International Trade: Theory and Policy

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