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Slide 01
Trade Theory
- From mercantilism to global value chains: how economists have explained why nations trade, who benefits, and what happens when borders open or close.
- 32 slides • Scroll to navigate
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Slide 02
Table of Contents
- Why Nations Trade
- Mercantilism and Early Thought
- Adam Smith: Absolute Advantage
- David Ricardo: Comparative Advantage
- The Ricardian Model in Practice
- Heckscher-Ohlin: Factor Endowments
- The Leontief Paradox
- Stolper-Samuelson Theorem
- Specific Factors Model
- New Trade Theory: Krugman
- Economies of Scale and Trade
- Intra-Industry Trade
- Gravity Model of Trade
- Trade and Growth
- Terms of Trade
- Trade Policy Instruments
- Arguments for Protection
- Free Trade Agreements
- The WTO and Multilateralism
- Global Value Chains
- Trade and Inequality
- The China Shock
- Trade Wars and Tariffs
- New New Trade Theory: Melitz
- Digital Trade
- Trade and Climate
- The Future of Trade
- Reading List
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Slide 03
Why Nations Trade
- At its core, international trade exists because countries differ -- in climate, resources, technology, tastes, and productive capacity. Trade allows specialization, which increases total output beyond what autarky (self-sufficiency) permits.
- Differences in Resources
- Saudi Arabia exports oil; Brazil exports coffee. Geography and geology create natural specializations that make trade mutually beneficial.
- Differences in Technology
- Japan produces cars with fewer resources than most countries, not because it has more steel, but because its production processes are more efficient.
- Economies of Scale
- A single country cannot efficiently produce every variety of aircraft, semiconductor, or pharmaceutical. Specialization allows longer production runs.
- Consumer Variety
- People value choice. France and Italy both produce wine, yet trade wine with each other because consumers want Bordeaux and Barolo alike.
- $25T
- Global merchandise trade (2023)
- $7.5T
- Global services trade (2023)
- ~30%
- Trade as share of world GDP
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Slide 04
Mercantilism and Early Thought
- Before modern economics, European governments operated under mercantilist principles: national wealth was measured by gold and silver stocks, and trade was a zero-sum game. Exports were good (gold flows in), imports were bad (gold flows out).
- 1500-1700 -- Mercantilist era: Spain, Portugal, England, France compete for colonial trade routes and bullion
- 1621 -- Thomas Mun's "England's Treasure by Forraign Trade" argues for trade surpluses
- 1664 -- Colbert's mercantilism in France: high tariffs, state-owned manufactures, colonial extraction
- 1720 -- British Navigation Acts restrict colonial trade to English ships
- 1776 -- Adam Smith's Wealth of Nations dismantles mercantilist logic
- "Nothing can be more absurd than this whole doctrine of the balance of trade."
- -- Adam Smith, The Wealth of Nations (1776)
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Slide 05
Adam Smith: Absolute Advantage
- Smith argued that trade benefits both parties when each specializes in what it produces most efficiently in absolute terms. If England makes cloth cheaper and Portugal makes wine cheaper, both gain by trading.
- The Logic
- Each country has some product it can produce with fewer resources than any other country
- Specialization in these products and trade increases total world output
- Division of labor, applied internationally, makes everyone richer
- Trade is positive-sum, not zero-sum
- Numerical Example
- Cloth (hrs)Wine (hrs)
- England26
- Portugal42
- England has absolute advantage in cloth (2 Limitation: What if one country is better at producing everything? Smith's framework cannot explain why trade would still occur -- that insight required Ricardo.
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Slide 06
David Ricardo: Comparative Advantage
- Ricardo's 1817 insight is the most powerful idea in trade economics: even if one country is more efficient at producing everything, both nations still gain from trade if they specialize in what they produce relatively most efficiently.
- Ricardian Example
- Cloth (hrs)Wine (hrs)
- England48
- Portugal23
- Portugal is better at both goods. But its advantage is greater in wine (3 vs 8 = 2.67x) than cloth (2 vs 4 = 2x). Portugal should specialize in wine; England in cloth.
- The Key Insight
- What matters is opportunity cost, not absolute productivity
- England's opportunity cost of 1 cloth = 2 wine; Portugal's = 1.5 wine
- England's opportunity cost of 1 wine = 0.5 cloth; Portugal's = 0.67 cloth
- England has comparative advantage in cloth (lower opportunity cost)
- Trade at any price between 1.5 and 2 wine per cloth benefits both
- "Comparative advantage is the only proposition in economics that is both true and non-trivial."
- -- Paul Samuelson
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Slide 07
The Ricardian Model in Practice
- The Ricardian model predicts that trade patterns follow differences in labor productivity across industries and countries. Modern empirical work has largely confirmed this.
- Dornbusch-Fischer-Samuelson (1977)
- Extended Ricardo to a continuum of goods, showing how the pattern of trade is determined by relative productivity and wages. Countries produce goods in which their relative productivity exceeds their relative wage.
- Eaton-Kortum (2002)
- Built a modern Ricardian model with many countries, trade costs, and technology differences drawn from probability distributions. Became the workhorse model for quantitative trade analysis.
- Empirical Evidence
- Golub and Hsieh (2000) showed that bilateral trade patterns strongly correlate with relative labor productivity differences across sectors -- exactly as Ricardo predicted.
- Limitations
- Single-factor (labor only), no role for capital or natural resources, no explanation for intra-industry trade, assumes perfect competition and constant returns to scale.
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Slide 08
Heckscher-Ohlin: Factor Endowments
- The H-O model (1919/1933) explains trade patterns through differences in factor endowments rather than technology. Countries export goods that use their abundant factor intensively.
- Core Predictions
- H-O Theorem: Capital-abundant countries export capital-intensive goods; labor-abundant countries export labor-intensive goods
- Factor Price Equalization: Free trade equalizes factor prices across countries (wages converge)
- Rybczynski Theorem: Growth in one factor increases output of the good using that factor intensively
- Stolper-Samuelson: Trade benefits the abundant factor and hurts the scarce factor
- Intuition
- China has abundant labor relative to capital. The US has abundant capital relative to labor. China exports labor-intensive manufactures (textiles, electronics assembly). The US exports capital-intensive goods (aircraft, software, machinery).
- The model elegantly connects who you are (endowments) to what you trade (production patterns) to who wins and loses (factor incomes).
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Slide 09
The Leontief Paradox
- In 1953, Wassily Leontief tested the H-O model using US input-output data. The US, the most capital-abundant country, should export capital-intensive goods. Instead, Leontief found US exports were more labor-intensive than its imports.
- Proposed Explanations
- US labor is qualitatively different (human capital, education)
- US has abundant natural resources, not just capital
- Trade barriers distort observed patterns
- Factor-intensity reversals across countries
- The H-O model is simply wrong
- Resolution
- Leamer (1980) showed Leontief's test was statistically flawed. When corrected, the paradox weakens. Trefler (1995) showed that adjusting for productivity differences ("effective factor content") largely resolves the puzzle. Romalis (2004) found strong H-O patterns using disaggregated data.
- Legacy
- The paradox motivated decades of refinement: the inclusion of human capital, technology differences, and multiple factors. It showed that simple two-factor models miss crucial dimensions of reality.
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Slide 10
Stolper-Samuelson Theorem
- Perhaps the most politically important result in trade theory: trade raises the real income of the abundant factor and lowers the real income of the scarce factor.
- The Logic
- When a rich country opens to trade, demand increases for its capital-intensive exports and decreases for its labor-intensive import-competing goods. Capital earns more; labor earns less.
- This is not just a relative shift -- it's an absolute decline in purchasing power for the scarce factor. Free trade creates winners and losers within each country.
- Political Implications
- In rich countries: trade threatens low-skilled workers
- In poor countries: trade threatens capital owners and landowners
- Explains why labor unions in the US oppose trade deals
- Explains why factory owners in developing countries resist liberalization
- Justifies compensation mechanisms (trade adjustment assistance)
- "The gains from trade are real, but so is the pain. The question is whether the winners compensate the losers -- and in practice, they rarely do."
- -- Dani Rodrik
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Slide 11
Specific Factors Model
- The Ricardo-Viner (specific factors) model offers a more realistic short-run view: some factors are stuck in their current industry and cannot move. Opening trade hurts specific factors in import-competing sectors.
- Setup
- Labor is mobile between sectors, but capital and land are specific to particular industries. A steel mill cannot become a wheat farm overnight.
- Key Result
- When trade opens, the specific factor in the export sector gains unambiguously. The specific factor in the import sector loses unambiguously. Mobile labor's outcome is ambiguous.
- Political Economy
- Explains why trade politics often follows industry lines, not class lines. Auto workers and auto executives jointly lobby for protection against imports.
- Time Horizon
- In the short run, specific factors dominate politics. In the long run (H-O world), factors become mobile and class-based coalitions form. The transition period is where most political conflict occurs.
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Slide 12
New Trade Theory: Krugman
- Paul Krugman's pathbreaking work (1979-80) explained something classical theory could not: why similar countries trade similar products with each other. France and Germany both make cars and trade cars with each other -- why?
- Key Ingredients
- Increasing returns to scale: Average costs fall as firms produce more
- Monopolistic competition: Firms produce differentiated varieties
- Consumer love of variety: Utility increases with the number of available varieties
- Trade costs: Distance and borders still matter
- Implications
- Trade occurs even between identical countries
- Larger markets attract more firms (home market effect)
- Trade patterns are partly arbitrary -- history and luck matter
- Integration benefits all consumers through greater variety and lower prices
- First-mover advantages can lock in patterns of specialization
- Krugman won the 2008 Nobel Prize for this work. It explained the massive growth in intra-industry trade among developed nations that classical theory could not account for.
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Slide 13
Economies of Scale and Trade
- Scale economies create a distinct rationale for trade: even if two countries are identical, trade allows each to specialize in fewer varieties and produce them at larger (more efficient) scale.
- External Economies
- Industry-level scale: Silicon Valley, Hollywood, Switzerland's watch industry. Clusters of firms generate knowledge spillovers, specialized labor pools, and supplier networks. Trade can reinforce these advantages.
- Internal Economies
- Firm-level scale: Boeing vs. Airbus. The world market cannot support many large commercial aircraft producers. Trade allows a few firms to achieve efficient scale by selling globally.
- Market Size Effects
- Industries with strong scale economies tend to locate in large markets (home market effect). This creates an agglomeration dynamic: firms cluster where demand is largest.
- Path Dependence
- With scale economies, initial conditions matter. Whichever country starts producing first may retain its advantage even if another country could potentially produce more efficiently. History trumps endowments.
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Slide 14
Intra-Industry Trade
- Perhaps the most striking empirical fact in modern trade: most trade between developed nations is in similar products within the same industry. Germany exports BMWs to Sweden and imports Volvos. This was invisible to classical theory.
- 60-70%
- Share of EU trade that is intra-industry
- 0.73
- Average Grubel-Lloyd index for US manufacturing
- 85%
- US-Canada auto trade that is intra-industry
- Types of Intra-Industry Trade
- Horizontal IIT
- Trade in similar-quality varieties of the same product. German and French wine at similar price points. Driven by consumer preference for variety and differentiated products.
- Vertical IIT
- Trade in different quality tiers. China exports cheap furniture; Italy exports luxury furniture. Driven by differences in factor endowments (quality requires capital/skill).
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Slide 15
The Gravity Model of Trade
- The most empirically successful model in trade: bilateral trade between two countries is proportional to their economic size (GDP) and inversely proportional to the distance between them. Like Newton's law of gravitation.
- The Equation
- Trade_ij = A * (GDP_i * GDP_j) / Distance_ij
- This simple equation explains 60-80% of variation in bilateral trade flows. Additional variables (common language, shared border, colonial history, trade agreements) improve the fit further.
- The Distance Puzzle
- Distance elasticity is roughly -1 (doubling distance halves trade)
- This has NOT declined over time despite falling transport costs
- Possible reasons: distance proxies for information costs, cultural barriers, time zones, and trust
- Borders reduce trade by 30-50% even controlling for distance ("border effect")
- Anderson and van Wincoop (2003) provided theoretical foundations for gravity, showing it emerges naturally from models with trade costs and CES preferences.
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Slide 16
Trade and Growth
- Does trade cause growth? The relationship is among the most debated in economics. Correlations are strong, but causation is contested.
- Pro-Trade Evidence
- East Asian tigers grew through export-oriented industrialization
- China's WTO accession (2001) preceded extraordinary growth
- Frankel and Romer (1999): geography-predicted trade boosts income
- Technology transfer through trade raises productivity
- Skeptical Evidence
- Rodriguez and Rodrik (2000): earlier studies had serious methodological flaws
- Many successful developers used strategic protection (Japan, Korea, Taiwan)
- Sub-Saharan Africa liberalized in the 1990s with disappointing results
- Causation may run from growth to trade, not vice versa
- Modern Consensus
- Trade openness is neither necessary nor sufficient for growth, but it is nearly always part of a successful development strategy. The key is how countries integrate -- sequencing, industrial policy, and institutional quality matter enormously.
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Slide 17
Terms of Trade
- The terms of trade measure the relative price of a country's exports to its imports. An improvement means a country can buy more imports per unit of exports -- it gets richer without producing more.
- Prebisch-Singer Hypothesis
- Raul Prebisch and Hans Singer (1950) argued that the terms of trade for primary commodity exporters (developing countries) decline secularly relative to manufactured goods exporters (rich countries).
- Income elasticity for manufactures > commodities
- Synthetic substitutes replace natural materials
- Productivity gains in commodities are passed to consumers as lower prices
- Monopoly power in manufactures vs. competition in commodities
- Implications
- Justified import-substitution industrialization in Latin America (1950s-80s)
- Empirical evidence is mixed -- commodity booms (2000s) temporarily reversed trends
- Long-run data (1900-2000) shows moderate decline for most commodities vs. manufactures
- Modern view: diversification matters more than whether terms-of-trade thesis is exactly right
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Slide 18
Trade Policy Instruments
- InstrumentMechanismExample
- TariffsTax on imports; raises domestic price above world priceUS 25% tariff on Chinese goods (2018-)
- QuotasQuantity limit on imports; creates rents for quota holdersEU sugar import quotas (pre-2017)
- Voluntary Export RestraintsExporting country "voluntarily" limits shipmentsJapanese auto VER with US (1981-94)
- SubsidiesGovernment payment to domestic producers; lowers their costsEU Common Agricultural Policy
- Anti-dumping DutiesTariff imposed when imports are below "fair value"US duties on Chinese solar panels
- Local Content RequirementsMandate minimum domestic inputs in productionNigeria's oil sector local content law
- Regulatory BarriersHealth, safety, or environmental standards that favor domesticsEU GMO restrictions on US crops
- Currency ManipulationUndervaluing exchange rate to boost export competitivenessChina (alleged), Japan (historical)
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Slide 19
Arguments for Protection
- Free trade is the default recommendation of most economists, but legitimate exceptions exist -- though they are often abused.
- Infant Industry
- New industries need temporary protection to achieve scale and learn-by-doing before competing globally. Used by: US (1790s), Germany (1840s), Japan (1950s), Korea (1960s). Problem: infants rarely "grow up" and surrender their protection.
- National Security
- Countries should produce strategic goods domestically (defense, food, energy, semiconductors) rather than relying on potentially hostile suppliers. Problem: everything gets labeled "strategic."
- Optimal Tariff
- A large country can improve its terms of trade by imposing a tariff -- but only if trading partners don't retaliate. In practice, retaliation is almost certain.
- Strategic Trade Policy
- In oligopolistic industries (aircraft, semiconductors), subsidies can shift profits to domestic firms. Brander-Spencer (1985) model. Problem: requires information governments rarely have.
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Slide 20
Free Trade Agreements
- The proliferation of preferential trade agreements has been called "spaghetti bowl" regionalism. Over 350 RTAs are currently in force, covering most of world trade.
- Types
- FTA: Zero tariffs among members (NAFTA/USMCA)
- Customs Union: FTA + common external tariff (EU, Mercosur)
- Common Market: CU + free factor mobility (EU)
- Economic Union: CM + harmonized policies (Eurozone)
- Trade Creation vs. Diversion
- Jacob Viner (1950): RTAs create trade (replacing domestic production) but also divert trade (replacing cheaper non-member imports with member imports). Net welfare effect is ambiguous.
- Major Agreements
- EU Single Market (1993) -- deepest integration
- USMCA (2020) -- replaced NAFTA
- RCEP (2022) -- 15 Asia-Pacific nations, 30% of world GDP
- AfCFTA (2021) -- 54 African nations, largest by membership
- CPTPP (2018) -- Pacific Rim, high standards
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Slide 21
The WTO and Multilateralism
- The World Trade Organization (est. 1995, succeeding GATT from 1947) sets global trade rules. Its core principles -- most-favored-nation, national treatment, binding tariffs -- underpin the liberal trade order.
- Achievements
- Average tariffs fell from 22% (1947) to 3% (today) for developed countries
- Dispute settlement system resolved 600+ cases
- 164 member countries covering 98% of world trade
- Rules-based system constrains unilateral power
- Crisis
- Doha Round (2001) never concluded -- developing/developed country deadlock
- US blocked Appellate Body appointments (2019), paralyzing dispute settlement
- China's state capitalism doesn't fit WTO categories
- Services, digital trade, climate poorly covered by existing rules
- Rise of bilateral/regional deals undermines multilateralism
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Slide 22
Global Value Chains
- Modern production is fragmented across countries. An iPhone is "designed in California, assembled in China" -- but its components cross borders multiple times. Roughly 70% of world trade now occurs within global value chains.
- The iPhone Example
- China captures ~$10 of value on a $1,000 iPhone (assembly). South Korea ($65, screens), Japan ($68, cameras), US ($600+, design, software, brand, marketing). Gross trade figures wildly misrepresent actual value flows.
- Smile Curve
- Value added is highest at the extremes (R&D/design and marketing/brand) and lowest in the middle (manufacturing/assembly). Developing countries often get stuck in the low-value trough.
- Policy Implications
- Tariffs hurt your own exporters (who use imported inputs)
- Bilateral trade balances are meaningless in a GVC world
- Countries now trade "tasks" not "goods"
- Supply chain disruptions (COVID, Suez) revealed fragility
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Slide 23
Trade and Inequality
- The distributional consequences of trade -- long predicted by Stolper-Samuelson -- became politically explosive in the 2010s. Globalization created aggregate gains but concentrated losses in specific communities.
- Within Rich Countries
- US manufacturing employment fell from 17M (2000) to 12M (2010)
- Wage premium for low-skilled workers eroded
- Geographic concentration of losses (Rust Belt, Northern England)
- Winners (consumers, exporters, capital) diffuse; losers concentrated and visible
- Compensation mechanisms (Trade Adjustment Assistance) were inadequate
- Between Countries
- China: 800 million lifted from poverty since 1980
- Global inequality (between countries) declined sharply
- But within-country inequality rose in many nations
- "Elephant curve" (Milanovic): middle classes of rich countries were globalization's losers
- The political backlash -- Brexit, Trump's tariffs, populist movements globally -- was in large part a response to trade's uncompensated losers.
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Slide 24
The China Shock
- Autor, Dorn, and Hanson's seminal research (2013, 2016) quantified the impact of China's rise on US labor markets -- finding effects far larger and more persistent than previously believed.
- 2.4M
- US manufacturing jobs lost to Chinese import competition (1999-2011)
- $1T
- Increase in Chinese manufacturing exports (2000-2007)
- 985
- US "commuting zones" studied
- Key Findings
- Local labor markets exposed to Chinese import competition saw persistent employment declines -- workers did NOT smoothly transition to other sectors
- Wage effects were concentrated among workers without college degrees
- Affected regions saw rising disability claims, opioid use, and declining marriage rates
- Adjustment was not instantaneous as standard models assumed -- it took a decade or more
- Political effects: exposed counties swung Republican in 2016
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Slide 25
Trade Wars and Tariffs
- The 2018-2020 US-China trade war represented the most significant reversal of trade liberalization in decades. Average US tariffs on Chinese goods rose from 3% to 19%, with retaliation raising Chinese tariffs on US goods to 21%.
- US Tariff Effects
- Full cost passed through to US importers and consumers (Amiti et al., 2019)
- $51 billion in annual consumer costs
- US manufacturing employment did not recover
- Trade deficit with China barely changed (diverted through Vietnam, Mexico)
- Historical Parallel: Smoot-Hawley
- The 1930 tariff act raised US tariffs to ~60%, triggering global retaliation. World trade collapsed by 65% (1929-34). Most economists consider it a contributing factor to the Great Depression's depth.
- Game Theory
- Tariffs are a Prisoner's Dilemma: each country has an incentive to protect, but mutual protection leaves everyone worse off. The WTO exists to enforce the cooperative equilibrium -- but enforcement has weakened.
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Slide 26
New New Trade Theory: Melitz (2003)
- Marc Melitz's model introduced firm heterogeneity into trade theory. Not all firms are alike -- and trade forces a reallocation from less productive to more productive firms.
- Key Mechanism
- Firms differ in productivity (randomly drawn from a distribution)
- Exporting has a fixed cost -- only the most productive firms can afford it
- Trade liberalization: the most productive firms expand (export); the least productive firms exit (can't compete with imports)
- Average industry productivity rises -- even without any firm improving
- Implications
- Trade gains come partly from selection: weeding out inefficient firms
- Explains why only 18% of US manufacturing firms export
- Exporters are larger, more productive, pay higher wages (self-selection)
- Trade liberalization is a Schumpeterian process: creative destruction across firms
- Provides micro-foundations for aggregate gains from trade
- Melitz's framework is now standard in quantitative trade models and informed the "new quantitative" revolution in trade.
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Slide 27
Digital Trade
- The internet has created entirely new forms of trade that existing rules barely cover. Data flows, digital services, and platform-mediated commerce now constitute a growing share of international economic activity.
- Scale
- Digitally-delivered services exports: $3.8 trillion (2022, UNCTAD). Cross-border data flows grew 112x from 2008-2022 and now contribute more to GDP growth than goods trade.
- Regulatory Fragmentation
- EU: GDPR restricts cross-border data flows
- China: data localization requirements
- US: minimal regulation, maximum flow
- India: data sovereignty demands
- Challenges for Theory
- How do you measure "digital trade" in traditional statistics?
- Where is value created when a US platform serves Indian users?
- Zero marginal cost challenges rivalry assumptions
- Network effects create winner-take-all dynamics
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Slide 28
Trade and Climate
- Climate policy creates new trade tensions. If one country prices carbon and another doesn't, carbon-intensive production migrates to the unregulated country ("carbon leakage"). The solution is controversial: carbon border adjustment mechanisms (CBAMs).
- EU CBAM (2026+)
- Importers of steel, cement, aluminum, fertilizer, electricity must buy certificates matching EU carbon price
- Prevents carbon leakage by equalizing costs
- Developing countries call it "green protectionism"
- WTO legality uncertain but plausible under Article XX (environmental exceptions)
- Broader Issues
- Transport emissions: shipping accounts for 3% of global CO2
- Embedded carbon: a car "made in Germany" may contain Chinese steel (coal-powered)
- Should trade rules account for production methods?
- "Climate clubs" (Nordhaus): coalitions of carbon-pricing nations with tariffs on outsiders
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Slide 29
Comparative Advantage Today
- Where does comparative advantage come from in the 21st century? Increasingly, it is created rather than inherited.
- Institutions
- Countries with strong rule of law, contract enforcement, and low corruption attract complex industries. "Institutional comparative advantage" (Hall and Soskice) explains cross-country specialization patterns.
- Innovation Ecosystems
- Silicon Valley, Shenzhen, Bangalore -- clusters create self-reinforcing advantages through knowledge spillovers, talent pools, and venture capital networks.
- Industrial Policy
- Taiwan's semiconductor strategy, Korea's chaebol system, China's "Made in 2025" -- governments deliberately construct comparative advantage through subsidies, R&D, and education.
- Economic Complexity
- Hidalgo and Hausmann's work shows that countries "diversify nearby" -- building on existing capabilities to develop new exports. The product space maps these evolutionary paths.
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Slide 30
Deglobalization and Friend-Shoring
- Since 2016, trade's share of GDP has plateaued and geopolitical fragmentation has accelerated. Are we witnessing the end of hyper-globalization?
- 2008
- Peak globalization (trade/GDP ratio)
- 3,000+
- New trade restrictions annually (Global Trade Alert)
- $2T+
- Announced "reshoring" investments since 2020
- New Paradigm
- Friend-shoring: Redirect supply chains to geopolitical allies (US CHIPS Act, EU strategic autonomy)
- Near-shoring: Move production closer to final markets (Mexico as alternative to China)
- Resilience over efficiency: Just-in-case replaces just-in-time
- Bloc trade: US-aligned vs. China-aligned trading networks emerging in semiconductors, AI, clean energy
- Yet total trade volumes remain near all-time highs. "Slowbalization" rather than deglobalization may be the more accurate term.
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Slide 31
The Future of Trade
- AI and Services Trade
- AI enables remote delivery of services previously requiring physical presence (legal, medical, engineering). Could trigger a "services trade revolution" comparable to manufacturing's globalization.
- Africa Rising
- AfCFTA (1.4 billion people, $3.4T GDP) could transform intra-African trade (currently only 15% of total). Young demographics and industrialization potential make Africa the next frontier.
- Green Trade
- Clean energy components (solar panels, batteries, wind turbines) are the fastest-growing trade category. New dependencies replace old ones (lithium, cobalt, rare earths).
- Theoretical Frontiers
- Quantitative spatial models (Caliendo-Parro), trade under uncertainty (Handley-Limao), trade and innovation (Sampson), trade and automation (Acemoglu) are the active research frontiers.
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Slide 32
Further Reading
- Essential Books
- International Economics -- Krugman, Obstfeld, Melitz. The standard textbook.
- The Wealth of Nations -- Adam Smith (1776). Where it all began.
- Principles of Political Economy -- David Ricardo (1817). Chapter 7 on comparative advantage.
- Straight Talk on Trade -- Dani Rodrik (2017). Skeptical but rigorous.
- The Great Convergence -- Richard Baldwin (2016). Trade in the age of value chains.
- Key Papers
- Krugman (1980) -- "Scale Economies, Product Differentiation, and the Pattern of Trade"
- Melitz (2003) -- "The Impact of Trade on Intra-Industry Reallocations"
- Eaton & Kortum (2002) -- "Technology, Geography, and Trade"
- Autor, Dorn, Hanson (2013) -- "The China Syndrome"
- Arkolakis, Costinot, Rodriguez-Clare (2012) -- "New Trade Models, Same Old Gains?"
- End of presentation. Trade theory remains one of economics' crown jewels -- a body of thought that has shaped global policy for two centuries while continuously evolving.
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