Do Old Rules Still Apply?

Do Old Rules Still Apply?
We begin our discussion of the causes of world trade in Chapter 3, with an analysis of a
model originally put forth by the British economist David Ricardo in 1819. Given all the
changes in world trade since Ricardo’s time, can old ideas still be relevant? The answer is
a resounding yes. Even though much about international trade has changed, the fundamental
principles discovered by economists at the dawn of a global economy still apply.
It’s true that world trade has become harder to characterize in simple terms. A century
ago, each country’s exports were obviously shaped in large part by its climate and natural
resources. Tropical countries exported tropical products such as coffee and cotton; landrich
countries such as the United States and Australia exported food to densely populated
European nations. Disputes over trade were also easy to explain: The classic political
battles over free trade versus protectionism were waged between English landowners who
wanted protection from cheap food imports and English manufacturers who exported much
of their output.
The sources of modern trade are more subtle. Human resources and human-created
resources (in the form of machinery and other types of capital) are more important than
natural resources. Political battles over trade typically involve workers whose skills are
made less valuable by imports—clothing workers who face competition from imported
apparel, and tech workers who now face competition from Bangalore.
As we’ll see in later chapters, however, the underlying logic of international trade
remains the same. Economic models developed long before the invention of jet planes
or the Internet remain key to understanding the essentials of 21st-century international
trade.
SUMMARY
1. The gravity model relates the trade between any two countries to the sizes of their
economies. Using the gravity model also reveals the strong effects of distance and
international borders—even friendly borders like that between the United States and
Canada—in discouraging trade.
2. International trade is at record levels relative to the size of the world economy,
thanks to falling costs of transportation and communications. However, trade has
not grown in a straight line: The world was highly integrated in 1914, but trade was
greatly reduced by economic depression, protectionism, and war, and took decades
to recover.
3. Manufactured goods dominate modern trade today. In the past, however, primary products
were much more important than they are now; recently, trade in services has
become increasingly important.
4. Developing countries, in particular, have shifted from being mainly exporters of primary
products to being mainly exporters of manufactured goods.
22 PART ONE International Trade Theory
PROBLEMS
1. Canada and Australia are (mainly) English-speaking countries with populations that
are not too different in size (Canada’s is 60 percent larger). But Canadian trade is twice
as large, relative to GDP, as Australia’s. Why should this be the case?
2. Mexico and Brazil have very different trading patterns. While Mexico trades mainly
with the United States, Brazil trades about equally with the United States and with the
European Union. In addition, Mexico does much more trade relative to its GDP.
Explain these differences using the gravity model.
3. Equation (2.1) says that trade between any two countries is proportional to the product
of their GDPs. Does this mean that if the GDP of every country in the world doubled,
world trade would quadruple?
4. Over the past few decades, East Asian economies have increased their share of world
GDP. Similarly, intra–East Asian trade—that is, trade among East Asian nations—has
grown as a share of world trade. More than that, East Asian countries do an increasing
share of their trade with each other. Explain why, using the gravity model.
5. A century ago, most British imports came from relatively distant locations: North
America, Latin America, and Asia. Today, most British imports come from other
European countries. How does this fit in with the changing types of goods that make
up world trade?
FURTHER READINGS
Paul Bairoch. Economics and World History. London: Harvester, 1993. A grand survey of the world
economy over time.
Alan S. Blinder. “Offshoring: The Next Industrial Revolution?” Foreign Affairs, March/April 2006.
An influential article by a well-known economist warning that the growth of trade in services
may expose tens of millions of previously “safe” jobs to international competition. The article
created a huge stir when it was published.
Frances Cairncross. The Death of Distance. London: Orion, 1997. A look at how technology has
made the world smaller.
Keith Head. “Gravity for Beginners.” A useful guide to the gravity model, available at http://pacific.
commerce.ubc.ca/keith/gravity.pdf
Harold James. The End of Globalization: Lessons from the Great Depression. Cambridge: Harvard
University Press, 2001. A survey of how the first great wave of globalization ended.
J. Bradford Jensen and Lori G. Kletzer. “Tradable Services: Understanding the Scope and Impact of
Services Outsourcing.” Peterson Institute Working Paper 5–09, May 2005. A systematic look at
which services are traded within the United States, with implications about the future of international
trade in services.
World Bank. World Development Report 1995. Each year the World Bank spotlights an important
global issue; the 1995 report focused on the effects of growing world trade.
World Trade Organization. World Trade Report. An annual report on the state of world trade. Each
year’s report has a theme; for example, the 2004 report focused on the effects on world trade of
domestic policies such as spending on infrastructure.