Neoliberal Economic Analysis

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Neoliberal economists have pushed for international free trade since global suffering caused by protectionism during the Great Depression. In the past 70 years there has been tremendous growth and prosperity for developed nations, however this has not been true for all nations. Additionally, even highly developed nations use aspects of trade policies counter to free trade to become, or keep competitive advantage in an industry. The neoliberal and opposing arguments for industrial policy, strategic trade policy, trade problems of developing nations, import substitution and export-led growth policies are outlined in this paper. Industrial policy is “government policy that is actively involved in creating comparative advantage” (Carbaugh, …show more content…
530). Free market economists argue that strategic trade policy is flawed due to empirical difficulties in modeling the markets, intervention will encourage rent-seeking firms, and empirical difficulties are magnified by general equilibrium making it extremely difficult for strategic trade policy to work in practice (Krugman, 1987). Additionally, strategic trade policy promotes beggar thy neighbor policies increasing geo political tensions and harming the global flow of trade. Supporters of strategic trade policy contend that imperfect competition leads to a small number of large companies dominating and government policy can increase the ability for the large company in their country to capitalized on increased capacity at the expense of the other company in the competing country (Carbaugh, 2013). Strategic trade policy is typically implemented using research and development (R&D) subsidies. Supporters of strategic trade policy state that benefits from R&D within one industry not only spill over to other industries, but also across international boundaries, therefore reducing beggar thy neighbor impacts (Jo, 2010). The introduction of strategic trade policy encouraged economists to look at free trade with a more discerning …show more content…
According to Joseph Stiglitz who resigned from the World Bank states “there is no doubt in my mind that trade liberalization will be of benefit to the developing nations, and to the world more generally” (Carbaugh, 2013, p. 246). Free trade economists argue that overall growth is increasing, however they acknowledge that there is much improvement needed. One primary challenge for developing nations is although the developed world claims they are open to free trade, these nations typically have protections on the industries in which developing nations have comparative advantage. Developed nations have been unwilling to remove agriculture tariffs when negotiating with developing nations. Under pressure from developing nations, a generalized system of preferences (GSP) to temporarily reduce tariffs on specific imports was developed to help developing nations (Carbaugh, 2013). The GSP has only been partly successful due to continued resistance of developed countries such as the U.S. to exclude products where developing nations have comparative advantage (Carbaugh, 2013). The combination of poor infrastructure and organization along with an uneven trade playing field has made it difficult for developing

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