Econ 433 Advanced International Trade Professor Andrés Rodríguez-Clare

Econ 433

Advanced International TradeProfessor Andrés Rodríguez-Clare

International trade

• Imports: purchase of goods or services from another country.

• Exports: sale of goods or services to other countries.

• Reasons for trade

Goods and services

• Goods: includes manufacturing, mining, and agricultural products.

• Services: includes business services like eBay, customer services, travel, insurance, tourism, and transportation.

Differences across industries

• Share of U.S. Demand served by Imports (2001)– Agricultural: 16% (21%)– Oil: 51% (10%)– Textiles: 12% (11%)– Clothing: 58% (11%)– Transport Equipment: 30% (20%)– Services: 2% (2%)

Industry-level effects

• Apparel employment in the US declined from 1.2 million in 1987 top 300 thousand in 2006

• Trade?

• What else?

Inequality has increased

Trade is controversial

• Opposition to trade is strong on both the left and the right

• According to a Wall Street Journal survey… – Six in 10 Republicans agreed with a

statement that free trade has been bd for the U.S. and said they would agree with a Republican candidate who favored tougher regulations to limit imports

Trade is controversial

• On the left, Lou Dobbs (CNN):– “One has to wonder why the effect of putting

our middle class in direct competition with the cheapest labor in the world isn’t as clear to them (big business) as it is to most working men and women in this country.”

More terminology

• Trade balance

• Current account

U.S. International Trade in Goods and Services, 1992-2007

In millions of dollars.

Balance

Exports

Imports

Year

Total Goods (1) Services Total Goods (1) Services Total Goods (1) Services

2004 -607,730 -669,578 61,848 1,160,588 807,516 353,072 1,768,318 1,477,094 291,224

2005 -711,567 -787,149 75,582 1,283,753 894,631 389,122 1,995,320 1,681,780 313,540

2006 -753,283 -838,270 84,987 1,457,014 1,023,109 433,905 2,210,298 1,861,380 348,918

2007 -700,258 -819,373 119,115 1,645,726 1,148,481 497,245 2,345,983 1,967,853 378,130

Source: U.S. Census Bureau, Foreign Trade Division.

Traditional trade

New forms of trade

The making of a Barbie doll

The Basics of World Trade

• Problems with data?– The whole $2 is counted as an export while only 35

cents of added value.

• So why is this a big deal?– In 1995, toys imported from China totaled $5.4 billion.– As trade with China continues to grow, China’s

apparent trade advantage begins to worry many in the U.S.

– When the trade statistics are misleading, it can cause undue controversy.

Map of World TradeIn 2000 $6.6 trillion in goods crossed international borders.

Increasing importance of trade

Openness in the US: % (Exp+Imp)/GDP

0

5

1015

20

25

30

1940 1950 1960 1970 1980 1990 2000 2010

Increasing importance of trade

Why?

• Reduction in policy barriers.

• Reduction in transportation costs

Share of “open” countries in the world

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 20000

10

20

30

40

50

60

70

80

90

100

% o

f M

O c

ountr

ies

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000-0.06

-0.04

-0.02

0

0.02

0.04

0.06

Year

Avg. growth All

Avg. growth SI

Import duties

Transportation costs

• In 1956 Malcom McLean first designed a transportation system around the packaging of cargo in huge metal boxes that could be loaded and unloaded by cranes….

• Dramatic reduction in freight costs

Other international flows

• Foreign Direct Investment (FDI) is the flow of capital across borders when a firm owns a company in another country.

• Migration is the flow of people across borders as they move from one country to another.

Map of MigrationFigure 1.5 Foreign-Born Migrants, 2000 (millions)

Foreign Direct Investment

• FDI occurs when a firm in one country owns and controls a company in another country.

• FDI can embed– capital, – technology, – know-how, – skills,– access to international markets

Map of Foreign Direct InvestmentFigure 1.6 Flows of Foreign Direct Investment, 2000