The case for free trade
Daniel M. Bernhofen
GEP School Conference
University of Nottingham
School Conference, June 28,
2010
1
Motivation
• Q: What trade economists do?
A: Ask and try to answer questions about the
global economy.
Key questions in the field of international
economics:
1) Why do countries trade?
2) What has caused the increase in world trade?
3) What are the benefits/costs from international
trade?
4) What are the recommendations for government
policy?
School Conference, June 28,
2010
2
Organization
• Facts about international trade.
• General economic arguments for free
trade.
• Look deeper into one theoretical
framework: “the enhanced opportunity
argument for free trade”.
• How is free trade sustainable ?
School Conference, June 28,
2010
3
Facts about
international trade:
GDP:
Sum of the market value
of all goods and services
produced in the
economy in a given time
period.
Trade:
(Imports+Exports))/2
Data Source: World
Development indicator,
(World Bank, 2005),
School Conference, June 28,
2010
4
School Conference, June 28,
2010
5
Where does the Barbie Doll
come from ?
School Conference, June 28,
2010
6
Arguments for free trade
• Enhancement of opportunities
-
Opportunity to make the best from your economic resources
(endowments and technologies).
Opportunity of having access to goods and technologies that the
economy could not produce on its own.
• Increase in competition
-
Foreign competition can reduce firms’ market power and provide an
incentive for firms to innovate. Innovation is the key driver of
economic growth.
• Peace argument (non-economic)
- Europe and “the German problem”.
School Conference, June 28,
2010
7
Enhancement of opportunities
Model:
• assume two goods: agriculture and manufacture
• assume two worlds: with and without trade:
• Production choices are constrained by
- countries’ endowments: labour, capital stock, land.
- available technology.
=> Concept of a production opportunity set which illustrates
the trade-offs a society faces.
School Conference, June 28,
2010
8
Economy’s opportunity set
Agriculture
Output
Opportunity set is constrained by
technology and endowments.
C
A
B
Manufacturing
Output
School Conference, June 28,
2010
9
Enhanced opportunities with
trade
Enhanced opportunity set
Agriculture
Output
D
International trade
line
Import
B
Export
Manufacturing
Output
School Conference, June 28,
2010
10
Trade acts like economic growth
Agriculture
Output
D
Point D could also be attained
through internal growth
Manufacturing
Output
School Conference, June 28,
2010
11
New goods
Mobile
phones
Example: Sub-Saharan economy
which is not able to produce
mobile phones
Opportunity set is constrained to
agricultural goods
Maximum amount
of output
Agriculture Output,
School Conference, June 28,
2010
12
International trade provides
access to new goods
Mobile
phones
Sub-Saharan economy is able to
obtain new goods
International trade
line
D
Import
Export
School Conference, June 28,
2010
Agriculture Output,
13
Two waves of globalisation
• First wave of globalisation:1870-1914.
• World War I: 1914-1918.
• Interwar Period and the Great Depression
of the 1930s.
• World War II: 1939-1945.
• Second wave of globalisation:1945present.
School Conference, June 28,
2010
14
School Conference, June 28,
2010
15
What caused the growth of
world trade?
• Government policies
– WTO (World Trade Organisation)
• Different rounds of trade negotiations
• Multi-lateral principles (non-discrimination, treat everybody
like a most favored nation).
– Regional integration.
• EU, North-American Free Trade Association (NAFTA)
• Improved transportation technology
–
Reduction of shipping costs (The container)
– Improved information technology (PC, internet).
–
School Conference, June 28,
2010
16
Recent concern: The collapse in world
trade
(October-Dec. 2008)
School Conference, June 28,
2010
17
The collapse in world trade
(continued)
• Two main causes:
(i)Breakdown of international supply chains
(a la Barbie doll)
(ii)Global reduction in consumer demand.
Concern about protectionism:
- Prevent the lessons from the past where
governments imposed trade barriers.
- So far, existing national and international
institutions have prevented this.
School Conference, June 28,
2010
18