The Essence of International Trade Theory

The following sections are included:

• Dedication
• Preface
• About the Author
• Acknowledgment
• Contents

In order to derive clear-cut results, international trade theory often makes use of simple small-scale models, which consist of only small numbers of goods, production factors, and/or countries. Those results obtained from small-scale models, however, can be extended to more general settings (with appropriate modifications and reinterpretations) as far as we fully recognize which properties are generic to an economy and which are specific to the model under consideration. In this preliminary chapter, we introduce some basic concepts, technical terms, and analytical tools in a general setting, which will be used in some specific contexts later in the book…

When the relative price of a good in one country is lower than in other countries, the first country is said to have a comparative advantage in this good over other countries. Differences in the relative prices are, among others, the most important driving force of international trade. A country will export its products to foreign markets where prices are higher than in its own markets and, conversely, import goods and services from foreign markets where prices are lower than in its own markets. In this way, there emerges a trade pattern — a description of which country imports or exports what kind of goods and services. Therefore, the first step to examine the structure of international trade is to show how the differences in relative prices across countries are determined. In this chapter, we first introduce a simple trade model called the Ricardian model, which highlights the roles of the differences in production technology as one of the determinants of comparative advantage. Then, we extend and generalize it into several different directions.

The knowledge of production technologies can be diffused all over the world through, for example, spillover effects, migration of skilled workers, or learning efforts by firms. The technology differences among countries may disappear in the long run and, if so, they cannot be a source of comparative advantage any longer. Instead of technology differences, the Heckscher–Ohlin–Samuelson (HOS) model and the Specific Factors (SF) model focus on the roles of the factor endowments, which can vary from one country to another because each country has its own historical background, geographic characteristics, demographic structure, and other features. One country may have a large amount of capital stock because it succeeded in an earlier start of industrialization than the other countries, while another country may be rich in labor forces because it has enjoyed a higher birthrate. Even if the production technologies are the same among countries, those differences in the factor endowments generate differences in the autarkic prices — the structure of comparative advantages…

How does international trade affect the welfare of people? By participating in international trade, can everyone improve their standard of living? If some (though not all) people were to suffer from trade liberalization, what can we do for them? These are long-standing questions in international trade to which a great deal of theoretical efforts have been devoted and a vast number of results has been accumulated under the title of gains-from-trade propositions. This chapter addresses the gains-from-trade propositions and related issues in the competitive circumstance. We first introduce some welfare criteria and investigate their implications for the existence of so-called social utility functions. Based on a social utility function, we prove the basic gains-from-trade proposition. Roughly, we can say that “free trade is better than no trade”. Then, we turn to the cases where trade liberalization would bring about conflicts of interests among people in a country. We show that the conflict among people can be dissolved or mitigated if trade liberalization is accompanied by some appropriate redistribution policies. We also introduce some useful analytical tools such as the trade utility function, trade indifference curve, and the offer curve.

Although the notion of comparative advantage plays crucial roles in determining trade patterns and gains from trade, in particular in the perfectly competitive circumstance, it is not the only cause of international trade. Other factors such as strategic interaction among agents, product differentiation and economies of scale come into play when the situation is not perfectly competitive. The first contributions to oligopolistic trade theory appeared in the early 1980s. By using a simple Cournot duopoly model, Brander (1981) has clearly shown that the strategic interaction among firms is a new independent cause of international trade and it explains “cross-hauling” or “intra-industry” trade in a homogeneous good. Built on Brander (1981)’s model, Brander and Krugman (1983) have shown that the strategic interaction among firms brings about “dumping” in the foreign market and this dumping is mutual. Following these contributions, a vast number of articles concerning the oligopolistic trade models has appeared and the literature is still growing. In this chapter, by using a simple unified model of international oligopoly, we focus on the relation between the strategic interaction among firms and international trade and examine trade patterns and gains from trade.

We develop models incorporating monopolistic competition, which are characterized by the increasing-returns-to-scale technology and product differentiation. The monopolistically competitive models have been first introduced to international trade theory in order to explain so-called intra-industry trade — the phenomenon that goods or services within the same category of a certain classification are exchanged internationally. Since then, they have been applied to various topics that are difficult (sometimes, impossible) to explain within the framework of classical theories of comparative advantage based on perfect competition…

In the competitive circumstance, free trade brings about a Pareto-efficient resource allocation in the world economy. Despite this remarkable theoretical result, the government of each individual country, in reality, often adopts interventional trade policies and somehow tries to affect the world resource allocations in favor of the country itself. Of course, the government of a country may have various “good” reasons for trade intervention. For example, the government may want to protect the domestic firms against harsher competition with foreign firms who can supply cheaper goods to the domestic market; to gain time to foster a new prospective industry that has just come into existence (i.e., an infant industry) until it becomes a mature well-established industry; to secure the health and safety of its nationals from those foreign food products that do not meet the appropriate sanitary/phytosanitary standards in the country, and so on. To see if those and other reasons for trade intervention can be theoretically justified or not, we have to get a good understanding of the effects of various trade policies and the way how they work. In this chapter, we first examine trade policies in the competitive circumstance. Our main focus will be on tariffs. The similarities and differences between tariffs and other policy measures will also be discussed. Then, we move on to the examination of trade policies in some imperfectly competitive circumstances. We discuss the so-called strategic trade policy arguments.

The following sections are included:

• Bibliography
• Index