International Trade Theory owes itself to David Ricardo and then a series of economists who have worked on various facets of trade. However, this recent book on Trade puts it all together in a contemporary context that takes into account modern geo political realities, especially after the World Trade Organisation has come into being. This book is primarily aimed at the student of economics who is trying to understand the science and the mathematics behind International trade. It has been broken up into a large number of self contained units and this edition has nine new papers that look at various aspects of international trade including trade policy reform, non tariff barriers and trade policy.
What emerges clearly is that this book argues forcefully for the benefits of trade. It argues against protectionism and encourages globalisation by giving a large number of theoretical models and evidence on how trade enables the world economy to grow without causing any losses to the trading countries. However it steers clear of a normative approach to the subject and through carefully worked out examples explains the various notions on trade and trade theory, with clear graphs and equations.
Unit 1 – Theories
The first unit is broken up into various chapters that focus on trade theory as it has evolved. The comparative advantage model given by David Ricardo is explained first and then the trade equilibrium I worked out. The unit further explains trade indifference curves using the Ricardian model and then examines the patters of trade using this model. It then goes on to explain how the Ricardian construct would apply to more than two countries and to multiple goods. It brings in the concern with transportation costs and how tariffs could alter the equilibrium.
The Hecksher Ohlin(H-O) model is explained next with multiple factors of production brought into discussion, in contrast with Ricardo’s model that only works with one factor of production. This model is then explained using various combinations of multiple goods and two factors or two goods and multiple factors of production, which is then followed by a discussion on the H-O model and its application to multiple goods and multiple factors. Empirical examples are then used to verify the H-O model. The book then explains how economies of scale affect trade in situations where perfect competition exists and this is then contrasted with models of monopolistic competition.
Unit II – Intervention
The book then starts looking at protectionism. Historically protectionism has operated through tariffs. The effects of a tariff on tems of trade are calculated and the Metzler Paradox is examined. This paradox is an interesting case where a tariff could actually result in the lowering of prices of imports. This anomaly could come about as a result of world prices falling below the tariff level or because the demand for exports of the country that imposes the tariff is completely inelastic. The Lerner symmetry is another facet of trade where in a perfectly balanced trade situation in any country, the effect of a tariff on imports equals the effect of any tax on exports.
Quotas are therefore the next issue of concern in trade theory. Quotas replace tariffs in protectionist environments that must bring down tariff levels. The unit then focuses on other forms of trade distortion like in the case of the use of voluntary restraints and levying of anti dumping duties. With these concepts explained, the next logical step is the explanation of the importance of calculating effective rates of protection. The unit defines this concept and explains how the effective rate can be predicted in any trade environment.
Unit III – Labour and Capital mobility
In this unit the authors look at the welfare aspects of trade. The gains from trade are calculated, from a small country perspective and from the larger perspective of the entire world. As Ricardo had explained two centuries ago, the world gains from trade and so do the small nations. Trade is always preferable to closed borders, referred to as autarky in Economics, and free trade benefits both importing and the exporting nations. Trade enables factor mobility and this allows for the most efficient utilization of resources.
Having examined trade in goods and in services, the effects of trade on wages and labour are looked at in detail. The reason for wage differentials and the stickiness of wages in calculated and explained. Similarly, the movement of capital across borders is explained and the welfare aspects of capital flows are looked at in detail. In a globalizing world, it is imperative that along with goods and services, labour and capital would move across borders and the effects of these are examined.
Unit IV – Conclusion
This unit provides the conclusion by looking at the welfare aspects of trade. It examines the diffusion of technology across borders and its impact on the economy. Distortions are explained and explanation given on how deadweight losses are avoided through trade. The shadow price method is used, by bringing in trade, to explain how world prices are calculated and how equilibrium is achieved. This book is a comprehensive text that examines all concepts related to International Trade theory and explains these using graphs and algebraic equations with empirical validation. It establishes the need for free trade in a world that still remains protectionist in pockets. It also brings forth the welfare aspects of trade and shows how greater trade in goods, services, labour and capital results in greater growth across the world.
References and Bibliography
- Bhagwati, J., Panagariya, P., and Srinivasan T., Lectures on International Trade – Oxford University Press, Oxford, 2003