International Trade Theories Lecture 2 International Trade Theories Hyun-Hoon Lee Professor Kangwon National University 1 1

Contents 1. What are the reasons for fast expansion of international trade? 2. What are the fundamental reasons for international trade? 3. What are the consequences (i.e. benefits and costs) of international trade? 4. Who are the major trade partners? 5. What are the consequences of (i.e. benefits and costs) of trade policy? 2 2

2. What are the Reasons for Fast Expansion of International Trade?

2. Reasons for Fast Expansion of International Trade Liberalization of Trade GATT/WTO Economic Integration Development of Transport Sea Transport Air Transport Development of Telecommunication Telephone Internet

Container shipping dramatically reduced shipping costs making it much easier and cost effective to ship world-wide.

3. What are the Fundamental Reasons for International Trade?

3. Fundamental Reasons for International Trade Comparative advantage Difference in technology - David Ricardo Difference in factor endowments – Heckscher-Ohlin  Inter-industry trade Economies of scale and product differentiation Economies of scale Product differentiation  Intra-industry trade

Top 10 export items of Korea (%) 3. Fundamental Reasons for International Trade Top 10 export items of Korea (%) Source : KOTIS

Top 10 import items of Korea (%) 3. Fundamental Reasons for International Trade Top 10 import items of Korea (%) Source : KOTIS

■ Costs of International Trade 4. What are the Consequences (Benefits and Costs) of International Trade? ■ Benefits of International Trade ■ Costs of International Trade

■ Benefits of International Trade 4. What are the Consequences (Benefits and Costs) of International Trade? ■ Benefits of International Trade Individuals Consumption of better quality products with lower prices Consumption of diverse products Firms Greater business opportunities Greater profit Nation Fast economic growth Job creation

■ Relation between Growth Rates of GDP and Trade 4. What are the Consequences (Benefits and Costs) of International Trade? ■ Relation between Growth Rates of GDP and Trade

■ Costs of International Trade 4. What are the Consequences (Benefits and Costs) of International Trade? ■ Costs of International Trade Individuals Loss of jobs employed in the less competitive industries Firms Face stronger competition and may lose competitive edge Nation Greater income disparity Possibility of environmental degradation in developing countries Greater vulnerability to foreign shocks

■ Net Benefit of International Trade 4. What are the Consequences (Benefits and Costs) of International Trade? ■ Net Benefit of International Trade Firms Greater business opportunity but may lose competitive edge Individuals As consumers, individuals become better off, but as workers, individuals may become worse off. Nation Overall national welfare becomes greater, but the nation may face the problems of income disparity, environmental degradation, etc.

Top 10 export markets for Korea 5. Who are the major trade partners Top 10 export markets for Korea Rank 1970 1980 1990 2000 2010 2012 Country % 1 2 3 4 5 6 7 8 9 10 U.S. Japan Hong Kong Germany Canada Netherlands U.K. Vietnam Singapore Sweden 47.3 28.1 3.3 2.3 1.6 1.5 1.3 0.9 Saudi Arabia Iran Indonesia 26.3 17.4 5.4 5.0 4.7 3.5 2.1 2.0 Hong Kong Taiwan France 29.8 19.4 5.8 4.4 2.8 2.7 1.9 1.7 China Malaysia 21.8 11.9 10.7 6.2 3.1 3.0 India Mexico 25.1 6.0 3.2 2.5 Russia 24.5 7.1 4.2 2.9 2.2 Total 91.4 71.6 72.9 68.8 62.4 64.8 Source : KOTIS

Top 10 import markets for Korea 5. Who are the major trade partners Top 10 import markets for Korea Rank 1980 1990 2000 2010 2012 Country % 1 2 3 4 5 6 7 8 9 10 Japan U.S Saudi Arabia Kuwait Australia Ira Germany Malaysia Canada U.K 26.3 21.9 14.8 7.9 3.1 2.9 2.1 1.7 1.4 Japn China Indonesia 26.6 24.3 4.7 3.7 3.2 2.5 2.3 1.8 Arab Emirate Taiwan 19.8 18.2 8.0 6.0 3.3 3.0 Qatar 16.8 15.1 9.5 6.3 4.8 3.4 2.8 2.6 15.5 12.4 8.3 7.6 4.9 4.4 3.5 2.7 Total 84.8 73.4 70.8 67.4 65.8 Source : KOTIS

5. Who are the major trade partners Gravity Model Other things equal, the bilateral trade between two countries is proportional, or at least positively related, to the product of the two countries’ GDPs, and the greater the distance between the two countries, the smaller is their bilateral trade. That is, the larger (and more equal in size) and the closer two countries are, the larger the volume of trade between them is expected to be. Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

■ Multilateralism vs. regionalism 6. What are the Consequences (Benefits and Costs) of Trade Policy? ■ Free trade vs. non-free trade ■ Tariff and non-tariff barriers ■ Multilateralism vs. regionalism

Hyun-Hoon Lee hhlee@kangwon.ac.kr