loss of monopoly profits. This decision process divides the continuum of indm,tries into those that export and those that do not. A strengthening of IPRs in the South has three potentially offsetting effects. First, stronger IPR.s make exporting less risky and expand the set of industries now engaged in trade with the South. This market expansion effect drives up Southern wages and Northern exports. Second, as the set of export industries expands, the Southern market share spent on the products of each existing industry falls. This market dilution effect increases Southern wages further but reduces exports. Third, stronger IPRs enhance the market power of existing Northern export industries. This market power effect raises Northern wages and increases Northern exports. As a result, the impact of an increase in the Souths IPRs depends quite delicately on the heterogeneity across industries in their susceptibility to imitation; relative country size; the primitive determinants of innovation; and the degree of product differentiation. In the third chapter, I provide a theoretical and empirical assessment of the diversification motive for tariff protection when trade environment is uncertain. In the context of a two-country Ricardian model with a continuum of commodities , tariff allows a country to diversify its domestic production and protect it from trade-related risk. With uncertainty in foreign technology, diversification considerations strengthen the argument for tariffs in smaller as opposed to larger countries, provided risk aversion is low. The empirical results are consistent with the prediction that small countries should be more protectionist when divernification considerations are included.