University of Maryland Department of Economics ECON 742 Fall 2001 Arvind Panagariya Tydings Hall 4118F International Trade Theory This course will cover key topics in international trade theory, some in detail and others only briefly. The main purpose will be to equip you with the principles and tools of trade theory and to familiarize you with its frontiers. All required readings have been placed in the departmental library in duplicate. For any missing items, inform Pedro Rodriguez, the teaching assistant for the course. My office hours are on Tuesday, 3.30 to 5.30 pm unless I inform you otherwise. 1. Principal Books The following book will serve as the main text: Bhagwati, J., Panagariya, A. and Srinivasan, T.N., Lectures in Trade Theory, MIT Press, 1998, September (BPS). You will also find the following book useful. Dixit, A. and Norman, V., Theory of International Trade, Cambridge University Press, 1980. (D&N) Two additional books of interest are Helpman, E. and Krugman, P.R., Market Structure and Foreign Trade. Increasing Returns, Imperfect Competition, and the International Economy, 1985, MIT Press. (HK1) Helpman, E. and Krugman, P.R., Trade Policy and Market Structure, 1989, MIT Press. (HK2) You are advised not treat books as substitutes for journal articles. Minimally, you should study the required readings. 2. Books of Readings (with abbreviated titles in parentheses) Bhagwati, J.N. (ed.) International Trade. Selected Readings, MIT Press, 2nd edition 1987 (Second Printing, 1988) (Bhagwati (a))
Bhagwati, J., ed. International Trade. Selected Readings, Penguin Books, 1969. (Bhagwati (b)) Bhagwati, J. et al., Trade, Balance of Payments and Growth, North Holland, 1971. (May be listed under the authorship of Kindleberger in the library.) (Bhagwati et al.) Bhagwati, J., Krishna, P. and Panagariya, A., eds., 1998, Trade Blocs: Alternative Approaches to Analyzing Preferential Trading Agreements, Cambridge, MIT Press. Caves, R.E. and Johnson, H.G. (eds.), AEA Readings in International Economics, Irwin, 1965, (1965) (AEA) Jones, R.W., International Trade. Essays in Theory, North-Holland 1979. (Jones) Krugman, P., 1990, Rethinking International Trade, 1990, MIT Press (Krugman). The best surveys of the field, even though dated, are to be found in: Jones, R.W. and Kenen, P.B., Handbook of International Economics, vol. 1, North-Holland, 1984. (Handbook) (Some more up-to-date surveys from third volume of the Handbook edited by Gene Grossman and Ken Rogoff are also useful and are referenced below under the title Handbook III.) 2
Course Outline (Items with a * are required; others are recommended.) 1. The Ricardian Model *BPS, ch. 2-4 Deardorff, Alan, V., "The General Validity of the Law of Comparative Advantage," JPE, Oct. 1980, 88, 941-57. D&N, ch. 1. *Dornbusch, R. et al. "Comparative Advantage, Trade and Payments in a Ricardian Model," AER, Dec. 1977. Jones, R.W., "Comparative Advantage and the Theory of Tariffs: A Multi-Country, Multi-Commodity Model," RES, June 1961, 161-75. Also in Jones. 2. The Heckscher-Ohlin Theory 2.1 The Stolper-Samuelson and Rybczynski Theorems *BPS, chs. 5, 10 (Section 10.1) *Jones, R. W., "The Structure of General Equilibrium Models," JPE, Dec. 1965. Also in Jones. *Mussa, M., "The Two-Sector Model in Terms of its Dual: A Geometrical Exposition" JIE, Nov. 1979, 513-526. Also in Bhagwati (a). *Rybczynski, T.M., "Factor Endowments and Relative Commodity Prices," Economica, Nov. 1955. Also in AEA. *Stolper, W. and Samuelson, P., "Production and Real Wages," RES, 9, (1941), 333-357. Also in Bhagwati (b). 3
2.2 Patterns of Trade and Factor-Price Equalization *BPS, ch. 6 Lancaster, K., "The H-O Model: A Geometric Treatment," Economica, 24, 1957, 19-39. Also in Bhagwati (b). Ohlin, B., International and Interregional Trade, Harvard University Press. 3. The Specific-Factors Model *BPS, chs. 7, 10 (Section 10.2 and 10.3) Grossman, G.M., "Partially Mobile Capital: A General Approach to Two-Sector Trade Theory," JIE, 1983, 15, 1-17. *Jones, R.W., "A Three-Factor Model in Theory, Trade and History" in Bhagwati et al. Mayer, W., "Short-Run and Long-Run Equilibrium for a Small Open Economy," JPE, Sept.-Oct. 1974, 955-67. Mussa, M., "Tariffs and the Distribution of Income: The Importance of Factor Specificity, Substitutability and Intensity in the Short and Long Run," JPE, Nov.-Dec. 1974, 1191-204. *Mussa, M. "Dynamic Adjustment in the H-O-S Model," JPE, October 1978, 86, 775-91. *Neary, J.P., "Short-Run Capital Specificity and the Pure Theory of International Trade," EJ, Sept. 1978, 448-510. Also in Bhagwati (a)., "Dynamic Stability and the Theory of Factor-Market Distortions," AER, September 1978, 671-682. 4. An Introduction to Duality *D&N, ch. 2. BPS, Ch. 9 4
5. Generalizations and Empirical Verification *BPS, ch. 8. D&N, ch. 4. *Deardorff, A.V., "Weak Links in the Chain of Comparative Advantage," JIE, May 1979, 9, 197-209. Also in Bhagwati (a). *Davis, Donald et al., 1997, "Using International and Japanese Regional Data to Determine when the Factor Abundance Theory Works," American Economic Review 87, 421-46. Dornbusch, et al., "Heckscher-Ohlin Theory with Continuum of Goods," QJE, 1980. Jones, R.W., Two-ness in Trade Theory: Costs and Benefits, Princeton Special Papers in International Economics, No. 12. Also in Jones. *Leamer, E.E. "The Leontief Paradox, Reconsidered." Journal of Political Economy 86(3) (1980): 495-503. Leontief, W.W., "Factor Proportions in the Structure of American Trade" in Bhagwati (b). Panagariya, A. Evaluating the Factor Content Approach to Measuring the Effect of Trade on Wage Inequality, Journal of International Economics 50, 2000, 91-116. Samuelson, P., "Prices of Factors and Goods in General Equilibrium," RES, 21, No. 1, 1953 pp. 1-20. Trefler, Daniel, "International Factor Price Differences: Leontief was Right!" JPE 101, no. 6, 961-987. Note: To review topics 1-5, read: Deardorff, A.V., "Testing Trade Theories and Predicting Trade Flows," in Handbook. Ethier, W.J., "Higher-Dimensional Trade Theory" in Handbook. Feenstra, R.E., "Empirical Studies of Trade Policy," January 1994, Handbook III. Jones, R.W. and Neary, J.P., "The Positive Theory of International Trade" in Handbook. 5
6. Economies of Scale and International Trade 6.1 Models Based on Homogenous Goods and Perfect Competition *BPS, ch. 11 (Section 11.1) Jones, R.W., "Variable Returns to Scale in General Equilibrium Theory," IER, 9, 1968, 261-72. *Panagariya, A., "Variable Returns to Scale in Production and Patterns of Specialization," AER, March 1981, 221-30. *Panagariya, A., "Increasing Returns and the Specific-Factors Model,"SEJ, July 1986, 1-17. 6.2 Models Based on Product Differentiation and Imperfect Competition *BPS, ch. 11 (Section 11.2) D&N, ch. 9. Ethier, W.J., "National and International Returns to Scale in the Modern Theory of International Trade," AER 72, 1982, 389-405. Helpman, E., "International Trade in the Presence of Product Differentiation, Economies of Scale and Monopolistic Competition: A Chamberlin-Heckscher-Ohlin Approach," JIE, Aug., 1981, 11, 305-40. Krugman, P., "Increasing Returns, Monopolistic Competition, and International Trade," Journal of International Economics 9, no. 4 (November 1979): 469-479. *Krugman, P., "Scale Economies, Product Differentiation, and the Pattern of Trade," AER, Dec. 1980, 950-59. Krugman, P., "History versus Expectations," Quarterly Journal Of Economics 106, no. (1991a): 651-667. *Krugman, P., "Increasing Returns and Economic Geography," Journal of Political Economy 99, no. 3 (1991b): 483-499. 6
*Krugman, P. and Venables, A.J., "Globalization and the Inequality of Nations," Quarterly Journal of Economics 110, no. 4 (November 1995): 857-880. Note: To review the literature on economies of scale, read: *Helpman, E., "Increasing Returns, Imperfect Markets and Trade Theory" in Handbook. HK1. 7. Commercial Policy: The Traditional Analysis 7.1 Tariffs and Terms of Trade BPS, Ch. 12. *D&N, ch. 5. Lerner, A.P., "The Symmetry between Import and Export Taxes," Economica, Aug. 1936. Also in AEA. *Lopez, R. and Panagariya, A., "The Lerner Symmetry and Other Results in the Presence of Quotas and Nontraded Goods," 1994, mimeo. 7.2 Tariffs vs. Quotas *BPS, ch. 13 *Bhagwati, J., "On the Equivalence of Tariffs and Quotas," in Caves et al., Trade, Growth and the Balance of Payments, (Chicago: Rand McNally, 1965), ch. 12. HK2, ch.2, 3. Pelcovitz, M.D., "Quotas vs. Tariffs," JIE, 1976. Rodriguez, C., "The Non-Equivalence of Tariffs and Quotas Under Retaliation," JIE, 4, 1974. Also in Bhagwati (a). 7.3 Intermediate Inputs and Tariff Analysis 7
BPS, ch. 15 Burgess, D.F., "Protection, Real Wages, and the Neoclassical Ambiguity with Interindustry Flows," JPE, 88, Aug. 1980, 783-802. *Corden, W.M., "The Structure of a Tariff System and the Effective Protection Rate," JPE, 74, 1966, 221-237. 8. Trade and Welfare 8.1 The Gains from Trade *BPS, ch. 14 *D&N, ch. 3 (Section 1 and 2) *Samuelson, P.A., "The Gains from International Trade Once Again," EJ, Dec. 1962. 8.2 An Introduction to the Theory of the Second Best *BPS, ch. 16 *Bhagwati, J., "Immesrizing Growth: A Geometrical Note," RES, 1958. Bhagwati, J., "The Generalized Theory of Distortions and Welfare" in Bhagwati (a). *Krishna, Pravin and Arvind Panagariya, "A Unification of the Second Best Results in International Trade," Journal of International Economics 52(2), 235-257, December 2000. [Also Center for International Economics, University of Maryland at College Park, Working Paper No. 31 (under a slightly different title)]. BPS, ch. 31. 9. The Economics of Preferential Trading Baldwin, Richard, 1993, "A Domino Theory of Regionalism," CEPR Working Paper No. 857, November. 8
*Bhagwati, Jagdish and Panagariya, Arvind, 1996, "Preferential Trading Areas and Multilateralism: Strangers, Friends or Foes?" in Jagdish Bhagwati and Arvind Panagariya, eds., The Economics of Preferential Trade Agreements, 1996 (AEI Press, Washington, D.C.) 1-78. Grossman, Gene and Helpman, Elhanan, 1995, "The Politics of Free Trade Agreements," American Economic Review 85(4), September, 667-690. Kemp, M. C. and Wan, H., "An Elementary Proposition Concerning the Formation of Customs Unions," JIE 6, 1976, 95-98. Krishna, Pravin, 1998, "Regionalism and Multilateralism: A Political Economy Approach," Quarterly Journal of Economics 113(1), 227-251. Krugman, P., "Is Bilateralism Bad?", ch. 1 in E. Helpman and A. Razin, eds., International Trade and Trade Policy, MIT Press, 1991. *Levy, Philip, 1997, "A Political Economic Analysis of Free Trade Agreements," American Economic Review 87(4), September, 506-519. *Panagariya, Arvind, 2000, Preferential Trade Liberalization: The Traditional Theory and New Developments, Journal of Economic Literature 38, No. 2, June, 287-331. Panagariya, A. and Krishna, P., "On Welfare Enhancing Free Trade Area, Journal of International Economics, forthcoming. 10. Commercial Policy under Imperfect Competition *BPS, ch. 30 *Brander, J.A. and Spencer, B.J., "Export Subsidies and Market Share Rivalry," JIE 18, 1985, 83-100. *Dixit, A., "International Trade Policy for Oligopolistic Industries," EJ, 1983, Supplement., "Comparative Statics for Oligopoly," IER, 1986, vol. 27. HK2, chs. 5, 7. 9
11. Political Economy of Trade Policy *BPS, ch. 34 Bhagwati, J., "Directly Unproductive Profit-Seeking (DUP) Activities," JPE,90, Oct. 1982, 988-1002. Bhagwati, J. and Hansen, B., "A Theoretical Analysis of Smuggling," QJE, 1973, 87, 172-87. *Bhagwati, J. and T.N. Srinivasan, "Revenue Seeking: A Generalization of the Theory of Tariffs," JPE, 88, December 1980, 1069-87. Grossman, Gene and Helpman, Elhanan, 1994, "Protection for Sale," American Economic Review 84(4), September, 835-50. Krueger, A., "The Political Economy of the Rent-Seeking Society," AER, 1974, 69, 291-303. Also in Bhagwati (a). Martin, L. and Panagariya, A., "Smuggling, Trade, and Price Disparity: A Crime Theoretic Approach," JIE, Nov. 1984, 201-17. and. "Smuggling and Enforcement in an Economy with Endogenous Illegal Trade," mimeo. *Mayer, W., "Endogenous Tariff Formation," AER, Dec. 1984, 74, 970-85. Also in Bhagwati (a). 12. Trade Reform 12.1 Piecemeal Trade Reform *BPS, ch. 35 Bertrand, T.J. and Vanek, J., "The Theory of Tariffs, Taxes and Subsidies: Some Aspects of the Second Best," AER 61, 1971, 925-31. *Falvey, R., ""Tariffs, Quotas, and Piecemeal Policy Reform," August 1988, JIE 25, 177-83. *Lopez, R. and Panagariya, A., "On the Theory of Piecemeal Tariff Reform: The Case of Pure Imported Intermediate Inputs," June 1992, AER, 615-622. 10
Panagariya, A., "Input Tariffs, Duty Drawback and Tariff Reform," 1991, JIE 32, 132-147. 12.2 The Uniform Tariff Issue Panagariya, A., "Why and Why-Not of Uniform Tariffs," 1994, Economic Studies Quarterly 45, No. 3 (September). *Panagariya, A. and Rodrik, D., "Political Economy Arguments for a Uniform Tariff," 1993, IER 34, No. 3, (August), 685-703. 13. Factor Mobility *Brecher, R.A. and Diaz Alejandro, C.F., "Tariffs, Foreign Capital and Immiserizing Growth," JIE, 1977, 7, 317-22. Also in Bhagwati (a). Helpman, E. "A Simple Theory of International Trade with Multinational Corporations," JPE, 1984, 92, 451-71.Also in Bhagwati (a). *Markusen, J.M., "Factor Movements and Commodity Trade as Complements," JIE, May 1983, 341-56. *Mundell, R.A., "International Trade and Factor Mobility," EJ, June 1949, 181-197. Also in Bhagwati (a). 11