1. A Theoretical Framework With Application GAINS FROM TRADE

2. Gains from trade

3. (1) GAINS FROM MOVING TO FREE TRADE FROM AUTARKY

4. THE GAINS FROM TRADE: DISSECTING THE CAUSES Differences between countries in the relative scarcity of goods Reflected in differences in (relative) prices in the absence of trade (autarky relative prices) Due to Supply side differences Relative productivities Relative factor endowments Demand side differences Differences in tastes

5. (2) GAINS FROM REMOVING DOMESTIC TRADE BARRIERS

6. (3) GAINS FROM TRANSPORT-COST REDUCTION (OR LIBERALIZATION) ABROAD Note: Direction and magnitude of effect depends exclusively on the impact on the terms of trade (price of exports relative to price of imports)

7. HOW LARGE ARE THE GAINS FROM TRADE? THE CASE OF TARIFF LIBERALIZATION

8. THE GAINS FROM TRADE:ILLUSTRATIVE CALCULATIONS

9. THE GAINS FROM TRADE:ESTIMATES FROM SIMULATION MODELS

10. GAINS FROM TRADE: THREE APPROACHES Three sets of simulations Own liberalization Others’ liberalization PTAs Size of effects depends on Share of trade in GDP Extent of market segmentation or price differential Terms of trade effects They mute the gains from liberalization in some large countries (e.g., the U.S.) They are responsible for some of the “perverse” (negative) effects in the Table.

11. MAGNITUDE OF ACTUAL TARIFFS Source: Bouet 2008

12. MAGNITUDE OF ACTUAL TARIFFS Source: Bouet 2008

13. Estimates from World Bank referring to just tariff removal

14. A MORE RECENT STUDY (IFPRI) Source: Bouet 2008

15. EMPIRICAL QUESTIONS Why do the Bradford and Lawrence numbers differ so much from the World Bank and IFPRI estimates? What do these numbers imply for the magnitude of benefits for continued trade liberalization (e.g., Doha)? What features of the real world may lead us to inflate these numbers (or reduce them)? Scale economies: but can cut both ways Externalities, imperfect competition and other market failures that may be alleviated or aggravated by trade openness Gains from product variety Static versus dynamic efficiency gains (trade => productivity growth over time ?) Samuelson’s riposte: the terms-of-trade effects of other nations’ productivity gains Peterson Institute: US richer by $1 trillion a year due to “past globalization” Considerations of employment/unemployment?

16. Does capital flow from rich to poor nations? Source: Prasad, Rajan and Subramanian (2006)

17. TRADE POLICY AND DISTRIBUTION: NOT EVERYONE WINS From Mankiw

18. WILL EVERYONE’S WAGES BE SET IN SHANGHAI? Source: Leamer

19. CAN TRADE EQUALIZE REAL WAGES ACROSS COUNTRIES Head-to-head competition in standardized industrial products role of labor productivity Differentiated products Degree of substitutability in demand Relationship-specificity of production Non-competing production Soccer balls for high-tech products Do non-traded sectors shield workers from the forces of global competition?

20. TRADE: MAJOR ISSUES Trade and jobs Job displacement versus unemployment Trade affects structure of employment, not amount But can cause unemployment in the short-run? The role of “Keynesian Adjustment costs Differ from the “permanent” distributional effects discussed earlier Distributional effects go beyond any adjustment costs

21. POLICY QUESTIONS The analogy with technological change objections? Is there such a thing as “unfair” trade? Foreign country subsidies Worker repression in foreign country Procedural fairness Should we compensate losers? What criteria should we use?