Page 139 - Global Political Economy_Understanding The International Economic Order

CHA PTER F IVE
lieve that manufacturing also produces higher profits, higher value
added, and higher wages. Some economic sectors, especially high-tech
industries such as computers, semiconductors, and information pro-
cessing, are particularly important because they generate spillovers
and other positive externalities that benefit the entire economy. Be-
cause a new technology in one sector may have indirect benefits for
firms in another sector, firms that do extensive research and develop-
ment produce benefits that are valuable to many others. Indeed, a
strategic industry may be defined as one that gives external benefits
to the rest ofthe economy. However, because firms may not be able
to capture or appropriate the results oftheir research and develop-
ment activities, many will underinvest in these activities. Proponents
ofSTT argue that such a market failure indicates that firms should
be assisted through direct subsidy or import protection, particularly
in high-tech industries that frequently raise the skill level of the labor
force and thus increase human capital. If, as the proponents of strate-
gic trade believe, such special industries exist, then free trade is not
optimal and government intervention in trade matters can increase
national welfare.
Strategic trade theory has become a highly controversial subject
within the economics profession. Some critics argue that it is a clever,
flawed, and pernicious idea that gives aid and comfort to proponents
oftrade protection. Others agree with this negative assessment but
also make the point that the theory itselfadds nothing really new to
already discredited arguments favoring trade protection. Perhaps in
response to severe denunciations ofstrategic trade theory by leading
mainstream economists, some ofthe earliest and strongest proponents
ofSTT have moderated their initial enthusiasm. Many economists
consider it to be merely an intellectual game with no relevance to the
real world oftrade policy. Despite these criticisms and recantations,
however, STT has had an important impact on government policy
and has undoubtedly been a factor in the slowdown in the growth of
world trade.
The neoclassical critique ofstrategic trade policy is that all indus-
tries, at least theoretically, are created equal; no economic sector is
intrinsically more valuable than any other in terms ofhigher value
added, higher wages, and so forth. The rate of productivity growth
ofan economic sector is considered the only real measure of its value
and ofits contribution to the nation’s long-term economic welfare. A
nation, therefore, should specialize in those economic sectors where
high rates ofproductivity growth exist and where it has a compara-
tive advantage. This sentiment was expressed in an often-employed
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