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

2. 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

3. 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

4. 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

5. 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.

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

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

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

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

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

11. 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

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

13. 4. What are the Fundamental Reasons for International Trade?

14. 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

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

16. ■ 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

17. ■ 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

18. ■ 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

19. ■ 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.

20. ■ 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

21. 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

22. 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

23. 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.

24. 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.

25. 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.

26. 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”.)

27. 7. Introduction to the course
■ Contents

28. 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!!

29. What is “To Study”(학문)?

30. 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?

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

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

33. 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:

34. Hyun-Hoon Lee