2. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-4 International Trade and Globalization Peter Zamborsky and Can Erbil

3. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-5 Introduction Profs: Peter Zamborsky and Can Erbil TA: Esteban Ferro You

4. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-6 My website www.brandeis.edu/~zamborsk Can’s profile http://www.brandeis.edu/global/fac ulty_detail.php?faculty_id=14

5. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-7 At Mt. Kinabalu, Highest Peak of South- East Asia (over 4,000m / 12,000 feet)

6. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-8 Globalization is ubiquitous Over 27 million hits on google search

7. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-9 Globalization: a tale of 2 cities Singapore Kota Kinabalu, Borneo, Malaysia

8. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-10 Singapore

9. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-11 Kota Kinabalu, Borneo, Malaysia

10. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-12 Discontents vs Defenders or Making Globalization Work? Globalization & its Discontents by Joseph Stiglitz (2003) In Defense of Globalization by Jagdish Bhagwati (2005) Making Globalization Work by Joseph Stiglitz (2006)

11. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-13

12. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-14 Globaloney, Deglobalization, Fair Trade

13. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-15 Outline of the lecture 1.Syllabus 2.My teaching philosophy 3.Online resources 4.Chapter 1: Gains from trade etc. 5.Presentation Guide 6.Chapter 2: Gravity Model etc.

14. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-16 Syllabus Prerequisites Required Readings Recommended Readings Advanced Readings Books on Intl. Trade & Globalization Recent Developments

15. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-17 Textbook and Course Material REQUIRED International Economics by Krugman and Obstfeld 3 Case Studies (Chiquita, Bombardier, China and WTO) RECOMMENDED Free Trade Under Fire by Irwin Other readings uploaded on course website

16. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-18 Grading Midterm: 30% Problem Sets: 15% Research Paper: 10% Final Exam: 35% Class Attendance and Participation: 5% Class Presentation: 5% See syllabus for grad students grading

17. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-19 Organizational issues/Key dates TA office hours/problem set due days My office hours July 4 class Midterm scheduled for July 18 in class Paper due August 10, outline July 23 Final scheduled for August 13 noon

18. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-20 My teaching philosophy Practical skills Student participation Real-life issues Enjoyment

19. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-21 Course Website www.courses.fas.harvard.edu/sum/32146 Course Documents RGE Monitor, Links Discussions, Blog

20. Slides prepared by Thomas Bishop Chapter 1 Introduction

21. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-23 Preview What is international economics about? Gains from trade Explaining patterns of trade The effects of government policies on trade International trade vs intl. finance

22. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-24 What Is International Economics About? International economics is about how nations interact through trade of goods and services, through flows of money and through investment. International economics is an old subject, but it continues to grow in importance as countries become tied to the international economy. Nations are more closely linked through trade in goods and services, through flows of money, and through investment than ever before.

23. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-25 What Is International Economics About? (cont.) International trade as a fraction of the national economy has tripled for the US in the past 40 years. Compared to the US, other countries are even more tied to international trade.

24. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-26 What Is International Economics About? (cont.)

25. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-27 What Is International Economics About? (cont.)

26. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-28 Gains from Trade: Norwegians and oranges… Several ideas underlie the gains from trade 1. When a buyer and a seller engage in a voluntary transaction, both receive something that they want and both can be made better off. Norwegian consumers could buy oranges through international trade that they otherwise would have a difficult time producing. The producer of the oranges receives income that it can use to buy the things that it desires.

27. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-29 Gains from Trade (cont.): specialization in most productive activities 2.How could a country that is the most (least) efficient producer of everything gain from trade?  With a finite amount of resources, countries can use those resources to produce what they are most productive at (compared to their other production choices), then trade those products for goods and services that they want to consume.  Countries can specialize in production, while consuming many goods and services through trade.

28. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-30 Gains from Trade (cont.): which goods to export/import? 3.Trade is predicted to benefit a country by making it more efficient when it exports goods which use abundant resources and imports goods which use scarce resources. 4.When countries specialize, they may also be more efficient due to large scale production. 5.Countries may also gain by trading current resources for future resources (lending and borrowing).

29. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-31 Gains from Trade (cont.): do all countries/all people benefit? Trade is predicted to benefit countries as a whole in several ways. However it may harm particular groups within a country.  International trade can adversely affect the owners of resources that are used intensively in industries that compete with imports (US labor-intensive industries hurt by Chinese imports).  Trade may therefore have effects on the distribution of income within a country.  Conflicts about trade should occur between groups within countries rather than between countries.

30. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-32 Patterns of Trade Differences in climate and resources can explain why Brazil exports coffee and Australia exports iron ore. But why does Japan export automobiles, while the US exports aircraft? Differences in labor productivity may explain why some countries export certain products. How relative supplies of capital, labor and land are used in the production of different goods may also explain why some countries export certain products.

31. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-33 The Effects of Government Policies on Trade Policy makers affect the amount of trade through  tariffs: a tax on imports or exports,  quotas: a quantity restriction on imports or exports,  export subsidies: a payment to producers that export,  or through other regulations (e.g., product specifications) that exclude foreign products from the market, but still allow domestic products. What are the costs and benefits of these policies?

32. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-34 The Effects of Government Policies on Trade (cont.) Economists design models that try to measure the effects of different trade policies. If a government must restrict trade, which policy should it use? If a government must restrict trade, how much should it restrict trade? If a government restricts trade, what are the costs if foreign governments respond likewise?

33. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-35 International Trade Versus International Finance International trade focuses on transactions of real goods and services across nations.  These transactions usually involve a physical movement of goods or a commitment of tangible resources like labor services. International finance focuses on financial or monetary transactions across nations.  For example, purchases of US dollars or financial assets by Europeans.

34. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-36 A Road Map International Trade  International trade theory (chapters 2–7)  International trade policy (chapters 8–11) Globalization

35. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-37 Presentations: instructions 1-2 students for a presentation 15-20 minutes

36. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-38 Topics Week 2 (7/4): Globalization and Inequality Week 3 (7/11): Rise of Outsourcing Week 4 (7/18): Emerging World Multinationals Week 5 (7/25): Costs of Protectionism Week 6 (8/1): China and India Readings uploaded on the course website

37. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-39 Handouts Presentation Guide How To Give a Talk Oral Presentation Self Evaluation Peer Evaluation Form Developing Active Listening Skills

38. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-40 Presentation Elements Content Design Research Analysis Delivery

39. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-41 Slides: good content and design Informative Easy to read Visual info

40. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-42 Research Relate the article to: news textbook other studies

41. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-43 Analysis Use theory or framework Identify main question Question the author

42. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-44 Delivery Use voice, body Don’t just read Interact with class

43. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-45 Oral Communication: Verbal, Vocal, Visual

44. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-46 Oral Communication: Visual Message Dominates

45. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-47 Vocal Variety Volume: loud-soft Tone: rough-smooth Rhythm: fast-slow (+ pauses) Pitch: high-low Articulation: clear-fuzzy

46. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-48 Rhythm Pause Don’t speak too fast Don’t use “eh” or “ok”

47. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-49 Pitch and tone Don’t be monotonous Stress important points Use rough/smooth, high-low

48. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-50 Eye contact Maintain eye contact Don’t read from the slides Get closer to the audience

49. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-51 Fun Start the talk with humor Relate it to news/your experience Improvise, try not to be boring

50. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-52 Bad gestures: defensive, closed

51. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-53 Good gestures: dynamic, open

52. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-54 Interaction Ask questions Ask for participation Ask for feedback

53. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-55 The Three Essentials Use visual aids Rehearse Make 3 points

54. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-56 Other Handouts How To Give a Talk Oral Presentation Self Evaluation Peer Evaluation Form Developing Active Listening Skills

55. Slides prepared by Thomas Bishop Chapter 2 World Trade: An Overview

56. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-58 Preview The largest trading partners of the US Gravity model:  influence of an economy’s size on trade  distance and other factors that influence trade Borders and trade agreements Next lecture: Globalization, then and now Changing composition of trade Multinational corporations and outsourcing

57. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-59 Who Trades with Whom? The 5 largest trading partners with the US in 2003 were Canada, Mexico, China, Japan and Germany. The total value imports from and exports to Canada in 2003 was almost $400 billion dollars. The largest 10 trading partners with the US accounted for 68% of the value of US trade in 2003.

58. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-60 Who Trades with Whom? (cont.)

59. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-61 Size Matters: The Gravity Model 3 of the top 10 trading partners with the US in 2003 were also the 3 largest European economies: Germany, UK and France. These countries have the largest gross domestic product (GDP) in Europe.  GDP measures the value of goods and services produced in an economy. Why does the US trade most with these European countries and not other European countries?

60. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-62 Size Matters: The Gravity Model (cont.) In fact, the size of an economy is directly related to the volume of imports and exports.  Larger economies produce more goods and services, so they have more to sell in the export market.  Larger economies generate more income from the goods and services sold, so people are able to buy more imports.

61. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-63 Size Matters: The Gravity Model (cont.)

62. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-64 The Gravity Model Other things besides size matter for trade: 1.Distance between markets influences transportation costs and therefore the cost of imports and exports.  Distance may also influence personal contact and communication, which may influence trade. 2.Cultural affinity: if two countries have cultural ties, it is likely that they also have strong economic ties. 3.Geography: ocean harbors and a lack of mountain barriers make transportation and trade easier.

63. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-65 The Gravity Model (cont.) 4.Multinational corporations: corporations spread across different nations import and export many goods between their divisions. 5.Borders: crossing borders involves formalities that take time and perhaps monetary costs like tariffs.  These implicit and explicit costs reduce trade.  The existence of borders may also indicate the existence of different languages (see 2) or different currencies, either of which may impede trade more.

64. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-66 The Gravity Model (cont.) In its basic form, the gravity model assumes that only size and distance are important for trade in the following way: T ij = A x Y i x Y j /D ij where T ij is the value of trade between country i and country j A is a constant Y i the GDP of country i Y j is the GDP of country j D ij is the distance between country i and country j

65. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-67 The Gravity Model (cont.) In a slightly more general form, the gravity model that is commonly estimated is T ij = A x Y i a x Y j b /D ij c where a, b, and c are allowed to differ from 1. Perhaps surprisingly, the gravity model works fairly well in predicting actual trade flows, as the figure above representing US–EU trade flows suggested.

66. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-68 Distance and Borders Estimates of the effect of distance from the gravity model predict that a 1% increase in the distance between countries is associated with a decrease in the volume of trade of 0.7% to 1%.

67. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-69 Distance and Borders (cont.) Besides distance, borders increase the cost and time needed to trade. Trade agreements between countries are intended to reduce the formalities and tariffs needed to cross borders, and therefore to increase trade. The gravity model can assess the effect of trade agreements on trade: does a trade agreement lead to significantly more trade among its partners than one would otherwise predict given their GDPs and distances from one another?

68. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-70 Does NAFTA explain US trade with Canada and Mexico? The US has signed a free trade agreement with Mexico and Canada in 1994, the North American Free Trade Agreement (NAFTA). Because of NAFTA and because Mexico and Canada are close to the US, the amount of trade between the US and its northern and southern neighbors as a fraction of GDP is larger than between the US and European countries.

69. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-71 Distance and Borders (cont.)

70. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-72 Distance and Borders (cont.) Yet even with a free trade agreement between the US and Canada, which use a common language, the border between these countries still seems to be associated with a reduction in trade.

71. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-73 Distance and Borders (cont.)

72. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-74 Distance and Borders (cont.)

73. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-75 Student info sheets

74. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-76 Next lecture Finish Chapter 2: Patterns of Trade Start Chap. 3: Comparative Advantage Skim International Trade Theory Essay Skim Irwin Chapter 1 Assignment 1 distributed, due in a week