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1 International Trade. FIGURE 1-3. Trade in Goods and Services Relative to GDP. The Financial Crisis. Trade Compared with GDP. TABLE 1-2.
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1 International Trade FIGURE 1-3 Trade in Goods and Services Relative to GDP
Trade Compared with GDP TABLE 1-2 Trade/GDP Ratio in 2008 Countries with the highest ratios of trade to GDP tend to be small in economic size. Countries with the lowest ratios of trade to GDP tend to be very large in economic size.
FIGURE 1-4 Average Worldwide Tariffs, 1860–2000 This diagram shows the world average tariff for 35 countries from 1860 to 2000.
Map of World Trade World Trade in Goods, 2006 ($ billions) Trade in merchandise goods between selected countries and regions of the world.
1 International Trade TABLE 1-1 Shares of World Trade, Accounted for by Selected Regions, 2006 .
Big Issues • Causes and Patterns of trade • Gains and losses from trade • Trade and income distribution • Trade and development • Trade Policy
Gains from trading • Gains from specialization and exchange • Gains from economies of scale • Gains from access to increased variety • Survival of the fittest • Learning-by-doing and or learning-by exporting • Access to cheaper inputs . . .
INSERT OPINION POLL SHOWING US OPINION AS LEAST FAVORABLE TO TRADE HERE
Classical advice for the colonies • "Were the Americans, either by combination or by any other sort of violence, to stop importation of European manufactures, and, by thus giving a monopoly to such of their own countrymen as could manufacture the like goods, divert any considerable part of their capital into this employment, they would retard instead of accelerating the further increase in the value of their annual produce, and would obstruct instead of promoting the progress of their country towards real wealth and greatness." Adam Smith, The Wealth of Nations, 1786
Deindustrialization as the “perfect plan of policy?” • “The effects of the perfect plan of policy must be (so far as it could operate without being eluded) to change the whole face of that industrial country [Bengal], in order to render it a field of the produce of crude materials subservient to the manufactures of Great Britain.” (Ninth Report of the House of Commons Select Committee on Administration of Justice in India, 1783, op. cited).
Deindustrialization as the “perfect plan of policy?” • “The prohibition of Indian goods had averted the ruin of our manufactures, and revived their prosperity.” -Daniel Defoe • “Dacca, the Manchester of India, has fallen off from a very flourishing town to a very poor and small town.” Select Committee of Parliament (1840) • “India is thus reduced from the state of a manufacturing to that of an agricultural country” – George Tucker - Director of the East India Company
Comparative advantage or ...? • “[H]ad this not been the case, had not such prohibitory duties and decrees existed, the mills of Paisley and Manchester would have been stopped in their outset, and could scarcely have been set in motion, even by the power of steam… Had India been independent, she would have retaliated, would have imposed prohibitive duties upon British goods, and would thus have preserved her own productive industry from annihilation. This act of self-defense was not permitted her; she was at the mercy of the stranger. British goods were forced upon her without paying any duty, and the foreign manufacturer employed the arm of political injustice to keep down and ultimately strangle a competitor with whom he could not have competed on equal terms” - Horace Wilson (British historian)
Now for some history ... • "The factory system would, in all probability, not have taken place in America and Germany. It most certainly could not have flourished, as it has done, both in these states, and in France, Belgium, and Switzerland, through the fostering bounties which the high-priced food of the British artisan has offered to the cheaper fed manufacturer of those countries." Richard Cobden’s Political Writings
Kicking away the ladder • "It is a very common clever device that when anyone has attained the summit of greatness, he kicks away the ladder by which he has climbed up, in order to deprive others of the means of climbing up after him. In this lies the secret of the cosmopolitan doctrine of Adam Smith, and of the cosmopolitan tendencies of his great contemporary William Pitt, and of all his successors in the British Government administrations. Friedrich List, The National Systems of Political Economy, 1841
De ja vu? • For centuries England has relied on protectionism, has carried it to extremes and has obtained satisfactory results from it. There is no doubt that it is to this system that it owes its present strength. After two centuries, England has found it convenient to adopt free trade because it thinks that protection can no longer offer it anything. Very well then, Gentlemen, my knowledge of our country leads me to believe that within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade. ( Ulysses S. Grant, the President of the USA, 1868-76
Infant industry protection • “The liberality of England towards the trade of her colonies has been confined chiefly to what concerns the market for their produce, either in its rude state, or in what may be called the very first stage of manufacture… The more advanced or more refined manufactures … the merchants and manufacturers of Great Britain choose to reserve to themselves, and have prevailed upon the legislature to prevent their establishment in the colonies, sometimes by high duties, and sometimes by absolute prohibitions” (Smith, Book IV).
Not completely unprecedented • Two waves of globalization (1820-1914 and 1960 – present) • Trade-to-GDP and Capital flows-to-GDP ratios stand at roughly the same level where these were at the end of the “first wave” of globalization • Both waves were driven by reduction in technological and political barriers to international integration • Both waves seem to have resulted in overall income convergence together with top-end convergence
Although nuances exist • Second wave distinguished by: • The more dramatic reduction in communication costs (the death of distance) • Initial conditions. The first wave occurred in a uniformly poor and agrarian world while the second occurred in a polarized world • The first wave industrialized the North, de-industrialized the South, and produced divergence in an initially relatively equal world. The second wave started with huge gaps between the North and the South, de-industrialized the North, and industrialized the South.
Although nuances exist (contd.) • Much more intra-industry trade and FDI in the second era. Roughly speaking, 1870-1914 period saw FDI flowing mainly from developed countries to developing countries. In the recent wave, most FDI also originated in developed countries but has also flowed mainly to developed nations.
Although nuances exist (contd.) • Much more restricted labor mobility • Factor prices: First era: Landowners versus poor workers. Second era: “Skilled” versus “unskilled” workers. • Tariff independence greater in the first era (no WTO!) • Capital flows much shorter term in second era. • Monetary independence greater in first era. Easier to manage the trilemma due to political factors.
