International Trade: Theory and Policy

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Brief Contents Contents About the Author Acknowledgments Preface Chapter 1: Introductory Trade Issues: History, Institutions, and Legal Framework The International Economy and International Economics What Is International Economics? Understanding Tariffs Measuring Protectionism: Average Tariff Rates around the World Problems Using Average Tariffs as a Measure of Protection Recent Trade Controversies Doha and WTO The WTO Seattle Ministerial—1999 Ambivalence about Globalization since the Uruguay Round The Great Depression, Smoot-Hawley, and the Reciprocal Trade Agreements Act (RTAA) The General Agreement on Tariffs and Trade (GATT) Nondiscrimination Most-Favored Nation National Treatment GATT Exceptions Trade Remedies Antidumping Antisubsidy Safeguards Free Trade Areas The Uruguay Round The Agreement on Agriculture (AoA) The General Agreement on Trade in Services (GATS) The Agreement on Textiles and Clothing (ATC) Trade-Related Aspects of Intellectual Property Rights (TRIPS) Other Agreements The World Trade Organization The Dispute Settlement Process Dispute Settlement History Appendix A: Selected U.S. Tariffs—2015 Appendix B: Bound versus Applied Tariffs Endnotes Chapter 2: A Pure Exchange Model of Trade A Pure Exchange Model: Preliminaries Indifference Curves The Edgeworth Box The Terms of Trade Evaluating the Gains from Trade Achieving a Unique Solution Additional Exercises Chapter 3: The Pure Exchange Model and Market Ethics Self-Interest and Cooperation Honesty and Markets Property Protection and Markets Self-Interest vs. Greed Ethics Enforcement Chapter 4: Production, Trade, and Comparative Advantage Production Possibilities The Opportunity Cost of Production Absolute and Comparative Advantages Gains from Specialization and Trade David Ricardo and Comparative Advantage A Second Method of Defining Comparative Advantage Misunderstandings about Comparative Advantage Production Possibilities with More than Two Individuals Sources of Economic Growth Additional Exercises Chapter 5: The Ricardian Theory of Comparative Advantage (Redux) The Theory of Comparative Advantage: Overview Historical Overview Ricardo’s Numerical Example The Ricardian Model: Assumptions and Results Defending against Skeptics: The Intuition behind the Theory of Comparative Advantage A Gardening Story Interpreting the Theory of Comparative Advantage Ricardian Model Assumptions Perfect Competition Two Countries Two Goods One Factor of Production Utility Maximization and Demand General Equilibrium Production Resource Constraint Factor Mobility Transportation Costs Exogenous and Endogenous Variables The Ricardian Model Production Possibility Frontier Definitions: Absolute and Comparative Advantage Labor Productivity Absolute Advantage Opportunity Cost Comparative Advantage Using Opportunity Costs Using Relative Productivities No Comparative Advantage A Ricardian Numerical Example Autarky Production and Consumption Points Exercise Conclusion Limitations of the Numerical Example Relationship between Prices and Wages Deriving the Autarky Terms of Trade The Motivation for International Trade and Specialization The Market Motivation to Trade The Market Motivation for Specialization Welfare Effects of Free Trade: Real Wage Effects Numerical Example: Calculating a Real Wage The Real Wage of Cheese Workers in Terms of Cheese The Real Wage of Cheese Workers in Terms of Wine The Real Wage of Wine Workers in Terms of Wine The Real Wage of Wine Workers in Terms of Cheese Real Wages in Autarky Comparison of Autarky Real Wages between Countries Effects of Free Trade on Real Wages The Welfare Effects of Free Trade: Aggregate Effects Appendix: Robert Torrens on Comparative Advantage Endnotes Chapter 6: The Pure Exchange Model Again with Three Traders A Simple Pure Exchange Economy A Simple Example of Trade Determinants of the Terms of Trade Preferences Uncertainty Scarcity Size Quality Effort Persuasion Expectations of Utility Expectations of a Future Relationship Government Policies Morality Coercion Summary Example of a Two-Person Trade Pattern Three Traders and Redistribution with Trade Three Traders with International Trade The Nondiscrimination Argument for Free Trade Endnotes Chapter 7: Factor Mobility and Income Redistribution Factor Mobility Overview Domestic Factor Mobility Time and Factor Mobility Immobile Factor Model Overview and Assumptions Overview Assumptions Number of Countries Number of Goods Number of Factors Consumer Behavior A General Equilibrium Demand Supply The Production Possibility Frontier in the Immobile Factor Model Autarky Equilibrium in the Immobile Factor Model Depicting a Free Trade Equilibrium in the Immobile Factor Model Effect of Trade on Real Wages Intuition of Real Wage Effects Interpreting the Welfare Effects Aggregate Welfare Effects of Free Trade in the Immobile Factor Model Endnotes Chapter 8: The Heckscher-Ohlin (Factor Proportions) Model Chapter Overview The Main Results of the H-O Model The Heckscher-Ohlin Theorem The Stolper-Samuelson Theorem The Factor-Price Equalization Theorem The Rybczynski Theorem Aggregate Economic Efficiency Heckscher-Ohlin Model Assumptions Perfect Competition Two Countries Two Goods Two Factors Factor Constraints Endowments Definition Demand General Equilibrium Heckscher-Ohlin Model Assumptions: Production Definition Remember Heckscher-Ohlin Model Assumptions: Fixed versus Variable Proportions Fixed Factor Proportions Variable Factor Proportions The Production Possibility Frontier (Fixed Proportions) The Rybczynski Theorem The Relationship between Endowments and Outputs The Magnification Effect for Quantities Percentage Changes in the Endowments and Outputs The Stolper-Samuelson Theorem The Magnification Effect for Prices Percentage Changes in the Goods and Factor Prices The Production Possibility Frontier (Variable Proportions) The Heckscher-Ohlin Theorem The H-O Theorem Graphical Depiction: Variable Proportions Depicting a Free Trade Equilibrium in the Heckscher-Ohlin Model National Welfare Effects of Free Trade in the Heckscher-Ohlin Model The Distributive Effects of Free Trade in the Heckscher-Ohlin Model The Compensation Principle Factor-Price Equalization The Specific Factor Model: Overview Basic Assumptions Specific Factor Model Results The Specific Factor Model Single-Firm Equilibrium in the Specific Factor Model Factor Payments Two-Firm Equilibrium in the Specific Factor Model Effects of a Price Increase Real Wage Effect Real Rental Effect Magnification Effect Effects of Trade Dynamic Income Redistribution and Trade Scenario Setup/Assumptions Short-Run Effects: Immobile Factor Model Medium-Run Effects: The Specific Factor Model Long-Run Effects: The Heckscher-Ohlin Model Factor Rewards over Time Endnotes Chapter 9: Economies of Scale and International Trade Chapter Overview Economies of Scale and Returns to Scale Economies of Scale and Perfect Competition Gains from Trade with Economies of Scale: A Simple Explanation Basic Assumptions A Numerical Example An Autarky Equilibrium Gains from Specialization Some Noteworthy Features Monopolistic Competition Model Assumptions: Monopolistic Competition The Effects of Trade in a Monopolistically Competitive Industry The Costs and Benefits of Free Trade under Monopolistic Competition The Benefits of Free Trade The Costs of Free Trade The Net Welfare Effects of Trade Chapter 10: Trade Policy Effects with Perfectly Competitive Markets Basic Assumptions of the Partial Equilibrium Model The Meaning of Partial Equilibrium The Large versus Small Country Assumption The Welfare Effects of Trade Policies: Partial Equilibrium Consumer Surplus Changes in Consumer Surplus Producer Surplus Changes in Producer Surplus The Effects of International Trade Depicting a Free Trade Equilibrium: Large and Small Country Cases Free Trade Equilibrium: Large Country Case Free Trade Equilibrium: Small Country Case Import Tariffs: Small Country Price Effects Import Tariffs: Small Country Welfare Effects Import Tariffs: Large Country Price Effects The Price Effects of a Tariff: A Simple Dynamic Story Noteworthy Price Effects of a Tariff Import Tariffs: Large Country Welfare Effects The Optimal Tariff The National Welfare Effects of Trade Liberalization for a Large Country Retaliation and Trade Wars The Noncooperative Solution (Nash Equilibrium) How to Find a Nash Equilibrium The Cooperative Solution Implications and Interpretations Import Quotas: Large Country Price Effects Administration of an Import Quota Import Quota: Large Country Welfare Effects Import Quota: Small Country Price Effects Import Quota: Small Country Welfare Effects The Choice between Import Tariffs and Quotas The Protective Effects of Tariffs versus Quotas with Market Changes An Increase in Domestic Demand An Increase in Domestic Supply A Decrease in the World Price The General Rule Export Subsidies: Large Country Price Effects Export Subsidies: Large Country Welfare Effects Countervailing Duties The Initial Export Subsidy The Countervailing Duty Welfare Effects of the CVD Welfare Effects of the Combined Policies (Export Subsidy plus CVD) Voluntary Export Restraints (VERs): Large Country Price Effects Administration of a Voluntary Export Restraint Voluntary Export Restraints: Large Country Welfare Effects Export Taxes: Large Country Price Effects Export Taxes: Large Country Welfare Effects Chapter 11: Domestic Policies and International Trade 1. Chapter Overview Types of Domestic Policies Domestic Policy versus Trade Policy Price Effects Domestic Policies as a Basis for Trade Welfare Effects of Domestic Policies in Small Trading Economies Equivalency between Domestic and Trade Policies Domestic Production Subsidies Production Subsidies as a Reason for Trade Production Subsidy Effects in a Small Importing Country Domestic Consumption Taxes Consumption Taxes as a Reason for Trade Consumption Tax Effects in a Small Importing Country 8. Equivalence of an Import Tariff with a Domestic (Consumption Tax plus Production Subsidy) So What? Chapter 12: Trade Policies with Market Imperfections and Distortions 1. Chapter Overview 2. Imperfections and Distortions Defined Monopoly, Duopoly, and Oligopoly Large Countries in International Trade Externalities Positive Production Externalities Negative Production Externalities Positive Consumption Externalities Negative Consumption Externalities Public Goods Nonclearing Markets Imperfect Information Policy-Imposed Distortions 3. The Theory of the Second Best First-Best versus Second-Best Equilibria Welfare-Improving Policies in a Second-Best World Trade Policies in a Second-Best World Summary of the Theory of the Second Best 4. Unemployment and Trade Policy Effects of an Import Tariff Unemployment Costs Objections to Protection First-Best versus Second-Best Policies Unemployment Costs 5. The Infant Industry Argument and Dynamic Comparative Advantage An Analytical Example Dynamic Effects of Infant Industry Protection The Economic Argument against Infant Industry Protection Other Arguments against Infant Industry Protection 6. The Case of a Foreign Monopoly Strategic Trade Policy First-Best Policy 7. Monopoly and Monopsony Power and Trade First-Best or Second-Best Trade Policies 8. Public Goods and National Security National Security and Public Goods Another Case in Which a Trade Policy Is First Best 9. Trade and the Environment Trade Liberalization with Environmental Pollution Trade Policy versus Domestic Policy Welfare Effects of a Tariff with Environmental Pollution Welfare Effects of a Consumption Tax with Environmental Pollution A Comparison: Trade Policy versus Domestic Policy A Source of Controversy Understanding the WTO’s Position on Trade and the Environment One Final Issue: Measurement Problems 10. Economic Integration: Free Trade Areas, Trade Creation, and Trade Diversion Preferential Trade Agreement Free Trade Area Customs Union Common Market Economic Union Monetary Union Multilateralism versus Regionalism Trade Creation and Trade Diversion Trade Diversion Trade Creation Aggregate Welfare Effects of a Free Trade Area Free Trade Areas and the Theory of the Second Best Endnotes Chapter 13: Political Economy and International Trade Chapter Overview Some Features of a Democratic Society The Nature of Lobbying The Economic Effects of Protection: An Example The Consumers’ Lobbying Decision The Producers’ Lobbying Decision The Government’s Decision The Lobbying Problem in a Democracy Chapter 14: Evaluating the Controversy between Free Trade and Protectionism Introduction Economic Efficiency Effects of Free Trade Production Efficiency Consumption Efficiency Free Trade and the Distribution of Income The Case for Selected Protection The Economic Case against Selected Protection The Potential for Retaliation The Theory of the Second Best Information Deficiencies Political Economy Issues: The Problem with Democratic Processes Free Trade as the “Pragmatically Optimal” Policy Choice Endnotes Index