international trade

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International Trade - Lecture 1
João Paulo Pessoa
FGV-EESP/CEP
March 2021
The Field of International Trade
Many interesting economic questions are related to the field of
international trade:
I What explains the pattern of trade across countries? And over
time?
I Which goods do countries trade?
I What types of firms trade?
I Does trade affect GDP growth?
I What is the relationship between international trade and
financial markets?
The Field of International Trade
I What are the effects of trade on labor markets? Who are the
winners and who are the losers generated by trade integration?
I Does international trade affect innovation?
I Is international trade affected by uncertainty?
I What is the role of outsourcing, FDI and multinational
production? How do they affect trade patterns?
Trade Facts: World over Time
Striking Growth since W.W. II
Trade Facts: Economic Crisis
Striking Fall during the Last Financial Crisis
Trade Facts: Economic Crisis
Not so much for Services
0
200
400
600
800
1000
1200
1400
1600
1800
0
500
1000
1500
2000
2500
Trade Facts: Trade by Country
Share of World Trade by Country
USA
Germany
China
UK
India
Brazil
0
.0
2
.0
4
.0
6
.0
8
.1
.1
2
.1
4
.1
6
Sh
ar
e 
of
 W
or
ld
 T
ra
de
1995 2000 2005 2010 2015
Year
Trade Facts: China’s Recent Boom
Impact on other economies: USA
.0
8
.1
.1
2
.1
4
M
an
uf
ac
tu
rin
g 
em
p/
po
p
0
.0
1
.0
2
.0
3
.0
4
.0
5
Im
po
rt 
pe
ne
tra
tio
n
1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
Year
China import penetration ratio
Manufacturing employment/Population
Trade Facts: China’s Recent Boom
Impact on other economies: UK
-1
.5
-1
-.
5
0
.5
D 0
0/
07
 ln
(E
m
pl
oy
m
en
t)
0 .05 .1 .15 .2
D00/07 Importschi/Expenditure
R2 = 0.3837, b= -4.7680
Trade Facts: China’s Recent Boom
Impact on other economies: Brazil
0
.0
5
.1
.1
5
S
ha
re
1995 2000 2005 2010
Year
Imports from China
Exports to China
Non-high-income countries
0
.0
5
.1
.1
5
S
ha
re
1995 2000 2005 2010
Year
Imports from China
Exports to China
Brazil
Share of China in total imports and exports
Trade Facts: China’s Recent Boom
Impact on other economies: Brazil
0
.2
.4
.6
.8
S
ha
re
 o
f a
gr
ic
ul
tu
ra
l/e
xt
ra
ct
iv
e 
se
ct
or
s 
in
 e
xp
or
ts
1995 2000 2005 2010
Year
Exports to China
Exports to all other destinations
Exports
0
.2
.4
.6
.8
S
ha
re
 o
f a
gr
ic
ul
tu
ra
l/e
xt
ra
ct
iv
e 
se
ct
or
s 
in
 im
po
rt
s
1995 2000 2005 2010
Year
Imports from China
Imports from all other origins
Imports
Share of agricultural and extractive sectors
in trade of Brazil
Trade Facts: Brazil
I Growth of trade in Brazil is more recent.
I What goods do we trade?
http://atlas.media.mit.edu/en/profile/country/bra/
http://atlas.media.mit.edu/en/profile/country/bra/
Recent Episodes affecting Trade
I Brexit.
I Donald Trump.
Helpman (1999), “The Structure of Foreign Trade”,
Journal of Economic Perspectives.
What happened in the field from 1960 to the late nineties?
Even before that...
Helpman (1999), “The Structure of Foreign Trade”,
Journal of Economic Perspectives.
What happened in the field from 1960 to the late nineties?
Even before that...
Helpman (1999): Ricardo
1817 - David Ricardo’s theory of comparative advantage.
I Only labor used to produce goods and services.
I Theory predicts that a country will export products in which it
has a comparative advantage
→ products where labor productivity is relatively higher.
I Until the 60’s, not many empirical tests.
I Important questions remain: What causes labor productivity
to differ across countries? Relationship between capital and
labor productivity?
Helpman (1999): Ricardo
1817 - David Ricardo’s theory of comparative advantage.
I Only labor used to produce goods and services.
I Theory predicts that a country will export products in which it
has a comparative advantage
→ products where labor productivity is relatively higher.
I Until the 60’s, not many empirical tests.
I Important questions remain: What causes labor productivity
to differ across countries? Relationship between capital and
labor productivity?
Helpman (1999): HO
1920’s - Heckscher-Ohlin.
I Emphasize the roles of labor, capital and land in agriculture
and industry, trying to explain how their availability shape a
country’s pattern of specialization and trade.
I Two-factors/Two-sectors version: Samuelson (1948)
Capital and labor - countries have different factor
endowments; Import- and export-competing sectors.
I A country should export the product that is relatively
intensive in using the factor with which the country is
relatively well-endowed.
Helpman (1999): HO
I Leontief (1954) puts the model to the test.
I Finds that the K/L ratio embodied in US imports exceeded
the one in US exports (opposite to HO prediction if we believe
that the US are more capital intensive than their trading
partners).
→ “Leontief paradox”.
I “Solution”: if US workers are much more productive, US
should export labor-intensive products.
→ Why are US workers so much more productive?
Helpman (1999): HO
I 1960’s-1980’s: other attempts to test the model, mixed
results.
Most of these tests, however, were based on pure accounting
exercises and on unrealistic assumptions:
factor price equalization, common technologies across
countries.
I Trefler (1993) takes into account productivity differences
across countries and shows (empirically) in a cross-country
comparison that relative factor rewards (wage rate/return to
capital) are highly correlated with (the calculated by Trefler)
relative productivity differences.
I Trefler (1995) takes into account not only productivity
differences across countries but also home-bias in
consumption: this combination provides the best explanation
to the data.
Helpman (1999): New Trade Theory
Krugman (1979): New Trade Theory.
I Theory (complementary to HO) based on economies of scale
and product differentiation.
I Krugman noted:
i) Large volumes of trade between countries with similar factor
endowments.
ii) Considerable volume of intra-industry trade.
I From the supply side, economies of scale favors countries
specialization in different products.
I From the demand side, “love for variety” leads to
intra-industry trade.
“New” Trade Theory
I In a neoclassical world, differences in relative autarky prices –
due to differences in technology, factor endowments, or
preferences– are the only rationale for trade.
I This suggests that:
I “Different” countries should trade more.
I “Different” countries should specialize in “different” goods.
I In the real world, however, we observe that:
I The bulk of world trade is between “similar” countries.
I These countries tend to trade “similar” goods.
“New” Trade Theory
I We observe a very large amount of intra-industry trade among
rich countries.
I No matter how much you disaggregate the trade data, rich
countries seem to export goods in exactly the same sectors as
goods that they import.
I Countries that seem to have a very similar technology, and a
very similar structure of factor endowments, do export the
same kind of things that they import.
I France and Germany buy the same type of cars from one
another.
“New”Trade Theory
I Why Increasing Returns to Scale (IRTS)?
I “New” Trade Theory proposes IRTS as an alternative
rationale for international trade and a potential explanation
for the previous facts.
I Basic idea:
I Because of IRTS, similar countries will specialize in different
goods to take advantage of large-scale production, thereby
leading to trade.
I Because of IRTS, countries may exchange goods with similar
factor content.
I In addition, IRTS may provide new source of gains from trade
if it induces firms to move down their average cost curves.
Monopolistic Competition
Trade economists preferred assumption about market structure
I How to model increasing returns to scale?
I Not compatiblewith perfect competition
I Monopolistic competition, formalized by Dixit and Stiglitz
(1977), is the most common market structure assumption
among “new” trade models.
I It provides a very mild departure from perfect competition,
but opens up a rich set of new issues.
I Classical examples:
I Krugman (1979): IRTS as a new rationale for international
trade.
I Helpman and Krugman (1985): Inter-and intra-industry trade
united.
I Krugman (1980): Home market effect in the presence of trade
costs.
Monopolistic Competition Basic idea
I Monopoly pricing:
I Each firm faces a downward-sloping demand curve.
I No strategic interaction:
I Each demand curve depends on the prices charged by other
firms.
I But since the number of firms is (assumed to be) large, each
firm ignores its impact on the demand faced by other firms.
I Free entry:
I Firms enter the industry until profits are driven to zero for all
firms.
Krugman (1979)
Endowments, preferences, and technology
I Endowments: All agents are endowed with 1 unit of labor.
I Preferences: All agents have the same utility function given by
U =
∫ n
0 u (ci ) di
I where:
I u(0) = 0, u′ > 0, and u′′ 0 is such that σ′ 
1
f /L+c0/ϕ
= n0
I Pro-competitive/efficiency effects:
(p/w)1 q0 (thanks to falling elasticity of
substitution).
Krugman (1979)
I Total number of varieties available to consumer increases with
trade
I But number of varieties produced in each country falls
I (ZZ): p
w = f
q + 1
ϕ = f
Lc + 1
ϕ
I p
w ↓⇒ q = Lc ↑
I Full employment ⇒ L = nf +
∫ n
0
q
ϕdi = n
(
f + q
ϕ
)
⇒ n ↓
I Surviving firms exploit gains of scale (lower average costs)
I But there is a reduction in the number of firms in each country
CES Preferences
Trade economists’ preferred demand system
I Constant Elasticity of Substitution (CES) preferences
correspond to the case where:
U =
(∫ n
0 (ci )
σ−1
σ di
) σ
σ−1
I where σ > 1 is the (constant) elasticity of substitution
between any pair of varieties.
I What is there to like about CES preferences?
I Pretty much, just tractability for the modeler
I Rejected in field of IO long ago (independence of irrelevant
alternatives property, constant markups, and other features we
deemed just too unattractive).
CES Preferences
Special properties of the equilibrium
I Because of monopoly pricing, CES ⇒ constant markups:
p
w =
[
σ
σ−1
]
1
ϕ
I Because of zero profit condition, constant markups ⇒
constant output per firm:
p
w = f
q + 1
ϕ
I Because of market clearing, constant output per firm ⇒
constant number of varieties per country:
n = L
f+q/ϕ
I So, gains from trade come only from access to Foreign
varieties.
I IRTS provide an intuitive reason for why Foreign varieties are
different.
International Trade and
Heterogeneous Firms
Bernard, Jensen, Redding and Schott (2007)
I Engaging in international trade is a rare activity.
I In the US in 2000:
I 5.5 million firms operating.
I Only 4% were exporters.
I Among exporters, 10% accounted for 96% of total US exports.
I Exporters are different: larger, more productive, more skill-
and capital-intensive and pay higher wages.
I Differences exist even before exporting (self-selection).
Bernard, Jensen, Redding and Schott (2007)
I The authors show how differences between trading and
non-trading firms have led to the development of new models
and new insights into the causes and consequences of
international trade.
I Document new stylized facts about firms’ participation in
international markets.
Bernard, Jensen, Redding and Schott (2007)
Empirical Challenges
I Old trade theory (Ricardian and HO models).
Inter-industry trade.
I “New” trade theory (Krugman).
Intra-industry trade.
I Both theories assume a representative firm.
→ Difficult to reconcile with variation in productivity, skill-
and capital-intensity across firms within narrowly defined
industries.
I Heterogeneity x Export orientation → Aggregate Productivity.
Bernard, Jensen, Redding and Schott (2007)
Exporting is Rare
Bernard, Jensen, Redding and Schott (2007)
Exporters are Different
Bernard, Jensen, Redding and Schott (2007)
Exporters are Different
I Exporters tend to be more productive
I What is the direction of causality?
I Several studies confirm that high productivity precedes export
sales
I That suggests that only the most productive firms self select
into exporting
I This is turn suggests the existence of sunk costs of exporting,
that only more productive firms find profitable to incur
(Roberts and Tybout, 1997).
I Not much evidence of learning by exporting.
Bernard, Jensen, Redding and Schott (2007)
Trade Liberalization, Reallocation and Productivity Growth
I Trade liberalization episodes are typically accompanied by
contraction of low productivity firms and expansion and entry
into export markets by high productivity firms.
I Potential for within industry productivity growth arising from
declining trade costs.
I Reallocation of resources towards more efficient firms may
increase average industry productivity.
I Additionally, trade liberalization may have pro-competitive
effects, reducing firms’ markups.
I Chilean trade liberalization: Pavcnik (2002) finds 2/3 of 19%
increase in aggregate productivity is due to greater survival
and growth of high productivity plants.
I Improvements in productivity within plants account for 1/3 of
the increase in aggregate productivity.
Bernard, Jensen, Redding and Schott (2007)
I Heterogeneous-Firm Trade Theories
→ Soon!
I Continuing the BJRS (2007)...
Bernard, Jensen, Redding and Schott (2007)
Trade is Concentrated
I In 2000 the top 1% of trading firms by value accounted for
80% of the value of total trade in the US.
They account for “only” 14% of employment.
I Heterogeneous firms model provide two possible explanations:
i) Very unequal distribution of productivity.
i) High elasticity of substitution between firms varieties.
I Other explanations: destination- or product-specific sunk
costs; economies of scale in overseas distribution and
marketing.
Bernard, Jensen, Redding and Schott (2007)
Trade is Even Scarcer than Thought
Bernard, Jensen, Redding and Schott (2007)
Multiproduct Firms and Exporting
Bernard, Jensen, Redding and Schott (2007)
Firms and Gravity
Bernard, Jensen, Redding and Schott (2007)
I Facts difficult to reconcile with the “new” trade theory:
all varieties are traded in equilibrium.
I Heterogeneous-Firm Trade Theories
→ Soon!
I Continuing the BJRS (2007)...
Bernard, Jensen, Redding and Schott (2007)
Imports are also Rare
Bernard, Jensen, Redding and Schott(2007)
Trading Premia
Bernard, Jensen, Redding and Schott (2007)
Gravity and Imports
Bernard, Jensen, Redding and Schott (2007)
Take Away
I Firms that trade are different:
Important aggregate implications.
I Some progress has been made with new heterogeneous-firm
trade theories
→ Next class!
I However, many facts remain unexplained.
	Motivation