International Trade Theory Chapter 1. Introduction to International Trade Theory Hyun-Hoon Lee Professor Kangwon National University 1 1

Contents Long-term trend of world trade Recent trend of world trade What are the reasons for fast expansion of international trade? What are the fundamental reasons for international trade? What are the consequences (i.e. benefits and costs) of international trade? Who are the major trade partners? What are the consequences of (i.e. benefits and costs) of trade policy? Introduction to the course 2 2

History of globalization 1. Long-term Trend of World Trade History of globalization First globalization: From the 1st Industrial Revolution to World War I Second globalization: From World War I to Great Depression Third globalization: From World War II to present Source: Bordo, M. (2003), "Globalization in Historical Perspective", NBER Working Paper

End of the third globalization? 1. Long-term Trend of World Trade End of the third globalization? World trade (as percent of global GDP) was increasing until late 2000, but has no longer been increasing since then. Source: The Economist, 2017

End of the third globalization? 1. Long-term Trend of World Trade End of the third globalization? Anti-Globalization Movement Claims globalization sacrifices human and environmental well-being to corporate profits of mutinationals Globalization is blamed for: World poverty and child labor in poor countries Job losses and lower wages in rich countries Environmental pollution and climate change Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.

2. Recent Pattern of World Trade ■ Merchandise exports by product groups Source: World Trade Organization, World Trade Statistical Review 2018

2. Recent Pattern of World Trade ■ Leading exporters and imports in world merchandise trade, 2016-2017 Source: World Trade Organization, World Trade Statistical Review 2018

2. Recent Pattern of World Trade ■ Leading exporters and imports in commercial services trade, 2016-2017 Source: World Trade Organization, World Trade Statistical Review 2018

2. Recent Pattern of World Trade ■ Share of developing economies in world exports, 2000-2016 (percentage share) Source: World Trade Organization, World Trade Statistical Review 2018

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

3. What are the 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.

4. What are the Fundamental Reasons for International Trade?

4. What are the 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

■ Costs of International Trade 5. What are the Consequences (Benefits and Costs) of International Trade? ■ Benefits of International Trade ■ Costs of International Trade

■ Benefits of International Trade 5. 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 5. What are the Consequences (Benefits and Costs) of International Trade? ■ Relation between Growth Rates of GDP and Trade

■ Costs of International Trade 5. 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 5. 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.

■ Multilateralism vs. regionalism 5. What are the Consequences (Benefits and Costs) of International Trade? ■ Free trade vs. non-free trade ■ Tariff and non-tariff barriers ■ Multilateralism vs. regionalism

Top 10 export markets for Korea 6. 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 export and import markets for Korea (2012) 6. Who are the major trade partners Top 10 export and import markets for Korea (2012) Export Import No Country Billion USD ratio 1 China 134 24.5% 81 15.5% 2 USA 59 10.7% Japan 64 12.4% 3 39 7.1% 43 8.3% 4 Hong Kong 33 6.0% Saudi Arabia 40 7.6% 5 Singapore 23 4.2% Qatar 26 4.9% 6 Vietnam 16 2.9% Australia 4.4% 7 Taiwan 15 2.7% Germany 18 3.4% 8 Indonesia 14 2.5% Kuwait 3.5% 9 India 12 2.2% Arab Emirate 10 Russia 11 2.0% Total 548 64.8% total 342 65.8% Source : KOTIS

6. 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.

7. Introduction to the course ■ Aims of the course To understand reasons for international trade Traditional trade theory Modern trade theory To understand benefits and costs of international trade To understand international trade policy Effects of tariffs and non-tariff barriers, etc.

7. Introduction to the course ■ Texts Main textbook Dominick Salvatore, International Economics, 10th edition, John Wiley & Sons, 2010. Auxiliary textbooks Recent research articles Economic daily news papers.

7. Introduction to the course ■ Grading Mid-term exam: 40% Final exam: 40% Quiz and homework: 10 Attendance: 10% (absence: -2 pts; late show up: – 1 pt) (Note: More than five-time absences will incur automatically an “F”.)

7. Introduction to the course ■ Contents

7. Introduction to the course ■ Requirements Intellectually Basic knowledge of microeconomics Mentally Professionalism Physically Healthy enough not to miss any of the lectures and homework!!

What is “To Study”(학문)?

學文: To learn letters? What is “To Study”(학문)? - ≪서경≫, ≪시경≫, ≪주역≫, ≪춘추≫, 예(禮), 악(樂) 따위의 시서ㆍ육예를 배우는 일. - i.e., To learn old-time classical philosophy?

學聞: To listen? What is “To Study”(학문)? - i.e., To listen to lectures in classroom?

學問: To ask questions? What is “To Study”(학문)? - 어떤 분야를 체계적으로 배워서 익힘. - i.e., Learning by asking

Who is your instructor? Ph.D. in economics from Univ of Oregon Professor, Dept of International Trade and Business, KNU Senior Analyst, Asia-Pacific Economic Cooperation (APEC) Senior Environmental Affairs Officer, United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) Visiting professor, Keio Univ, Melbourne Univ, Univ of Oregon, Bank of Korea Homepage: http://cc.kangwon.ac.kr/~hhlee/

Hyun-Hoon Lee hhlee@kangwon.ac.kr