I'Overview of international trade

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Rose-Hulman Institute of Technology Department of
Humanities Social Sciences / K. Christ SL 151,
Principles of Economics
Student Notes 15 International Trade Exchange
Part II

• I. Overview of international trade
• Pattern of trade
• Balance of payments
• Motivation for trade Ricardian trade
• Comparative advantage
• Terms of trade
• III. International balances, exchange rates, and
  adjustment
• IV. The political economy of international trade
  part 1
• Justifications of protectionism
• Traditional welfare analysis of trade
  restrictions
• V. The political economy of international trade
  part 2
• Historical perspectives and international
  institutions
• The anti-globalization backlash

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Political Economy of International Trade
If there were an Economists Creed, it would
surely contain the affirmations I understand the
Principle of Comparative Advantage and I
advocate Free Trade. For one hundred seventy
years, the appreciation that international trade
benefits a country whether it is fair or not
has been one of the touchstones of
professionalism in economics. Comparative
advantage is not just an idea both simple and
profound it is an idea that conflicts directly
with both stubborn popular prejudices and
powerful interests. This combination makes the
defense of free trade as close to a sacred tenet
as any idea in economics. Paul Krugman, Is Free
Trade Passé?, Journal of Economic Perspectives 1
(Fall 1987), 131 144.
Paul Krugman
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Political Economy of International Trade
Common justifications for rejection of free trade
/ adoption of protection

• National security
• National identity
• Environmental concerns
• Labor standards concerns
• Protection of certain industries
• Industries that are just getting started (the
  infant industry argument)
• Industries that are subject to unfair competition
  (anti-dumping measures)
• To gain a strategic advantage / capture a market

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Political Economy of International Trade
Tools of Protection and/or Methods of managing
trade

• Tariffs a tax on imports
• Quotas a legal restriction on the amount of a
  good coming into the country
• Anti-dumping duties
• Export Subsidies the opposite of a tariff
• Countervailing duties
• Non-tariff barriers barriers to trade that
  result from regulatory actions
• Exchange rate policies

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Political Economy of International Trade
Welfare Analysis of Tariffs (and Quotas)
Country 1
Country 2
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XS
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MD
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Political Economy of International Trade
Welfare Analysis of Tariffs (and Quotas)
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Political Economy of International Trade
Welfare Analysis of Tariffs (and Quotas)
P
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Political Economy of International Trade
Welfare Analysis of Tariffs (and Quotas)
P
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Political Economy of International Trade
Welfare Analysis of Tariffs (and Quotas)
P
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Political Economy of International Trade
Welfare Analysis of Tariffs (and Quotas)
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Political Economy of International Trade
Welfare Analysis of Tariffs (and Quotas)
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A B C D E
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Political Economy of International Trade
History of the Political Economy of Trade The
First Era of Globalization

• 1776 Smiths Wealth of Nations argues
  eloquently against mercantilist approaches, and
  in favor of free trade.
• 1818 Ricardos Principles of Political Economy
  and Taxation introduces the concept of
  comparative advantage into the economic arguments
  in favor of free trade.
• 1840s Corn law debates in the U.K. lead to
  the unilateral adoption of free trade by Great
  Britain.
• Late 1800s Remarkable expansion of world trade.
• 1900-1914 Culmination of this period of
  globalization (widespread trade liberalization
  and an amazing amount of labor migration).

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Political Economy of International Trade
History of the Political Economy of Trade
Breakdown of World Trade

• 1914-1920 World War I breaks down the
  international trading system.
• 1921-1930 Uneven recovery (robust in the U.S.,
  less so elsewhere) only partially restores
  international trade to pre-war level.
• 1930-1945 The Great Depression and World War II
  seriously damage the international trading system
• Smoot Hawley tariff (June 1930) was a high water
  mark of U.S. protectionism.
• Reciprocal Trade Agreements Act (1934)
  represented a step back in the direction of
  managed trade.
• Overall, world trade declined by some 66 between
  1929 and 1934.

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Political Economy of International Trade
History of the Political Economy of Trade
Bretton Woods

• July 1944 Delegates from 44 nations gather at
  Bretton Woods, a small resort town in New
  Hampshire to deliberate upon and agree to a
  system of rules and international institutions
  for governing commercial and financial relations
  among the major industrial states.
• Delegates committed themselves to the gradual
  reduction of trade barriers.
• Chief features of the Bretton Woods international
  financial system
• An obligation for each country to maintain its
  exchange rate within a fixed valueplus or minus
  one percent.
• The provision of emergency international finance
  to bridge temporary payments imbalances.

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Political Economy of International Trade
History of the Political Economy of Trade Road
to the WTO

• Key institutions of the Bretton-Woods system
• The International Monetary Fund (to provide
  financing to countries experiencing balance of
  payments imbalances).
• The World Bank (to orchestrate development
  assistance).
• A third key institution an international trade
  organization did not become a reality until
  1995
• Between the late 1940s and 1994, the General
  Agreement on Tariffs and Trade (GATT) evolved
  through successive rounds to lower trade barriers
  and move slowly toward realization of the WTO.
• In 1995, GATT gave way to the WTO.

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Political Economy of International Trade
History of the Political Economy of Trade GATT
and Post-War Trade

• Main constraints of GATT on domestic trade
  policy
• Forbade the use of export subsidies, except in
  the area of agricultural goods (an exception
  promoted by the U.S. and the EU).
• Limited the use of import quotas to the case of
  domestic market disruptions.
• Limited the use of tariffs by requiring that new
  tariffs be offset by barrier reductions in other
  areas.
• Last phases of GATT focused on trade
  liberalization in agriculture and textiles, and
  the movement toward the creation of the WTO.

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Political Economy of International Trade
History of the Political Economy of Trade Key
International Institutions of the World Trading
System

• The International Monetary Fund (IMF, 1945)
• Monitors economic and financial developments and
  policies in member countries and at the global
  level, and provides policy advice to its members.
• Lends to member countries with balance of
  payments problems.
• Provides governments and central banks of its
  member countries with technical assistance.
• The World Bank (1945). The "World Bank" is the
  name that has come to be used for the
  International Bank for Reconstruction and
  Development (IBRD) and the International
  Development Association (IDA). A specialized
  United Nations agency that provides low-interest
  loans, interest-free credit, and grants to
  developing countries, under the assumption that
  infrastructure, education, and healthcare are
  fundamental to economic growth.
• The World Trade Organization (WTO, 1994-1995)
  The only global international organization
  dealing with the rules of trade between nations.
  An important part of its mission includes
  mechanisms for dispute resolution between
  countries so that retaliatory trade policies and
  trade wars do not disrupt the flow of goods and
  services among nations.

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Political Economy of International Trade
The Political Economy of Trade

• Trade liberalization increases the output and
  national incomes of trading countries. (The
  gains from trade argument.)
• Trade liberalization creates winners and losers.
• If the overall gains from trade liberalization
  are positive, the gains to winners must more than
  offset the losses to losers hence, most
  economists generally view free trade agreements
  as good (or Pareto imroving).
• Generally, economists suggest that the losers
  from free trade agreements (workers who become
  unemployed) can (and should) be compensated (with
  retraining subsidies, for example). The
  implementing legislation for NAFTA provided for
  such indirect compensation via sidebar
  agreements.

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Political Economy of International Trade
The Political Economy of Trade

• Trade liberalization can hurt key constituencies,
  which often are well organized and have
  significant political power.
• Winners from trade liberalization often are
  harder to identify than losers
• A person who loses a job when the plant they work
  for moves to a different country can easily
  attribute their loss to the movement toward freer
  trade.
• People who are hired because of an increase in
  exports may not see the link between their job
  and trade liberalization.
• People who are hired because of higher national
  incomes usually do not attribute their hiring to
  free trade policies.
• People who purchase goods whose price has fallen
  due to trade liberalization are not usually
  conscious of the price effect, or if they are,
  may not give credit to trade liberalization.
• Those who have gained from trade liberalization
  have tended to be people who are educated and
  highly skilled.
• Those who have lost due to trade liberalization
  have tended to be in manufacturing and/or people
  who have little education.