International Trade
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Top Ten Exporting Countries
Country Exports as a Fraction of World Exports
Country
1980
1990
2000
2009
Germany
9.41
10.95
7.90
8.52
..
1.33
3.53
8.35
11.45
12.37
13.51
9.89
Japan
6.19
7.48
6.67
3.99
Netherlands
3.81
3.68
3.21
3.45
France
6.45
6.60
4.77
3.83
Italy
4.10
5.08
3.75
3.17
United Kingdom
6.15
5.53
5.11
3.77
Canada
3.16
3.46
4.15
2.41
..
..
3.07
2.30
China
United States
Hong Kong, China
Top Ten Exporting Countries Account for approx. 50% of World Exports
Source: WDI Online, World Bank.
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3
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Services in World Trade
Services Account for Approx. 20% of World Trade
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Intermediate Goods in World Trade
Much of World Trade is in Intermediate Goods
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Comparative Advantage
Example
Output per Worker
U.S.
Butter (per pound) 20
Wheat (per bushel) 8
Total Labor
10
China
5
4
10
• U.S. is more efficient (higher productivity) than China in producing both goods.
Hence the US has a competitive advantage in producing both goods.
• U.S. is relatively more efficient in producing Butter (20/8>5/4) and China is relatively
more efficient in producing Wheat, so the U.S. has a comparative advantage in
producing Butter and China has a comparative advantage in producing Wheat.
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Gains from Trade due to Comparative Advantage
B
u
t
t
e
r
200
U.S.:
Production possibility
frontier for the U.S
Trading Line:
2 Butter = 1 Wheat
80
B
u
t
t
e
r
80
100
China:
Production possibility
frontier for China
50
comparative
advantage in
Butter.
Trading Line:
2 Butter = 1 Wheat
comparative
advantage in
Wheat.
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Wheat
Without trade, each country consumes somewhere on its production
possibility frontier. With trade and specialization in production (US in
Butter and China in Wheat), each country consumes on its Trading Line.
Specialization is determined by comparing a country’s
internal rate of exchange in production to the external
rate of exchange in the market.
Both countries are better off with trade. Why?
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Examples of Comparative Advantage
In each case below, what’s the source of comparative advantage?
Natural endowment
• Hawaii exports pineapples
• Mongolia exports cashmere
Factor abundance
• China exports textile goods
• The U.S. exports capital-intensive goods
Learned skill
• New York exports financial services
• India exports software services
• Italy exports ceramics
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Comparative Advantage
Key Prediction: Countries will export those goods for which they have a
comparative (relative productivity) advantage.
•
China has a productivity/cost advantage in producing labor-intensive goods.
•
The G3 countries (U.S., Germany, Japan) have a productivity/cost advantage in producing
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capital-intensive goods
Comparative Advantage and the
Minimization of Production Cost
• Wages are determined in the aggregate labor market
– Wage = economy-wide average labor productivity
• Production cost affected by wages relative to labor productivity
– Unit labor cost for a given industry = Wage / labor productivity in the industry
• A country will have a Comparative Advantage in an industry in
which unit labor costs are low
– Industry unit labor cost = Wage/Industry labor productivity = economy-wide
average labor productivity / industry labor productivity
• For an industry to maintain its comparative advantage, it must
raise its labor productivity at least as fast as other potential
industries within the country
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Unit Labor Cost in Advanced Countries
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Unit Labor Cost in Emerging Countries
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Plant Level Productivity
Plants within an industry differ greatly in terms of productivity
Source: Bernard, Eaton, Jensen, Kortum, “Plants and Productivity in International Trade,” American Economic Review, 2003.
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Exports and Plant Productivity
Plants that export are more productive than those that don’t.
Source: Bernard, Eaton, Jensen, Kortum, “Plants and Productivity in International Trade,” American Economic Review, 2003.
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Fraction of Plants that Export
Only a small fraction of plants export. Exporting firms are scattered across all industries.
Source: Bernard, Eaton, Jensen, Kortum, “Plants and Productivity in International Trade,” American Economic Review, 2003.
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Intra-Industry Trade
Index = 1 – |Imports-Exports|/(Imports+Exports)
Industry
Index in the US
Power-generating equipment
.99
Office machines
.98
Electric machinery
.89
Inorganic chemicals
.88
Organic chemicals
.81
Pharmaceutical products
.73
Telecommunications equipment
.53
Road vehicles
.53
Iron and steel
.48
Clothing and accessories
.15
Footwear
.00
• Intra-industry trade is trade
within an industry.
• A significant portion of world
trade is intra-industry trade.
Why?
• Office machine examples:
• electronic computers
• computer storage
devices
• computer terminals
• computer peripheral
equip.
• calculating and
accounting machines
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New Trade Theory
• Industries with significant intra-industry trade have high
degrees of product differentiation
•Fixed production costs within a product variety leads to
economies of scale, hence production is concentrated in a
limited number of countries (global brands)
• Preference for variety means all goods are sold to all
countries
• Note that product differentiation leads to market power
• New Trade Theory (Krugman’s Nobel Prize)
http://www.youtube.com/watch?v=jMBvtRODvEQ&feature=related
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Trade and Conflict
Given the gains from trade, why is there so much conflict surrounding trade issues?
• Trade encourages some industries within a country to
expand and others to contract
• Factors of production tied to the contracting industries will
lose and those tied to the expanding industries will win.
– Low-skill workers in the U.S. are hurt from trade
– Owner’s of natural resources (e.g., oil) benefit from trade as the
demand for these goods rise
– Farmers in the U.S. may be hurt from trade
• Often there are a few big losers and many small winners
from trade, so the losers tend to exploit the political system
to their advantage
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Income Inequality and Trade
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The 7 Instruments of Trade Policy
Tariffs
Subsidies
Voluntary
Exports
Restraints
Import
Quotas
Local
Content
Requirements
Antidumping
Duties
Administrative
Policies
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Tariffs and Florida OJ
•Florida: 40 percent
of the World OJ
market.
•Brazil: 45 percent
of the World OJ
market. Brazil
controls World
market except the
US.
•29.5 cent per gallon
tariff on Brazilian
OJ concentrate.
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Agricultural Subsidies
• Very common in North America, Europe and Japan
– EU-sugar; US-cotton
• Keeps inefficient farmers in business.
• Encourages production of products that can be grown more
cheaply elsewhere.
• Reduces world trade.
• Perpetuates global poverty.
•
Poor countries are
predominantly agrarian
•
Rich country subsidy to
farmers prevents poor
countries from growing
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US Cotton Subsidies –
Impact on Mali
"Subsidies are a catastrophe for us,"
said Zakariyaou Diawara, who heads
the union of Mali's cotton farmers. "Our
cotton is of better quality; it's the
subsidies that crush us."
U.S. subsidises cotton farmers by $3
billion per year, significantly reducing the
world price of cotton.
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Examples of Other Trade Restrictions
• Local Content Requirements: for NAFTA, 50 percent of
value must come from US, Canada, Mexico
• Antidumping Duties: US argued that Vietnam and China
are dumping (selling below cost) shrimp in the U.S.
• Voluntary Export Restraints: in 1980s Japan agreed to
limit exports of cars to the U.S.
• Import Quotas: Mexico has an import quota on sugar
• Administrative Policies: product and labeling standards,
administrative delays
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Development of the World Trading System
• Prior to WWI, free trade as government policy
– Britain’s (1846) repeal of the Corn Laws.
– Britain continued free trade policy.
• WWI to WWII
– Great Depression led to Smoot-Hawley Act (1930) that
started a trade war (US exports tumbled)
• General Agreement on Tariffs and Trade (GATT)
proposed by US in 1947.
– 19 original members grew to 120 nations
• World Trade Organization (WTO) replaced GATT in
1995
– Currently 158 member countries
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History of Tariffs
• Tariffs were raised during the global economic depression in the
1930s as an attempt to protect domestic industries
• Trade in second half of century boosted by declining tariffs
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Average Tariff by Region
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World Trade Organization
•
•
•
•
Commenced in 1995 (GATT commenced in 1948).
153 member countries (97% of world trade)
Multilateral institution governing international trade
Member countries can sue to recover damages from
unfair trade practices
• Policy/agreements set in various rounds (Kennedy
round, Tokyo round, etc.)
• Uruguay round (1986-94) (8th round)
– Focus on trade in services (banking and insurance) and IP
– Created WTO
• Doha round (2001- )
– Help world’s poor by reducing barriers and subsidies to
farming
– Very contentious; seems stalled
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Regional Trade Agreements
• EU: Complete elimination of restrictions on goods flows, capital
flows, and labor flows within Europe.
• NAFTA: Free trade among Canada, US, Mexico.
• Andean Pact: Bolivia, Colombia, Ecuador, Peru, Venezuela.
• Mercosur: Argentina, Brazil, Paraguay, Uruguay.
• ASEAN: Brunei, Indonesia, Laos, Malaysia, the Philippines,
Myanmar, Singapore, Thailand and Vietnam.
• APEC: US, Canada, Japan, China, many in S.E. Asia, Australia.
• African trade blocs: 9 different trade blocs.
Encourage trade within the trading bloc, but tend to Balkanize the
world and discourage trade between trading blocs.
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Strategic Trade Policy
•
•
•
Increasing returns creates rents
Boeing moves first
Nash equilibrium with no subsidy is
Pn
–
–
•
•
Suppose Airbus receives a subsidy of
10
Nash equilibrium moves to Np
–
–
•
Boeing: 100
Airbus: 0
Boeing: 0
Airbus: 110
A subsidy of 10 raises Airbus’ profits
from 0 to 110, clearly a winning
strategy for Europe
Political economy of free trade:
subsidy might provoke a trade war in which everybody loses
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Bomardier vs. Embraer
•
•
•
Both had origins in failed government-run ventures (Canadair)
Combination of privatization and emerging demand for smaller aircraft led to
strong growth for both companies
Both continued to receive government subsidies
–
–
–
•
•
•
•
Embraer gained significant market share relative to Bombardier
Bombardier convinced Canada to file a protest with the WTO (a protest must come
from a government)
Embraer filed a counter protest
WTO ruled both were in violation
–
–
•
•
•
Bombardier received R&D assistance through Technology Partnerships Canada (TPC)
Embraer’s customers received subsidized interest rates to compensate for “Brazil risk”
(PROEX)
Embraer’s subsidy was significantly more valuable
Financial contribution made by a government
That confers a benefit contingent upon export performance
Bombardier/Canada brought its program into compliance
Embraer did not and continued to receive multibillion dollar orders
Options available to Bombardier
–
–
–
Impose countervailing tariffs on Brazilian imports to Canada
Seek sanctions, approx $1.4B
Seek a similar subsidy from Canadian government to Bombardier
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