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International Trade
University of Kansas School of Law
Bhala, Raj

Trade is not necessarily driven solely by economics
·         this is a modern construct originating mainly from the ideas of Smith and Riccardo
·         in older times, security and morality were the driving forces behind trade
o       morality
§         Plutarch’s quote is driving at the fact that trade contributes to friendship and understanding and, ultimately, peace (morality)
§         Doctrine of the Universal Economy also drove at this point and explained that uneven distribution of resources were a means to force people trade and be compelled to interact
·         this was thought to be part of Natural Law engineered by Divine Providence
o       security
§         Horace took a different approach and saw trade as a corrupting influence on society because people were exposed to barbaric practices and ideas
·         this was the dominate ideal for most of the world up until the middle ages
·         this line of reasoning lead to the position that trade should only be used to make up for lacks of essential resources to ensure domestic security
·         the importance of this understanding is that although int’l trade law is now mostly based on law and economics, it is thuroughly underpinned in considerations of morality and, to some extent, security
 
Origins of WTO and GATT
·         the main idea behind these organizations is that free trade is good and brings prosperity to all
·         during the middle ages and on, mercantilism was the dominant economic system
o       mercantilism is based on maximizing exports and minimizing imports (basically having a favorable balance of trade)
o       this made sense because if a country exported a lot, it could build up a reserve of gold or other precious species making it easier to wage wars
·         eventually Smith and Riccardo developed ideas that supported free trade
o       factors of production
§         labor
§         land
§         capital (physical)
§         human capital
§         technology
§         (n.b. Smith and Ricardo focused almost exclusively on labor and land)
o       Smith and absolute advantage
this idea states that if a country can make a good more cheaply and efficiently than anyone else, then it should specialize in that good because it increases efficiency and thereby increases world output and raises the standard of living for everyone
e.g., in China, it takes 5 hours to make textiles, but it takes 7 hours in India; in this case, China should specialize in making textiles because it has an absolute advantage
further, if it takes 10 hours to make steel in China, but 8 hours in India;  in this case, China can maximize its productivity by shifting workers from steel to textiles
this approach is very utilitarian in that it takes for granted that producing more goods for more people is inherently good; it takes for granted the other less desirous byproducts such as pollution, overproduction, etc.
Riccardo and comparative advantage
this idea has more to do with trade; it states that a nation will be able to acquire a good more cheaply if it is trading one of its specialized products for another nation’s
e.g., China specializes in textiles and India specializes in steel; if China, which makes pants more cheaply trades them to India, which makes steel more cheaply, then China will get more steel for the same price than if it had produced the steel itself
this idea proves that trade will maximize efficiency and production in every nation
the collorary to this statement is that even in a nation has no absolute advantage, they can still take advantage of specializing in their efficient sectors
although Smith and Riccardo were an improvement, they failed to anticipate many additional problems
security considerations might make a state loathe to trade because, even though it might be able to get goods more cheaply, this is little consolation if war breaks out and that state stops getting a product and no longer has sufficient production capacity to produce it
although these principles support free trade, they do so objectively from a utilitarian viewpoint; if one takes into account subjective factors or has a different point of view, then free trade doesn’t look like a panacea anymore
 
 schools of economic thought
·         classical
o       led by Ricardo and Smith
o       dominant school of though during the late 17th century and early 18th century
·         neo-classical
o       led by Alfred Marshall
o       became a predominant school of thought during the 19th century
 
the bottom line on comparative advantage
·         production gains
o       as a whole, w/ trade, the world will produce more goods than if each state was autarkic
·         consumption gains
o       as a whole, w/ trade, the population of the world will be able to consume more than if each state was autarkic
·         overall 
o       these gains are net – there will be some losers from free trade, but overall the world as a whole will be better off
 
 
assumptions of free trade theory
·         rationality
o       each economic agent will act in a rational way to increase their material satisfaction
·         two countries
o       the proofs of absolute and comparative advantage assume there are only two countries in the world
·         two commodities
o       the proofs of absolute and comparative advantage assume there are only two good

tal endowments, etc.
§         production functions for different goods make use of factors of production in different proportions (e.g., more labor is needed to make carpets, while more land is needed to produce wheat,  but more technology is needed to make microprocessors)
§         the production function is the same in every country for a particular good (i.e. each country has the same production technology for a particular good)
o       results and predictions
§         the empirical evidence for this theorem is mixed, but it remains an important predictive tool
§         the major knot in the theorem is that when two nations that share the same endowments trade (e.g., the US and Japan that are both well-endowed in labor, physical capital, human capital, and technology), the theorem cannot predict which goods will be traded and in what directions they will go
o       bottom line
§         this theorem is a good starting point to use in predicting trade patterns, but must be used w/ care
·         the Leontief Paradox and empirical tests of the Factor Proportions Theory
o       the paradox was discovered when an input-output test was run on the US economy in 1947 that showed the US exported labor-intensive goods, while importing capital-intensive goods; this was the opposite outcome predicted by the Factor Proportions Theory b/c the US, as a capital-rich country, should have imported more labor-intensive goods than it exported
§         the paradox has been observed in the US over and over again and in several other developed and developing countries
§         one explanation for the original observation of the paradox was that US workers were roughly 3 times as productive as the average worker in the world and when this productivity was taken into account, it explained why the US exported more labor-intensive goods; namely, its lack of labor endowments was made up for by its technological endowments; this explanation has been abandoned
§         the current explanation was that study that observed the paradox was too simplistic and did not take into account the differences b/t skilled and unskilled labor, arable and nonarable land, etc.