Time Line

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1799 The Dutch East India company, formerly the world's largest company goes bankrupt, partly due to the rise of competitive free trade.

•1815 The British Corn Laws are introduced, preventing grain imports.

•1817: James Mill, Robert Torrens, and David Ricardo showed that free trade might benefit the industrially weak as well as the strong, in the famous theory of comparative advantage.

·1840 Opium War- Britain invades China to overturn the Chinese bar on opium imports. The British case was argued in Ricardian terms against the import barriers the Chinese wished to impose; parliament argued that the trade in opium should not be restrained.

•1848 The Infant Industry Scenario developed by J.S Mill

•1860 Free trade agreement finalized between Britain and France under the presidency of Napoleon III

•1868 The Japanese Meiji Restoration leads the way to Japan opening its borders and quickly industrializing through free trade

•1892 France introduces the Meline Tariff, ushering in an era of protectionist measures.

•1897 In the Dingley Tariff, U.S. import duty is raised to a 46.5% average.

•1930 The most famous trade restriction in history the Smoot Hawley Tariff Act roughly doubled the U.S. tariff levels from those set in 1913.

•1933 Bertil Ohlin publishes Interregional and International Trade, giving conditions under which a comparative advantage can exist despite identical technologies internationally (the Heckscher-Ohlin Model).

For Gieselman

International Trade

19^th Century - 1945

• The pre-eminence of free trade was primarily based on the estimate of whether or not it was in any particular country's self-interest (a.k.a national advantage) to open its borders to imports in the 19^th century.

• 1817 – David Ricardo, James Mill and Robert Torrens show that free trade might benefit the industrially weak as well as the strong, in the Comparative Advantage Theory (a.k.a. "Ricardo's Law") which explains why it can be beneficial for two parties to trade without barriers if one is more efficient at producing goods or services needed by the other.

• John Stuart Mill proved that a country with monopoly pricing power on the international market could manipulate the terms of trade through maintaining tariffs, and that the response to this might be reciprocity in trade policy. This was taken as evidence against the universal doctrine of free trade, as it was believed that more of the economic surplus of trade would increase to a country following reciprocal, rather than completely free, trade policies.

• Mill developed the “infant industry” scenario which promoted the theory that the government had the "duty" to protect young industries, if only for a time necessary for them to reach full capacity. This became the policy in many countries attempting to industrialize and surpass English exporters.

• The Great Depression was a major economic recession that lasted from 1929 until the late 1930s. During this period, there was a great drop in trade. The lack of free trade was considered by many as a principal cause of the depression.

• Only during World War II did the Great Depression end in the United States.

1944 – 44 countries signed the Bretton Woods Agreement, which was intended to prevent national trade barriers, and avoid depressions. It set up rules and institutions to regulate the international political economy: the International Monetary Fund and the International Bank for Reconstruction and Development (later divided into the World Bank and Bank for International Settlements).

International Trade- Definition- The exchange of goods and services across international boundaries or territories.

Industrialization, advanced transportation, and globalization all have a major impact on international trade.

International Trade Theory-

Ricardian Model- (RESEARCH FURTHER) Focuses on comparative advantage, perhaps the most important concept of international trade theory. Countries specializing in what they produce best. Countries will fully specialize in making these products instead of producing a broad array of goods. The Ricardian model’s flaw is that it does not consider factor endowments.

Heckscher-Ohlin Model- (RESEARCH FURTHER) Alternative to the Ricardian model. More complex than the Ricardian model but not much more accurate. According to the Heckscher-Ohlin model, the pattern of trade is determined by differences in factor endowments. Countries will export goods that make intensive use of locally abundant factors that are locally scarce. If there is an increase of the price of a good, the owners of that good will profit. This model is ideal for particular industries and in understanding income distribution.

Gravity Model- (RESEARCH FURTHER) Presents a more empirical analysis of trading nations than the previous two. The gravity model predicts trade based on the distance between the two countries and the interaction of the countries economic sizes.

Regulation of International Trade- For a long time the belief of mercantilism caused most nations to have high tariffs, and many restrictions on international trade. In the 19^th century, a belief in free trade became prominent. It was usually supported by the most economically powered nations in the world. (RESEARCH FURTHER).

During recessions there is often strong domestic pressure to increase tarrifs to protect domestic industries. This occurred around the world during the Great Depression.

Trade Theories

Ricardian Model

David Ricardo constructed the Ricardian Model in the 19th century. Ricardo was opposed to tariffs and other restrictions on international trade so he developed the idea of comparative advantage. Comparative advantage is "the ability to produce a good at a lower cost, relative to other goods, compared to another country." According to Ricardo, with perfect competition and undistorted markets, countries tend to export goods in which they have a comparative advantage.

Important Ricardian Model Ideas

Trade occurs due to differences in production technology- Ricardo constructed his model assuming the only difference between two countries is their production technology. Countries trade because of differences in technology.

Trade is advantageous for everyone in both countries- Ricardian model shows that everyone can benefit from trade. This is assuming that there is only one factor of production.

Even a technologically inferior country can benefit from free trade-

A developed country can compete against some low foreign wage industries.

Heckscher-Ohlin Model

The Heckscher-Ohlin Model is a "general equilibrium mathematical model of international trade. It was developed by Eli Heckscher and Bertil Ohlin to build on Ricardo's theory of comparative advantage by predicting patterns of trade based on factor endowments of a region. Factor endowments are the amount of land, labor, capital, and entrepreneur ship that a country possesses and can exploit for manufacturing. The Heckscher-Ohlin model says that countries will export products that are abundant while importing products that are scarce. Relative endowments of the factors of production determine a country's comparative advantage. Countries have comparative advantages with the goods that are abundant in their nations.

Gravity Model

The gravity model estimates the pattern of international trade. It consists of factors of geography and distance but can be used to test other economic theories of trade.