Economics 970 : The Economics of Trade Policy Spring 2017 Dr Thomas Baranga [email protected] Littauer 111 Department of Economics Harvard University
Time: M/W 10-11.30 Location: M16 Website: https://canvas.harvard.edu/courses/26222 Office Hours: Fri 2-4 (Littauer 111)
Accommodating the rise of China and uneven adjustment to globalization have pushed debate over the costs, benefits and consequences of international trade back to the top of the political agenda across the industrialised world. The welfare consequences of trade and the appropriate policy responses to shifting trade patterns are some of the oldest questions in economics, but the conclusions of the Economics profession remain widely disputed.
This class will explore the rationales and consequences of a range of trade-related government interventions using the tools of economic analysis. The first third of the class covers classical trade theory. We will start by reviewing the sources of potential gains from trade, how its redistributive effects create both winners and losers, and classical arguments for and against protectionism. The next section of the class studies the ‘new’ trade theory and the implications of imperfect competition in goods markets for trade policy. Finally we will look at the political economy of trade policy, and the process of global multilateral trade integration and negotiations.
Prerequisites: Intermediate Microeconomics (Econ 1010a) and Statistics (Stat 104 or equivalent) Collaboration: The goal of the tutorial is to stimulate and encourage discussion between students, both inside and outside of the classroom. However, all written assignments must be completed individually, and any sources used should be clearly cited. For questions about Harvard’s stance on academic honesty, consult the Academic Information section in the Harvard College Handbook for Students.
Evaluation: Students will write 10 two to three page essays, responding to the seminar’s topic and papers (35%), a 3-5 page prospectus outlining a final paper project (5%), and a 15-18 page final paper (30%) on a relevant topic of the student’s choice. Students will also complete the STATA mini-course and four associated problem sets (10%), and are also expected to contribute regularly in classroom discussions, including leading two classroom presentations (20%).
STATA Problem Sets
All Ec 970 students take the STATA mini-course, which consists of one lecture, ten video tutorials, and four problem sets which contribute 10% of your overall grade. The training in STATA will be very useful for any empirical analysis that you do in your final paper.
The STATA lecture will take place on Tuesday Feb 7th, from 8.30-10.00 am in Harvard Hall 104
Short Essays
There are twenty-three seminars, and all but the first suggest an essay question informed by the readings for the seminar. Students must write 10 of these essays over the course of the semester, but the choice of which topics to write on is left to the student. Essays should be submitted by email by 9 pm the evening before the relevant seminar meeting. Students are welcome to write more than 10 essays, and if they do so then their best 10 scores will count towards their final grade. However only essays submitted by the 9 pm deadline will count for credit, and these deadlines are firm and non-negotiable. The essays should be two to three pages (double-spaced) and draw primarily on the assigned readings (although students are welcome to cite other relevant economics papers that they have read).
Final Paper
The final paper will be an original piece of research on a topic related to trade policy, chosen by the student. Possible topics include evaluating the impact of a free trade agreement on trade flows; or a case study assessing the costs and benefits of a particular trade policy as implemented in an industry of interest to the student (not necessarily limited to the US). In addition to presenting your own findings on this policy issue, the paper should also review relevant work in the field, and conclude by describing whether your results confirm or depart from current views, as well as any implications for policy.
Students should meet with me to discuss potential topics before writing their draft prospectus, which is due by March 9th. The draft prospectus will set out the question, and sketch out the approach that the student intends to use to explore it.
Getting feedback on your writing and revising it is an invaluable part of the research process. You will submit a preliminary first draft of your research paper two weeks before the final due date, in order to have time to make any substantive revisions that might improve it.
Classroom Participation
Attendance is mandatory at all seminar meetings. If for any reason you are unable to attend, you must contact me in advance to confirm the necessity for your absence. Students are expected to have read the assigned readings in advance and to come to class prepared to discuss them.
Students are also required to lead two seminar discussions. Leading the seminar involves giving the introductory presentation, setting out the issues and reviewing the readings. Students will be assigned topics for future presentations at the second class meeting.
Due Dates
10 short essays: by 9 pm the day before the seminar meets STATA PS#1: Feb 17th STATA PS#2: Mar 3rd STATA PS#3: Mar 24th STATA PS#4: Apr 7th Paper prospectus: Mar 9th First draft of the final paper: Apr 17th Final paper: May 1st
Readings
One of the goals of the Sophomore Tutorial is to train students to read the academic Economics literature. To this end, Ec 970 assigns readings from papers published in economics journals, rather than using textbook presentations. This may seem daunting at first, as academic papers, building on an extensive academic literature, often take for granted a sophisticated understanding of economics. This is particularly true in a field like trade, which economists have been arguing about from the earliest days of our discipline – current papers incorporate more than two hundred years of research and thinking about these questions!
Clearly, with only a Principles and Intermediate theory class under your belts, it is not expected that you will be able to understand all of the arguments and references in these readings. Nevertheless, there is a lot to be gained from diving into the deep end of the pool.
Firstly, you will develop the skill of extracting the central, most important issues out of a mass of detail. Economists like to formalize their ideas, and present them in the most general terms possible, typically as abstract mathematical models. This can make understanding economics papers quite daunting. An essential skill an economist needs to develop is to be able to read through a model to understand the intuitive idea, without getting stuck trying to follow every step of the mathematical argument. If (and only if) the model’s general idea seems interesting, do you need to come back and spend a lot of time puzzling over the details of the mathematics! Also, because these papers have been published in highly regarded peer reviewed journals, you can more or less take for granted that the mathematics is correct. You don’t need to spend time checking each step (unless you are curious to understand the details of how the model works).
Secondly, there is no better way of learning how to write and analyse issues like a professional economist than by reading and thinking about the research of professional economists. And by the end of the course you will have read a lot of cutting-edge economics!
Thirdly, all of these readings are available for free online through Harvard’s library system, so you do not need to incur any expenses to purchase books for the course.
Because questions of the costs and benefits of trade have been debated by economists for two hundred years, many of the ideas that we will encounter have a venerable academic pedigree and have been around for a long time. There are many excellent textbooks covering the field of international trade, and if you find that the academic papers are too complicated, you could consult any one of them to find simplified presentations that break the issues down into more digestible pieces.
You are not required to purchase or consult any of these books, but in case you find it helpful to have some suggestions, then either of the following are highly regarded textbooks with excellent presentations of the standard trade theory:
“International Trade”, Robert Feenstra and Alan Taylor “International Trade: Theory and Policy”, Paul Krugman and Maurice Obstfeld
A very useful book on the welfare economics of trade is “Trade Policy and Economic Welfare”, by Max Corden. The second edition (1997) contains significant revisions to the first edition (1974) and is strongly recommended over the first edition.
Jan 30th: Introduction
“The Positive Theory of International Trade”, Sections 1 and 2.1, pp. 2-10, Jones and Neary, in the Handbook of International Trade, vol. 1, 1984, ed. Kenneth Arrow and Michael Intriligator
“The Normative Theory of International Trade”, Max Corden, Handbook of International Economics, vol. 1, Sections 1-3, pp. 65-77
Feb 1st: The Ricardian Model
“The Positive Theory of International Trade”, Section 2.2, pp. 10-14, Jones and Neary, in the Handbook of International Trade, vol. 1, 1984, ed. Kenneth Arrow and Michael Intriligator
“Putting Ricardo to Work”, Jonathan Eaton and Samuel Kortum, Journal of Economic Perspectives, vol. 26 no.2, pp. 65-89, Spring 2012
Essay question: What role do differences in technology play in international trade?
Feb 6th: The Heckscher-Ohlin Model
“The Positive Theory of International Trade”, Section 2.3, pp.14-21, Jones and Neary, in the Handbook of International Trade, vol. 1, 1984, ed. Kenneth Arrow and Michael Intriligator
“Factor Proportions and the Structure of Commodity Trade”, John Romalis, American Economic Review, vol.94 no.1, pp.67-97, Mar 2004
Essay question: Do countries’ endowments of the inputs of production affect international trade?
Feb 8th: Empirical Evidence on Comparative Advantage
“Unpacking Sources of Comparative Advantage: A Quantitative Approach”, Davin Chor, Journal of International Economics, vol. 82, pp. 152-167, 2010
“The Dynamics of Comparative Advantage”, Gordon Hanson, Nelson Lind and Marc Muendler, working paper, June 2016: http://gps.ucsd.edu/_files/faculty/hanson/hanson_research_dynamics.pdf
Essay question: What factors influence countries’ comparative advantage?
Feb 13th: The Specific Factor Model
“The Positive Theory of International Trade”, Section 2.4, pp.21-27, Jones and Neary, in the Handbook of International Trade, vol. 1, 1984, ed. Kenneth Arrow and Michael Intriligator
“Short-Run Capital Specificity and the Pure Theory of International Trade”, Peter Neary, Economic Journal, Sept 1978, sections 1 and 2, pp. 488-494
Essay question: Is everybody guaranteed to gain from a trade liberalization?
Feb 15th: Redistributive Effects of Trade
“Are Your Wages Set in Beijing?” Richard Freeman, Journal of Economic Perspectives, v.9 no.3, Summer 1995, pp. 15-32
“How Trade Hurt Unskilled Workers,” Adrian Wood, Journal of Economic Perspectives, v.9 no.3, Summer 1995, pp. 57-80
“Globalization and US Wages: Modifying Classic Trade Theory to Explain Recent Facts,” Jonathan Haskel, Robert Lawrence, Edward Leamer and Matthew Slaughter, Journal of Economic Perspectives, v.26 no.2, pp.119-139, Spring 2012
“The China Syndrome: Local Labor Market Effects of Import Competition in the United States,” David Autor, David Dorn and Gordon Hanson, American Economic Review, v.103 no.6, Oct 2013, pp. 2121-2168
Essay question: Is trade liberalization responsible for the increase in US income inequality since the 1980s?
Feb 22nd: Services Trade and Offshoring
“Trading Tasks: A Simple Theory of Offshoring”, Gene Grossman and Esteban Rossi-Hansberg, American Economic Review, v.98 no.5, Dec 2008, pp. 1978-1997
“Services Trade and Policy”, Joseph Francois and Bernard Hoekman, Journal of Economic Literature, vol.48 no.3, pp. 642-692, Sept 2010
“Integration of Trade and Disintegration of Production in the Global Economy,” Robert Feenstra, Journal of Economic Perspectives, Fall 1998, pp. 31-50
Essay question: Is the advent of offshoring an opportunity or a threat to US workers?
Feb 27th: Trade Taxes and the Costs of Protection
“The Normative Theory of International Trade”, Max Corden, Handbook of International Economics, vol. 1, Sections 4.1-4.3 pp. 77-79
“Trade Policies in Developing Countries”, Anne Krueger, Handbook of International Economics, vol. 1, Ch. 11, Section 3.3-3.5, pp. 541-547
Essay: What social costs are associated with taxes on trade?
Mar 1st: The Theory of Domestic Distortions
“The Normative Theory of International Trade”, Max Corden, Handbook of International Economics, vol. 1, Section 6 and 7, pp. 86-104
“Domestic Distortions, Tariffs, and the Theory of Optimum Subsidy”, Jagdish Bhagwati and V.K. Ramaswami, Journal of Political Economy, v.71 no.1, pp. 44-50, Feb 1963
“The General Theory of Second Best”, R.G. Lipsey and Kelvin Lancaster, The Review of Economic Studies, vol.24 no.1, pp.11-32, 1956
Essay question: Is there a role for trade policy in addressing market failures?
Mar 6th: The “Optimal” Tariff
“The Normative Theory of International Trade”, Max Corden, Handbook of International Economics, vol. 1, Section 5, pp. 82-86
“Optimal Tariffs and Market Power: The Evidence”, Christian Broda, Nuno Limao and David Weinstein, American Economic Review, vol.98 no.5, Dec 2008, pp. 2032-2065
Essay question: Should trade policy be used to improve a country’s terms of trade?
Mar 8th: The “Infant Industry” Argument
“Trade Policies in Developing Countries”, Anne Krueger, Handbook of International Economics, vol. 1, Ch. 11, Section 1-1.2.1, pp. 520-525
“Learning by Doing Spillovers in the Semiconductor Industry,” Douglas Irwin and Peter Klenow, Journal of Political Economy, 102, Dec 1994, pp. 1200-1227
Essay question: Should trade policy be used to support developing industries?
Mar 20th: Increasing Returns as a Source of Trade
“Increasing Returns, Imperfect Markets, and Trade Theory”, Elhanan Helpman, Handbook of International Economics, vol. 1, pp. 325-364
“Gains from Trade When Firms Matter”, Marc Melitz and Daniel Trefler, Journal of Economic Perspectives, vol.26 no.2, Spring 2012, pp.91-118
Essay question: Do increasing returns to scale in production influence the gains from trade?
Mar 22nd: Quantity Restrictions on Trade
“The Normative Theory of International Trade”, Max Corden, Handbook of International Economics, vol. 1, Section 4.4 pp. 79-81
“Trade Policies in Developing Countries”, Anne Krueger, Handbook of International Economics, vol. 1, Ch. 11, Section 2.2, pp. 531-538
“More on the Equivalence of Tariffs and Quotas”, Jagdish Bhagwati, American Economic Review, v.58, pp. 142- 146
“Tariffs vs Quotas with Implicit Collusion”, Julio Rotemberg and Garth Saloner, Canadian Journal of Economics, vol.22 no.2, pp. 237-244, May 1989
Essay question: Should there be a presumption in favour of tariffs or quotas as a tool of trade policy?
Mar 27th: Welfare Costs of US Tariffs and Quotas
“Trade Restrictiveness and Deadweight Losses from US Tariffs”, Douglas Irwin, American Economic Journal: Economic Policy, vol.2 no.3, August 2010, pp. 111-133
“How Costly is Protectionism?”, Robert Feenstra, Journal of Economic Perspectives, vol.6 no.3, Summer 1992, pp. 159-169
Essay question: Does US trade policy appear to have raised the average US standard of living?
Mar 29th: Antidumping
“Dumping and Antidumping Duties”, Bruce Blonigen and Thomas Prusa, NBER Working Paper 21573, Sept 2015
“Anti-Dumping: A Growing Problem in International Trade”, Thomas Prusa, The World Economy, May 2005, pp. 683-700
“The Rise of US Anti-Dumping Activity in Historical Perspective”, Douglas Irwin, The World Economy, May 2005, pp.651-668
Gregory Mankiw and Phillip Swagel, “Antidumping: The Third Rail of Trade Policy,” Foreign Affairs, July/August 2005, pp. 107-119
Jeffrey Hart, “The Antidumping Petition of the Advanced Display Manufacturers of America: Origins and Consequences”, World Economy, 16, Jan 1993, pp. 85-108
Essay question: Do current anti-dumping rules do more harm than good?
Apr 3rd: Strategic Trade Policy in Theory
“Strategic Trade Policy”, James Brander, Handbook of International Economics, vol.3, ch.27, pp. 1397-1450
“Industrial Policy Under Monopolistic Competition”, Harry Flam and Elhanan Helpman, Journal of International Economics, vol.22, 1987, pp. 79 -102
Essay question: In what circumstances might an industry warrant a “strategic” trade policy?
Apr 5th: Strategic Trade Policy in Practice
“Optimal Trade and Industrial Policy Under Oligopoly”, Jonathan Eaton and Gene Grossman, Quarterly Journal of Economics, vol.101 no.2, pp. 383-406, May 1986
“Voluntary Export Restraints on Automobiles: Evaluating a Trade Policy,” Steven Berry, James Levinsohn and Ariel Pakes, American Economic Review, v.89 no.3, June 1999, pp.400-430
Essay question: What difficulties might a strategic trade policy face in practice?
Apr 10th: The Political Economy of Trade Policy
“Political Economy of Trade Policy”, Dani Rodrik, Handbook of International Economics, vol.3, Ch.28, 1995, pp.1458-1490
“Protection for Sale”, Gene Grossman and Elhanan Helpman, American Economic Review, 84(4), pp.833-50, Sept 1994
Essay question: What political economy factors might influence explain why some industries are protected and others are not?
Apr 12th: Testing the “Protection for Sale” Model
“Protection for Sale: An Empirical Investigation” Goldberg and Maggi, American Economic Review, 89(5), pp. 1135-55, Dec 1999
“Protection for Sale in a Developing Country: Democracy vs. Dictatorship,” Devashish Mitra, Dimitrios Thomakos and Mehmet Ulubasoglu, Review of Economics and Statistics, v.84 no.3, pp. 497-508, Aug 2002
Essay question: Does the empirical evidence support the theory of “Protection for Sale”?
Apr 17th: International Trade Agreements
“The World Trade Organization and the Future of Multilateralism”, Richard Baldwin, Journal of Economic Perspectives, vol.30 no.1, Winter 2016, pp.95-115
“International Rules and Institutions for Trade Policy”, Robert Staiger, Handbook of International Economics, vol.3, Ch.29, 1995, pp.1497-1541
“Can Regional Blocs be a Stepping Stone to Global Free Trade? A Political Economy Analysis”, Shang-Jin Wei and Jeffrey Frankel, International Review of Economics and Finance, vol.5 no.4, pp. 339-347, 1996
“The Politics of Free Trade Agreements”, Gene Grossman and Elhanan Helpman, American Economic Review, 85(4), pp.667-690, Sept 1995
Essay question: In what circumstances are international trade agreements beneficial?
Apr 19th: International Trade Negotiations in Practice
“What Do Trade Negotiators Negotiate About? Empirical Evidence from the World Trade Organization”, Kyle Bagwell and Robert Staiger, American Economic Review, v.101 no.4, pp.1238-1273, June 2011
“Trade Wars and Trade Talks with Data,” Ralph Ossa, American Economic Review, v.104 n.12, pp.4104-4146, Dec 2014
“Do We Really Know that the WTO Increases Trade?”, Andrew Rose, American Economic Review, vol.94 no.1, Mar 2004, pp.98-114
Essay question: Have international trade agreements helped to lower trade barriers and increase trade flows in practice?
Apr 24th: The Impact of NAFTA
“NAFTA’s and CUFSTA’s Impact on International Trade”, John Romalis, Review of Economics and Statistics, vol.89 no.3, pp. 416-435, Aug 2007
“Looking for Local Labor Market Effects of NAFTA”, Shushanik Hakobyan and John McLaren, Review of Economics and Statistics, vol.98 no.4, pp.728-741, Oct 2016
Essay question: What have been the most important consequences of NAFTA?
Apr 26th: The Gains From Trade
“Is Free Trade Passe?”, Paul Krugman, Journal of International Economics, vol.1 no.2, pp. 131-144, Autumn 1987
“New Trade Models, Same Old Gains?”, Costas Arkolakis, Arnaud Costinot, Andres Rodriguez-Clare, American Economic Review, vol.102 no.1, pp. 94-130, Feb 2012
Essay question: Does trade policy matter?