Econ355: International Trade

Lecture 1

Duke University, Spring 2022

Professor Rafael Dix-Carneiro

I Background
I Grew up in Rio, Brazil
I Studied Engineering and Math
I PhD in Economics at Princeton
I Main hobby is to play the electric guitar and enjoy music
I Also enjoy tennis, soccer, travelling and good food!

I Expertise
I Academic economist: active in both teaching and research
I At Duke since 2013
I Have previously taught at the University of Maryland and Yale
I Specialize in International Trade, Labor Economics and
Development Economics
My Research

I Main focus: I study how economies adjust in response to

trade shocks (tariff changes, exchange rates, liberalization,
productivity growth in other trade partners)

I How labor market conditions affect crime

I How firms respond to exchange rate shocks

I Research page: https://sites.google.com/site/

rafaeldixcarneiro/research
I Below each paper, there is an easy-to-read column I wrote on
my research
I A good summary of part of my work is here: https://www.
dropbox.com/s/3l8oge9ts1foj73/Chapter_IMF.pdf
Logistics

I Instructor: Rafael Dix-Carneiro

I Office Hours: Tuesdays 5pm to 6pm
I Happy to schedule appointments outside of these times

I TA: Jeffrey Kaufman – jeffrey.kaufman@duke.edu

I Office Hours: TBA

I Very Important: if you plan to come to my office hours or to

Jeff’s, please let us know beforehand so that we make sure we
are there. Sometimes no students come to office hours, in
which case we would like to make alternative plans.
Duke Sakai

I I organize all of the course materials under the Lessons tab on

Sakai.
I Syllabus
I Lecture Notes
I Recorded Lectures through Zoom (if any)
I Additional Readings
I Problem Sets and Solutions

I Please rely on the Lessons tab when accessing our

course page.
Course

I This is a course on the economics of globalization and trade

policy.

I Introduce you to topics related to international trade from the

perspective of economic theory.

I Focus on economic models.

I Good opportunity to put your microeconomic theory skills to

work on policy relevant questions.

I I will frequently discuss in class or post on Sakai relevant new

research on timely topics.
Textbook and Materials
I Main Textbook: John McLaren “International Trade,” Wiley,
First Edition

I Secondary Textbook: Paul Krugman, Maurice Obstfeld and

Marc Melitz “International Economics: Theory and Policy,”
Addison Wesley

I Book: Doug Irwin “Free Trade Under Fire,” Fifth Edition,

Princeton University Press

I Very Highly Recommended

I “Trade Talks” podcast run by Chad Bown (Peterson Institute
for International Economics) and Soumaya Keynes (The
Economist)
I Covers current issues in trade and often cites current
economics research to analyze the issues of interest.
Contents

I The Ricardian Model

I The Specific-Factors Model
I The Hecksher-Ohlin Model
I Oligopoly Models
I Increasing Returns to Scale Models
I Monopolistic Competition
I Heterogeneous Firms
I Tariffs and Quotas with Perfect Competition
I Tariffs and Quotas under Oligopoly
I Infant-Industry Protection
I Trade Creation and Trade Diversion (time permitting)
Grading

I 5 problem sets
I Lowest grade is dropped
I Account for 30% of final grade

I 1 mid-term exam (tentatively Tuesday March 22, 8.30am –

9.45am)
I Accounts for 25% of final grade

I 1 final exam (April 30th, 7pm – 10pm)

I Accounts for 30% of final grade

I Book summary/essay on “Free Trade Under Fire” by Doug

Irwin (April 22)
I Accounts for 15% of final grade
Broad Themes

I The Gains From Trade

I When is trade MUTUALLY beneficial?

I The Patterns of Trade

I Who sells what to whom, and how much?

I Protectionism
I Should governments regulate international trade?
Broad Themes: The Gains From Trade

I Nobody thinks Norway should grow its own oranges

I Many people are skeptical about benefits of trading goods a

country can produce for itself

I Shouldn’t Americans buy American goods whenever possible,

to help create jobs in the US?
Broad Themes: The Gains From Trade

I There are gains from trade

I International exchanges are always made to mutual benefit

I Common misconception that trade is harmful if there are large

disparities between countries in productivity or wages
I Businesses in India worry that opening for trade will drive them
out as they will not be able to compete with American,
Chinese or Japanese goods.
I People in the US worry that trade with lower-wage countries
will drag their standard of living down.
Broad Themes: The Gains From Trade

I We will see that two countries can trade to their MUTUAL

benefit even if one of them is more efficient at producing
EVERYTHING.

I International trade allows countries to SPECIALIZE in

producing narrower ranges of goods
I Efficiencies of large-scale production
Broad Themes: The Gains From Trade

I Although nations gain from international trade, it is likely that

trade hurts particular groups WITHIN nations
I International trade can have strong effects on the distribution
of income

I Owners of resources that are SPECIFIC to industries that

compete with imports are likely to be hurt.
I Power looms are now less valuable in the US, given import
competition from textiles made in China
Broad Themes: The Patterns of Trade

I Explaining main patterns of trade – who sells what to whom,

and how much – is a major concern of international
economists

I If economists are to have any confidence discussing the effects

of international trade or recommend trade policy changes,
they should know if their theories are good enough to explain
the patterns of trade

I Some patterns are easy to understand

I Climate and resources explain why Brazil exports coffee and
Saudi Arabia exports oil.
I But why does Japan export cars while the US exports aircraft?
I Why Germany exports BMW’s and Mercedes’ to France, and
France exports Peugeot’s and Renault’s to Germany?
Broad Themes: Protectionism

I Governments have for a long time worried about the effect of

international competition on the prosperity of domestic
industries

I Should governments regulate trade?

I Shielding domestic industries placing limits on imports
(quotas), taxes or other barriers?
I Helping domestic industries in world competition subsidizing
exports?
What is Globalization?

I Increasing integration of the world economy

I Trade: integration of goods and services markets

I Internationalization of the production process: offshoring,

outsourcing, global supply chains

I Integration of financial markets: borrowing and lending, foreign

direct investment

I Integration of factor markets (labor and capital): migration

Globalization Forces

I Anything that facilitates expanded economic integration

across countries
I Anything that makes it easier to buy or sell goods and services
across national borders
I Anything that makes it easier for a firm in one country to set
up production facilities in another
I Anything that makes it easier for an investor to invest in
securities originating in another country
I Anything that makes it easier for a worker in one country to
travel and seek employment in another
Globalization Today

I International interdependence is a central feature of the world

economy

I Economic fortunes of countries are intertwined via trade,

foreign direct investment, and financial capital flows

I Production networks are spread across countries and

continents
I Supply of products in one country is highly dependent on
economic activities in multiple foreign countries.
Globalization Today

I For example, recent research finds that US firms with high

dependence on Japanese inputs suffered large output losses
following the 2011 Tohoku earthquake.
I Non-technical summary here:
http://www.voxeu.org/article/
global-supply-chains-and-transmission-shocks
Boeing 787 Dreamliner
iPhone
Globalization: Why the Fuss?

I Labor Market Conditions in Industrialized Countries

I Loss of manufacturing jobs
I Increased job insecurity
I Stagnant real wages low-skilled workers
I Growing skill premium / inequality

I Loss of cultural identity

I Environmental concerns

I Loss of governmental control: WTO

Big (and Difficult!) Questions

I To what extent is globalization, and international trade in

particular, responsible for each of these?

I Should trade policies be part of the governmental response? If

so, what type?
Globalization: Two Large Waves

I 19th century (possibly centered around the 1820’s)

I 20th century (after 1970)

Globalization: 19th Century Drivers of Globalization

I Rise of steamship – lowers cost of ocean shipping and river

shipping.

I Suez canal.

I Transatlantic cable – improved communications.

19th Century Evidence

I Evidence on falling shipping costs around 1820’s (direct

evidence).

I Evidence on convergence of product prices around 1820’s

(indirect evidence).
20th Century Drivers of Globalization

I GATT/WTO multilateral reductions in trade barriers

beginning with end of WWII (undoing early-century tariffs).

I Loosening of immigration restrictions imposed early in

century.

I Further improvements in communications; internet, etc.

20th Century Evidence

I Rising trade flows.

I Rising importance of FDI.

I Rising share of foreign-born in US labor force.

Role of changes in transport technology

I Hummels (2007) studies trends in transport costs.

I 1970’s: Containerization revolution.

I Standardized containers can be shipped worldwide from truck

to train to ship, then back to train and truck.
Break bulk Cargo
I However, this does not seem to have caused a consistent drop
in ocean shipping rates: Fuel costs are still critical, and
volatile.

I But air freight rates have dropped dramatically

Overall message

I First big globalization: 19th century: Seems to have been

driven mainly by technology.

I Second: Late 20th century: Seems to have been driven mainly

by policy.

I Future: Economic crisis plus rising fuel costs could lead to

another de-globalization. We will see.
China

I The emergence of China as a major player in international

markets is the single most important event of the past 30
years.
China
The China Shock

GMG (Princeton University ) Lecture 1: Just the Facts Fall 2016 40 / 41

China
US Imports from China

GMG (Princeton University ) Lecture 1: Just the Facts Fall 2016 41 / 41

Beyond the trends: Why do countries trade?

I Answer that question and you have a theory of trade.

I Different answers to that question imply different theories of

trade, with different policy implications.

I There are three main theories, and we will go through each of

them.
Reasons for trade

1. Differences between countries (e.g., technology,

productivities): Comparative advantage.

2. Increasing returns to scale.

3. Imperfect competition.

I These give rise to the three branches of the family tree of

trade theory.
Family Tree of Trade Theory