Part 1 - Introduction to international trade

Question 1

What type of dimension a trade policy has?

Answer 1

Any trade policy always has an international dimension.

Question 2

What is a tariff?

Answer 2

a tariff is a tax levied when a good is imported

Question 3

Are tariff simple or complicated trade policy? Are they used very often? Between what countries is more common used?

Answer 3

Tariffs are the simplest trade policy – are on average quite low nowadays (between developed countries), but their effects are important to understand other trade policies.

Question 4

What are Non-tariff barriers?

Answer 4

Non-tariff barriers to trade include inter alia import quotas (limitations on the quantity of imports), export restraints (limitations on the quantity of exports), technical regulations and product standards.

Question 5

What are the different types of trade policy instruments?

Answer 5

Tariffs and Non-tariff barriers

Question 6

What are export promotion?

Answer 6

A type of trade policy instrument and it is all government’s activities that aim at promoting exports by domestic firms.

Question 7

Export promotion examples

Answer 7

Export promotion policies include export subsidies, export credit guarantees and export promotion programs.

Question 8

What is the trade liberalization aim?

Answer 8

Trade liberalization aims at lowering tariff and/or non-tariff barriers, which opens up the economy for trade

Question 9

Multilateral trade liberalization:

Answer 9

All members of the World Trade Organization WTO (formerly GATT) agree on a new trade agreement that takes effect for all member-countries.

Question 10

Regional Trade Agreements (RTAs):

Answer 10

All RTA-members (two or more) agree on a new trade agreement that only takes effect for members of the RTA.

Question 11

Why should we open our economy to international trade?

Answer 11

Stylized empirical facts shows that:
• More open economies tend to grow faster.
• More open economies are richer as measured by GDP pc (per capita).

Question 12

What are different sources for gains from trade?

Answer 12

• Productivity gains.
• Lower prices.
• More products available.

Question 13

Is it a good or bad idea to open for trade?

Answer 13

Good idea overall to open for international trade (welfare-enhancing) but do not forget that will always be winners and losers due to trade liberalization

Question 14

Economic Openness and GDP per Capita graph: how to calculate countries wealth?

Answer 14

GDP / Total number of citizens living in a country = how rich is the country

Question 15

Relationship between level of openness and GDP

Answer 15

Countries that have always been open as an economy have a higher average GDP (4X richer than countries who were never open)

*Positive relationship - correlation - so it does not means necessarily that opening up will cause a higher GDP per capita

Question 16

Closed Economies vs Open Economies Graph grow rate per capita (1965-2000)

Answer 16

Closed Economies: No relation between the initial GDP and the average growth rate that succeed later on.

Open Economies: negative relation between the initial GDP per capita and the average growth rate - negative means positive because countries that were initially poorer but were open economies tended to grow faster than countries that were already initially richer - expect conversions of GDP level for economies that are open

Question 17

Graph on economic openness and GDP per capita:

Answer 17

• Countries that were always open between 1965 to 2000 were, on average, 4.5 times as rich as countries that were never open.
• This indicates a positive relationship (or correlation) between openness and the level of GDP per capita.

Question 18

Correlation vs causation

Answer 18

Correlation - variable A might influence B and B might influence A and they might influence each other
Causation - variable A causes variable B to change

Question 19

Three pieces of evidence that being open to the world economy will cause a country to become richer (causation).

Answer 19

• Graphs on economic growth in closed and open economies indicate that average growth in the closed group, 1.5% per year, is significantly lower than in the open group, 3.0% per year, and among open economies, poorer countries grow faster(strong evidence of convergence).
• Historical evidence from countries like Japan, South Korea and Vietnam. (before opened and after)
• Frankel and Romer study (1999) show raising the ratio of trade to GDP by one percentage point raises income by 0.5% to 2.0%, where by authors exploit geographic characteristics (and not trade policy) to identify this effect.

Question 20

Trade Lessons from Japan:

Answer 20

• Japan is a good example of autarky

* Rapid shift from autarky to free trade from 1859 on (natural experiment)

Question 21

How opening to trade has affected Japanese real income?

Answer 21

1. Gains from trade 8 to 9 percent of Japan‘s real GDP

2. Weil (2008) reports that opening to trade has raised Japanese real income by 65% over two decades.

Question 22

Trade Lessons from the 1930s - How did the Great Depression affected the economy?

Answer 22

• Great Depression led many countries to increase their trade barriers (Raising barriers to imports, Fiddling with exchange rate, Collapse of world trade.)
• Between 25 and 50 percent of the total decline in world trade due to protectionist measures.

Question 23

What was the impact of the infamous U.S. Smoot-Hawley Act of 1930?

Answer 23

• U.S. imports fell over 40 percent in two years thereafter.

* Irwin (1998): 22 percent of the observed decline due to this act.

Question 24

What is protectionism?

Answer 24

Protectionism refers to government policies that restrict international trade to help domestic industries.

Question 25

U.S. Import Volume and Real GNP (1929-1938)

Answer 25

Real economic side led to lowering international trade flows because of less income available but also protectionism measures have further increased the burthen of the economic downturn

Question 26

The Ricardian model:

Answer 26

David Ricardo (1817) argues that the comparative (not absolute) advantage establishes gains from trade. Countries specialize in their production and trade with each other.

Question 27

The Heckscher-Ohlin model:

Answer 27

Eli Heckscher and Bertil Ohlin (1933) argue that the comparative advantage of countries depends on their relative resource endowment (also Factor-proportions model).

Question 28

The Specific Factors model:

Answer 28

The Specific Factors model allows for distributional effects across sectors, if production factors are immobile.

Question 29

The Krugman model:

Answer 29

Paul Krugman (1979, 1980) pionereed the New Trade Theory that focuses on the role of increasing returns to scale and consumers‘ love of variety.
• imperfect competition was allowed
• firms paid a fixed cost in order to be able to start producing - this allowed the introduction to the increased return to scale.
• all firms were alike

Question 30

The Melitz model:

Answer 30

Marc Melitz (2003) suggested the New New Trade Theory that builds on the Krugman model and adds heterogeneous firms (also Heterogeneous Firm model).

Question 31

What is the increased return to scale ?

Answer 31

Larger firms tend to be more cost efficient than smaller firms, and larger firms can profit more to opening up to international trade

Question 32

Different sources for gains from trade:

Answer 32

• Differences in productivity between workers or firms.
• Differences in technology.
• Differences in factor endowment - one country has more labor than the oder

Question 33

Different theoretical models for gains from trade:

Answer 33

• Productivity gains (Ricardo model, Melitz model)
• Lower prices (Krugman model, Melitz model) - increased competition should led to lower prices in the domestic economy once you open up for international trade
• More products available (Krugman model, Melitz model) - more variety if you open up for international trade

Question 34

Productivity gains from trade:

Answer 34

Trefler (2004) finds an increase in average labor productivity of Canadian manufacturing plants by 6 percent due to the Canada-U.S. Free Trade Agreement.

Question 35

Lower prices in domestic economy from trade:

Answer 35

• De Loecker, Goldberg, Khandelwal and Pavcnik (2016) demonstrate that India‘s comprehensive trade liberalization reduced average prices by 18 percent.
• Fajgelbaum and Khandelwal (2016) find that trade typically favors the poor, who concentrates pending in more traded sectors.

Question 36

More products available from trade:

Answer 36

Brodaand Weinstein (2006) show that the number of available products in U.S. imports tripled from 1972 to 2001, representing welfare gains equivalent to 2.6 percent of GDP.

Question 37

Forms of trade liberalization:

Answer 37

• Multilateral Liberalization

* Regional Trade Agreements

Question 38

International Trade Organization (ITO)

Answer 38

was foreseen to become international institution for the regulation of international trade.

Question 39

The Havana Charter:

Answer 39

signed in March 1948, but never ratified by the United States and consequently by any other country.

Question 40

General Agreement on Tariffs and Trade (GATT)

Answer 40

Separate negotiations, including parts of the Havana Charter, led to the General Agreement on Tariffs and Trade (GATT), which took effect in 1948.

Question 41

GATT

Answer 41

• 23 founding countries.
• Permanent secretariat in Geneva.
• Legally binding upper-bound limit to tariffs by members.

Question 42

When was the WTO established?

Answer 42

Establishment of World Trade Organization (WTO) in 1995.

Question 43

Two main forms of trade liberalization:

Answer 43

Multilateral vs. „bilateral“ trade liberalization.

“Bilateral” - mean two member country signing a trade agreement

Question 44

Goal of trade liberalization:

Answer 44

Reduction or elimination of tariff and non-tariff trade barriers

Question 45

Most favored nation (MFN) principle:

Answer 45

Most favored nation (MFN) clause one of the cornerstones for multilateral trade liberalization and GATT/WTO law:

• Obligation to extend advantages „unconditionally“ to all members.
• The country which is the recipient of a treatment must receive trade advantages as the „most favored nation“ by the country granting such treatment.

Question 46

Important exceptions to MFN:

Answer 46

− Customs Unions.
− Regional Trade Agreements (RTAs).
− Special and differential treatment for developing countries

Question 47

What is preferable? Multilateral trade liberalization (GATT/WTO) or regional trade agreements (RTAs)?

Answer 47

Most economists would agree that Multilateral trade liberalization is preferable.

Question 48

RTAs umbrella term for

Answer 48

Preferential trade agreements (PTAs), economic integration areas and costums unions.

Question 49

RTAs were historically often confined to a certain region not true any longer. TRUE OR FALSE?

Answer 49

TRUE

Question 50

RTAs are sometimes also called…

Answer 50

free trade agreements (FTAs).

Question 51

Why are RTAs controversial?

Answer 51

RTAs are controversial due to their discriminatory nature.
• Trade creation vs. trade diversion
• Negative welfare effects for non-members and members possible.

Question 52

Are RTA’s increasing or decreasing in the last decades?

Answer 52

RTAs are booming (in particular since the early 1990s).
 
As of April 2020, 303 RTAs were in force (covering goods or services or goods and services). This number increases to 321 RTAs including accessions.