ECONOMICS 235 INTERMEDIATE INTERNATIONAL TRADE THEORY AMERICAN UNIVERSITY OF BEIRUT, DEPARTMENT OF ECONOMICS SYLLABUS REQUIRED TEXT: o Dennis Appleyard and Alfred Field (A-F), International Economics, 4th Edition (Irwin, McGraw-Hill, 2001) RECOMMENDED TEXTS o Philip King, International Economics and International Economic Policy, A Reader. 2nd Edition (McGraw-Hill 1995) o Richard E. Caves, Jeffrey A. Frankel, and Ronald W. Jones, World Trade and Payments An Introduction, 9th Edition (New York: Addison Wesley, 2002) o Linda Goldberg and M. Klein (GK), Current Issues in the international Economy, A Reader. o Krugman, P and M. Obstfeld (KO), International Economics. 4th Edition (Harper Collins, 94). o Bo Sodersten and G. Reed (SR), International Economics. 3rd Edition (Macmillan Press, 94) CATALOG COURSE DESCRIPTION The classical trade model, the Heckscher-Ohlin theorem and subsequent theoretical developments, tariffs, domestic distortions, customs union, trade, and economic growth. COURSE OBJECTIVE The economies of the world have been becoming increasingly interdependent. The economic benefits of trade among nations have long been recognized, but only in the past few decades the political structure of the world has become stable enough to allow for a steady expansion of economic relations among countries. Through a series of regional and global treaties and agreements (e.g., European Economic Union, NAFTA, GATT, etc.) and with the help of international organizations such the IMF, the World Bank, and the World Trade Organization the countries of the worlds have been opening their economies to their neighbors and, to varying degrees, to other countries. Contrary to the occasional arguments made in some political quarters against free trade and economic openness, our economic links to the other economies of the world have, by and large, brought us markedly higher standards of living which could easily be observed in both quantity and quality of the goods and services we consume. While enjoying the benefits of international trade, we should be mindful of the drawbacks of international interdependence. While on the whole the country has benefited from free trade and foreign competition, free trade has occasionally brought about hardship to some of our domestic industries and resulted in significant sectorial labor displacement. Are the costs of these external disturbances to the economy significant enough to warrant a more conservative trade policy? Should we protect our weaker industries from foreign competition? Does everyone benefit from trade equally? Should we trade only with those countries whose economic systems are similar to ours? Does trade with low-wage (low-cost) countries like China have negative impacts on our wages and standards of living? Should we limit our trade with those countries whose environmental laws are less restrictive than ours? 1
The objective of this course is to provide students with a good understanding of the economic theory of trade and tools of analysis, enabling them to better understand the trade issues facing us as well as the complexities of the global economy and international trade relations. COURSE DESCRIPTION International economics deals with economic issues from a global perspective. This course emphasizes the microeconomic side of international economics, thereby focusing on “real” factors and on the behavior of decision-makers. The macro side, focusing on “financial” factors and on aggregate behavior, is covered in the sequel to this course, namely international finance. The course will begin with a rigorous presentation of the neoclassical theory of pure trade relations, essentially applying microeconomic theory to international exchange. The main issues in this theory are (a) why do countries trade? (b) How does trade affect production and consumption in each country? (c) What determines the direction of trade (international specialization), (d) what are the gains (or losses) form trade and how are they distributed? (e) Which country gains from trade? (f) Within each country, who are the gainers and losers from opening trade (g) Should poor countries simply refuse to trade, or do they stand to lose more from marginalization than from globalization? And (h) In what ways does trade alter the distribution of income in a country? We shall then examine critiques of neoclassical trade theory and some alternative theories, which have been proposed. The second half of the term will be focused on (a) the economic effects of trade policies: import tariffs, non-tariff barriers, export subsidies (b) Old and new arguments for trade intervention: infant-industry arguments, strategic trade policies, protection for declining industries, antidumping policies and (c) The political economy of trade policy. We will conclude with a brief discussion of economic integration and trade blocks, with a focus on custom unions, the first stage of economic integration. LEARNING GOALS I hope that by taking this course you will be able to: (1) Identify the causes and consequences of changes in international trade. (2) Evaluate the effects of government intervention to alter patterns of production and trade. (3) I also hope you will be better able to assess current controversies over globalization and the role of international organizations such as the WTO, IMF, and World Bank. (4) Understand basic theoretical and applied concepts in international economics (5) Be able to apply economic theory to current international economic issues. (6) Know the strengths and weaknesses of various international economic policies (7) Be able to critique basic intervention strategies (tariffs, quotas, voluntary export restraints) and provide pre- and post-intervention welfare analysis. METHOD OF INSTRUCTION I will adopt a lecture format as appropriate (e.g., to introduce relevant material, or to elaborate on material contained in the readings). However, class participation is essential. It is expected that each student will have read all assigned material before attending the class session that deals with that material. This expectation applies not just to the text, but also to the assigned internet materials and occasional class handouts; all three kinds of materials will be the basis for class discussions.
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In addition, you will be required to complete exercises assigned from the text and other sources including the university library and internet. Students are expected to complete such assignments in a timely manner and to be prepared to lead and/or participate in class discussion related to these exercises. LECTURES Lectures are a supplement and not a substitute for the readings. The lectures are designed to cover the most fundamental issues and provide a foundation for the readings. It is essential that students work their way through (at least) the required readings as the course progresses. Students should take full advantage of the office hours to clarify doubts and discuss readings. COURSE REQUIREMENTS Assignment Mid term Exam (November 11th) Reading Journal Class Participation and Homework Term paper Final Exam Total
Total 35% 5% 10% 5% 45% 100%
GRADES A student's course grade will be based on my assessment of his or her performance on tests and examinations and on classroom attendance and participation. Mid term Exam: I have scheduled one exam (on November 11th). Reading journal: You will keep a current economic events reading journal to be handed in twice during the semester. The purpose of the journal is to encourage you to be aware of changing international economic circumstances and to apply some of our classroom insights in explaining those situations. You should collect about 7-8 articles, underline key points in each article, and provide a typed (1-3) page summary or guide to the articles you have selected. Your first reading journal is due November 13th. The second reading journal is due January 13th 2004. Class participation and homework consists of three components: completed homework assignments, attendance and class discussion. Homework: I will provide occasional homework assignments that emphasize an understanding of the models that constitute a large part of this course. Homework is not always “required” in the sense of being collected and graded; rather, it is preparatory for subsequent classes and exams. In addition, homework will frequently cover new material or extensions not treated in class, and mastery of this material will be assumed in all classes subsequent to its assignment. Term paper: You will write 8-10 page essay (double-spaced and typed) on a topic related to the issues discussed in class. The essay is due the last day of classes (January 15th, 2004). The topics will be chosen from the following menu: 9 Trade and the environment: Is there a conflict? 9 Do trading blocks help or hurt the cause of global trade liberalization? 9 Has international trade been responsible for the recent increase of income inequality? 9 Is Lebanon likely to gain or to lose from joining the WTO? 9 Should western countries restrict imports from less developed countries that do not respect 3
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workers' rights? Should trade agreements be based on rules or outcomes? The implications of the Asian crisis for international trade relations. Economic integration, E-commerce, Globalization Trade in less developed countries, Middle East trade relations, Trade liberalization in the (ME) Comparative advantage and industrial policy, Impact of trade on industry Income distribution and labor market issues Multinationals and other global alliances Intellectual property rights, Intellectual property rights and international trade Import substitution versus export promotion Middle East peace process: Are there prospects for trade and growth?
Note, however, that only a limited number of students may write on any one particular topic since I do not want to read 20 papers on the same topic. It will be by the first come first serve principle. In any case chose your topic by November 18th. Give me a 1-paragraph abstract. The purpose of the essay is to give you the opportunity to apply the trade theory tools and trade debates in the readings to current events. Specifically, you will compare theory to reality. Remember to LIMIT your essay to no more than 10 pages, excluding bibliography but including footnotes. There are various Internet resources to help you with your writing: William Strunk's Elements of Style Purdue University's Online Writing Lab Ferris State University Writing Center Professor Charles Darling's guide to better writing Final Exam: Students must take the final exam on the date and time scheduled by the University. The final exam will consist of a mix of short and long essay questions that explore the student’s knowledge of theoretical models, factual content, key institutions, and issues. The final exam has an assigned weight of 45 percent. TESTING: The emphasis of my exams reflects the emphasis of my lectures, and lectures will sometimes cover ground not found in the readings. Be sure to take good notes, as they will be crucial to your performance on the examinations. I will also draw on the required readings for exam questions. I therefore recommend attempting the end of chapter problems, when they are available. In this course, I rely primarily on non multiple-choice examinations. I write my own questions, and I look for evidence of deep understanding rather than cursory exposure. Past exams are available at the graduate assistants’ office. Examine them now. If you don’t like such exams I suggest that you take appropriate action now.
POLICIES 1. Attendance. Regular attendance is required for this course. I will consider as absence not coming to class, coming late to class or leaving before the end of the class. Showing up late to class is not only demonstrative of a lack of respect to the instructor, it is also shows a lack of respect to other students. It is disruptive to lectures. It is a negative externality that is dumped on your fellow students. It is not fair to other students to show up late. Better not to show up at all than to show up late. Of course, it is best to show up on time. You are all too civilized to dump your garbage on your neighbor’s lawn or car. Extend this courtesy to fellow students. 4
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If you must be absent, it is important that you contact a fellow student or me to find out what you missed.1 Students who miss more than one fifth of class sessions are subject to withdrawing from the course with a W-grade. Attending class means more than just showing up. Show me you care about learning. Ask questions when I am doing a lousy job of explaining. If you think I am wrong speak your mind. Missed Exams. Exams will be held in class. If you miss an exam you get a zero for that exam. In other words. If you miss the exam you fail the exam. In the event that some unforeseen tragedy prevents you from taking the mid-term you must notify me ahead of time, if possible, or as soon as practical (if there is some emergency). You must provide independently verifiable evidence of the emergency. Please be considerate of your classmates and me, and show up at exam time. If you must miss an exam, please arrange as soon as possible to take the make-up exam. You should make up the exam before the next class period, if possible. Please note that all exam dates are listed on this syllabus. Office Visits. Please feel free to come see me at any time, if you have any problems with this course. My office hours are listed at the top of this syllabus. If these times are not convenient, I will be glad to make an appointment to talk with you at another time. You are also welcome to send a question by e-mail. Grades. Please keep all graded exams and homework assignments until you complete the course. If I make a mistake in your grade, we will need your graded work to make the necessary corrections. Academic Honesty. Students are encouraged to help each other during group activities, homework or on worksheets. However, exams are intended to assess individual efforts. Don’t cheat. Any act of cheating on the student’s part will result in serious repercussions. For more on Academic integrity and disciplinary procedures, please refer to page 33 in the Student handbook.
CLASSROOM RESPONSIBILITIES 1. In order to create and maintain a classroom environment that is conducive to learning all students are expected to avoid engaging in disruptive/distracting behavior (for example, coming to class late, walking out of the classroom, and talking with others) during lectures. Please let me know before the class if you must leave early. 2. Make sure that you sign in on the roll sheet when it is passed around or after the end of the lecture. 3. Turn off your cell phones and pagers during the class. TENTATIVE SCHEDULE WEEK
TOPIC I.
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READING ASSIGNMENT
MODELS OF TRADE BEHAVIOR
1) Early Trade Theories i. Mercantilism ii. David Hume iii. Adam Smith 2) The Ricardian Model
Ch. 2 (A-F)
Ch. 3-4 (A-F) 5
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Krugman, “Ricardo’s Difficult Idea”, 3/1996 (http://web.mit.edu/krugman/www) 3) Neoclassical Trade Theory, Production Possibilities i. Relative Prices ii. Welfare Effects of Changes in Terms of Trade iii. Offer Curves 4) The Heckscher-Ohlin Model 5) Specific Factors model, p. 135-139 in (A-F) and Ch. 3 in (K-O) Krugman, “Was it All in Ohlin?”10/1999 (http://web.mit.edu/krugman/www)
Ch. 2 (K-O) Ch. 5-7 (A-F), Ch. 5 (K-O) (p.94-99).
Ch. 8 (A-F) Ch. 4 (K-O)
MID TERM EXAM: NOVEMBER 11 II. GROWTH AND TRADE 8
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Trade Effects of Production Growth 1) Trade Effects of Consumption Growth 2) Immiserizing Growth III. TRADE POLICY
Ch. 11 (A-F), Ch. 5 (p. 99-113) (K-O) Ch. 7 (S-R).
1) Tariffs i. Tariffs and measurements (p.233-243) ii. The Impact of tariffs in a partial Equilibrium Ch. 13-14 (A-F) Setting (The Small country Case) (p. 251-254) Ch. 8 and appendix I iii. The Impact of tariffs in a partial Equilibrium (K-O) Setting (The Large country Case) (p. 262-268) Ch. 10-12 in (S-R) iv. The Impact of tariffs in a General Equilibrium Setting (p. 272-279)
DECEMBER 12th LAST DAY OF DROP WEEK 9: NO CLASSES, Id Al Fitr 2) Other National Policies Affecting Trade, i. Export Subsidy, Import Quota, VER (p. 243250) ii. The Impact of non-tariff Barriers to free trade in a partial Equilibrium Setting (The Small country Case) (p. 254-262) Ch. 13-14 (A-F) iii. The Impact of non-tariff barriers to free Trade 13 and 15 Ch. 1, 2, 4, 6, 7 (King) in a partial Equilibrium Setting (The Large country Case) (p. 268-272) iv. Arguments for and against Tariffs, chapter 15 in (A-F), chapter 9 in (K-O).
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WEEK 14: NO CLASSES, X-MASS AND NEW YEAR VACATION IV. ECONOMIC INTEGRATION AND
Ch. 18 (A-F) 6
TRADE BLOCKS 1) Levels of Economic Integration 2) Theory of Customs Union 17
FNAL EXAMINATION
Ch. 8-9 (King)
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GET YOUR MONEY’S WORTH It would be stupid to incur the direct and opportunity cost of taking this course, but fail do all you can to achieve your goals. Failing to come to class will hurt you. Failing to ask questions will hurt you and your classmates (which is the reason I’ve included a participation element along with homework in the evaluation criteria). I’ll try to give you clear information on how you are doing as the course progresses. But it is your obligation to contact me to discuss concerns about your learning with me as they arise. Note: responsibilities may cause me to disrupt my office hours; so I advise you to phone/email me for an appointment. IF YOU HAVE DIFFICULTY WITH THE CLASS If at any point in time you are having difficulty with the class, I expect you to see me during office hours, make an appointment to see me at a mutually convenient time, or call me at my private office to discuss the problem. I expect specific questions. "I just don't understand." is not an acceptable question. "Can you please explain in more detail the concept of the consumption function." is an acceptable question. There is no valid excuse for you not to do well in this class. I am available for you and you have access to me that virtually no one else has except my family and close friends. SOME WARNINGS, ADVICE AND HINTS: 1. If you are having problems, please seek out help early. Come in prepared, having gone over the lectures, text, and problems in the text. If you have missed any classes, make sure you have gotten the missed notes from classmates. In cases like this, it usually pays to get the notes from at least two of your classmates. 2. Some students slack off. The readings, after all, seem pretty minimal. They aren't! Economics is deceptive. The only way to learn it is to keep going over it, work the problems in your text, and THINK about what you are doing at each step. I suggest that you first read through the entire book. This will help you to begin to think about macroeconomics. Go over the lectures and think about what problems I raise and what problems are raised in the book. A good exercise is to pick up the newspaper and come up with alternative explanations of various "business" and "economic" news. Furthermore, let me urge you to read as much of the material as possible early on in the course. You will find this will help you develop a perspective on the course material and lead to a better understanding of macroeconomics. 3. Do not wait until after I have lectured on something to read the material work on it yourself. Come to class prepared! 4. The emphasis in this class is on developing your ability to apply analytical techniques and on your understanding of fundamental concepts. Exams will emphasize this. They will not test whether you remember what the balance of trade for the U.S. was in 1978. They will assume you have a complete understanding of the lectures, text and study guide, and will ask you to apply what you have learned to "new" circumstances.
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5. The course material builds on earlier work. It is essential that you master every part of the material. I will integrate the material as we go along, but you will be ahead of the game if you make extended efforts to learn and integrate it yourself. STUDY STRATEGGIES 1. Don't reserve your studying for the weekends. I suggest an hour per day. Regular exposure is much better than cramming. 2. Study at the library or someplace else that is not distracting. 3. Attend class and take good notes. Good notes will be crucial to your performance on the examinations. And studies indicate that attendance improves performance.2 4. Do the required reading. I draw on the required readings for exam questions. 5. Don't read it just once. If you own the text, read with a highlighter or pencil and outline the important points. 6. Do end of chapter problems, when they are available. I often develop exam questions based on these problems. 7. Discuss the readings and problems in a study group. Student who use them tell me that study groups are very helpful. Make up problems in your study group as part of exam preparation. 8. Don't let your questions go unanswered! Sources of Trade Information The World Trade Organization This is the successor organization to the GATT. The U.S. International Trade Commission This is an independent U.S. agency encharged with deciding dumping cases. The US Department of Commerce's International Trade Agency Import Administration office administers investigations of dumping and injury from imports. U.S. Trade Representative (USTR) is the White House's negotiating arm in international trade negotiations. The International Economics Study Center A resource center based at GWU. Harvard Center for International Development Global Trade Negotiation homepage A resource center with overview arguments and links. Congressional Research Service report on China's MFN status Economic Resources Extensive links to data sources, working papers and other economics departments around the world. Bureau of Economic Analysis The World Bank , The International Monetary Fund (DOT and IFS). 1
Romer, David, ”Do Students Go to Class? Should They?'' Journal of Economic Perspectives 7(3), Summer 1993, pp.167--74.
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