Y669 International Political Economy, lecture #3, dealing mainly with theories of international trade.

1. Y669 International Political
Economy
September 14, 2010

2. Pioneers of Trade Theory
• Adam Smith, The Wealth of
Nations (1776) – first defense of
free market policies
• David Ricardo, Principals of
Political Economy and Taxation
(1817) - introduced theory of
comparative advantage

3. Graphical Version of Ricardian
Theory

4. Heckscher-Ohlin Model
• Basic model: two countries, two goods, two
factors of production (Ricardo only had one)
• Differences in factor endowments lead to “gains
from trade”
• Both countries will be better off if they specialize
in producing goods which require a relatively
abundant factor and then trade with another
country
• For maximum benefit, the other country should
have a very different factor endowment

5. Let’s Play the Trade Ruler
Game!
• http://nobelprize.org/educational_games/economi

6. History of U.S. Trade Policy
• Smoot-Hawley Tariff of 1930
• Depression High Tariffs
• FDR (espec. Cordell Hull) favors free trade
for post WW2 period
• 1947 -- Congress rejects
International Trade Organization treaty
proposed initially at Bretton Woods
• The GATT becomes the main trade regime

7. Overall Tariff Levels and
Trade/GNP, 1850-1990

8. Source: International Monetary Fund, Direction of Trade
Statistics Yearbook
(various years).
Figure 3-2. Growth in World Exports, 1958-2006,
in Billions of Current Dollars

9. Figure 3-3. Trade/GDP in the US, Britain, Germany,
France, and Japan, 1960-2006, in Percentages
Sources: World Bank, World Development Indicators 2001 CD-ROM (Washington,
D.C.: World Bank, 2001): OECD.Stat, http://stats.oecd.org/.

10. Main Rules of the GATT
• Nondiscrimination among members of the
GATT
– most favored nation (MFN) principle
– tariffs must be adjusted to reflect MFN levels
• Participation in multilateral trade
negotiations to lower tariffs and
nontariff barriers
A tariff is a tax that is charged on the
value of imported goods.

11. Multilateral Trade Negotiations
• 1947 Geneva
• 1949 Annecy
• 1950 Torquay
• 1956 Geneva
• 1960-61 Dillon
• 1962-67 Kennedy
• 1973-79 Tokyo
• 1986-93 Uruguay
• 2000- Doha
Biggest tariff reductions occurred in the Kennedy Round.
Tokyo Round began discussions of non-tariff barriers.
Uruguay Round established the basis for the World Trade
Organization.

12. Main Issues in the Tokyo Round
• Tariffs
• Conflict resolution; dispute settlement
• Nontariff barriers:
– subsidies
– government procurement
– standards
– custom valuation
– licensing

13. Example of a Subsidies Dispute:
Airbus vs. Boeing
This is
a Boeing
777
This is an Airbus 300
Latest WTO ruling (video)

14. Main Issues in the Uruguay
Round
• Agriculture (mainly subsidies)
• Trade in Services
• Trade-related Intellectual Property (TRIPs)
• Trade-related Investment Measures
(TRIMs)
French farmers
protesting the
Maastricht Treaty
inEurope.

15. Multilateral Trade Negotiations:
The Doha Round
• Begun in early 2000
• Major conferences so far:
– 2001 Doha (Qatar)
– 2003 Cancun
– 2004 Geneva
– 2005 Hong Kong
– 2006 Geneva
– 2007 Potsdam
– 2008-9 Geneva Pascal Lamy calls time out
on Doha Round in 2006

16. Main Issues in the Doha Round
• Timing of implementation of Uruguay
Round agreements, espec. Agriculture,
services, regional agreements,
TRIPs/TRIMs
• Reductions in agricultural subsidies and
textile/apparel tariffs in the rich
industrialized countries