Winter School in Political Economy

Lecture 2

Trade

Set-up of the lecture

• Final essay
• State of trade
• Problems with trade
• Free trade in a perspective
• Case for free trade

 Final essay

Suggestions

• Policy paper or academic paper
• 3,000 words (excluding references)
• A (positive) research question or a (relevant) societal issue
• Short and focused literature review
• Research design – hypothesis or a problem statement
• Research design – case selection
• Results – make a point
• Conclusion – (at least) summarise
• Give yourself time

State of trade

Trade and growth

• Strong correlation
• Mechanism
  • competition
  • economies of scale
  • learning
  • instituions
• Reverse causation
• Problems with micro-level data

State of trade

• 40% of GDP among developed countries
• 30% of global GDP (20% after corrections)
• Multinational 9% of global output
• Growth at 3.5%
• Decline from 5.5%
• Decline driven by tensions and uncertainty
• EU intra trade more than 50%
• EU intra FDI more than 60%

State of trade

• US historically below global average

• Germany (and Europe) above global average

• Patterns over time

  • Industrialisation

  • Great depression

  • WW I

  • Post-WW II rise

  • Post-2000 rise

State of trade

• EU – US biggest trading partners
• EU trade surplus with US 153 billion USD
• EU 27 – UK biggest trading partner
• EU also biggest trading partner of Germany
  • But US tops the list of individual countries
  • Followed by France and China
  • V4 larger than US

State of trade

• Effect of COVID-19 on trade
  • resilient supply chain
• Effect of climate change on trade
  • European Green Deal and carbon tax
• Effect of politics on trade
  • Biden administration

Touch of theory

• What is opportunity cost?
• What is deadweight loss?
• What is comparative advantage?

Problems with trade

Problems with trade

• Bilateral trade deficit

  • Highly political

  • Not a problem from economic perspective

  • And politics?

  • Are the politics poorly informed?

Problems with trade (data)

• Trouble with bilateral data

• iPod example

  • $299 retail price

  • $73 Toshiba drive

  • Chip from a US company

  • 1% value added by China

  • $150 in trade deficit

Free trade

Free trade

• Economic theory on trade at odds with reality

• Interventionist policy can be abused

• Interest groups and free trade

  • Case of steel

  • Resisting protectionism

• Economic history at odds with reality
  • Tariffs rates
  • UK and France

Free trade

• Intellectual property rights and state-sponsored espionage

  • XIX century and today

• Free trade and the structure of the domestic economy
  • XIX century and today
• Debunking free trade myth
  • Implication for today

Case for free trade

• “New” Washington Consensus, trade has:

  • Hurt US workers

  • Gutted the middle class

  • Increased inequality

• ​US growth and its distribution
  • Bottom 50% between 1980 and 2014 no change in real wage
  • technology, unionisation, market power concentration and barriers to entry in a two tier labour market

Case for free trade

• Free trade helps by reducing prices
  • What drives distribution of these gains
  • Tariffs and socio-economic status – regressive tax on consumption
• The marriage of anti-trade and anti-migrant sentiments

Thank you and see you in the Q&A