5311 International Trade Spring 2011 Instructor Yoichi Sugita Office: 886 Mail: [email protected] Office Hours: Monday 3-4:30pm Purpose This course aims to understand the mechanism of global economic integration, its consequences on the level and distribution of income within and across countries, and the effectiveness of policy interventions in globalized economies. Content The course has two parts. The first part considers the fundamental question why people trade goods and services across borders. We study two classical theories each of which is based on comparative advantage (RicardoHeckscher-Ohlin) and scale economy (Krugman), respectively, and review their empirical supports. Using these basic theories, the second part discusses several topics of the globalization. The list of topics includes: 1. Geography and international income inequality 2. A rise in wage inequality both in developed and developing countries 3. Costs of European rigid labor markets in the globalized age 4. Foreign investment and multinational enterprise 5. Offshoring and outsourcing 6. Heterogeneous firms and within-industry resource reallocation 7. Multilateral trade agreements (GATT/WTO) and regional trade agreements Format The course has 15 lectures, one review session for final exam, one final exam, and homework problem sets. Grade Final exam (70%) and problem sets (30%)

Readings No expensive textbook is required. The course uses a collection of journal articles ranging from classical theories, empirical evidence, and policy applications. One or two articles are assigned for each lecture (** and * in the reading list). All readings are posted in the courseweb. Handouts and Lecture Slides I also prepare many handouts for theory articles. They will be usually posted on Wednesday before the corresponding week.

Lecture Slides I will post lecture slides after each lecture. The slide is not a close substitute for the attendance! Office hours I will set regular office hours during which students can meet with the instructor without appointment. We can set up a meeting outside the office hour by appointment. Problem Sets Four problem sets will be assigned. Problem sets will be graded and followed up by the answers posted on the web and tutoring during the instructor's office hours.

Further study If you want to know a particular topic whether covered by the course or not, feel free to ask the instructor for further readings. If you are thinking of writing your master thesis on topics on international economics, I will also be able to help you find a topic, readings and dataset. Recommendable books Undergraduate textbooks covering some topics discussed in the course (I list the newest edition but the old one can be get in lower prices). Robert C. Feenstra and Alan M. Taylor, International Economics (or International Trade), Worth publishers, 2011. Krugman, Paul, Maurice Obstfeld, and Marc Melitz International Economics: Theory and Policy, 9th edition, Prentice Hall, 2011 Nontechnical (and fun) books on the broader topics on international trade Douglass A. Irwin, Free Trade under Fire, Princeton University Press, 2009. (Excellent sub-reading on policy related issues) Pietra Rivoli, The Travels of a T-Shirt in the Global Economy: An Economist Examines the Markets, Power, and Politics of World Trade. Wiley, 2009. (Political economy of trade policies seen from a life of t-shirts) Ronald Findlay and Kevin O’Rouke, Power and Plenty: Trade, War, and the World Economy in the Second Millennium, Princeton University Press, 2007. (History of the globalization from the days of Genghis Khan) Also, reports from international organizations provide excellent summaries of professional discussions on the current issues. They can be downloaded from their websites. World Trade Reports by the World Trade Organization (The 2008 issue is on the recent research on international trade and the 2007 issue is on the trade agreements). World Economic Outlook by the International Monetary Fund World Development Reports by the World Bank (the 2009 issue is on the economic geography). World Investment Reports by UNCTAD Nontechnical essays by European economists on economic issues appear at www.voxeu.org

Class Schedule and Literature I will upload the links for each article on the download folder by Jan. 20. Papers with stars (** and *) are required readings that students are expected to read before the class (** is more important). Others are not required but discussed in the class. Handouts will be posted one week before the corresponding class. 1. January 24th, Monday, 10.15-12.00, Room 336 Introduction: Basic Terms, Maps, and Trends of International Trade *World Trade Organization. (2008) “Globalization and Trade.” in World Trade Report 2008, pp.15-26. Downloadable from http://www.wto.org/english/res_e/publications_e/wtr08_e.htm Hummels, D. (2007), “Transportation costs and international trade in the second era of globalization”, Journal of Economic Perspectives 21(3), 131--154. Feenstra, R.C. 1998. “Integration of Trade and Disintegration of Production in the Global Economy,” Journal of Economic Perspectives, 12(3): pp. 31-50 Anderson, J. and Van Wincoop, E. (2004), “Trade costs”, Journal of Economic literature 42(3), 691--751.

2. January 26th, Wednesday, 10.15-12.00, Room 336 Review of Microeconomics and the Law of Comparative Advantage **Handout **Bernhofen, D. and Brown, J. (2004), “A direct test of the theory of comparative advantage: the case of Japan”, Journal of Political Economy 112(1), 48--67.

3. January 31th, Monday, 10.15-12.00, Room 336 Ricardian Model of Comparative Advantage **Handout **Dornbusch, R., Fischer, S. and Samuelson, P. (1977), “Comparative advantage, trade, and payments in a Ricardian model with a continuum of goods”, American Economic Review, 823--839.( until page 831 ) Hummels, D. and Klenow, P. (2005) “The Variety and Quality of a Nation’s Exports.” American Economic Review, 95(3): 704-723. Trefler, D. (1993) “International Factor Price Differences: Leontief was Right!” Journal of Political Economy, 101(6): 961-987

4. February 2nd, Wednesday, 10.15-12.00, Room 336 Applications of the Ricardian Model **Handout

*Krugman, P. (1979), “A model of innovation, technology transfer, and the world distribution of income”, Journal of Political Economy 87(2), 253--266. *Davis, D. and Weinstein, D. (2002), “Technological superiority and the losses from migration”, NBER working paper, W8971. Eaton, J. and Kortum, S. (2002), “Technology, geography, and trade”, Econometrica 70(5), 1741—1779 (This is very technical, so the reading is not required)

5. February 7th, Monday, 10.15-12.00, Room 336 Heckscher-Ohlin Model of Comparative Advantage **Handout for the Heckscher-Ohlin model *Krugman, Paul (2008) “Trade and Wages, Reconsidered,” Brookings Papers on Economic Activity Spring 2008, pp. 103-154. Romalis, J. (2004), “Factor proportions and the structure of commodity trade”, American Economic Review, 94(1): 67-97.

6. February 9th, Wednesday, 10.15-12.00, Room 336 Globally Integrated Factor Markets **Davis, D. (1998), “Does European unemployment prop up American wages? National labor markets and global trade”, American Economic Review 88(3), 478--494. *Davis, D. and Weinstein, D. (2001), “An account of global factor trade”, American Economic Review 91, 1423--1453. *Helpman, Elhanan (1999) “The Structure of Foreign Trade” Journal of Economic Perspectives, Vol. 13, No. 2 (Spring, 1999), pp. 121-144

7. February 14th, Monday, 10.15-12.00, Room 336 Scale Economy and the Gains from Variety **Krugman, P. (1980), “Scale economies, product differentiation, and the pattern of trade”, American Economic Review 70(5), 950--959. **Krugman, P. (1979), “Increasing returns, monopolistic competition, and international trade”, Journal of international Economics 9(4), 469--479. *Broda, C. and Weinstein, D. (2006), “Globalization and the Gains from Variety”, Quarterly Journal of Economics 121(2), 541--585.

8. February 16th, Wednesday, 10.15-12.00, Room 336 Home Market Effect and New Economic Geography

**Krugman, P. (1980), “Scale economies, product differentiation, and the pattern of trade”, American Economic Review 70(5), 950--959. *Krugman, P. (1991), “Increasing returns and economic geography”, Journal of Political Economy 99(3), 483--499. Krugman, P. and Venables, A. (1995), “Globalization and the Inequality of Nations”, Quarterly Journal of Economics 110(4), 857--880. **Redding, S. and Sturm, D. (2008), “The Costs of Remoteness: Evidence from German Division and Reunification”, American Economic Review 98(5), 1766--1797. *Davis, D. and Weinstein, D. (2002), “Bones, bombs, and break points: The geography of economic activity”, American Economic Review 92(5), 1269--1289. World Bank, World Development Report 2009 (Special issue on geography, trade, and economic development) Head, Keith and Mayer, Thierry, (2010) “Gravity, market potential and economic development” Journal of Economic Geography: 1-14.

9. February 21th, Monday, 10.15-12.00, Room 336 Firms in International Trade **Handout for the Melitz Model **Bernard, A., Jensen, J., Redding, S. and Schott, P. (2007), “Firms in international trade”, Journal of Economic Perspectives 21(3), 105--130. Melitz, M. (2003), “The impact of trade on intra-industry reallocations and aggregate industry productivity”, Econometrica 71(6), 1695--1725. *Trefler, D. (2004), “The long and short of the Canada-US Free Trade Agreement”, American Economic Review 94(4), 870--895. Verhoogen, E. (2008), “Trade, Quality Upgrading, and Wage Inequality in the Mexican Manufacturing Sector”, Quarterly Journal of Economics 123(2), 489--530. Alla Lileeva & Daniel Trefler, 2010. "Improved Access to Foreign Markets Raises Plant-Level Productivity... for Some Plants," Quarterly Journal of Economics, MIT Press, vol. 125(3), pages 1051-1099. Paula Bustos. “Trade Liberalization, Exports and Technology Upgrading: Evidence on the impact of MERCOSUR on Argentinean Firms”, American Economic Review, forthcoming

10. February 23th, Wednesday, 10.15-12.00, Room 336 Offshoring, Outsourcing *Blinder, A. (2006), “Offshoring: the next industrial revolution?”, Foreign affairs 85(2), 113--128. **Grossman, G. and Rossi-Hansberg, E. (2006), “The Rise of Offshoring: It's Not Wine for Cloth Anymore” The New Economic Geography: Effects and Policy Implications, Jackson Hole Conference Volume, Federal Reserve Bank of Kansas City *Feenstra, R.C. 1998. “Integration of Trade and Disintegration of Production in the Global Economy,” Journal of Economic Perspectives, 12(3): pp. 31-50

Robert Koopman, Zhi Wang, and Shang-Jin Wei (2008) “How Much of Chinese Exports is Really Made in China? Assessing Domestic Value-Added When Processing Trade is Pervasive” NBER working paper W14109. Amiti, Mary, and Jozef Konings. 2007. "Trade Liberalization, Intermediate Inputs, and Productivity: Evidence from Indonesia." American Economic Review, 97(5): 1611--38. Mary Amiti & Donald R. Davis, 2008. "Trade, Firms, and Wages: Theory and Evidence," NBER Working Papers 14106 Sugita, Yoichi (2011) “Matching, Quality, and Comparative Advantage: A Unified Theory of Heterogeneous Firm Trade.” Mimeo. Yi, Kei Mu (2003)"Can Vertical Specialization Explain the Growth of World Trade?" Journal of Political Economy, (February 2003), pp.52-102.

11. February 28th, Monday, 10.15-12.00, Room 336 Increasing Income Inequality Goldberg, P. and Pavcnik, N. (2007), “Distributional effects of globalization in developing countries”, Journal of Economic Literature 45(1), 39--82. **Kremer, M. (2006), “Globalization of Labor Markets and Inequality”, Brookings Trade Forum, 211--228. **Feenstra, R. (2008), Offshoring in the global economy, MIT Press, Chapter 1.(Ohlin lecture) Verhoogen, E. (2008), “Trade, Quality Upgrading, and Wage Inequality in the Mexican Manufacturing Sector”, Quarterly Journal of Economics 123(2), 489--530. Mary Amiti and Donald R. Davis, 2008. "Trade, Firms, and Wages: Theory and Evidence," NBER Working Papers 14106

12. March 2th, Wednesday, 10.15-12.00, Room 336 Foreign Direct Investment and Multinational Enterprise *Markusen, James R.(1995) “The Boundaries of Multinational Enterprises and the Theory of International Trade.” Journal of Economic Perspectives 9 (2): pp. 169-189. Blonigen, B. (2005), “A review of the empirical literature on FDI determinants”, Atlantic Economic Journal 33(4), 383--403. *Elhanan Helpman, Marc J. Melitz and Stephen R. Yeaple (2004) “Export versus FDI with Heterogeneous Firms”American Economic Review Vol. 94, No. 1 (Mar., 2004), pp. 300-316. Sanford J. Grossman and Oliver D. Hart. (1985) "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration." Journal of Political Economy, Vol. 94, No. 4 (Aug., 1986), pp. 691-719 Pol Antras. (2003) "Firms, Contracts, and Trade Structure." Quarterly Journal of Economics, Vol. 118, No. 4, Pages 1375-1418. Giorgio Barba Navaretti and Anthony J. Venables. Multinational Firms in the World Economy, Princeton University Press.

13. March 7th, Monday, 10.15-12.00, Room 336 Effects and Determinants of Trade Policies Handouts Gene M. Grossman and Elhanan Helpman (1993). "Protection for Sale."The American Economic Review, Vol. 84, No. 4 (Sep., 1994), pp. 833-850. Pinelopi Koujianou Goldberg and Giovanni Maggi (1999) "Protection for Sale: An Empirical Investigation."The American Economic Review, Vol. 89, No. 5 (Dec., 1999), pp. 1135-1155. **Broda, C., Limao, N. and Weinstein, D. (2008), “Optimal tariffs and market power: the evidence”, American Economic Review 98(5), 2032--2065.

14. March 9th, Wednesday, 10.15-12.00, Room 336 GATT/WTO **Bagwell, K. and Staiger, R. (2010) “The WTO: Theory and Practice”, NBER working paper, w15445. **Bagwell, K. and Staiger, R. (forthcoming) “What Do Trade Negotiators Negotiate About? Empirical Evidence from the World Trade Organization”, American Economic Review. Ossa, Ralph (2010) “A ‘New Trade’ Theory of GATT/WTO Negotiations”.,NBER working paper, W16388.

15. March 14th, Monday, 10.15-12.00, Room 336 Trade, Geography, and Income Frankel, J. and Romer, D. “Does Trade Cause Growth?” American Economic Review, 89(3), pp. 379-399. Waugh, Micheal E. (forthcoming) “International Trade and Income Difference.” American Economic Review, 100 (December 2010): 2093–2124 ** Feyrer, J. (2009), “Trade and Income–Exploiting Time Series in Geography”, NBER Working Paper w14910. Feyrer, J. (2009), “Distance, Trade, and Income-The 1967 to 1975 Closing of the Suez Canal as a Natural Experiment”, NBER Working paper w1557. *Hummels, D. (2007), “Transportation costs and international trade in the second era of globalization”, Journal of Economic Perspectives 21(3), 131--154.

16. March 16th, Wednesday, 10.15-12.00, Room 336 Review Session for the Final Exam (the attendance is voluntary)