International Trade Theory: History and Development

1. International Trade Theory: History and Development Professor Zhou Wengui

2. Trade: Decisively Significant to China’s Economic Growth • The world today is an opening world advancing rapidly along the track of economic globalization. • The critical role of international trade in economic development of almost all countries in the world. • International trade: a very significant economic sector of China’s national economy.

3. How to Understand International Trade Theory? • Summarization of the actual international trade businesses. • Generalization of the basic laws in international economic exchanges. • Description of the stipulation of the widely accepted international trade practices, the existing laws of such game, which must be rigidly followed by all countries participating the overseas trade.

4. The First Set of Problems Explored by Trade Theory Why different countries mutually exchange goods and services? Which country exports which kinds of goods and services? To whom the goods and services are exported? How to determine the price of the exported goods and services? Which country should produce which kinds of goods and services? That means trade theory must at first bring to light the causes of trade, commodity structure and geographical structure of international trade and division of production among different countries in the years when trade is playing an important role in economic development of every country and of the overall world.

5. The Second Set of Problems Explored by Trade Theory Is it good or bad for a country as well as for the whole world to carry out international trade? What are trade benefits? If there indeed exist trade benefits where do they derived from? How to distribute such trade benefits among all the trade participants? How to determine terms of trade for each trading nation? Whether or not the total trade benefits are enjoyed by some nations and the other nations have to suffer losses from trade? Is there the so-called “zero-or-sum” game in international trade? That means trade theory must also reveal whether or not there exist some general trade benefits and the principles of how to share such benefits among trading nations.

6. Why to Study Trade Theory • Seek the appropriate theoretical guidance of trade • Try to develop reasonable trade relations with the other countries • Strive to win the possible largest national benefit from such trade. • Develop the overseas trade business with the specific characteristics of China. • Boost forward China’s opening up both in depth and in breadth

7. On the whole, in the march toward establishing and improving the market economic system in a socialist country as China especially in the overall environment of economic globalization, it must be very much important to strive for exploring and setting up an efficient mechanism which could completely joint the international economic and trade practices and such practices could be perfectly followed. • Doing so, China will enjoy a sustainable economic development in long run.

8. Emergence of Trade Theory • The two basis social economic states of the human being: Natural economy and commodity economy. • The essentiality of natural economy: Self-sufficiency. Commodity exchanges among people even trade with the other countries were just some sporadic economic phenomena. No trade thus no trade theory in the natural economy. • The essentiality of commodity economy: Commodity and currency relations had greatly developed and generally permeated all sectors of the social life. Domestic exchanges had developed into international trade. There existed necessities to theoretically summarize trade practices thus emerged trade theory.

9. Social Economic Foundation of Emergence of Trade Theory • Establishment of national states with their own sovereignty. • Greatly developed commodity production and exchanges.

10. Mercantilism: the Logic Starting Point of Trade Theory • Mercantilism: economic doctrine and policy system representing benefits of the newly thrived commercial capitalists in the years of primitive capital accumulation from the 15th to the 17th century. • Historical position of mercantilism: To destroy feudalist production relations and to carry within feudalist society the seeds of capitalist production relations by greatly developing commodity and currency relationship.

11. Mercantilist Doctrine of Wealth • The exclusive representative of the social wealth: Precious metals, such as gold and silver. Christopher Columbus once wrote in a letter from Jamaica of 1503: Gold is a wonderful thing! Whoever possesses it is master of everything he desires. With gold, one can even get souls into paradise. • Mercantilist static point of view toward the stock of social wealth: The total amount of gold and silver in the whole world is a constant quantity. • The process of accumulating wealth for the kingdoms is nothing but to re-distributing the given amount of precious metals.

12. Mercantilist View on Trade • D. Martin Luther: Germans are making all the world rich and beggaring themselves by sending their gold and silver to foreign countries. Frankfurt, with its fairs, was the hole through which Germany was losing her treasure. • Serra: How important it is, both for people and princes, that a kingdom should abundant in gold and silver. • Johann Joachim Becher: It is always better to sell goods to others than to buy goods from others, for the former brings a certain advantage and latter inevitable damage.

13. Mercantilist View on Trade • The overseas trade: the only way to accumulate gold and silver for the kingdoms since there were few gold and silver mines in the western European countries . • Trade must be a zero-or-sum game. One country benefits from trade implies its trade partners losses in trade. • Trade with the overseas nations must bring back wealth in terms of gold and silver. • Particular balance and general balance

14. Trade Policy Measures of Mercantilists • The objectives of mercantilist trade policy: Accumulating gold and silver from the overseas trade. • Typical mercantilist trade policy measures: —Absolutely forbidding exporting gold and silver to the other countries. —Strictly managing trade business of the kingdom —Extremely monopolizing trade between the suzerain and the overseas colonies

15. Requirements of Industrial Capitalists • A free domestic market economic environment • No control over the overseas trade thus cheap raw materials could be bought from abroad and the domestically manufactured goods with competitiveness could be sold to the other countries. • Outflow of gold and silver must be allowed. • Trade deficit in some particular cases must be permitted.

16. Logic Starting Point of the Classical Trade Theory • Mercantilism seriously conflicted with interests of the newly thrived industrial capitalists. • Such conflicts initiated a profound criticism by classical economists represented by Adam Smith. • As the opposite to classical economists mercantilism provided the best target of criticism. In this process classical economics and trade theory were initiated. • In this sense, mercantilism functioned as a logic starting point of trade theory.

17. Development Track of Trade Theory from Adam Smith • Adam Smith (An Inquiry into the Nature and Causes of the Wealth of Nations , 1776) • David Ricardo (Principles of Political Economy and Taxation , 1817) • John Struart Mill (Principles of Political Economy , 1848) • Alfred Marshall (The Pure Theory of International Trade, 1879;Money Credit and Commerce 1923)

18. Development Track of Trade Theory from Adam Smith • Eli Heckscher (The Effect of Foreign Trade on the Distribution of Income, 1919) • Francis Ysidro Edgeworth (Papers Relating to Political Economy, 1925) • Bertil Ohlin (Interreginoal and International Trade, 1939) • W. E. Stolper & Paul Samuelson (Protection and Real wage, 1941)

19. Development Track of Trade Theory from Adam Smith • Paul Samuelson (International Trade and the Equalzation of Factor Prices, 1948; International Factor-Price Equalization Once Again, 1949) • James Edward Meade (A GeometryofInternationalTrade , 1952) • M. T. Rybszynski (Factor Endowment and Relative Commodity Price, 1955)

20. Empirical Testing of Trade Theory • G.D.A. MacDougall (BritishandAmericanExports: AStudySuggestedbytheTheoryofComparativeCosts, 1951, 1952) • W. W. Leontief (DomesticProductionandForeignTrade: TheAmericanCapitalPositionRe-examined, 1953; Factor Proportions and the Structure of American Trade: Further Theoretical and Empirical Analysis,1956）

21. M. Tatemoto and S. Ichimura (FactorProportionsandForeignTrade: TheCaseofJapan, 1959) • Wolfgang Frederich Stolper & Karl Roskamp (Input-Output Table for East Germany with Application to Foreign Trade, 1961） • D. F. Wahl（CapitalandLabourRequirementsforCanada′sForeignTrade, 1961） • R. Bharadwaj (Factor Proportion and the Structure of Indo-US Trade, 1962) • Robert E. Baldwin (Determinants of the Commodity Structure of American Trade,,1971)

22. Explanation of Leontief Paradox • Human Capital (Irving Klavis, Availability and Other Influences on the Commodity Composition of Trade 1956; Peter Kenen, Nature Capital and Trade 1965) • Labor Skill (Donald Keesing, Labour Skills and Comparative Advantage , 1966) • Natural Resource (Jaroslav Venek, The Natural Resource Content of Foreign Trade, 1870-1955, and the Relative Abundance of Natural Resources in the United States , 1959; The Factor-Proportions Theory: the N-Factor Case 1968; Harry Postner, Factor Content of Canadian International Trade 1975)

23. R & D (W. Gruber, D. Metia, R Vernon (The R and D Factor in International Trade and Investment of United States Industry, 1967) • Factor-intensity Reversal (B. S. Minhas, The Homophypallagic Production Function,Factor-Intensity Reversals and Heckscher-Ohlin Theorem, 1962) • Consumption Biases Reversal (Stefan Valavanis-Vail, Leontief's Scarce Factor Paradox, 1954; H. S. Houthakker, An International Comparision of Household Expenditure Patterns, Commemorating the Centenary of Engel's Law, 1957) • Linder Theorem (Staffan Linder, An Essay on Trade and Transformation, 1961) • Trade Policy Distortion Effect (R. Baldwin, Determinants of the Commodity Structure of American Trade , 1971)

24. New Trade Theory • Technology Gap Theorem (Michael Posner, InternationalTradeandTechnicalChange , 1961) • Trade Model in Product Cycle (Raymond Vernon, InternationalInvestmentandInternationalTradeintheProductCycle , 1966) Trade in imperfect competition • Trade in imperfect competition (Dixit, A.K. and Stigliz, J.E., Monopolistic Competition and Optimum Product Diversity, 1977) • Intra-industry Trade Model (Paul Krugman，Intra-industry Specialization and Gains from Trade, 1981)

25. Reading Materials • Dominick Salvatore, International Economics, Eighth Edition, John Wiley & Sons Inc., 2004. • Paul Krugman and Maurice Obstfeld, International Economics: Theory and Policy (Fifth Edition), Addison-Westley Publishing Company 2000. Chinese version was published by China People’s University Press in 2002. • Dennis Appleyard and Alfred Field, Jr., International Economics (Forth Edition), the McGraw-Hill Companies, Inc., 2001. English version was published by China Machine Press in 2002. • Eric Roll, A History of Economic Thought(Revised and Enlarged), Shenval Press Ltd.，London，Hertford and Harlow, 1956. • Wilfred Ethier, Modern International Economics, W. W. Norton and Company, 1983.

26. Reading Materials • 鲁友章、李宗正（主编）：《经济学说史》（上册），人民出版社，1979年。 • 周文贵：《国际贸易纯理论：历史与发展》，海南出版社，1995年。 • 佟家栋（主编）：《国际经济学》，南开大学出版社，1995年。 • 陈 宪等（编著）：《国际贸易——原理·政策·实务》，立信会计出版社，1998年。 • 杨 星（编著）：《国际贸易通论》，暨南大学出版社，1999年。 • 薛敬孝等（主编）：《国际经济学》，高等教育出版社，2000年。 • 海 闻：《国际贸易》，上海人民出版社，2003年。 • 《克鲁格曼国际贸易新理论》，中国社会科学出版社，2001年。 & Initiation of His Trade Theory

27. Questions and Problems Briefly illustrate relations between China’s striving to peacefully rise and the tendency of economic globalization? Why should we earnestly study the course of International Trade Theory? When did trade theory emerge and why? What critical questions that must be answered by theory of international trade? Basically describe development track of trade theory?