INTERNATIONAL TRADE-ECONOMICS
HISTORY OF ITRADE
☐ Four Phases of Globalization
☐ cost of moving goods, cost of moving technology, cost of moving
people
☐ PH1: Humanizing the Globe (consumers moved to production)
☐ PH2: Localizing the global economy (Production moved
consumers, agriculture, domestic animals)
☐ PH3: Globalizing Local Economies (trade with local economies)
☐ PH4: Globalizing Factories (Industrialization)
THE VOLUME AND PATTERN OF TRADE
☐ The volume of trade usually refers to total quantity of goods
☐ and services traded internationally
• Exports as percent of GDP=(Exports/GDP) x 100
• Index of Openness: [(exports + imports)/GDP]
☐ Bilateral Trade depends on: size, distance, and preferential trade agreements
☐ The Gravity Model
• A simple theory to explain the volume of bilateral trade between 2 countries
• Size of the country and the size of the economy is related to international trade
• Large economies produce more goods/services=have more to export
• Large economies generate more income=can buy more imports
• Tcountry1&2=[A(Y1)(Y2)]/Dcountry1&2 DISTANCE, Y=GDP
☐ Distance: between markets influences transportation costs and therefore the cost of imports and
exports
☐ Culture Affinity: If two countries have cultural ties= strong economic ties
☐ Geography: lack of mountains or oceans can make trade easier
☐ Multinational Corporations: corporations spread across different nations import and export many
goods between their divisions
☐ Borders: customs
COMPARATIVE ADVANTAGE AND THE GAINS
FROM TRADE
Partial Equilibrium-study of a single market in isolation from others
General Equilibrium- Study of all markets simultaneously
Comparative Advantage: FTP>AP: export
Comparative Disadvantage: FTP<AP: import
Home welfare= consumer surplus + producer surplus
MD= D-S
XS=S-D
Production Possibilities Frontier (TT)
• Maximum of Qx for any given Qy
• Slope is the Opportunity Cost of x in terms of y
• Opportunity is normally increasing
☐ Iso-Value Line
• V=PxQx+PyQy (All combinations of Qxy that produce National Income Level)
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☐ What determines the free trade price?
☐ Indifference Curves
• All combinations of Dx and Dy that produce a given level of utility
• Utility is higher further from the origin
• Indifference curves never cross
• Slope=Marginal Rate of Substitution (Rate at which the consumer is willing to give up food to get
more cloth
• Slope is decreasing (diminishing marginal utility)
GENERAL EQUILIBRIUM MODELS OF PRODUCTION
☐ Ricardian Model
• Single Factor of Production= LABOR
Qy
• Countries differ in technology
m=-aLx/aLy
• aLx=unit labor input
• Specialization in
o Good x if px/py> aLx/aLy
Consumption Curve
o Good y if px/py< aLx/aLy
• Absolute Advantage of good x
o aLx<aLx*
• Absolute advantage of y
o aLy<aLy*
• Comparative Advantage
o aLx/aLy < (aLx/aLy)*
• Distribution of Income
o Real Wage (x)
 w/px=1/aLx
o Real Wage (y)
 w/yx=1/aLy
☐ Heckscher-Ohlin Model
• Two Mobile Factors
• Countries have the same technology
• Capital (K)
• Labor (L)
• F(food) capital abundant
• C(clothes) labor abundant
• A country will produce the goods its resources
is the most abundant in
• Leontief’s Paradox
-US Capital Abundant, exports labor intensive goods
Qx
• Rybczynski Theory
o If production is diversified, then for given prices, an increase in the supply of a factor
increases the output of the good using that factor intensively and reduces the output of
the other good.
• Distribution of Income
o Pc= aLc(w) + aKc(r)
o Pf= aLf(w) + aKf(r)
• Stolper-Samuelson Theorem
o Increase of price=increase of real income of that good
☐ Specific Factor Model
• Two sector specific factors and one mobile factor
• Capital (M)
• Land (F)
• Labor (L) Moblie
• Productions Function
• The Marginal Product of Labor
• The Production Possibility Frontier in the Specific Factors Model
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Wm
Wf
MPL
Income of the capitalist
W
W
w/p
MPL
L
Labor Distribution
EXTERNAL ECONOMIES OF SCALE AND
INTERNATIONAL LOCATION OF PRODUCTIONS
☐ A production technology ecxhibits economies if
• A x% increase in all factors leads to more than x% increase in output
• Average cost decreases as output increases
☐ Economies of scale comes in two varieties
• Internal; AC of firm falls with the firm output
• External; AC of firm falls with industry output
☐ Specialized equipment or services: These are supplied more cheaply if the supplier firms are in the
same location. At the same time, supplier firms find it profitable to locate where their customers are.
☐ Labor pooling: a large and concentrated industry may attract a pool of workers, reducing employee
search and hiring costs for each firm
☐ Knowledge spillovers: workers from different firms may more easily share ideas that benefit each
firm when a large and concentrate industry exists
FIRMS IN THE GLOBAL ECONOMY
☐ Internal Economies of Scale
• Firms total cost of production includes:
o A fixed cost= F
o Constant marginal cost=c
o Total cost: TC =F =cQ
o Average cost: AC= TC/= F/Q+c
☐ IES implies imperfect competition
• Perfect Competition implies P=MC
• Internal Economies of scale implies AC>MC
• This PC and IES together imply P<AC
☐ Total Profit= Total Revenue -Total Cost
☐ How is total profit affected by a one-unit change in output?
• Marginal Profit= MR-MC
• If MR>MC, then unit of increase in output increases total profit
• If MR<MC, then a one unit decrease in output increase total profit
• If MR = MC, then profit cannot be increased by changing output. (Profits are maximized)
• Average Profit= P-AC
☐ As the number of firms increases the price charged by each firm decreases (Competition effect) (PP)
FOREIGN DIRECT INVESTMENT
☐ FDI refers to investment in which a firm in on country directly
controls or owns a subsidiary in another country
☐ If a foreign company invests @ least 10% of the stock in a
subsidiary, the two firms are typically classified as a multinational
corporation
☐ Greenfield FDI: is when a company builds a new production
facility abroad
☐ Brownfield FDI is when a domestic firm buys a controlling stake in
a foreign firm
☐ Developed Countries have been the biggest recipients of inward
FDI
☐ Horizontal FDI: when the affiliate replicates the production process
elsewhere in the world
☐ Vertical FDI: when the production chain is broken up, and parts of
the production processes are transferred to the affiliate location
• Vertical FDI is mainly driven by production cost differences between countries
☐ Horizontal FDI is dominated by flows between developed
countries
☐ Foreign outsourcing or offshoring occurs when a firm contracts
with an independent frim to produce in the foreign location
TRADE POLICY HISTORY
☐ GATT ROUNDS OF NEGOTIATIONS
• General Agreements on Tariffs and Trade
• Geneva 1947
• Annecy (France) 1949
• Torquay (England) 1951
• Geneva 1956
• Dillion 1961-62 (Dillion was undersecretary of state)
• Kennedy 1963-67 (Geneva)
• Tokyo 1973-79
• Uruguay 1986-94-WTO established, World Trade Orginization
• Dona Round 2001-2010-failed
☐ GATT Articles
• The Most Favored-Nation Clause (I): a provision that allowed a country to receive the same tariff
reduction that the United States negotiates with a 3rd country
• National Treatment (III): prohibits discrimination between imported and domestically produced
goods with respect to internal taxation or other government regulation.
• Antidumping and Countervailing Duties (VI): A tariff levied on imports in retaliation for selling
below fair value, A tariff on imports that is levied in retaliation against foreign subsidies
• Customs procedures (VII-X)
• Elimination of Quantitative Restrictions (XI): No quotas or licensing schemes. Can't use anything
but duties, taxes, and other charges to restrict trade, allowed to restrict trade if you want to protect
public morals
• Subsidies (XVI)
o SCM Agreement
o Prohibited
o Actionable
o Non-actionable
• Safeguard: is a restraint on international trade or economic development to protect communities
from development aggression or home industries from foreign competition
o No presumptions of unfair trade
o Purpose: to absorb import surges to that might otherwise destabilize political support for
free trade
• General Exceptions
o public morals, health, environment & exhaustible resources, patent protection, prison
labor, national treasures, commodity agreements, alleviate shortages, national security
• Nullification or Impairment (XXIII)
o Basis of Dispute Settlement
• Preferential Trade Agreements (XXIV)
• Trade and Development (PART IV)
o Calls for Developed country tariff reductions on developing country goods
Enabling clause/Generalized Systems of Preferences
☐ Final Act of the Uruguay Round (Marrakesh Agreement)
• Established the WTO
• Multilateral Agreements on Goods
• General Agreements on Trade in Services (GATS)
• Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs)
• Understanding on Rules and Procedures Governing the
Settlement of Disputes
• Trade Policy Review Mechanism
• Plurilateral Trade Agreements
☐ Structure of the WTO
• Functions
o Forum for Negotiations
o Administer Dispute Settlements
o Conduct Trade Policy Reviews
• Governing Bodies
o Ministerial Conference
o General Council
 Dispute Settlement Body
 Conciliation & Reciprocity
 Consultation
 Panel
 Appeal
 Sanction
 Council on Goods
 Council on Services
 Council on TRIPS
o Secretariat
 Director General
o Majority Voting
THE INSTRUMENTS OF TRADE POLICY
☐ Trade policy instruments consists of
• Price Instruments
o Tariffs
o Subsidies (export, production)
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o Contingent protection
• Quantity Instruments
o Import Quotas
o Export restraints
o Domestic Content Requirement
• Other non-tariff barriers
o Government procurement
o Technical Barriers
TARIFFS
Ad Valorem: (tax paid as a percentage of value of the product)
• Domestic Price = World Price + (Tariff Rate) x (World Price)
Specific (tax paid per unit, independent of the value of the
product)
• Domestic Price= World Price + Tariff
Effect of a tariff on a small country
• Small Country (Constant world prices)
• Partial Equilibrium Model
o Single imported good
o Perfect competition/Constant returns to scale
• Effects of a Tariff:
o Domestic Price of Imports increases
o Q of domestic consumption increases
o Q of domestic consumption decreases
o Imports decrease
☐ Effect of Import Tariff on a large country
• Home country imports the product according to its import demand curve
• Foreign country exports the product according to its export supply curve
• World Market equilibrium is determined by equality of home import demand and foreign export
supply
• Home Price Increases
o Home Production increases
o Home Consumption decreases
• Foreign Price Decreases
o Foreign Productions decreases
o Foreign Consumption increases
• Volume of Trade Decreses
☐ Utilitarian Social Welfare Function
• Welfare=Consumer Surplus + Producer Welfare + Government Revenue
☐ Effects on Home Welfare
• Decrease in home consumer surplus
• Increase in home producer surplus
• Increase in home tariff revenue
• Net effect is ambiguous (if home is large)
☐ Effects on foreign welfare (if home is large)
• Increase in foreign consumer surplus
• Decrease in foreign producer surplus
• Net effect is negative
☐ Tariff reduces Welfare
☐ Export Subsidies
• Subsidies may be specific or ad valorem
• Specific export subsidy: firm receives S for each unit it exports.
• Revenue per unit of exports: PW + S
• Revenue per unit of domestic sales: If consumers cannot import the good, then
• P = PW + S
☐ Welfare= CS+PS-Subsidy Bill
☐ Effect of an Export subsidy
• Domestic Prices increases
o Home CS decreases
o Home PS increases
• Net effect on home country is negative
• Foreign Price Decreases (If country is large)
o Foreign Consumer Surplus Increases
o Foreign Producer Surplus decreases
• Net Effect on Foreign country is Positive
• Net Effect on world is negative
☐ Quantitative Restrictions
• Import Quota
o Importing government issues quota licenses, entitling
the license holder to import a certain quantity.
o Total quantity is limited by limiting the supply of
licenses.
o Value of a unit license = P - PW
o Quota Rent = (P - PW) ·QImports
• Voluntary Export Restraint
o Exporting Government issues the licenses
o Exporting country gets quota rent
☒ Are tariffs and quotas equivalent?
• Yes if
o Perfect Competition
o Homogenous Products
o Predictable World
• No if
o Imperfect Competition
o Quality differences within product categories
o Unanticipated Shocks
THE POLITICAL ECONOMY OF TRADE POLICY
☐ Why do nations use trade policy?
• Externalities
o International Externalities
o Domestic Externalities
• Domestic Politics
o Voting
o Pressure Groups
☐ International Externalities
• Terms of Trade Externality
o Large country can improve the terms of trade, but this worsens the foreign terms of trade.
o If the home country ignores the negative effect of its policy on the foreign country, its
nationally-optimal policy is a tariff.
o Trade agreements help countries “internalize” this externality.
• Cross-Border Pollution
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Consumption or production of an imported product may be harmful to residents of the
importing country
If the foreign government ignores this externality, the nationally-optimal policy is a tariff
☐ Domestic Political Pressure
• Trade affects distribution of income
o Specific factors Model
o Stolpher-Samuelson theorem
• Lump-Sum transfer are the best means to redistribute income
o Problems include administrative costs and private information
• Models of Political Pressure
o Median Voter Model
o Pressure group models
☐ The Medium Voter Model
• One Dimensional policy space
• Voter have “single peaked preferences
• Politicians care only about getting elected
• Result: politicians choose tariff of median voter
☐ The logic of Collective Action
• Political action suffers from the free rider problem
• A person is more likely to be participate the greater are the:
o Benefit of influencing policy relative to the costs
o Likelihood of being pivotal
o Likelihood of being detected
• Tariffs impose small costs on many consumers and confer large benefits on few producers
☐ Protection across Industries
• Protection received by industry is higher if:
o Labor-intensive, low-skill, low wage
o High or recently increased import penetration
o Final not intermediate goods
o Regionally concentrated production
o Low intra industry trade
• Examples
o Clothing
o Agriculture
o Steel
☐ Protection across Countries
• Developing countries have much higher protection on average than industrial countries
o Poor countries rely on tariffs for revenue
o Tariff rates decline with endowed capital-labor ratios
o Rich countries protect agriculture more than poor countries
• Among Industrial Countries
o Average tariffs are lower in larger countries (two dramatic cases).
o NTBs more prevalent in countries with higher unemployment
o larger number of parliamentary constituencies and PR
STRATEGIC TRADE POLICY
☐ Two Firm Competition
☐ Effects of a subsidy to Airbus S=20
☐ Effects of a Subsidy to Both Airbus and Boeing
☐ Two-Firm Competition: An Alternative Case
☐ Effects of subsidy to Airbus
PREFERENTIAL TRADE AGREEMENTS
☐ WTO Exceptions of the Most Favored Nation clause
• GATT Article XXIV: It permits preferential trade agreements (PTAs) of two forms: Free Trade Areas
(FTAs) and Customs Unions (CUs).
o FTA: internal tariffs are zero (NAFTA)
o CUs: internal tariffs are zero and the common external tariff (EU)
• Internal trade must be substantially free
• External barriers may not rise
• Enabling Clause: Developing countries can exchange trade preferences (which can be partial)
• Developed countries can give developing countries one-way trade preferences
☐ Preferential Trade agreements
• Nearly all WTO’s 148 members participate in PTA’s
• 1948-1994, the GATT received 124 notification of PTA’s
• 130 PTA’s have been added 1995
• 250 notified PTA, only 170 are in force, additionally 70 exist but are not notified
• World Trade mostly happen between PTA members
☐ Issues
• Basic Economic Analysis
o Trade Creating vs Trade Diversion
o Trade Creation: the replacement of expensive domestic production by cheaper imports
from more efficient partner countries
 By joining the EU, you can import products at a cheaper price
o Trade Diversion: the increase of trade with a higher cost producer
o ABC all trade, B has cheapest price, A imports from B, PTA with A and C, A now imports
with C even if its higher because there are less barriers to trade
• Factors affecting trade within PTAs
o Geography, political economy, non-trade issues, rules of origin, spaghetti bowls.
o Spaghetti bowls. Of RTA in the Americas and Asia pacific that overlap
• Building blocks vs stumbling blocks for multilateral cooperation
• Other issues
o Investments, Lock-in of Reforms, Peace and Security
CONTINGENT PROTECTION
☐ Trade “Remedy” Laws
• Anti-Dumping (AD) and Countervailing Duties (CVD)
o GATT 1947-Article VI
WTO 1994- Agreement on Implementation of Article VI (Anti-dumping) and Subsidies
and Countervailing Measures Agreement.
• Safe Guards
o GATT 1947 Article XIX
o WTO- Agreement on Safeguards
• Exotic forms of contingent protection in the U.S.
o U.S. Section 323-National Security
o U.S. Section 301- “Unfair” Foreign Practices
 Allows the US to impose tariffs when there was unfair foreign trade practice
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☐ Antidumping: Nanjing Widgets
☐ Antidumping
• Dumping: foreign firm is said to be dumping when it sells at “less than fair value” (LTFV) in the
domestic market
• Dumping Margin: the difference between fair value and the actual price
• Material Injury: domestic firms are measurably harmed in some way
• Complains brought by domestic firms against foreign countries
• Dumped imports causing, or threatening, material injury are charged a tariff not exceeding the
dumping margin.
☐ Countervailing Duties
• Applied in case of foreign subsidy
• Complaints are brought by domestic firms
• Importing government estimates the subsidy rate
• If subsidy is found to cause or threaten material injury, the importing government may impose
tariff up to the level of the subsidy.
☐ Reasons for Dumping
• PRICE DISCRIMINATIN BETWEEN SEGMENTED MARKETS
o Firm charges lower price in more competitive market
• MAINTAIN “TOEHOLD” IN FLUCTUATING MARKET
o Firms with high sunk costs sells at below average cost whenever market price is below
average
• Predatory Dumping
o Firms with deep pockets drive out firms with shallow pockets through price cutting
☐ US AD Laws
• Petitioners must account for >25% of domestic production
• AD and CVD cases can be filed together
• Dep of Commerce (DOC) computes dumping margin
• International Trade Commission (ITC) decides material injury
• Tariff must equal dumping margin
• Foreign firm can avoid tariff by raising price
• Material Injury is more likely to found:
o If import penetration is high
o During recession, or during periods of strong currency
• If the industry produces steel.
TRADE POLICY UNCERTAINTY
☐ Economic Policy is Uncertain
• The World: Unpredictable
☐ How to Measure Policy Uncertainty?
• Media Index of Economic Policy Uncertainty
• Look for key words in the media
o Economic, economy, uncertain, uncertainty
o Governmental words, congress or deficit, federal reserve
☐ Trade Agreements and Trade Policy Uncertainty
• Trade Agreements seek to reduce trade policy uncertainty
o Under the WTO
 Countries commit to keeping tariffs below a certain level
 Nondiscrimination MFN and national treatment
 Common Rules and procedures, customs procedures, safety criteria
 Minimum Standards of intellectual property protection
WTO does not eliminate Trade Policy Uncertainty
 Anti-dumping, counter-vailing duties and safeguards
 Disputes
 Investment and services protections are very weak
☐ Effect of Policy Uncertainty on Investment
• The Bad News Principle
o If investments are irreversible (sunk) and the future is uncertain, then the risk of bad
news (downside risk) provides an incentive to delay investment
o The Possibility of good news does not matter
o This is because delaying investment preserves the option of avoiding loss if bad news
arrives in the future.
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GLOBALIZATION AND THE ENVIRONMENT
☐ Questions to think about
• Is Globalization Bad for the Environment?
• Do WTO rules impeded the proper regulation of the environment?
• What are Multilateral Environment Agreements?
☐ Decomposing Pollution
• Variation in pollution is due to
o Scale Effect
 Increased production results in more pollution
 Trade increases economic activity: more pollution
o Techniques Effect
 Different countries have different standards
 Trade increases wealth and thus demand for a cleaner environment: less pollution
o Composition Effect
 Different countries produce a different mix of goods
 Trade changes the composition of a county’s production
 Two outcomes
 If a country has a comparative advantage in pollution intensive goods, we
would expect it to specialize more in those goods
 If a country's comparative advantage in pollution-intensive goods is due to
lack environmental standards  "pollution havens"
☐ Policy
• Tax/regulate pollution itself
• Production problem
o tax/regulate production
• Consumption problem
o tax/regulate consumption
• When is Trade Policy Optimal?
o When pollution is associated with imports or exports only.
☐ WTO
• Article XX
• Exceptions for health, safety, environment and public morals
• Allows for product standards
• It may not be "disguised protectionism"
• Must be least trade-restrictive means
• Must be non-discriminatory
• Most commonly used to restrict consumption of hazardous goods.
• Frowns on Extraterritoriality
• Encouragement of BEAs and MEAs (e.g., Montreal Protocol)
• CARBON EMMISIONS
☐ The Paris COP21 Agreement
• Nearly Universal Participation
o In contrast to the Kyoto protocol, in which many major emitters (U.S., China, India) did
not participate.
• Nationally-determined contributions (NDCs)
o Nonbinding. In contrast to the Kyoto protocol, which set a global goal allocated with
binding commitments.
o NDCs are in terms of future (2030) carbon emissions. No common policy approach.
o Current NDCs are not expected to meet the 2 degree goal.
• Mandatory reporting
• Renewal of NDC evert 5 years
MIGRATION
☐ Top source countries
• US
o MEX, CHI, PHIL, IND, PR, VIET, ELSAL, SKOREA, CUB, CAN
• UK
o IND, POL, PAKIS, IRE, GER, SA, BANG, US, JAMAI, KENY
• Qatar
o PAK, IND, NEPAL, IRAN, PHIL, EGYP, SRI
• SA
o ZIMBABWE, MOZAMBIQUE LESOTHO, SWAZILAND, BOTSWANA, MALAWI, AUSTRALIA,
NEW ZEALAND
☐ International Migration: Supply and Demand Determinants
• Supply (reasons why people migrate)
o Pull factors: reasons to go to a new country
o Push countries: reasons to leave home country
o Welfare in new countries
o Geographical
o Cultural factors (colonization)
o Demographic: young county: young people: more outflow
o Political Factors
o Network Effects
• Demand (reasons for the demand of immigrants)
o Public Opinion in destination country
o Political system in destination country (democracy)
o Policy makers’ objectives in destination country
o Institutional structure of government
o International agreements (WTO, PTA, EU)
☐ Impacts of international migration
• the labor-market competition of migrants, i.e. migrants (who are similar to me) are competing with
me, thus I do not want them; or vice versa, migrants (who complement me) make me more
productive, so I want more of them;
• the welfare-state impact of migrants (unskilled migrants tend to be a burden for public finances,
i.e. unskilled migration is likely to be associated with tax increases or reductions in the number
and/or quality of public services; the opposite is true when skilled migrants arrive). Poor and rich
respondents are affected differently by the welfare-state impact of migration. If taxes
increase/decrease, the rich are the most impacted group while if the number and/or quality of
public services decreases/increases, the poor are the most impacted group;
• the price effect of migration (migrants decrease the prices of the services they provide: for
example, nanny services, cleaning services, gardening services);
• the political effect of migration: when migrants arrive to a country like the U.S., where jus soli hold,
their kids can become citizens and vote: thus migration changes the voting population of the
country and the political landscape;
• the cultural, crime and security impact of migration.
☐ Welfare Effects of Home Immigration
o Gain to Home Immobile Factor (A+B)
o Loss to Home Native Labor (A)
o Loss to Foreign Immobile Factor (D+F)
o Gain to Foreign Non-Migrant Labor (F)
o Gain to Migrants (C+D)
o Total Payments to Migrants (C+D+E)
o Net Gain to World (B+C)
FINAL EXAM REVIEW
☐ 17 of December = (4-6PM) (ICC ROOM #103)
☐ ½ Closed Answer, given answer, choose one, multiple, matching
☐ ½ Open Answer, give answer from your knowledge, fill in the
blank, supply the definition, add to the diagram, short essay
☐ What determines the volume and pattern of trade?
• Gravity Model
o Countries tend to trade a lot of with big countries and close by countries
• Comparative Advantage
o A product has a low PA= export
o A product has a high PA= import
o Source 1: Technology-Ricardo’s doctrine of Comparative advantage
o Source 2: Factor Endowment: Hecksher-Ohlin Theorem
• Economies of Scale
o Produce a lot, produce at low cost
o External
o Internal-Monopolistic Competition, Interindustry trade
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• Evidence
o Source 1: Technology-Ricardo
o Source 2: Factor Endowments- HO Theorem
Do countries gain from trade? YES
• Perfect Competition/constant returns of scale: YES
o A) partial equilibrium
o B) general equilibrium (indifference curves)
• External economies of scale: MAYBE but sometimes no
• Internal Economies of Scales: Monopolistic competition: additional gains (increase of product
variety, rationalization, pro-competitive, prices driven down)
How are the gains form trade distributed?
• Ricardo
o Single factor of production (Labor)
o Practically all workers experience an increase in real wage
o Everybody gains from trade: because there is only one factor of production
• Heckscher-Ohlin Model
o Two mobile factors (Capital and Labor)
o One factor wins and the other loses
o Stolpher Samuelson Theorem
• Specific Factors Model
o Three Factors; one mobile (L), two specifics (T & K)
o Specific factors: factors used in exports win, factor used in import loses
• Evidence
o Skill premium
o lobbying
Trade Policy History and Institutions/ Milestone leading up to
the GATT/WTO
• Important dates of these milestone
• The Structure of the GATT/WTO
o Articles
o Decision making
What do trade policies do?
• Perfect Competition
o Tariffs
 Small country vs large country
 Effects on trade on welfare
o Quantitative Restrictions
 Quotas, VERs: Diff: (Who gets or allocates the quotas)
 Equivalence with tariffs
o Subsidies
 Export Subsidies (Harmful to the country that imposed them (large country)),
production subsidies
 Effects on Trade and Welfare
• Imperfect Competition/Economies of Scale
o Subsidies Considers
o Subsidy wars
o Can see how subsidies can drive out companies
• Trade policy uncertainty
o When is uncertainty a problem?
o Effect on trade flows (whenever trade requires a sub cost investment)
Why would you use trade policies?
• Welfare arguments to use a tariff: Externalities
o Terms of Trade
 What the terms of trade argument for trade argument?
o Cross-Border Pollution
 What’s the cross-border externality argument for an international environmental
agreement?
o Domestic Externalities
 What’s the best policy here?
 Increase domestic production
 Domestic production subsidies
• Political Factors
o Median Voter Model
 How does a skewed distribution of skill affect the median voter’s ideal trade
policy?
o Special interests’ politics
 Why are producers better organized than consumers and what does that imply
about trade policy?
☐ Post-WTO trade policy landscape
• Contingent Protection
o What factors might trigger antidumping duty against a firm?
o Antidumping, what factors might trigger the anti-dumping duty
o Whatever I produced to a foreign country either below my domestic market
• Preferential Trade Agreements
o Trade creation and trade diversion
o Should we expect PTA to do be trade diverting in practice?
• Trade and the environment
o Is trade good or bad for the environment
o How does the WTO deal with environmental concerns, (article 20)?
o Reason for and structure of MEAs
☐ International Factor Movements
• Foreign Direct Investment
o Decisions of multinational firms
• Migrations
o Welfare and distributional consequences