Who's Bashing Whom? Trade Conflict in High-Technology Industries.

• Author: Krueger, Anne O.

Until recently, there was probably more agreement among economists on the desirability of free trade than on any other economic policy prescription. The case for reliance on comparative advantage was well buttressed by theory: a Pareto optimum is achieved when the international marginal rate of transformation equals the domestic marginal rate of transformation. This would happen in a competitive environment under free trade for a country; in the absence of monopoly power in trade, protection would unequivocally reduce welfare.

With the advent of the "new" trade theory, in which monopolistically competitive or oligopolistic industrial organization could lead to a divergence between marginal cost and price, however, the theoretical underpinnings of the free trade prescription appeared to weaken. Simultaneously, popular pressures have arisen for trade interventions, including especially "managed trade". Laura Tyson has been a highly visible proponent of managed trade, which she defines as being "commonly understood to encompass any trade agreement that establishes quantitative targets on trade flows. Managed trade thus lies at one end of a continuum between regulating trade flows through fixed rules and regulating them through fixed quantities or targets". Tyson advocates managed trade in "high-tech" industries, arguing that laissez-faire and free trade subject to international rules of the game will not secure as favorable an outcome for the United States.

Tyson's most recent book was of interest when it appeared as the latest, and therefore presumably the most carefully articulated, statement of her position. Given her appointment to chair the Council of Economic Advisers, interest increased. The book should be read and taken seriously by all economists.

Unfortunately, it is an exceptionally difficult book to review; the central message is not well focussed. Chapters 1 and 2 present a broad overview of high-technology trade and the issues as perceived by Tyson; Chapters 3 through 6 provide case studies of individual industries; Chapter 7 then provides a conclusion, yet even there, there is no systematic answer to the question as to why "quantitative targets" rather than alternative instruments of policy are appropriate for intervention. Indeed, in much of the book, Tyson claims that she is advocating "civilian industrial policy", on the grounds that trade policy is an inadequate tool.

A first question that arises for any economist in...