Transcript The Case for Free Trade - University of Nottingham

The case for free trade
Daniel M. Bernhofen
GEP School Conference
University of Nottingham
School Conference, June 28,
2010
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Motivation
• Q: What trade economists do?
A: Ask and try to answer questions about the
global economy.
Key questions in the field of international
economics:
1) Why do countries trade?
2) What has caused the increase in world trade?
3) What are the benefits/costs from international
trade?
4) What are the recommendations for government
policy?
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Organization
• Facts about international trade.
• General economic arguments for free
trade.
• Look deeper into one theoretical
framework: “the enhanced opportunity
argument for free trade”.
• How is free trade sustainable ?
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Facts about
international trade:
GDP:
Sum of the market value
of all goods and services
produced in the
economy in a given time
period.
Trade:
(Imports+Exports))/2
Data Source: World
Development indicator,
(World Bank, 2005),
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Where does the Barbie Doll
come from ?
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Arguments for free trade
• Enhancement of opportunities
-
Opportunity to make the best from your economic resources
(endowments and technologies).
Opportunity of having access to goods and technologies that the
economy could not produce on its own.
• Increase in competition
-
Foreign competition can reduce firms’ market power and provide an
incentive for firms to innovate. Innovation is the key driver of
economic growth.
• Peace argument (non-economic)
- Europe and “the German problem”.
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Enhancement of opportunities
Model:
• assume two goods: agriculture and manufacture
• assume two worlds: with and without trade:
• Production choices are constrained by
- countries’ endowments: labour, capital stock, land.
- available technology.
=> Concept of a production opportunity set which illustrates
the trade-offs a society faces.
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Economy’s opportunity set
Agriculture
Output
Opportunity set is constrained by
technology and endowments.
C
A
B
Manufacturing
Output
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Enhanced opportunities with
trade
Enhanced opportunity set
Agriculture
Output
D
International trade
line
Import
B
Export
Manufacturing
Output
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Trade acts like economic growth
Agriculture
Output
D
Point D could also be attained
through internal growth
Manufacturing
Output
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New goods
Mobile
phones
Example: Sub-Saharan economy
which is not able to produce
mobile phones
Opportunity set is constrained to
agricultural goods
Maximum amount
of output
Agriculture Output,
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International trade provides
access to new goods
Mobile
phones
Sub-Saharan economy is able to
obtain new goods
International trade
line
D
Import
Export
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Agriculture Output,
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Two waves of globalisation
• First wave of globalisation:1870-1914.
• World War I: 1914-1918.
• Interwar Period and the Great Depression
of the 1930s.
• World War II: 1939-1945.
• Second wave of globalisation:1945present.
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What caused the growth of
world trade?
• Government policies
– WTO (World Trade Organisation)
• Different rounds of trade negotiations
• Multi-lateral principles (non-discrimination, treat everybody
like a most favored nation).
– Regional integration.
• EU, North-American Free Trade Association (NAFTA)
• Improved transportation technology
–
Reduction of shipping costs (The container)
– Improved information technology (PC, internet).
–
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Recent concern: The collapse in world
trade
(October-Dec. 2008)
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The collapse in world trade
(continued)
• Two main causes:
(i)Breakdown of international supply chains
(a la Barbie doll)
(ii)Global reduction in consumer demand.
Concern about protectionism:
- Prevent the lessons from the past where
governments imposed trade barriers.
- So far, existing national and international
institutions have prevented this.
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