ECN 110 January 13

Introduction to Trade

  • Understanding trade as a function of factors of production: labor, land, capital, and human capital.

  • Importance of production factors in determining trade patterns among countries.

Trade Costs

  • Definition: Trade costs are factors that raise prices from production to market.

  • Example: Wheat produced in the U.S. Midwest costs $1.50 per bushel in Chicago but $2.25 in Liverpool due to trade costs (transportation, time).

  • Classic quote: "Wheat is plentiful in Chicago... costs increase when shipping to Europe due to various costs."

  • Overall trend: Trade costs fell significantly over time due to various factors such as new trade agreements.

Historical Evolution of Trade Costs

Landmark Agreements

  • 1860 Treaty between Britain and France

    • A pivotal point for reducing trade costs through lowered tariffs.

    • Introduction of the Most Favored Nation (MFN) clause, non-discrimination among trade partners.

    • Enables signing of multiple trade treaties to ensure competitiveness.

Trade Agreements Post-1860

  • Surge in the number of trade treaties post-1860.

  • Charting growth in trade treaties starting from the 1870s, indicating rising collaboration among nations.

Transportation Revolution

  • Advances in steamships and railroads—made shipping cheaper, safer, and faster.

  • Steam propulsion transformed maritime and terrestrial transportation.

  • Shifts in shipping technology contributed to lower trade costs.

Data Science in Trade

  • Data analysis began optimizing shipping routes and schedules, enhancing efficiency in trade.

  • Acknowledgment of contributions from early data scientists to streamline trade practices.

Colonialism and Trade Dynamics

  • Colonial powers restricted tariffs in East Asia, impacting trade capabilities of local economies.

  • Japan's transition from isolation to trade in the mid-19th century prompted significant economic changes with global market interactions.

    • Economic benefits included increased export prices and reduced import costs, improving terms of trade.

Communication Innovations

  • Establishment of the telegraph in 1866 helped connect markets globally, instantaneously providing market information.

  • Impact of instant communication on reducing trade risk and enhancing market engagement.

The Global Banking System

  • Rise of global banks during the late 19th century supported international trade through credit and financial networks.

  • Banks facilitated knowledge transfer and financial backing for trade ventures.

Gold Standard and Fixed Exchange Rates

  • Introduction of gold standards provided fixed exchange rates, reducing risks in international trade.

  • Understanding that fixed rates equate to lower transaction risks compared to fluctuating exchange rates.

Comparative Advantage Theory

Classical Economists

  • Adam Smith emphasized the importance of the division of labor determined by market size.

  • Comparative advantages arise from differences in resource endowments among countries.

Heckscher-Ohlin Model

  • Heckscher and Ohlin Theory explains comparative advantages based on factor endowments (labor vs land).

  • England = labor-abundant; Argentina = land-abundant.

    • Outcomes:

      • Britain specializes in labor-intensive goods (e.g., textiles).

      • Argentina specializes in land-intensive goods (e.g., beef, wheat).

Predictions on Trade Patterns

  • Opening trade leads to specialization in comparative advantage areas.

  • Specialization will affect the production of other goods—countries will increasingly export what they do best and import what they do not produce efficiently.

Conclusion

  • Trade dynamics shaped by historical agreements, transport innovations, communication advances, and banking systems.

  • Continued exploration into how these factors inform modern trade practices will occur in subsequent discussions.