[This paper shows that temporary exchange rate fluctuations can have persistent (i.e., hysteretic) effects on trade prices and quantities. Specifically, if market-entry costs are sunk, sufficiently large real exchange rate shocks can alter domestic market structure and thereby induce hysteresis. This simple idea idea has strong implications for exchange rate theory, trade policy, and the estimation of trade equations. Empirical evidence suggests that the recent dollar overaluation induced hysteris in U.S. import prices.]

Productive factors, such as human and physical capital, accumulate, and trade policy can affect their steady-state levels. Consequently, in addition to the usual static effects, trade liberalization has dynamic effects on output and welfare as the economy moves to its new steady state. The output impact of this dynamic effect is measurable and appears to be quite large. The welfare impact of this dynamic effect is also measurable. The size of this dynamic gain from trade depends on the wedge between social and private returns to capital. Rough numerical estimates of the output and welfare effects are provided.

tag=1 data=Are economists' traditional trade policy views still valid? by Robert E. Baldwin tag=2 data=Baldwin, Robert E. tag=3 data=Journal of Economic Literature, tag=4 data=XXX tag=6 data=June 1992 tag=7 data=804-829. tag=8 data=TRADE tag=10 data=Recent developments in trade theory have raised doubts whether economists should continue their traditional opposition to trade taxes and subsidies. tag=11 data=1992/4/11 tag=12 data=92/0735 tag=13 data=CAB

This paper summarizes certain aspects of my research into the trade and employment effects in the United States of a significant multilateral reduction in tradedistorting measures by the world's major trading nations. The study differs from earlier investigations into this question such as those by Giorgio Basevi (1968), Stephen Magee (1973), Robert Stern (1964), and Beatrice Vaccara and Walter Salant (1960) in that the industry breakdown is much more detailed and the consequences of a multilateral tariff reduction on both U.S. export and import-competing industries is taken into account. By estimating not only the net trade and employment effects of a significant tariff reduction in over 350 industries but also in the 50 states and on some 14 occupational groups, it is hoped that the results will be useful for those who are now embarked on the so-called Tokyo round of trade negotiations within the framework of the General Agreement of Tariffs and Trade (GATT). Another novel feature of the study is the estimation of the net employment effects of multilateral tariff cuts under the assumption of flexible exchange rates.

Lawrence Weiser and Keith Jay have made an important contribution to our efforts to sort out the relative significance of innovational activities, different types of labor skills, and economies of scale as determinants of the commodity structure of international trade. In particular, they provide new evidence substantiating the importance of technological progress as a basis for the U.S. comparative advantage position as well as support for the view that scale economies should be given greater weight than my study indicated. However, there are still a number of questions and problems to be answered before very firm conclusions can be drawn on these matters. In an effort to disentangle the relative importance of the innovational and skill factors, the authors calculate a measure of technical progress for various U.S. manufacturing industries between 1961 and 1967. However, their estimate of technical progress does not take explicit account of changes in the skill levels of industries during that period. Consequently, one still cannot be sure of the extent to which the measure represents innovational activity versus changes in the quality of labor. Although my study indicates that the size of plants in export industries is considerably larger than in import-competing industries, the scale variable did not show up as significant in the various multiple regressions that included such variables as capital/ labor ratios by industry, proportions of various skill groups, and R&D efforts. However, Weiser and Jay do obtain significant multiple regression results for the scale factor when they use Gary Htifbauer's measure of the scale variable and a different dependent variable than the one I uised. Their dependent variable is the ratio of U.S. exports of each industry to the industry exports of eleven leading exporting countries whereas my dependent variable was adjusted U.S. exports minus adjusted U.S. imports. It should be noted that when they used Hufbauer's scale variable and exports minus imports as the dependent variable, they failed to obtain a significant result for the scale variable. To a considerable extent, therefore, the issue seems to come down to what is the best dependent variable to use. Clearly, if one is interested in the best indicator of export performance (as they are), a variable including imports is not appropriate. However, trade theory should, I think, generally focus on net trade flows rather than just exports or imports since the policy variables in which we usually are concerned are framed in net terms, for example, balance-of-trade or net employment effects of trade policy changes. As the authors are aware, it might well be that their scale variable would not show up as significant if they in some way also included the U.S. world import share by industry as part of their dependent variable. It would be interesting, to extend their analysis of trade patterns along these lines as well as by taking account of skill changes in calculating a measure of technical progress.

As others have noted (see articles by Harry Johnson (1971, 1972) and Jaroslav Vanek), the highly mathematical nature of most of the literature integrating growth and trade theory serves to restrict considerably the size of the audience to which explanations of this important subject can be directed.' This paper attempts to widen this audience by framing the analysis of the topic in simple geometric terms that utilize the standard two-country, two-sector (commodity), two-factor model of international trade. Assume that the two commodities produced by the two countries A and B are a capital good K and a consumption good C. The capital good together with a growing labor force L are the two factors of production.2 As is typical for this model, also suppose that the capital good cannot be traded once it is used as a productive factor and that this good is produced in a uniformly laborintensive fashion compared to the consumption good.3 The production function of each good is identical in both countries and subject to constant returns to scale.4 It is further assumed that the growth rate of the labor force is the same in both countries and that each economy saves a constant but different proportion of its income.5 There are two requirements for steadystate equilibrium in such a model: 1) The desired rate of capital accumulation in both countries must equal the exogenously determined rate of growth of the labor force, and 2) The value of exports must equal the value of imports for each of the two countries.6 As the first step in the analysis, it will be shown that over some range of capital-labor (K/L) endowment ratios for each country, there is for each of these endowment ratios some relative price of the capital good in terms of the consumption good (Pk) that will equalize the desired rate of capital accumulation in each country and the common rate of labor force growth. After finding the set of Pk and K/L ratios for each country satisfving this equilibrium condition, the next step will be to select the subset of Pk at which the two countries wish to trade in opposite directions, and determine for each of these Pk the relative size of the countries as measured bv the ratio of their labor supplies that would be needed to equalize the value of exports and imports in each country. Given some actual initial ratio of the size of the two labor forces a ratio that remains constant throughout the growth process, since the rates of labor force growth are equal in the two countries it will then be possible to read off from this schedule of * Professor of economics, University of Wisconsin, Madison. ' The exposition of these authors deals mainly with the case of a small country facing fixed terms of trade whereas the analysis here focuses on the more general case where there are two countries, each of which can affect the terms of trade. 2 For simplicity, depreciation of the capital good is ignored. Some initial supply of K and L in each country is also assumed. 3This assumption concerning factor intensity is made to insure a unique, stable steady-state equilibrium. I Such other standard assumptions of the simple Heckscher-Ohlin-Samuelson model as diminishing marginal productivity and perfect competition are also made. I In each economy, all individuals have the same savings ratio and possess the same quantity of capital. 6 When the desired rate of capital accumulation in a country equals the labor force growth rate, the country's supply of the capital good will generally not equal its demand for this good. However, the trading condition required for equilibrium insures that one country's excess demand for K is matched by the other country's excess supply. Thus, the two requirements can be combined into the more familiar condition that the actutal rate of capital accumulation equal the common growth rate of the labor force.

If the received wisdom is right, the EU's rapid economic integration should have been asso? ciated with a transfer of economic policy sov? ereignty to the supranational level. This paper marshals several strands of evidence in support the received wisdom, although the relationship in the EU is clearly two-way. Economic inte? gration makes governments more interested in international cooperation, but the institutional reforms that facilitate such cooperation also facilitate deeper economic integration.

There have been major changes in recent years in the trade policy strategy used by the United States in promoting its economic and political goals. In contrast to the benevolent multilateral approach from the early 1940s through the 1960s in which international cooperation aimed at strengthening the free world was emphasized, the United States in the 1970s and 1980s has increasingly pursued an aggressive bilateral strategy oriented toward domestic economic interests and particular regional political objectives. One manifestation of this policy shift is the increased use of bilateral negotiations in which the United States threatens to restrict access to its domestic market in order to force open a trading partner's markets for more U.S. exports or to curtail market-disrupting imports from the country. Negotiating free-trade agreements with the Caribbean basin, Israel, and Canada is another. Other indicators of this strategy shift are an increased emphasis on fair trade, the greater use of the antidumping and countervailing duty laws to restrict imports, and a willingness to give up the most-favorednation principle in limiting imports even when injury to a domestic industry is not due to unfair foreign trade practices. The United States has not abandoned the multilateral approach, as its participation in the Uruguay Round negotiations demonstrates, but even here the United States seems less willing than in the past to compromise for the purpose of achieving a consensus among the participants. This paper briefly analyzes the reasons for this shift in trade policy strategy and considers its usefulness for promoting U.S. interests in the future. I. From Hegemon to Oligopsonist

This paper shows that temporary real exchange rate fluctuations can have persistent (hysteretic) effects on trade. Specifically, when market-entry costs are sunk, sufficiently large exchange rate shocks alter domestic market structure and thereby induce hysteresis. This simple result has strong implications for exchange rate theory, t rade policy, and estimation of trade equations. Empirical evidence su ggests that the recent dollar overvaluation induced hysteresis in U.S. import prices. Namely, the aggregate pass-through equation (of exchange rates to import prices) shifted in the 1980s. The shift's nature and timing is broadly consistent with the hysteresis hypothesis.