Cheat sheet · Intl Trade

Definitions to write verbatim

• Globalization: the free cross-border movement of goods, services, capital, information and people; also the growing integration of societies and national economies.
• Economic globalization: the increasing integration of national economic systems through growth in international trade, investment and capital flows. Also a dynamic, multidimensional process in which national resources become internationally mobile and economies increasingly interdependent.
• The five dimensions, always in this order: globalization of production, markets, competition, technology, corporations and industries. Drivers and barriers are the professor's movers and restraining factors.
• The four types: economic, financial, cultural, political globalization.
• Interdependence: the economic relationship among nations, measured roughly as (imports + exports of goods and services) / GDP. Much larger for small industrial and developing countries than for the United States.
• Mercantilism: a nation could become rich and powerful only by exporting more than it imported, so surpluses brought in bullion; the world stock of precious metals being fixed, one nation gained only at another's expense.
• Absolute advantage (Smith): a nation can produce a commodity more efficiently than another. If each has an absolute advantage in one good, both gain by specialising and trading. Limit: if one nation is better at both, it predicts no trade.
• The law of comparative advantage (Ricardo, 1817): even if a nation is less efficient in producing both commodities there is still a basis for mutually beneficial trade; it should specialise where its absolute disadvantage is smaller.
• Opportunity cost: the amount of a second commodity that must be given up to release just enough resources to produce one additional unit of the first. Under constant costs, P_X / P_Y equals the opportunity cost of X in terms of Y.
• Note on the split: this page is sessions 1 to 5 only. There is no mid-sem; the end-sem covers both pages, so revise them together.

The three periods, and the four sources of gain

• 1870 to 1914: industrial revolution, new resource sources in regions of recent settlement, millions of immigrants, vast foreign investment. Ended by the First World War.
• 1945 to 1980: the dismantling of heavy trade protection.
• 1980 to now: the most pervasive and dramatic, driven by telecommunications, transport and the elimination of restrictions on capital flows.
• Anti-globalization blames it for world poverty and child labour in poor countries, job losses and lower wages in rich ones, environmental damage, and multinational profit before human and environmental well-being.
• Four sources of gain from trade: items of limited domestic availability (coffee, bananas, cognac, tin, tungsten, petroleum, copper); lower-cost products; greater variety; economies of scale.

Gravity model

• Newton: F_ij = G x M_i x M_j / d_ij^2
• Trade: X_ij = C x Y_i x Y_j / t_ij
• X_ij exports from i to j · C a constant · Y economic mass, that is GDP · t_ij bilateral trade costs. Never say transaction costs.
• Two predictions: larger countries trade more; higher trade costs between two partners reduce trade between them.
• New trade / old trade = old t / new t
• Trap: t falling from 100 to 80 is a 20 % fall in trade costs but a 25 % rise in trade, because it is a reciprocal. With a mass change too, the factors multiply: 1.25 x 1.10 = 1.375, so 37.5 %, not 35 %.
• Proxies for t: distance, adjacency, common language, colonial links, common currency, island, landlocked, institutions, infrastructure, migration flows, bilateral tariffs.
• Origin Tinbergen (1962). Leamer and Levinsohn (1995): some of the clearest and most robust findings in empirical economics. Now gone back to microfoundations, and different microfoundations imply different estimation techniques.

The two tables, and every number in them

• Absolute advantage: US 6 wheat or 4 cloth per hour; UK 1 wheat or 5 cloth per hour. US advantage in wheat, UK in cloth.
• Comparative advantage: US 6 wheat or 4 cloth per hour; UK 1 wheat or 2 cloth per hour. UK disadvantage 2:4 in cloth against 1:6 in wheat, so UK cloth, US wheat.
• Labour saving on the US side: 6W costs 1.00 hour; making 6C itself would cost 1.50 hours; saving 0.50 hours, which is 3 more bushels.
• Labour saving on the UK side: 6C costs 3 hours; making 6W itself would cost 6 hours; saving 3 hours. Six hours of UK labour make 12C, of which 6 are exported, so the gain is 6C of labour time.
• Range of mutually beneficial trade: 4C < 6W < 12C Total gain from trading 6W = 12C - 4C = 8C
• Splitting the gain: at 6W = 6C the US gains 2C and the UK gains 6C, and 2 + 6 = 8. The nearer the terms of trade to a nation's own domestic ratio, the smaller its share.
• The no-trade case: if the UK made 3W per hour instead of 1 it would be uniformly half as productive, both nations' ratios would be 6W = 4C, the range would collapse to a point and no trade would occur.

Comparative advantage with money

• Price in money = wage rate / output per worker-hour
• US wage $6 an hour, UK wage GBP 1 an hour, exchange rate $1 = GBP 2, that is GBP 1 = $2.
• US: wheat 6/6 = $1.00 a bushel, cloth 6/4 = $1.50 a yard.
• UK: wheat GBP 1/1 = GBP 1.00 = $2.00 a bushel, cloth GBP 1/2 = GBP 0.50 = $1.00 a yard.
• So the US exports wheat, the UK exports cloth. For mutually beneficial trade the dollar price of a bushel must lie between $1 and $2.
• Trap: a change in the exchange rate changes the division of the gains, and a large enough change reverses the pattern of trade. Always state which currency each price is in.

Heckscher-Ohlin set-up

• Why extend Ricardo: to explain the basis of comparative advantage, and the effect of trade on the return to labour.
• Ten assumptions: two nations, two goods, two factors; same technology; X labour intensive and Y capital intensive in both; constant returns to scale; incomplete specialisation; identical tastes; perfect competition in commodity and factor markets; perfect internal factor mobility and none between nations; no transport costs, tariffs or obstructions; full employment and balanced trade.
• Factor intensity: Y is capital intensive if (K/L)_Y > (K/L)_X, in BOTH nations
• Nation 1: Y uses 2K, 2L so K/L = 1; X uses 1K, 4L so K/L = 1/4. Nation 2: Y uses 4K, 1L so K/L = 4; X uses 1K, 1L so K/L = 1.
• Nation 2's ratios are higher because capital is cheaper there. It is the ratio, never the absolute amounts.
• Abundance in physical units: compare TK / TL Abundance in factor prices: compare P_K / P_L (LOWER means capital abundant)
• The two definitions can disagree, because a factor price contains demand as well as supply. H-O uses the relative factor price definition.

Cases and names worth quoting

• Boeing's global value chain: the globalization of production, components from many countries assembled in one.
• India's cultural globalization: cultural convergence, and India's own long history of it.
• The Petition of the Candlemakers (Bastiat): satire against protection: candlemakers petition to block out the sun. The fallacy it attacks is that blocking a cheaper supplier makes a nation richer.
• Names and years: Smith absolute advantage · Ricardo 1817 comparative advantage · Haberler opportunity cost · Tinbergen 1962 gravity · Heckscher and Ohlin factor endowments.

Formula cards

The four theorems, verbatim

• Heckscher-Ohlin theorem: a nation will export the commodity whose production requires the intensive use of the nation's relatively abundant and cheap factor, and import the commodity whose production requires the intensive use of its relatively scarce and expensive factor.
• Factor-price equalisation theorem (Heckscher-Ohlin-Samuelson): international trade brings about equalisation of the relative and absolute returns to homogeneous factors across nations, so trade substitutes for factor mobility.
• Stolper-Samuelson theorem: a rise in the relative price of a commodity raises the real return to the factor used intensively in producing it and lowers the real return to the other factor.
• Specific-factors model: the short-run counterpart, where one factor cannot move between industries.
• Leontief paradox: US exports were more labour intensive than US import substitutes. Explanations: human capital, natural-resource intensity, tariff structure, factor-intensity reversal. Trade is likely only a small reason for the widening skilled to unskilled wage gap.

Economies of scale, intra-industry trade, product cycle

• Increasing returns to scale: output grows proportionately more than inputs. Striking result: mutually beneficial trade can occur between nations identical in every way.
• The class's numbers: two runs of 15 labour each = 30 labour; one run of 20 units needs 25 labour; saving 5. Average cost 1.50 to 1.25 per unit, a 16.7 % fall.
• Four internal economies: technical, financial (a lower interest rate), marketing, purchasing or bulk buying. External, or location, economies: SEZs, textiles in Bangladesh, automobiles in Chennai, IT in Bangalore.
• Outsourcing buys parts abroad; offshoring makes them in its own plants abroad. The test is ownership.
• Intra-industry trade index: T = 1 - |X - M| / (X + M)
• T = 0 one-way trade only; T = 1 exports equal imports. Shortcoming: the broader the industry definition, the higher T, with no trade flow changing. Always state the aggregation.
• Technological gap model (Posner, 1961): new products give a temporary monopoly, often via patents. Shortcomings: does not explain the size of gaps, nor why they arise or how they close.
• Product cycle model (Vernon, 1966): five stages. I innovator only, no trade. II innovator monopoly at home and abroad. III standardised, licensing, imitator produces for itself. IV imitator undersells in third markets. V imitator undersells in the innovator's own market. IV and V are the product-decline stage.
• Net exports = production - consumption

Tariffs: the four effects, and the numbers

• Tariff: a tax or duty on a traded commodity as it crosses a national boundary. Import tariff for protection in industrial nations; export tariff for revenue in developing ones, prohibited by the US Constitution.
• Three types, in order: ad valorem a fixed percentage of value ($10 on a $100 bicycle) · specific a fixed sum per unit ($10 per bicycle) · compound both (5 % + $10 gives $15 on a $100 bicycle, $20 on a $200 bicycle).
• Partial equilibrium applies when a small nation taxes imports competing with a small industry: world prices do not move, the rest of the economy does not move.
• The two rows: free trade at $1: consume 70, produce 10, import 60. With a 100 % tariff at $2: consume 50, produce 20, import 30. Autarky point E is $3 and 30 units.
• Consumption effect = 50 - 70 = -20 Production effect = 20 - 10 = +10 Trade effect = 30 - 60 = -30 Revenue effect = imports AFTER x duty = 30 x $1 = $30
• Checks: trade effect = consumption + production effects. Trap: revenue uses imports after, never the 60.
• Elasticity: more elastic demand, bigger consumption effect · more elastic supply, bigger production effect · both more elastic, bigger trade effect and smaller revenue effect. Demand elasticity does not touch the production effect, because the tariff fixes the price.
• Prohibitive tariff = (autarky price / world price) - 1 = 3/1 - 1 = 200 %

Tariff welfare: the box, every number

• Consumer loss = (units still bought x price rise) + 1/2 x (fall in consumption) x (price rise) = (50 x $1) + (1/2 x 20 x $1) = $50 + $10 = $60 = a + b + c + d
• Producer gain = (old output x price rise) + 1/2 x (rise in output) x (price rise) = (10 x $1) + (1/2 x 10 x $1) = $10 + $5 = $15 = a
• Govt revenue = imports after x duty = 30 x $1 = $30 = c Deadweight = 60 - 15 - 30 = $15 = b + d
• b = $5 production or protection triangle CJM: resources move from efficient exportables to inefficient importables. d = $10 consumption triangle BHN: the pattern of consumption is distorted.
• Cross-checks: consumer surplus falls from $122.50 to $62.50; producer surplus rises from $5 to $20; producers' revenue rises from $10 to $40, of which $15 is surplus and $25 is cost of production.
• Redistribution, both ways: consumers to producers, and the abundant factor (exportables) to the scarce factor (importables). Producer surplus is also called the subsidy effect of the tariff.
• Cost per job saved = loss of consumer surplus / jobs saved
• Rubber footwear: $208m consumer cost, 1,705 jobs, about $122,000 a job. Use consumer surplus on top, not the deadweight loss.
• Doubling the tariff quadruples the deadweight loss, because both triangles grow in base and height. At 50 % the box is $32.50, $6.25, $22.50 and $3.75.

Effective protection, escalation, optimum tariff

• g = (t - a_i x t_i) / (1 - a_i)
• g effective rate to producers · t nominal tariff on the final good · a_i imported input cost / final good free trade price · t_i tariff on the input.
• The suit: $80 wool in a $100 suit, 10 % nominal. Nominal 10/100 = 10 %; effective 10/20 = 50 %. With t_i = 5 %, g = 30 %; t_i = 10 %, g = 10 % = t; t_i = 20 %, g = minus 30 %.
• Five conclusions: a_i = 0 gives g = t · g rises with t · g rises with a_i · g is above, equal to or below t as t_i is below, equal to or above t · when a_i t_i exceeds t, g is negative, so less is produced at home than under free trade.
• Nominal matters to consumers (how much the price rises); effective matters to producers (how much the processing is protected). The multiplier is 1 / (1 - a_i).
• Tariff escalation, or a cascading structure: zero or low tariffs on raw materials, higher rates the greater the processing. Highest on textiles and clothing, leather, rubber and travel goods, exactly where developing nations have a comparative advantage.
• Two cautions on g: it assumes international prices are unaffected by tariffs, and that inputs are used in fixed proportions. Still definitely superior to the nominal rate, and central to the Uruguay Round.
• Optimum tariff: the rate maximising the net benefit of improved terms of trade against reduced trade volume, for a large nation. The partner's terms of trade are the reciprocal, so it definitely loses and retaliates; even without retaliation the imposing nation gains less than the partner loses, so the world is worse off than under free trade.

Quotas and non-tariff barriers

• Find P such that Qd(P) - Qs(P) = quota Licence rent = quota x (domestic price - world price)
• Class quota numbers: free trade supply 10, imports 80, demand 90; with a quota of 30, supply 20, imports 30, demand 50. (Textbook's Figure 9.1 has 70/10/60 on the free trade row; the quota side is identical. Check against your class slides.)
• Four effects of a quota: production, consumption, protection, balance of payments. No revenue effect unless licences are auctioned.
• Five differences from an equivalent tariff: (1) quota gives higher price and production, tariff gives higher consumption and imports; (2) on a demand rise the price moves under a quota ($2 to $2.50, output 20 to 25) and the import quantity under a tariff (30 to 45), so a quota replaces the market mechanism; (3) licences bring monopoly profits, arbitrary allocation and rent-seeking; (4) a quota is certain, a tariff's trade effect is not and exporters can absorb part of it; (5) a quota is less visible, so producers prefer it.
• Verdict: quotas are more restrictive, so society should resist substituting them. The Uruguay Round did the reverse: tariffication.
• VERs, or orderly marketing arrangements: the importing country induces voluntary export cuts under threat. The rent goes to the exporting country. Less effective than quotas because exporters ship higher quality, higher priced goods. Phased out by the end of 1999.
• The new protectionism: health and safety regulations; government purchasing restrictions (Buy American Act 1933, 12 % preference, 50 % on defence; Tokyo Round procurement code); indirect tax rebates. Class examples: BS-6 car parts, FDA drug approval, the Indian mango ban.
• International cartel: suppliers from different nations restricting output and exports to raise total profits. OPEC quadrupled crude prices 1973 to 1974. Succeeds with few suppliers, an essential product, and no substitutes.
• Dumping: export below cost, or sale at a lower price abroad than at home. Persistent (continuous, monopolist profit maximisation) · predatory (temporary, to destroy rivals, then raise prices) · sporadic (occasional, to unload a surplus). Remedy: anti-dumping duties; firms usually raise prices instead.
• Export subsidy: quotable price = (cost - subsidy) + target profit Net welfare = producer gain - consumer loss - subsidy cost
• Rupees: cost Rs 100, 20 % margin so Rs 120; rival at Rs 110; a Rs 20 subsidy makes effective cost Rs 80 and price Rs 100, with the same Rs 20 profit. Dollars: at $3.50 produce 35, consume 20, export 15; a $0.50 subsidy raises the price to $4, produce 40, consume 10, export 30; consumer loss $7.50, producer gain $18.75, subsidy cost $15.00, net loss $3.75. Foreign consumers gain.

Political economy, GATT and the WTO

• Fallacious: (1) cheap foreign labour: unit labour cost = wage per hour / units per hour, so a high-wage country is cheaper whenever its productivity ratio exceeds its wage ratio ($30 at 15 units gives $2.00; $6 at 2 units gives $3.00); and trade on comparative advantage benefits both anyway. (2) The scientific tariff raises import prices to the domestic price, so it eliminates price differences and all trade subject to it.
• Questionable: protection to reduce unemployment and to cure a balance of payments deficit. Both work by import substitution, both are beggar-thy-neighbour, so others retaliate and all nations lose in the end.
• Qualified: the infant-industry argument: temporary protection until the industry can meet competition, achieve economies of scale and reflect comparative advantage. Valid only if the grown-up return offsets the higher prices consumers paid during infancy. Qualifications: better for developing than industrial nations; hard to identify the industry and hard to remove the protection; an equivalent production subsidy is superior because it avoids the consumption distortion, though it needs money whereas a tariff raises it.
• Who gets protected: organised industries (automobiles); consumer rather than intermediate goods; decentralised industries with many workers; industries protected in the past; industries facing competition from poor countries. Most protected US industry: textiles and apparel.
• Strategic trade policy: creating comparative advantage in high-technology fields with high risk, large scale and extensive external economies. Boeing and Airbus: $100m alone, minus $10m each if both produce; a $15m subsidy turns minus 10 into plus 5, Boeing exits, Airbus keeps $100m unsubsidised. Three difficulties: picking winners, mutual neutralisation, retaliation. Verdict: suboptimal in theory, optimal in practice.
• GATT 1947, Geneva. Three principles: non-discrimination (most-favoured-nation), elimination of non-tariff barriers, consultation on disputes. Weak because rulings needed unanimity, so the guilty nation could block action.
• Uruguay Round Punta del Este 1986 to December 1993, effective 1 July 1995. Services, agriculture and investment brought in; 20-year patents; tariffication; VERs out by 1999; created the WTO, which covers goods and services, decides by a two-thirds or three-quarters vote and can penalise or expel.
• Doha Round launched November 2001, collapsed July 2008 over agricultural subsidies, now dead. Outstanding problem: labour and environmental standards can be captured by protectionist forces.

Session 10: sustainability and TradeTech (no deck, no note)

• Verify all of this against your class slides. There is no deck and no note for session 10 in the Drive. Source: the outline topic plus the WEF report Artificial Intelligence for Efficiency, Sustainability and Inclusivity in TradeTech 2025. The group assignment is due in this session.
• TradeTech: technologies applied to the process of trading, not to the goods: documentation, customs clearance, logistics, trade finance, and the data joining them. In course language it acts on t, the gravity model's trade cost term.
• Three lenses: efficiency (trade costs), sustainability (embodied emissions), inclusivity (who can use it).
• Five AI applications: trade documentation; customs risk-scoring and classification; logistics optimisation; demand forecasting; trade finance risk assessment.
• CBAM levy = (importing carbon price - foreign carbon price) x embodied emissions Ad valorem equivalent = levy / product price
• EUR 90 at home, EUR 20 abroad, EUR 700 steel: 2.0 t CO2 per tonne gives EUR 140, a 20 % equivalent; 1.2 t gives EUR 84, or 12 %. Two identical goods, two different effective tariffs, because the rate depends on the production process. Purpose: prevent carbon leakage.
• Where it fits: between a tariff (a money charge at the border) and a technical regulation of the new protectionism (compliance the exporter pays for). Data localisation belongs in the same family, restricting trade in services as a quota restricts goods.
• Regressivity: burden % = fixed cost per consignment / consignment value
• EUR 1,200 is 0.5 % of a EUR 240,000 shipment but 8.0 % of a EUR 15,000 one, a gap of 7.5 percentage points on an identical rule. That is the inclusivity case in one line.
• The judgement to argue: for: prevents leakage, charges only the domestic carbon price, credits foreign carbon prices, applies to a measurable physical quantity. Against: the levelling logic is the scientific tariff's, standards are easily captured, and the burden is regressive. Verdict: protectionist by administration, not by construction.

Formula cards