Question

There are two questions related to Trade Regulations and Industrial Policies 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

* 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.

* 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.