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

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2 Contents 1. Trend of world trade 2. What are the reasons for fast expansion of international trade? 3. What are the fundamental reasons for international trade? 4. What are the consequences (i.e. benefits and costs) of international trade? 5. Who are the major trade partners? 6. What are the consequences of (i.e. benefits and costs) of trade policy? 7. Introduction to the course

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1. Trend of World Trade Source: World Bank, World Development Indicators and OECD development data Trend of Worlds Exports (Billion dollars)

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Trend of Worlds Exports (% of GDP) 1. Trend of World Trade Source: World Bank, World Development Indicators and OECD development data

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Comparison of Goods Trade and Financial Asset Trade 1. Trend of World Trade

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6 1960(a)2011 (b)b/a GDP per capita (in US$)155.2122,424.06144.27 GDP (in billion US$)3.891,116.25286.82 Exports (in billion US$)0.12626.885,100.36 [ Korea in 1962 and in 2007 ] 1. Trend of World Trade Koreas International Trade

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7 Trend of Koreas Exports and Imports 1. Trend of World Trade

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

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Liberalization of Trade GATT/WTO Economic Integration Development of Transport Sea Transport Air Transport Development of Telecommunication Telephone Internet 2. Reasons for Fast Expansion of International Trade

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

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3. What are the Reasons for International Trade?

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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 3. Fundamental Reasons for International Trade

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13 Top 10 export items of Korea (%) Source : KOTIS 3. Fundamental Reasons for International Trade Ran k 197019801990200020102012 ItemShareItemShareItemShareItemShareItemShareItemShare 1Textiles40.8Garments16.0Garments11.7Semiconductor15.1 Semiconductor10.8 Petrochemical products10.2 2Plywood11.0 Steel Plate- rolled Products 5.4Semiconductor7.0Computer8.5 Vessel 10.5 Semiconductor 9.2 3Wigs10.8Footwear5.2Footwear6.6Automobile7.7 Automobile 7.5 Automobile 8.6 4Iron ores5.9Vessel3.6Video Apparatus5.6 Petrochemical products 5.3 Flat penal display6.9 Vessel 7.3 5 Electronic goods 3.5 Audio Apparatus 3.4Vessel4.4Vessel4.9 Petrochemical products 6.7 Flat Display and Sensors 5.7 6 Confection ery 2.3 Man made filament fabrics 3.2Computer3.9 Wireless telecom 4.6 Wireless telecom 5.9Parts of Automobile4.5 7Footwears2.1 Rubber Products 2.9Audio Apparatus3.8Synthetic Resin2.9 Parts of Automobile 4.0Wireless telecom4.2 8Tobaccos1.6 Woods & Wood items 2.8 Steel Plate-rolled Products 3.8 Steel Plate- rolled Products 2.8 Synthetic Resin 3.6Steel Plate3.6 9 Iron products 1.5 Video Apparatus 2.6 Man made filament fabrics 3.6Garments2.7 Steel Plate-rolled Products3.5 Man made filament fabrics 3.6 10 Metal products 1.5Semiconductor2.5Automobile3.0 Video Apparatus 2.1 Computer1.9 Electronic Application goods 1.6 Tota l 81.147.653.456.662.058.4

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14 Top 10 import items of Korea (%) Source : KOTIS 3. Fundamental Reasons for International Trade 19962000200520102012 ItemShareItemShareItemShareItemShareItemShare 1Crude Oil9.6Crude Oil15.7Crude Oil16.3Crude Oil16.1Crude Oil20.8 2Semiconductor7.0Semiconductor12.4Semiconductor9.6Semiconductor7.5Semiconductor6.2 3Gold3.9Computer4.9Natural Gas3.3Natural Gas5.1Natural Gas5.3 4Petroleum Product2.9Petroleum Product3.1Computer3.0Petroleum Product4.2Petroleum Product5.2 5Computer2.8Natural Gas2.4Petroleum Product3.0 coded and wireless telephone 4.1Coal3.1 6Other Machinery2.2 Semiconductor production equipment 2.3Iron panel2.9Coal3.1Iron panel2.0 7 Semiconductor production equipment 2.2Gold1.7 Semiconductor production equipment 2.3 Semiconductor production equipment 2.4Iron ore1.8 8Measuring analyzer2.1 Cable communication Product 1.6Coal2.1Iron panel2.4Computer1.8 9Aircraft parts2.1Iron panel1.5Electronic applications1.7Precision instrument2.3 Semiconductor production equipment 1.8 10Motor and pump2.1Fine chemical materials1.4alloyed wire1.7Plastic resins1.9Fine chemical materials1.7 36.947.145.949.249.7

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Costs of International Trade 4. What are the Consequences (Benefits and Costs) of International Trade? Benefits of International Trade

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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 4. What are the Consequences (Benefits and Costs) of International Trade?

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Relation between Growth Rates of GDP and Trade 4. What are the Consequences (Benefits and Costs) of International Trade?

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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 4. What are the Consequences (Benefits and Costs) of International Trade?

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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. 4. What are the Consequences (Benefits and Costs) of International Trade?

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20 Top 10 export markets for Korea Source : KOTIS 5. Who are the major trade partners Rank 197019801990200020102012 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 U.S. Japan Saudi Arabia Germany Hong Kong Iran U.K. Indonesia Netherlands Canada 26.3 17.4 5.4 5.0 4.7 3.5 3.3 2.1 2.0 U.S. Japan Hong Kong Germany Singapore U.K. Canada Taiwan France Indonesia 29.8 19.4 5.8 4.4 2.8 2.7 1.9 1.7 U.S. Japan China Hong Kong Taiwan Singapore U.K. Germany Malaysia Indonesia 21.8 11.9 10.7 6.2 4.7 3.3 3.1 3.0 2.0 China U.S. Japan Hong Kong Singapore Taiwan Germany India Mexico Indonesia 25.1 10.7 6.0 5.4 3.3 3.2 2.5 2.3 2.1 1.9 China U.S. Japan Hong Kong Singapore Vietnam Taiwan Indonesia India Russia 24.5 10.7 7.1 6.0 4.2 2.9 2.7 2.5 2.2 2.0 Total91.471.672.968.862.464.8

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21 Top 10 export and import markets for Korea (2012) Source : KOTIS 5. Who are the major trade partners ExportImport NoCountryBillion USDratioNoCountryBillion USDratio 1China13424.5%1China8115.5% 2USA5910.7%2Japan6412.4% 3Japan397.1%3USA438.3% 4Hong Kong336.0%4Saudi Arabia407.6% 5Singapore234.2%5Qatar264.9% 6Vietnam162.9%6Australia234.4% 7Taiwan152.7%7Germany183.4% 8Indonesia142.5%8Kuwait183.5% 9India122.2%9Arab Emirate152.9% 10Russia112.0%10Taiwan142.7% Total54864.8%total34265.8%

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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. 5. Who are the major trade partners

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Multilateralism vs. regionalism 6. What are the Consequences (Benefits and Costs) of Trade Policy? Free trade vs. non-free trade Tariff and non-tariff barriers

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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. 7. Introduction to the course

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Texts Main textbook Dominick Salvatore, International Economics, 10th edition, John Wiley & Sons, 2010. Auxiliary textbooks Recent research articles Economic daily news papers. 8. Introduction to the course

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Grading Mid-term exam: 35% Final exam: 35% Quiz: 10% Home work: 10% Attendance: 10% (absence: -2 pts; late show up: 1 pt) (Note: More than five-time absences will incur automatically an F.) 5. Introduction to the course

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Contents 5. Introduction to the course

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Requirements Intellectually Basic knowledge of microeconomics Mentally Professionalism Physically Healthy enough not to miss any of the lectures and homework!! 5. Introduction to the course

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What is To Study( )?

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: To learn letters? - , , , , ( ), ( ) . - i.e., To learn old-time classical philosophy?

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What is To Study( )? : To listen? - i.e., To listen to lectures in classroom?

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What is To Study( )? : To ask questions? - . - i.e., Learning by asking

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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: http://cc.kangwon.ac.kr/~hhlee/

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Hyun-Hoon Lee hhlee@kangwon.ac.kr