Applied international trade analysis

1
Applied international trade analysis

• Lectures Wed, 1700-2000
• Office hours
• Crt Kostevc
• Friday 1200, room R-304
• crt.kostevc_at_ef.uni-lj.si

2
Outline of the course

• Historic overview of trade policy (lecture 1)
• Gains from trade I (lecture 2)
• Gains from trade II (lecture 3)
• Arguments for trade protection (lecture 4)
• Efficiency of trade policies I (lecture 5)
• Efficiency of trade policies II (lecture 6)
• Economic integration (lecture 7)
• Mobility of production factors (lecture 8)
• Firm heterogeneity and productivity (lecture 9)
• Multinational enterprises (lecture 10)
• Economic geography (lecture 11)

3
Course requirements

• A (passing) grade can be obtained by
• Option 1
• 7 homeworks (out of the possible 10) 70
• 15 to 20-page seminar (January or sooner) 30
• Option 2
• 15 to 20-page seminar (January or sooner) 30
• Exam (in January)
  70
• Option 3
• Exam (in January)
  100

4
Development of world trade and trade policy

• necessary conditions for world trade
• knowledge of the world
• transport infrastructure.
• required condition ? production surpluses
• world trade (world trade proper) starts after the
  discovery of America (driven by primary products,
  materials,..)

5
Trade before the 16th century

• Continental trade only (Europe-Middle East-Asia)
• Around 1000 AD Europe was relatively
  underdeveloped relative to Asia and the Islamic
  world
• Limited manufacturing activity, trade relies on
  primary goods, materials and simple manufactured
  goods.

6
Interregional trade flows (around year 1000)
(source Findlay ORourke, 2007)
7
Development of Western Europe

• Atlantic trade (New World trade routes replace
  the traditional eastern markets)
• Strengthening merchant groups trading across the
  Atlantic able to curtail the power of the
  monarch
• Changes in institutions enabled the protection of
  property rights
• These property rights in turn fostered future
  economic growth
• Great divergence Britain, Netherlands (fast
  growth) vs Spain, Portugal (limited growth) vs
  Venice, Genoa (no growth)

8
(No Transcript)
9
(No Transcript)
10

• stages in the development of world trade proper
  and trade policy
• Mercantilism (16th to 18th century)
• Liberalism (later part of the 18th century until
  early 19th century)
• Protectionism (mid 19th century until the great
  depression)
• Interventionism (approximately 1933 to 1947)
• Liberalism, neoprotectionism, and globalism
  (after 1947).

11
Mercantilism

• Spans the time period from the discovery of
  America (1492) until the French revolution (1789)
• Characteristics (economic nationalism)
• Strong state
• Trade routes integrate the world, growing trade,
  capital accumulation, trade superpowers (Spain,
  GB, Portugal, Holland), gold parity
• Sporadic trade, no systematic trade promotion.
• Trade policy
• Growth of national wealth
• Trade surplus as means of achieving national
  wealth
• Deflation effect of the net outflow of gold
  (specie flow)
• Summary?many nations stil view trade as
  competition

12
Specie-flow mechanism

• Served as definitive refutation for
  mercantilistic principles
• Natural distribution of specie (coined
  money money in the form of coins) will be
  established by purely automatic forces
• additional gold raises prices relative to other
  countries, resulting in an import surplus
  financed by specie outflow ?same reaction in gold
  receiving country
• Gold??P??Ex?,Im?? Gold?

13
Liberalism

• Period between 1789 and 1890
• Characteristics
• Political and economic integration
• Removal of trade and factor movement
  restrictions
• British supremacy ? GB as an engine for world
  economic growth. British trade deficit transfered
  buying power to other parts of the world. Crisis
  in Britain lead to a fall in world prices causing
  a new growth cycle to start.
• Trade policy
• Liberalization of trade tariffs (new tariff code
  in GB) 1815-1845
• New forms of gold parity
• Absolute (Smith, 1776) and comparative advantages
  (Ricardo, 1819)

14

• Short period of trade liberalization
• In Britain it lasts from 1841 until WWI
• Rest of Europe Germany and France from 1860
  (Cobden-Chevalier agreement) until 1879 when
  Germany and later France (1881-1882) introduce
  protectionist measures). These measures were
  later also introduced in the Austro-Hungarian
  empire, Italy, Russia and, after 1865, the U.S.
• Summary liberalism remains alive mainly in
  theory, less in practice

15

• Evolution of world trade
• Developed in the 19th century (1815 Napoleonic
  wars-1914 WWI). Best illustarted on British
  foreign trade data. Between 1700 and 1790 exports
  tripled (3,6 to 10 million ), while doubling to
  20 million in the next ten years alone. Growth
  continued throughout the 19th century.
• GB generated world trade through its deficit

16

• The conditions for a functional connection
  between the British and world economies
• Britain as a large production centre with a
  substantial trade deficit
• Complementary production structures of Britain
  and the rest of the world
• Automatic adjustment of employment to the trade
  cycle
• A shift of British demand from European countries
  to their colonies (data in percentages)

17
Protectionism

• From 1890 until 1929-33 (the great depression)
• Characteristics formed in response to liberalism
• temporary deviation from free trade
• formed as a response to the supremacy of GB
  German economic nationalism (List),
  mercantilistic (Hamilton) to industrial (Carey)
  protectionism
• Reasons for the spread large barriers, large
  disparities between rich and poor
• Trade policy
• Implementation of tariff codes in the majority of
  countries
• Summary protectionism enabled the economic
  development of the majority of the current OECD
  members

18
Interventionism

• Between 1933 until 1947
• Characteristics
• Formed as a response to the great depression
• Internal price policy, Price regulation
• Active role of the state seeking internal
  incentives for starting a business cycle
• Goal external equilibrium no longer a priority,
  seeking full employment
• Consequences
• Decrease in world trade (self-sufficient
  countries)
• Import replacement strategy
• Trade policy
• Large number of trade policy instruments
  implemented, state monopolies in trade
• Summary inefficient

19
Liberalization, neoprotectionism, and globalism

• After 1947
• Characteristics
• Deregulation (internal), trade policy
  liberalization, globalization of production
• Formed in response to interventionism
• Forms of world trade liberalization
• Multilateral liberalization (GATT, WTO)
• Regional trade liberalization in the form of
  economic integrations
• Increase in trade of goods and services
• Convergence in development levels
• Increased mobility of production factors,
  increased role of multinational firms
  (globalization of production and consumption
  habits)

20
(No Transcript)
21

• Trade policy
• Neoliberalism (developed countries liberalize
  trade in industrial products, less developed
  agriculture)
• Limits to the use of trade policy instruments (by
  GATT and WTO)
• Neoprotectionism (use of non-tariff barriers to
  trade)
• Globalism
• Interaction of world trade liberalization and
  internationalization of production
• Primary manifestation international reallocation
  of production, capital agglomeration
  (concentration) to unify production and services
  ? more efficient research and development
  activities and lower costs.

22
Source Bergoeing, Kehoe (2003)
23
Source Bergoeing, Kehoe (2003)
24
Dangers of globalisation

• Mergers could cause a oligopolization of
  industries, decrease in RD activity and
  sensitivity to shocks
• Growing difference between developed and
  developing countries can lead to further
  polarization
• International financial system can quickly be
  overwhelmed in case of financial crysis