FGG Papers
Wissenschaftszentrum Berlin fuer Sozialforschung
Veroeffentlichungsreihe der Forschungsgruppe GLOBUS
FGG/dp 86-1
Assessing the Political
and Economic Effects of Protection Against Third World Exports
by
Brian M. Pollins
March 1986
Working Draft. Not for Quotation. All Comments Most Welcome.
Paper prepared for delivery at the 27th Annual Meeting of the International Studies Association, Anaheim, California, March 25-29, 1986.
An important portion of the work reported in this paper was conducted during the Summer of 1985, while the author was a Guest Scientist at the Wissenschaftszentrum Berlin. The support of that institution and resident colleagues is gratefully acknowledged.
Wissenschaftszentrum Berlin fuer Sozialforschung
Die in dieser Arbeit vertretenen Auffassungen sind die des Verfassers und nicht notwendigerweise die des Wissenschaftszentrums Berlin fuer Sozialforschung, Forschungsgruppe GLOBUS.
The views expressed in this paper are those of the author and not necessarily those of the Wissenschaftszentrum Berlin fuer Sozialforschung, GLOBUS Research Group.
ABSTRACT
Although there is a vast theoretical and empirical literature concerned with the effects of Protection, it is striking that so little work attempts to comprehensively assess such effects. Comprehensive assessment requires construction of what W.M. Corden called an "anti-monde" which permits more controlled study of counterfactual conditions.
The objectives of this paper are 1) To construct a framework for comprehensive assessment of the effects of Protection, and 2) to introduce an "anti-monde" capable of addressing these concerns. Illustrative results are presented showing the effects of changing advanced nation Protection against selected developing country goods. Changes in international conflict and cooperation are examined in addition to more commonly considered economic variables.
ZUSAMMENFASSUNG
Es mangelt weder an theoretischer noch an empirischer Literatur, die sich mit den Auswirkungen von Handelsrestriktionen befasst. Auffallend ist jedoch, wie wenige Arbeiten sich umfassend mit den Auswirkungen beschaeftigen. Der umfassende Ansatz bedarf der Konstruktion einer - wie W. M. Cordon es bezeichnet - "anti-monde", durch die nachvollziehbare Untersuchungen hypothetischer Annahmen und Bedingungen und damit die genauere Betrachtung von Auswirkungen moeglich werden.
Zu den Anliegen der hier vorliegenden Arbeit gehoeren 1.
die Konstruktion der Rahmenbedingungen, um hypothetische Annahmen ueber Beschraenkungen eingeben und die Auswirkungen untersuchen zu koennen, 2. die Einfuehrung einer "anti-monde"
als Konstrukt, mit dem die einzelnen Zusammenhaenge durchleuchtet werden koennen. Es werden Beispiele vorgestellt, um die Auswirkungen verschiedener Hände1srestriktionen einer entwickelten Nation gegenueber ausgewaehlten Handelsguetern einzelner Entwicklungslaender aufzuzeigen. Ferner werden Veraenderungen im internationalen Konflikt- und Kooperationsverhalten im Zusammenhang mit allgemeineren Wirtschaftsvariablen untersucht.
TABLE OF CONTENTS
A. Introduction... 1 B. A Framework for Assessment... ... 3
B. 1 Protect i o n ’s Effects Upon Self....
B. 2 Protect ion ’s Effects upon Others.
B. 3 Organizing the Major Concerns....
C. GLOBUS as "Anti-Monde"...
D. Illustrative R e s ults...
E. Early, but Firm Conclusions...
References... ...
14 20 41 45
A. Introduction
The issue of Protection, whether we find it in the popular press or in the academic literature, is a subject of frequent and intense controversy. In domestic political arenas, one easily finds arguments hailing Protection as the lone hope for the nation, or damning it as a "tax" on all society for the sole purpose of subsidizing the inefficient.
Internationally, this issue is often the sorest point between even the closest allies, and it has been a central issue in the debate between the advanced North and the developing South since the formation of the postwar trade order in 1947 (Krasner, 1985; Pollins, 1985).
Moreover, one does not see any evolution toward concensus in these debates. In the North-South trade debate, for example, the main issue has surrounded the desirability of preferential access for developing countries to advanced nation markets. Yet more than three decades after this idea was born, we still find polarization between those who see preferential access as essential to Southern development (Brandt Commission, 1980:18) and those who argue that the pursuit of such access has hampered the global economy in general, and Southern development in particular (Wolf, 1984).
Nor can we find any greater prosect for resolution by looking beyond the North-South debate. Some see Protection as a significant hindrance to economic well-being (Klein and Su, 1979) while others argue that the real effects of Protection are trivial (Strange, 1985), or negligible (Sohn and
Mandarino, 1984:259-261) , or are overwhelmed by other factors like domestic tax structures (Whalley, 1980) or exchange rate movements (Marsden and Hollander, 1981). Indeed, there are few issues on the global agenda over which there is such a cacaphony of disagreement. Why should this be the case?
One reason is obvious and ineradicable. The debate between Free Trade and Protection is a contest over who gets what. It is, therefore, essentially a political debate, and one which occurs at several layers in the global economy. The battle lines in this debate may at times be defined by economic class1 , or by c o m p e t i n g c a p i t a l s (export-oriented vs.
declining industries, for example), or between societies which are conscious of the terms-of-trade and developmental implications of the changing levels and structure of Protection.
Another reason is less obvious, but at least is amenable clarification in ways which may shed light on the underlying political controversies. Quite simply, we find much of the debate to be disjointed. Different scholars and commentators tend to look at a few, specific effects of Protection in particular areas. It is less surprising, therefore, that these writers would arrive at such radically different conclusions. In our reading, we seldom find a comprehensive accounting of winners and losers, or costs and benefits. More 1 In a two facto r (la b or, c a p ita l) Hechsher-Ohlin world, the issue of Free Trade vs. Protection in e vita b ly ia p lie s eleaents of class c o n flic t. S p e c ific a lly , we know froa the Stolper-Saauelson Theorea that Protection w ill b e n e fit the re la tiv e ly scarce facto r at the d ire c t expense of the abundant factor (because of the e ffe c t on the wage-rent r a tio ) . Hence, a P ro te ctio n ist p o lic y can favor the wage-earning class or the p ro fit-e a rn in g class in a society depending upon which fa cto r is re la tiv e ly scarce in that society. Staying at th is le ve l of g e n e ra lity, i t is in te re s tin g to observe th a t the cossercial p o lic ie s of aany developing so cie ties (being re la tiv e ly labor abundant and P ro te c tio n is t) as well as aost advanced c a p ita lis t so cie tie s (being c a p ita l abundant and re la tiv e ly "open” in th e ir coaaercial p o licy) both favor c a p ita l in the wage-rent struggle.
commonly, in empirical as well as theoretical work, an assessment is based upon examination of one or a few effects of Protectionist policy. Yet the conclusions drawn about the desirability or undesirablility of Protection are more often presented as general.
Our objective is to reduce the level of confusion by assessing the effects of Protection on a more integrated basis than is commonly found. The tasks implied by this objective are two: First, we will develop a more comprehensive framework for assessing the effects of Protection. Second, we must devise a means for measuring those effects. The first task will be basically accomplished by surveying the theoretical and empirical literature on Protection. The second task requires construction of a tool which permits examination of counterfactual conditions; a device which W.M.
Corden (in his work in this same area) called an "anti-monde"
(Corden, 1975:70).
In subsequent sections of this paper, therefore, we will develop an assessment framework, describe our means for examining counterfactuals, and present illustrative results from an exercise in which developing nations are given preferential access to Northern markets for agricultural and manufactured goods.
B. A Framework for Assessment
We will begin, quite simply, by "taking inventory" of the effects of Protection which we find discussed in the theoretical and empirical literature on trade. Later, we will organize our findings by creating general headings which
capture particular effects discussed in the literature. This survey, we expect, will provide a basis for a broader-range assessment of Protection than we have commonly found in the trade literature, and guide our own study on the question. We can begin this survey by dividing the search into two channels: One channel concerns the effects upon the country emplacing the Protection (let us call this set of concerns
"effects upon self"). A second channel involves the consequences of one country’s Protection upon other countries, or upon the trade system itself (let us call these concerns
"effects upon others"). We will look at each channel in turn.
B.l Protection’s Effects Upon Self
Clearly, theoretical and empirical studies of Protection’s "effects upon self" are much more numerous and frequently discussed than "effects upon others". The extent to which work within this channel is dominated by the values of Liberal political economy is also striking. Specifically, we find societal "welfare" to be repeatedly equated with
"goods available for consumption" (or some direct equivalent), and that concerns for economic efficiency dominate distributional concerns.
Much of the work in this area comes under the heading which Corden (1975:53) called the "Costs of Protection"
school. On the theoretical side, such "cost" concerns encompass textbook portrayals of the deadweight Production and Consumption losses which Protection entails (due to loss of efficiency on the supply and demand sides) as well as the rents generated by Protection as a market "distortion".
Besides such static shifts, "costs" may includes effects upon aggregate economic growth and adjustment. The question of economic adjustment is obviously important, for it leads us to consider dynamic effects upon the economy and includes the effects upon such important variables as employment, capacity utilization, and income distribution. In short, the theoretical literature tells us the direction of the effects of Protection upon particular domestic economic indicators:
the higher price on the protected good will result in societal production and consumption decisions which are welfare
damaging (in terms of deadweight loss).2 In addition, factors of production will be allocated to the relatively inefficient sector which otherwise would not be, and income will be redistributed toward the scarce factor.3
By looking at the empirical literature treating these same effects, we can get some idea about the magnitude of these effects. Here, we must note that many studies calculate the static welfare effects of Protection as small in relation to GNP (Sohn and Mandarino, 1984; Corden, 1975:60). If such calculations are correct4 , then any significant consequences of Protection must be ascribed either to dynamic effects, or to changes in specific, affected sectors (i.e. changes in
2 Teras-of-Trade e ffe c ts , however, aay sore than counterbalance the deadweight losses fo r a large country, and produce a net gain in so cie ta l welfare. This w ill be treated in our consideration o f "e ffe cts upon others” .
3 For present purposes, we can include the sizable lite ra tu re concerning "doaestic d is to rtio n s " as part of the "Costs of P rotection" school. The “doaestic d is to rtio n s " work is b a sica lly concerned with the e ffic ie n c y e ffe cts o f Protection w ith in as w ell as between fira s (Johnson, 1965).
4 Such calculations are in fa c t widespread. But aore recent work by H arris and Cox argues that, previous studies seriously underestiaate the welfare e ffe cts of Protection due to the assuaptions of perfect coapetition and constant, returns to scale which aost aodels eaploy. See H arris (1984) and Cox and H a rris (1985).
in aggregate importance of of Protection distributional variables rather than
consumption.) Such findings underline the moving beyond static analysis in the assessment
and of examining the disaggregated effects upon an economy;
i.e. it will be important to include some differentiation of economic sectors and income groups in the analysis.
The empirical literature in this area also treats additional concerns and indicators not found in the theoretical work. Much of the theoretical work proceeds from assumptions of full employment, perfect competition, and constant returns to scale. By contrast, most of the empirical literature relaxes one or more of these assumptions and will, therefore, assess the effects upon variables not often treated in theoretical work. In the Harris (1984) study, for example, we find assessment of factors such as Labor Productivity, Intra-Industry Trade, and Production Runs in addition to welfare effects and output changes. Deardorff and Stern (1981) include measures of employment and exchange rate movements. And Sohn and Mandarino (1984) track GNP, consumption, and the balances of trade and payments.
The relaxation of one assumption in particular -- that of constant returns to scale — has given rise to a distinct body of work. Trade liberalization can be viewed as a process whereby the size of a market is expanded by decreasing the trade barriers which fragment it. If returns to scale are increasing rather than constant, such market expansion (or fragmentation by Protection) may amplify the effects we have already discussed. The first wave of work in this area involved both ex ante and ex post studies surrounding proposed
or actual instances of trade liberalization (Corden, 1975: 73- 75) . More recently, work by Harris and Cox may be particularly important in reassess ing the welfare and distributional effects of Protection in light of scale economies (see Harris (1984) and Cox and Harris (1985)).
Finally, it is interesting to note some increase in interest regarding internal redistribution. Specifically, we see a growing number of models in which specific economic sectors are identified. Hence, the differential effects of protection across sectors may be addressed. Whalley (1985) presents a model in which six sectors are identified in each of two national and five regional economies. Deardorff and Stern (1981) have constructed a model with 29 sectors and 34 countries. We still have not found systematic treatment of income groups in these models, or of wage-profit splits (though the Deardorff and Stern model does have endogenous wages by sector).
B.2 Protection’s Effects upon Others
While we find a smaller body of work in this area, a large number of concerns spread over a broad range is present.
Let us begin again with textbook coverage of the issues. The predominant theoretical concern here is with international distribution. Specifically, we know that Protection may affect the net barter terms-of-trade. Assuming no retaliation by trade partners, Protection will improve a country’s terms- of-trade. Indeed, this effect may be more than sufficient to overcome the deadweight efficiency losses we have already discussed, and the Protection-imposing society may actuallly
find itself at a higher level of social welfare. One clear instance in which this benefit will not accrue is the small country whose Protect ion-induced reduction in demand will be insufficient to affect world prices. Recalling our initial point that Protection has inescapable political implications, this theoretical finding is interesting in a number of ways.
First, as we move to the international dimension, we can see strongly conflicting interests between societies; the division between "winners and losers" in the commercial policy game is sharper. Second, an important asymmetry in market relations has been identified, namely that large countries may be able to benefit from Protectionist measures, while small countries ("price-takers") have no similar opportunity. In fact, they may well find that they can only harm themselves further by retaliating against a large country’s Protectionist policy.5
Hence there are clear indications that, in the global trade system, opportunities are asymmetrically distributed among participants. This asymmetry is also indicated in studies done by John Whalley and his associates. Using a General Equilibrium model to simulate various patterns of trade liberalization, they find terms-of-trade and associated welfare gains accruing to the South only in instances where the North unilaterally reduces its trade barriers. Any reciprocation by the South results in serious net losses for developing countries, and dramatic gains for the North (Whalley, 1984; Hamilton, Mohammed, and Whalley, 1984).
5 I t is worth underlining tha t th is is one area of Liberal p o litic a l econosy where d is trib u tio n is a central question.
Theory guides us on other points as well. The theory of customs unions tells us that our Protection can affect the level and composition of our partners’ trade. And beyond the simple two-country case, Protection can also affect the direction of trade. We are referring, of course, to "trade creation" and "trade diversion" effects. By extension, trade theory also discusses the effects of changing trade patterns upon trade balances and currency exchange rates. As before, theory reveals the direction which terms-of-trade, levels, and direction of trade should take, but the magnitude of such change can only be occasionally and crudely foreseen. Some of the studies mentioned in the previous section have also addressed these international effects.6 One recent partial study addressed changes in levels of imports and exports assuming a decrease in Protection against Third World goods in Northern markets (Kirmani, Molajoni, and Mayer, 1984). Terms- of-trade effects and effects of changing levels of trade upon domestic economies were not discussed in this study, however.
Another major tradition concerning the international dimension of commercial policy involves the interaction of commercial policy between two or more countries. Here, most theoretical and empirical work has focussed upon the incentive one country may have to retaliate in kind against a Protectionist measure by another country. This incentive may arise from a purely rational attempt to recoup the terms-of- trade deterioration caused by the adversary’s Protectionist move (Whalley, 1985: 231-250), or the more strategically
Notably, these would include Whalley (1985), Sohn and Handarino (1984), and Deardorff and Stern (1981).
rational incentive to discourage further harmful action on the part of the adversary by replying in kind to each move (Axelrod, 1984) . Trade wars between two large countries roughly equal in size will often have Prisoners’ Dilemma logics to them, though not all commercial rivalries will be so structured, and even those which are may not iterate to some non-Protectionist, cooperative outcome (Conybeare, 1985).
Other recent game-theoretic work focuses less on commercial rivalry and more on international bargaining over trade liberalization. Chan (1985) finds evidence that the Tokyo Round of GATT, because of the rough equivalence in bargaining strength of the major economic powers, resulted in the development of bargaining strategies in which "egalitarian"
concerns came to clearly dominate classic, short-run, economic
"efficiency"interests.
A second, recent consideration regarding the interactive effects of tariffs between two countries does not involve game
I
theory, but it is equally interesting. Deardorff and Stern (1985a) tell us that we must move beyond a nation-specific treatment of commercial policy and realize that the symmetry or asymmetry of barriers between partners may say everything about the true level and structure of Protection maintained by a society. This work may be viewed as a significant extension of the concept of "effective protection" and implies that the effective commercial policy of any state is not determined by that state alone, but by the overall structure of Protection in the system at any moment. Deardorff and Stern’s work on this point must seriously call into question the "autonomy" of state policy in this realm.
Another international effect of Protection is before us.
The theory of customs unions tells us that Protection will affect the level and direction of trade. A mass of empirical work supports these claims. Therefore, work concerning the relationship between trade and conflict becomes relevant. It has been a corollary of Liberal trade theory that "commerce brings peace" since the time of Adam Smith. This has been repeated countless times; most recently (and passionately) by Milton Friedman (1980:43-44). Serious theoretical and empirical work on this question, however, has only appeared in recent times. Polachek (1980), working from a Rational Choice-theoretic perspective, has shown the "welfare damaging"
consequences of conflict upon trade. From this he derives a state’s "demand for conflict", which is inhibited by its assumed desire to maximize its own material well-being (which is always enhanced by trade). He also finds empirical evidence that higher levels of trade between nations are indeed associated with diminution of bilateral conflict.7 Arad and Hirsch (1981), working independently of Polachek, also employ neoclassical economics to derive similar (though somewhat more detailed) expectations about the salutary effects which trade could have upon Arab-Israeli relations. Both works are concerned with bilateral conflict and cooperation at a general level, not only in the game-theoretic, move-for-move sense.
See also Gasiorowski and Polachek (1982).
And both works would claim« therefore, that Protection is not only welfare-inhibiting, but conflict-inducing.8
B.3 Organizing the Major Concerns
From the existing literature alone, then, we have found numerous and wide-ranging concerns about the effects of Protection. While theory is relatively clear about the direction of each of these effects, a net assessment of the kind we desire will require some measure of the magnitude of change in these factors. Before we move to a discussion of the measurement of magnitude, let us simply take inventory.
By grouping the widely-varying concerns revealed in our survey under a limited number of headings, we will have our framework for assessing the effects of Protection. We see three major themes which capture the concerns of previous theoretical and empirical efforts:
1. Trade Flow Effects
- level of imports and exports
- composition of imports and exports - direction of trade
- payments and exchange rate implications of changing flows
2. Growth and Welfare Effects
- changes in income distribution; wage-profit ratios
- changes in consumption and production - changes in terms-of-trade
- changes in market shares
8 One very curious aspect o f both the Poiachek and Arad and Hirsch works is th e ir insistence tha t trade influences c o n flic t, but c o n flic t does not influence trade. In each o f the c ite d Poiachek studies, e s p iric a l evidence is offered to support th is one-way c a u sa lity. Yet h is own arguaent says that states w ill be c o n flict-a ve rse with trade partners precisely because they know tha t c o n flic t w ill in h ib it trade, and in h ib ite d trade w ill dasage th e ir “w e lfa re". S im ila rly , Arad and Hirsch ignore the fa c t that increased trade between the Is ra e lis and Arabs presumes a p rio r d isin u tio n of h o s tilitie s , or "no ra a liza tion " of re la tio n s . Likewise, w hile East-West trade during the era o f detente say have led to a fu rth e r d is in u tio n of c o n flic t (th is is the focus of Sasiorowski and Poiachek (1982)}, there can be l i t t l e doubt that the upturn in such trade at the beginning o f that period resulted d ire c tly fros a p rio r iaprovesent in diplom atic clim ate, not to sention s p e c ific trade and credit-extension agreesents.
- changes in partner or commodity concentration
- scale economies
- sectoral reallocation of labor and capital;
associated changes in efficiency 3. International Diplomatic, Political Effects
- changes in patterns of conflict and cooperation
- reciprocal action-reaction dynamics (trade wars vs. evolution of cooperation)
The distinction between "effects upon self" and "effects upon others" (which served as a heuristic in organizing the literature) is dropped here because: 1) As organized in this framework, a policy change by any actor can potentially affect that same actor as well as others in the system. 2) We do not think of policy-makers as "autonomous", or separable into
"self" and "others" when they must operate within a system whose own rules and tendencies shape the interests and capabilities of those constituent actors.9 Our own work argues that international economic exchange must be represented as a system if the political economic relationships which define it are to be theoretically and empirically identified (Pollins and Kirkpatrick, 1986).
Recent work by Nagy (1983) and Lambelet (1985) also takes the strong stance that to represent trade relations as anything but a system will fail to identify the global constraints upon change. And Deardorff and S t e r n ’s above-cited work on the structure of Protection makes the same argument for commercial policy (Deardorff and Stern, 1985a).
'■ When the success or fa ilu re — and u ltim a te ly the su rviva l — o f policy-making agents is as such outside th e ir hands as in i t , i t sakes sore sense to consider such agents as dependent upon the systes, not autonosous fro s i t . To state the sase point »osewhat d iffe re n tly : i f the very existence of ce rtain agents as policy-aakers presuses an underlying social order, ho» could they possibly be “ separate” fro s tha t order? C le a rly, our in te re s t is to avoid a s ta tis t approach to the study of p o litic a l econoay. For a thorough discussion o f the im p licatio n s of such cossitsents see Ashley (1983 and 1984).
C. GLOBUS as "Anti-Monde"
Any assessment of policy change requires some representation of counterfactual conditions, namely, a description of what the world would look like if the policy intervention had not taken place. At one level, this is one service provided by theory, for theory should provide a representation of the real world which is manipulable (and thus capable representing counterfactual conditions).10 The pure theory of international trade, and associated theory of commercial policy provides just such a starting point. But as we have seen, such theory shows us the direction of change which a Protectionist policy would bring, but can tell us little about the magnitude of that change. Measuring the magnitude of change is no mean task, for it requires more information than predicting the direction of change alone.
First, the measurement of magnitude certainly requires parameters to be placed upon the asserted theoretical relationships. In addition, existing studies relevant to the question of Protection indicate that the measurement of magnitude may also require representation of dynamic effects (Corden, 1975: 58-60), some degree of s e c t o r a l d i f ferentiation (Cox and Harris, 1985, for example), and higher-order effects (Polachek, 1980, for example).
1 Such “ theory” say be very simple. For exaspie, one say assert th a t the world without the policy in te rve n tio n would look very such lik e the world before the p olicy change. In sany cases, the assuaption is tha t a simple extrapolation of observed trends before the in terven tio n w ill t e l l us what the world would look lik e had the in terven tio n never occured. Even tis e -s e rie s representations lik e Box-Jenkins or ARIHA and associated assesssents using in terru pte d tis e -s e rie s designs say be viewed as s lig h tly sore sophisticated extrapolations of past, trends. Scse argue that u n iva ria te tis e -s e rie s analysis is simply a way of viewing the reduced-fora of the th e o re tica l sodel producing the time se rie s. Whether such theory is adequate resains an open question (see note 11).
empirical Derivation of parameters usually requires
estimation as well as some means of judging the adequacy of the entire model.*Io11 * Moreover, as the list of effects to be assessed lengthens, the model becomes increasingly complex.
To assess flow effects alone, a model of trade patterns may suffice. To also examine growth and welfare effects would require models of associated national economies and their linkages to the outside world. And to examine higher-order effects (such as the action-reaction dynamics of commercial rivalry, or trade’s effects upon international diplomacy) requires further specification and estimation. In short, unless the list of effects to be assessed is relatively short, the theoretical device which we require is sufficiently complex to resemble a world unto itself. In C o r d e n ’s terms, we create an "anti-monde" (Corden, 1975:70).
Now it is easier to understand why much of the work to date has concentrated upon a short, limited list of effects in assessment studies. For if broader assessments require theoretical complexity, complex models require considerable computation in order to be manipulated, or "solved". These computational requirements are considerable not only for models which must be solved numerically, but even for those with analytical solutions (such as General Equilibrium
1 1 Adequacy say be p a rtly judged by seasures o f s ta tis tic a l f i t , s ta tic forecasts, dynamic forecasts, or sose combination of these. He do not see such seasures as the sole or fin a l a rb ite r o f adequacy, however.
Io take an extrese case, imagine two models; one sodel is a ll but devoid o f underlying theory but has
“e x c e lle n t” f i t , while a competing sodel - - holding f ir s to strong the o re tica l p rio rs - - f i t s the e xistin g data poorly by comparison. However, as we sove in to the fu tu re , and variables begin to take on values beyond our o rig in a l estim ation range, we could well fin d that the sodel based on strong theory outperforms the a th e o re tica l c u rv e -fittin g sp e c ific a tio n which f i t our i n it ia l data so w e ll. He hold, therefore, that models intended fo r the examination of counterfactuai conditions outside the range o f the data used for estim ation sust have the strongest th e o re tica l foundation possible, even when i t can be demonstrated that sose ad-hoc “ f i x ” would provide a noticably b e tte r f i t with that data.
models). Such computational power has been available to researchers for little more than a decade. Efforts to assess the effects of Protection on a broader basis are still few in number and have been published within the last five years.
The major efforts are those of Project LINK, the Leontieff group, Deardorff and Stern, Harris and Cox, and Whalley and his associates . 12 It is not the purpose of this paper to summarize their work, but to present our own, and, where appropriate, to orient our approach and findings to these related efforts.
Our own study of the effects of Protection employs GLOBUS, a large-scale computer simulation of global political and economic processes spanning the years 1970-2010. GLOBUS contains six major submodels for twenty-five countries, plus a
"Rest-of World" entity .13 * The major submodels are: 1) a government budget model tracing processes of revenue generation and government spending for each of the twenty-five nations, 2) an international political model specifying conflictual and cooperative diplomatic relations between the twenty-five nations, 3) a domestic political model concentrating upon processes of domestic support for, and opposition to, the ruling regime, 4) an exogenous demographic model, 5) a national economic model, and 6) an international
1 P ublications describing these e ffo rts are Deardorff and Stern (1981; 1985; 1986), Whalley (1985), Brown and Whalley (1981), H arris (1984), Cox and Harris (1985). For the L e o n tie ff group, see Sohn and Mandarino (1984). For Project Link see Klein and Su (1979), and Hicksan and K lein (1985).
1 3 The tw e nty-five nations include seven advanced sarket econosies (The United States, Canada, Great B rita in , France, The Federal Republic of Germany, Ita ly , and Japan), four aesbers of the CHEA (The Soviet Union, Czechoslovakia, Poland, and the Geraari Desocratic Republic), fiv e aesbers of OPEC (Venezuela, N igeria, Saudi Arabia, Ira n , and Indonesia), and nine other developing countries (Mexico, B ra z il, Argentina, Egypt, Turkey, Ind ia , Pakistan, The Union o f South A fric a , and The People’ s Republic o f China).
economic model.14 Let us look more closely at the last two major submodels and relate them to other major efforts already identif i e d .
The national economic model for any single country is defined by four markets (goods, factors, domestic finance, international finance). Goods are differentiated into six sectors: food and agriculture, non-fuel raw materials, primary energy, manufactures, armaments, and non-factor services.
With the conspicuous exception of the armaments sector, this sectoral breakdown is quite common in the existing literature.15 Our explicit inclusion of an armaments sector reflects our interest in tracing certain political-economic relations both internationally (arms sales, military aid) as well as domestically (government procurement, aid expenditures). Like General Equilibrium models, GLOBUS is initialized in equilibrium. Thereafter, however, the aforementioned markets will continually tend towards equilibrium, but may not be in equilibrium at any particular moment. This reflects our belief that most systems require time to adjust to change (i.e. they cannot adjust instantaneously), and that equilibrium itself is often a continuously-moving target. Because of the long time-horizon of the model, considerable effort has been made to model the supply side as well as the demand side of the economy, and to
1 4 Detailed description and documentation fo r these six major submodels is found in Bremer (1985a).
S p e c ific a lly , the national economic model is described in Hughes (1986), the government budget model is found in Cusack (1985), domestic p o litic a l processes are described in Eberwein (1985), demographic processes in Bremer (1985b), in te rn a tio n a l p o litic a l processes in Smith (1985), and in te rn a tio n a l economic processes in Brecke (1985). These c ita tio n s are conference-volume d ra fts c u rre n tly under revision for p ub lica tio n . The authors may request, that only fin a l versions be disseminated a t th is time.
1 5 See Hhalley (1985), and Artus and McSuirk (1981), fo r example.
embody the process of technological growth. In short, the GLOBUS national economic model bears some resemblance to each of the aforementioned modeling efforts, but also has features which differentiates it from each. The similarities are sufficient to eventually make direct comparison of our results with those other efforts an interesting and enlightening exercise (though we will undertake no such comparison in this pa p e r ).
The international trade model in GLOBUS also bears strong theoretical similarity to recent models of the international economy. Like the ORANI model, the LINK project, and Whalley efforts, we separate the decision regarding level of imports from the decision regarding trade partners. Given a level of total import demand for a particular good, the choice of trade partners is decided by a utility-maximizing logic which looks at the global distribution of relative prices (i.e.
"comparative advantage") and non-price factors. The way in which such factors are brought into the decision is critical, for the consistency of the demand specification must be maintained. If such consistency is lost, it is no longer clear what the decision process is maximizing, nor can we be sure that trade flows will properly add-up. Recent efforts in
large-scale trade modeling (including GLOBUS) have been sensitive to this problem, and have employed the same basic solution (Whalley, 1985; Cronin, 1985).
Specifically, the separation of the trade decision into the two steps just described permits use of the "Armington assumption". This approach has several conspicuous advantages beyond the maintenance of demand consistency: First,
bilateral trade flows can be more accurately modeled because differentiation of products by place of origin allows for intra-industry trade, or "cross-hauling". Intra-industry trade represents a significant proportion of global trade (more than half of all trade among advanced market economies, for example), and such trade is not captured by models based upon the Hecksher-Ohlin pure theory of trade (Whalley, 1985:
38-39). Second, the Armington assumption also enables the explicit identification of historical influences upon bilateral trade relations, including supply-side economic effects, and changing diplomatic relations (Pollins and Kirkpatrick, 1986). Third, the Armington formulation permits specification of international trade as a tightly integrated system, especially when the supply side is explicitly modeled as we have done in GLOBUS. This is particularly important for models with long time-horizons (Nagy, 1983; Lambelet, 1985), or where the "autonomy" of policy-makers is called into question by the structure and rules of the system in which they operate (see note 9).
At some point, it may be appropriate to match each element in our assessment framework to specific sectors, or even specific variables in GLOBUS. Before we lose the forest for the trees, however, let us assert that GLOBUS is sufficiently detailed to serve as an ant i-monde in the assessment of the effects of Protection. We make this assertion because GLOBUS provides detailed representations of trade flows, national economies and their linkages to the world economy, and potential higher-order effects of Protection, such as possible changes in international
diplomatic climate, or domestic support and opposition. We view GLOBUS as sufficiently similar to other major efforts in this field to make direct comparisons of our results possible, yet we are sufficiently different in certain aspects of our approach that those same comparisons should be interesting and enlightening. Let us examine some preliminary results to get a better feel for the possibilities and limitations of our method of assessment.
D. Illustrative Results
While the GLOBUS model has been running in integrated form now for some months, it is still undergoing the rigors of
"fine-tuning". Changes have been made in the model since our runs were conducted in September, 1985, so we cannot stand by the results presented here until we have had the opportunity for further analysis. Take the policy scenario and the results we present here as an exercise of the model; a means of illustrating the m o d e l ’s range, capabilities, and limitations. Such was the original intention of these runs in any event. A true assessment of the effects of our chosen policy scenario will be conducted during the coming months, and will require much more detailed analysis than we can present in the coming pages.
Our substantive interest concerns the political and economic effects of Northern Protectionism against Southern exports. These trade barriers have long been an important part of the North-South debate, as well as a contributing factor to domestic contention regarding commercial policy within these countries. More recent controversies surrounding
Third World debt have greatly increased the potential importance of market access. What might be the overall effects of a preferential tariff scheme?
As a first cut, we chose to model a modest change in the level of advanced country Protection against LDC goods. Our initial year (1970) follows the close of the Kennedy Round, so we know that nominal tariff levels of OECD nations against each other was on the order of 8%. We also know that Protection by these same countries against LDC goods was measureably higher (Ray and Marvel, 1984), although computing a precise tariff-equivalent of increasingly-important NTBs is difficult. In the aggregate, the overall level of protection in the North against Southern exports may be on the order of 15-25%. A "strong policy" scenario might model the complete removal of all such Protection against goods of Southern origin, but recent studies show that actual preferential tariff programs, such as GSP, have been almost completely coopted by Northern countermeasures which leave the true measure of relief much lower than the stated policy may indicate (Ray, 1985). So the "strong policy" scenario, while interesting in its own right, might be unrealistic. By choosing some level between no change and the complete removal of Protection, we might approximate the mix of the strong policy and the advanced market economies’ reaction to it.
Hence, we elected to implement a ten percentage-point reduction in the level of Protection currently in place in advanced country markets against agricultural and manufactured products of Southern origin.
More specifically, we identify the advanced market economies as the seven members of the "West" group in the GLOBUS model (USA, Canada, Britain, France, FRG, Italy, and Japan) and the LDCs in this exercise are the nine non-OPEC developing countries designated as "South" in GLOBUS (Mexico, Brazil, Argentina, India, Pakistan, Turkey, Egypt, South Africa, and China). Because the model is in equilibrium in the initial 1970 period, the trade—share equations "embody" many factors, including the level of Protection. We implement our scenario, therefore, simply by reducing the relative prices for the appropriate country—pairs by ten percent.
Representing a change in the level of Protection by adjusting overall prices is the means employed by Klein and Su (1979) in their LINK Project study on worldwide Protection.16 We chose to implement this policy change all at once in the year 1985.
We will discuss selected effects in each of the three major areas of assessment outlined in our framework. Again, because these results were generated by one of the initial runs of the GLOBUS model, the results should be considered as illustrative of the m o d e l ’s capabilities rather than our final assessment regarding preferential tariff schemes. Hopefully, the reader will gain a better understanding of the breadth of assessment which this model can offer, and the attendant feedbacks between different sectors which few modeling efforts have thusfar attempted. We will also see that information at a variety of levels and forms is retrievable in GLOBUS.
1 Klein and Su (1979) experimented with price changes o f 5Z, 10Z, and 202. Others, such as Whalley (1985) and Beardorff and Stern (1985a; 1985b) have seasured le ve ls of Protection sore d ire c tly .
Turning first to an assessment of trade flow effects, the change in the level of manufactured goods exports is shown across various countries (see Figures la to lc). What is most interesting is the difference in impact across countries. It is not surprising that all developing countries increase their exports of manufactured goods, nor that the differences across countries may be appreciable. But the nation-level information provides a sharper picture of who-gets-what than region-level results could. For simplicity of presentation, we have selected three developing countries as representative of the kind of behavior we see across all beneficiaries (Figure la). In the figures presented here, change is always expressed as a percentage deviation from the base run.
The consequences for the seven advanced market economies is also interesting for its variety (Figures lb and lc).
While all experience some modest loss of exports during the initial five years following the policy change, their response for the remainder of the period is quite varied. Indeed, if further analysis shows this pattern of results to be robust, integration of the areas under certain country curves would show some advanced market economies exporting more under the preferential tariff scheme than under the present trade regime.17
Perhaps it is more important to note here that
"counterintuitive" results such as these can be explained in
:i 7 He suspect a sodest trade creation e ffe c t say contribute to th is re s u lt, and there is sose evidence for th is in tha t the global market fo r manufactured goods grows modestly (see Figure 2a). But world aggregate fig ures can sssk considerable s h ifts a t the regional and national le v e ls , and we have not yet had the opportunity to calculate fin a l ’ winners” and “ losers” on the basis of a ll the evidence; i . e . , whether trade creation exceeds trade d ive rsio n, and i f so, for who®.
F i g u r e l a
T r a d e F l o w I n d i c a t o r
CHANGE IN VOLUME OF EXPORTS (MANUFACTURES)
['/. PERCENTAGE DIFFERENCE FROM BASE RUN]
8 0 . 0 0
7 0 . 0 0
6 0 . 0 0
5 0 . 0 0
4 0 . 0 0
3 0 . 0 0
2 0 . 0 0
1 0 .0 0
0 . 0 0
- 1 0 .0 0
- 2 0 .0 0
1965 1970 1975 1980 1985 1990 1995 2000 2005 20 1 0 2015 YEAR
LE£EN£L
a=BASE
+=8RAZIL X=ARGENTINA O=MEXICO
w *
live/«
a x * as
F i g u r e l b
T r a d e F l o w I n d i c a t o r
CHANGE IN VOLUME OF EXPORTS (MANUFACTURES)
(Z PERCENTAGE DIFFERENCE FROM BASE RUN)
3 0 .0 0 -|---
2 5 .0 0 -
2 0 . 0 0 -
1 5 .0 0 -
- 1 0 . 0 0 -
- 1 5 . 0 0 -
- 2 0 . 0 0 ---1--- 1--- 1--- 1--- ~i i i i i
1965 1970 1975 1980 1985 1990 1995 2 0 0 0 2005 2010 2015 YEAR
IIV6Z6E S S tr M
LEGEND
*=BASE +=USA x=canada O=U.K.
F i g u r e l c
T r a d e F l o w I n d i c a t o r
CHANGE IN VOLUME OF EXPORTS (MANUFACTURES)
CZ PERCENTAGE DIFFERENCE FROM BASE RUN]
1 2 .0 0 ---
1 0 .0 0 -
8 . 0 0 -
6 . 0 0 -
4 . 0 0 -
2 . 0 0 -
0 . 0 0 -
- 2 . 0 0 -
- 4 . 0 0 -
- 6 . 0 0 -
- 8 . 0 0 H--- 1--- 1--- 1--- 1---r --- n ---1--- 1--- 1—
1 9 6 5 1 9 7 0 1 9 7 5 1 9 8 0 198 5 1990 1995 2 0 0 0 2 0 0 5 2 0 1 0 2 0 1 5
YEAR
V » s< ® ’
IIVG/CC 6 SEP 85
LEGEND a=BASE +=FRANCE
X=WEST_GERMANY
❖= ITALY
^=JAPAN
terms of the model. That is, it is always possible to
"backtrace" through the highly-detailed model results to reconstruct the production of any particular result. Such model-based "explanation" can then serve as a basis for further theoretical and empirical work. In other words, the model itself is a form of theory, capable of producing novel results which are empirically testable.
Growth and welfare effects cover a multitude of important concerns in our framework. We have chosen to present only shifts in market shares at this point, because the national economic model, which would provide much of the information on the effects under this heading, was undergoing experimental revision at the time our runs were conducted.18 Figures 2a and 2b show only modest change in the global markets for manufactures and agricultural products. Again, however, global aggregates may be showing only the modest net effects of considerable regional or national changes. Figures 2c and 2d give somewhat sharper indication that regional differences are indeed important, for the South group is gaining market share at the expense of the West.19 Finally, Figure 2e shows
1 8 I t was known in Suaaer, 1985, that, the supply side of the national econoaies was underspecified in the SLOBHS aodel. Indeed, one purpose of our p o licy run was to id e n tify the shortcoaings o f that s p e c ific a tio n ; i. e . , to h ig h lig h t those areas where aodel behavior deviated aost seriously froa our theory-based expectations. Hopefully, we could also id e n tify what was needed in the aodel to re c tify such probleas. B a sica lly, we found that i t was d if f i c u l t to represent the undereapioyaent o f factors which is so coaaon to developing countries, and hence i t was also d if f ic u lt to capture the "extensive” tors of growth which a p re fe re n tia l t a r if f scheae sig h t fa c ilita te . He were le f t with strong “crowding" e ffe c ts in national econoaies which co ntin u ally approxiaated fu ll-e a p lo yse n t throughout the run. The supply side has undergone extensive revision during the past s ix aonths (aost conspicuously, facto r aarkets have been added), but we have not yet had the opportunity to recreate our p olicy scenario.
1 ::: The coaparison with Figures 2a and 2b is not d ire c t, however, because we have s h ifte d our focus froa aarket size to aarket. share. S t i l l , s h ifts in share of th is magnitude probably could not be accoaaodated w ith in the rather aeager o verall growth o f the aarket which these re s u lts in d ica te , hence there is probably soae real loss by ce rta in advanced aarket econoaies, and Figures la to 1c can ind icate who they eight be.
F i g u r e 2 a
G r o w t h a n d W e l f a r e I n d i c a t o r
[7. PERCENT CHANGE FROM BASE RUN]
5 .0 0 -i---
4 .5 0 - /
I
I
4 .0 0 - /
1II 1
3 .5 0 - !
I
tI
3 .0 0 - /
1
2 .5 0 - /
2 .0 0 - ■'
II
t
II
1 .5 0 - /
/
1 .0 0 - /
I
0 .5 0 -
0 .0 0 -j--- 1--- 1--- 1--- r - - — I---1---i--- 1--- 1
1965 1970 1975 1980 1985 1990 1995 2000 200 5 20 10 2015
CHANGE IN SIZE OF WORLD EXPORT MARKET (MANUFACTURESJ
YEAR
livt/tt 1 » 85
L£££NQ.
-=BASE_RUN
=SCENARIO
F i g u r e 2 b
G r o w t h a n d W e l f a r e I n d i c a t o r
['Z PERCENT CHANGE FROM BASE RUN]
9 . 0 0 -j--- ---
8 . 0 0 -
7 . 0 0 - I:
I«
6 . 0 0 - /
I»
5 . 0 0 - /
Iti tI
4.00 - :
I II
3 . 0 0 - :I
III1 I<
2 . 0 0 - !
t
1 . 0 0 - / \ :
/ \ /
t t t
o.oo - --- --- Vy---
- l . o o -I---1---1--- 1--- 1---1---1--- 1--- 1---1---
1965 1970 1975 1980 1985 1990 1995 200 0 200 5 201 0 2015
CHANGE IN SIZE OF WORLD EXPORT MARKET (AGRICULTURE)
YEAR
HW/CE
I » os
LEGEND
-=BASE_RUN
«SCENARIO
F i g u r e 2 c
G r o w t h a n d W e l f a r e I n d i c a t o r
svUttfs
CHANGE IN WORLD IMPORT MARKET (MANUFACTURES)
CX PERCENTAGE POINT DIFFERENCE FROM BASE RUN]
6 .0 0 ---
5 . 0 0
4 . 0 0
3 . 0 0 -
2 . 0 0
1 .0 0 -
0 . 0 0 - ---
- 1 . 0 0 -
- 2 . 0 0 -
- 3 . 0 0 -
- 4 . 0 0 H--- 1--- 1--- 1--- 1--- 1---1--- 1--- 1--- 1—
1965 1970 1975 1980 1985 1990 1995 200 0 200 5 2010 2015 YEAR va
nve/K
LEGEND --- =BASE
... =WEST_SHARE
--- =S0UTH_SHARE
F i g u r e 2 d
G r o w t h a n d W e l f a r e I n d i c a t o r
SCARES
CHANGE IN WORLD IMPORT MARKET*(AGRICULTURE)
[ ’/. PERCENTAGE PO INT DIFFERENCE FROM BASE RUN]
1 2 .0 0 -i---
1 0 .0 0
8.00 -
6 .0 0 -
4 .0 0 -
2 .0 0 -
0 .0 0 -
- 2 . 0 0 -
- 4 . 0 0 -
- 6 . 0 0 -
- 8 . 0 0 -|--- 1--- 1--- 1--- 1--- 1--- 1--- 1 i i 1965 1970 1975 1980 1985 1990 1995 20 0 0 20 0 5 2010
LEGEND
--- =BASE
...=VEST_SKARE --- =SOUTH_SHARE
2015 YEAR va
6 IIVGZCC I SEP 05
F i g u r e 2 e
G r o w t h a n d W e l f a r e I n d i c a t o r
S
CHANGE IN WEST IMPORT MARKET (MANUFACTURES)
[ ’/. PERCENTAGE PO INTS IN SHARE OF TOTAL MARKET]
1 0 . 0 0 -i---
8 .0 0
6 . 0 0
4 .0 0
2 .0 0
0 .0 0
- 2 . 0 0
- 4 . 0 0
- 6 . 0 0
- 8 . 0 0 -
-lo.oo A--- 1--- 1--- 1--- 1--- 1--- 1--- 1--- 1--- 1—
196S 1970 1975 1980 1985 1990 1995 200 0 2005 2010 2015 YEAR
tm s< ® > s
I1VC/GE 6 SEP 85
LEGEND a=BASE
+=SQUTH_SHARE X=EAST_SHARE O=WEST_SHARE
^=OTHR_SHARE
the changes for all groups in that import market most directly affected by this policy change; i.e. that of the preference
granting West. Again, change in the W e s t ’s share of its own market basically mirrors that of the South group.
We suspect that such a policy could have appreciable effects in the developing South in terms of sectoral allocations of labor and capital, wages, consumption and aggregate growth, and we wish we could have presented more on those subjects at this time. Growth and welfare effects may well be the most important effects in this particular policy scenario, but we can as yet make no such claim.
International political effects generated by this policy scenario are interesting for a number of reasons. While we must still consider these results as provisional pending new runs and further analysis, the effects portrayed in Figures 3a through 3e go farthest in illustrating the capabilities of our model. In short, they show: 1) higher-order effects of Protection not considered before; effects which are based on sound theory and empirical estimation, 2) how the m o d e l ’s structural specification can serve in the construction of model-based explanations, and 3) how first-order relationships can be overwhelmed by higher-order effects to produce counterintuitive results.
Figure 3a portrays an aggregate indicator of all flows of conflict and cooperation between each advanced market country with each member of the developing South. Intuitively, we might expect that a "concession" on the part of the West, such as granting preferential access to their markets, would engender an improvement in diplomatic climate. While this is
F i g u r e 3 a
I n t e r n a t i o n a l P o l i t i c a l I n d i c a t o r
CHANGES IN POLITICAL CLIMATE (TENSION) WEST-SOUTH
YEAR
LEGEND --- =BASE
...=UEST-SOUTK
VZB
IIW/«
• » K
F i g u r e 3 b
I n t e r n a t i o n a l P o l i t i c a l I n d i c a t o r
CHANGE IN WEST-SOUTH COOPERATION
YEAR
V »
e(LWWu>«
IIVG/CC 6 SEP IS
LEGEND.
--- =BASE
...=WEST-SOUTH ---- =SOUTH-WEST
F i g u r e 3 c
I n t e r n a t i o n a l P o l i t i c a l I n d i c a t o r
CHANGE IN WEST-SOUTH HOSTILITY
VZB
6
live/«
YEAR LEGEND
--- =BASE
... -= WEST-SOUTH --- =SOUTH-WEST
F i g u r e 3 d
I n t e r n a t i o n a l P o l i t i c a l I n d i c a t o r
CHANGE IN SOUTH-WEST IMPORT MARKET SHARES
ua
• ( S ' tIVG/fit
I KP M
YEAR LEGEND
--- =BASE
... =S_SHARE_IN_U - — =W_SHARE_IN_S
F i g u r e 3 e
I n t e r n a t i o n a l P o l i t i c a l I n d i c a t o r
CHANGE IN SOUTH-WEST BILATERAL TRAOE IMBALANCES
IV. PERCENTAGE CHANGE FROM BASE RUN]
5 0 .0 0 -j---
4 0 .0 0 -
3 0 .0 0 -
2 0 . 0 0 -J /
I t
I *
I *
1 0 .0 0 - / \
- 1 0 . 0 0 - I /
1 X *
- 2 0 . 0 0 -
-3 0 .0 0 -
- 4 0 . 0 0 -
- 5 0 . 0 0 --- r- ' ---1---1--- 1--- 1--- 1--- 1--- 1 i
19 6 5 1970 1975 1980 1985 1990 1995 2 0 0 0 2 0 0 5 2 0 1 0 20 1 5 YEAR
IE6LNQ
---=BASE
1IV6/6C 6 SEP K
WS_IMB_WI_SO SO_IMB_WI_WS
the case for a few years, the dominant result seems to be an increase in tension. Figures 3b and 3c show the two immediate components of the Tension indicator. While cooperation does increase modestly (Figure 3b), the general increase in hostility is considerably larger (Figure 3c), hence the aggregate picture is more understandable, but the conflict and cooperation flows themselves must now be explained.
In the GLOBUS model, cooperative behavior is positively affected by trade share; i.e. the higher the portion of one country’s imports and exports exchanged with a particular partner, the more cooperatively predisposed that country will be toward that partner. Figure 3d shows that our preferential tariff scenario does result in higher trade shares for each of our key regions in the ot h e r ’s trade. In other words, a
"tightening" of the interregional economic relationship is indicated at this point. Other things being equal, we would expect greater cooperation. But other things are never equal.
Hostility sent by one country to another in GLOBUS is affected by an indicator called "Bilateral Imbalance". This indicator essentially measures the balance of trade between two partners in the context of its overall account. If a country’s overall Current Account picture is not in deficit, then any particular bilateral deficit will be ignored. But when an overall deficit is present, it will become sensitive to bilateral deficits, and increasingly so as that overall deficit gets large. Figure 3e shows that this is indeed a problem resulting from our policy scenario. In the aggregate, advanced market economies’ trade accounts do worsen, and developing countries are "blamed" for this. Why would this
effect not be counterbalanced by the improvement in the South group’s Bilateral Imbalance with the West? The answer lies within the international political model itself (Smith, 1985).
Richardson-like action-reaction dynamics are the heart of that model, and countries do not react identically to cooperation or hostility sent by others. In our case, we can note that, generally, large countries react very little to the cooperative or hostile flows sent by small countries, while small countries tend to react strongly to such actions directed at them by large states (keep in mind that we are basically dealing here with forms of exchange below the use of force). Hence the action-reaction dynamic for large-small country pairs will tend to be "led" by the large country’s actions. The reaction coefficients are estimated using data from the late forties to early seventies.
Our preliminary reconstruction then, is that the worsening trade balances of the West lead to an increase in their hostility toward the South. The So u t h ’s reaction to this increased hostility overwhelms the lessening in tension they otherwise may have felt given their improved trade balance and the tightening of their trade ties with the West.
The net effect is a modest increase in political tension between these two regions.
Again, we cannot stand by these results until we rerun our scenario. And we would also look at the described patterns on a much more disaggregated basis before making region-wide generalizations as we just have. Our purpose at present is simply to illustrate the power of the model as an
"analytical engine". The very act of understanding model
