International Trade

Session 1
- Introduction – main issues, stylized facts
- Historical overview of trade (and trade theory)
- Introduction: empirical methods
Vilém Semerák
[email protected]

IES, Fall 2024

https://dl1.cuni.cz/course/view.php?id=14117
Moodle password: Trading_2024$
 Lecturers/Assistants
• Lecturer:
• Vilém Semerák (Vilém)
• Currently Charles University in Prague & CERGE-EI
• Interests:
• History of trade relations, global trade issues, role of China in trade,
modelling of effects of PTAs
• Contacts:
• E-mail: [email protected]
• Office hours:
• After the class (Friday 2:00-3:00 p.m., IES #311)
• Online option for office hours available (Google Meet/Skype/Zoom)
• Moodle:
• https://dl1.cuni.cz/course/view.php?id=14117
• Moodle password: Trading_2024$
• Teaching assistant: Tomáš Boukal - [email protected]
Online/Hybrid Classes
• Officially not available – due to administrative
issues and other problems
• If necessary, recordings can be made (and links to
them shared via Moodle)
• However, other forms of online interaction (chat etc.)
during the sessions will not be available
• Exams and most of the graded aktivity: only on-site
 Prerequisites
• Technically not relevant for most Erasmus students –
please contact me if you are still experiencing troubles
• Although the recommended literature and handouts
should be accessible even for students with lower
initial level of knowledge of microeconomics, the
course is not quite suitable for 1st year students who
never saw economics in their life
• If in doubts:
• Discuss it with me
• It would still be good to check the reading + syllabus +
sample exams!
 Outline of the Course (1)
• Introduction. Trade data and trends.
• Model of comparative advantage (Ricardo) and its extensions.
• Neoclassical models - the role of differences in factor
endowments. Specific factor model.
• Heckscher-Ohlin model: derivation of the Leamer diagram.
Stolper-Samuelson theorem. Factor Price equalization.
Rybczynski theorem.
• Empirical tests of trade theory. Leontief paradox. Intra-industry
trade. Alternative theories of international trade (Product
cycles, Linder's overlapping demands).
• New theory of international trade: Krugman model with
monopolistic competition and increasing returns to scale.
 Outline of the Course (2)
• Introduction to the "New new" theory - models with
heterogenous firms (Melitz).
• Introduction to the New Economic Geography (NEG)
• Trade policy: basic instruments, partial equilibrium models.
• Trade policy: general equilibrium, large country issues.
• Economic integration: customs unions and free trade areas.
Trade creation and trade diversion effects.
• International trade and economic growth. Models with
mobility of factors of production.
 Orientation of the Course
• Trade theory:
• How should we measure/analyzed trade flows?
• What determines international trade flows?
• How trade influences welfare, wages, specialization, long run
development of regions …
• How do we model effects of introduction of trade policy
instruments (tariffs, quotas)?
• What are not going to deal with:
• International finance/macroeconomics (exchange rates
determination) → International Finance or Open Econ Macro
• Practical business (letters of credits, logistics of trade, etc.) →
Economics of Global Business
 Evaluation:
• Exams:
• Midterm 15 points
• Final exam 50 points
• Assignments and quizzes:
• Team assignments (4 weekly/bi-weekly assignments) 20 points
• Quizzes and in-class activities during the semester: 10 points
• Participation in online Moodle quizzes 5 points
• Extra additional points for active participation in discussion
seminars and quizzes: up to 5 points

• Please note that we will be using the new grading scale (A-F) –
please see the details in the syllabus.
Scheduling Issues
• We will lose October 25th (Dean’s day)

• Friday, January 10th will therefore reserved for a

makeup session (or final consultations)
Exams: Organization?
• Midterm exam:
• Tentative date: November 15th, seminar session slot
• Final exams in January/February
• Preliminary dates:
• January 17th
• January 24th
• February 14th
• Additional options or early exams can be arranged
• Form of the final exam:
• A written test that will include
• a quiz (multiple choice questions)
• solution of problem sets, some based on appropriate application
of diagrams which demonstrated the functioning of a model
• a short (on-site) essay
 Course Reading: Basic Texts
• KRUGMAN P., OBSTFELD, M. a MELITZ. M. International
Economics. N. York, Pearson, 2012. [KOM]
• HELPMAN, E. Understanding Global Trade. Belknap Press,
2011. ISBN-10: 0674060784, ISBN-13: 978-0674060784

• Other option instead of KOM:

• FEENSTRA, R.C., TAYLOR, A.M.: International Trade, any recent addition
• PUGEL T. Int. Economics, N. York, McGraw Hill, 2012, s. 1-378.
• APPLEYARD D., FIELD, S. COBB, S.: International Economics, McGraw-
Hill/Irwin, any recent edition
• SALVATORE, D.: International Economics
• Course materials (slides, sample exercises,…) available via
Moodle
• Moodle password: Trading_2024$
 Online Textbooks
• A Practical Guide to Trade Policy Analysis:
• https://www.wto.org/english/res_e/publications_e/prac
tical_guide12_e.htm,

• S. Suranovic - International Economics Study Center

• http://internationalecon.com/

• J.R. Markusen’s web and textbook

• http://spot.colorado.edu/~markusen/textbook.html
• Includes access to Markusen et al.: “Int. Trade: Theory
and Evidence" textbook
Course Reading: Additional Sources
• BERNSTEIN, W.J. A Splendid Exchange – How Trade Shaped the
World. Atlantic Monthly Press, New York, 2008

• LEAMER E.E. The Heckscher-Ohlin model in theory and practice.

Princeton Studies in International Finance. No. 77, February 1995

• For braver and more curious students:

• GILBERT, J., a TOWER, E. An Introduction to Numerical Simulation for Trade
Theory and Policy. World Scientific Publishing Company, 2013. ISBN 978-
9814390811
• FEENSTRA: Advanced International Trade
Reading/Listening for the Next Week
• Helpman (2011): chapter 1
• Additional (voluntary) short text:
• Baldwin (2012): Global Supply Chains: Why They Emerged, Why They Matter, and
Where They Are Going

• Brookings Podcasts - Robert Koopman (WTO) on global value chains and

the WTO:
• https://www.brookings.edu/articles/robert-koopman-on-global-value-chains-
and-the-world-trade-organization/
• Try to find answers to the following questions:
• Discusses Baldwin's ideas on unbundling. Does he agree or disagree with Baldwin's
interpretation and why?
• Can it happen that companies rely on export markets without knowing that? How does it
work?
• Does Vietnam create just a small proportion of the value added in the products they are
exporting?
• Which activities are rewarded in the job market? How would you understand their
comparison (indirect) of bookkeeping and janitorial services?
Other Assignments
• Please try to form teams consisting of 3-4 members

• First online quiz which will be opened since this

midnight (at the latest)
• Deadline for graded submission: next Thursday (Oct
10th) midnight.
One Last Issue
• Especially this first lecture includes lots of data and
historical facts.
• Nobody expects you to memorize the data from
tables and charts.
 Outline of This Session
• Introduction
• Outline of the course etc.
• Role of international trade, basic facts on global trade
and trade data
• Overview of the development of trade theory
• Brief history
• The most important and most useful concepts from trade
theory
• Mercantilism
• If we have time: a brief intro into empirical methods
So, how about some trade finally?
 A Few Observations
and Stylized Facts on Trade
• International trade has a very long history
• Trade patterns are much more logical and stable than many
people (esp. politicians and diplomats) realize
• Most of trade seems to be motivated by the need to specialize
• We have detailed trade statistics, but they are often providing a
rather incomplete picture of the reality
• Even though trade typically increases general welfare, it has
asymmetric effects on various groups in our societies
• Actual trade policies often do not seem to maximize national
welfare, and they are often determined in rather strange ways
• Bilateral trade deficits have no real economic meaning, there
are no economic reasons to be concerned about them
 First Traders and Long Distance Trade
• We have some evidence on trading with obsidian – e.g. between Armenia
and Mesopotamia – probably as early as 6000 BC
• Interesting fact: found obsidian seems to respect the gravity rule which is still typical
for trade until today
• Physical evidence of trade in Mesopotamia: about 4000 BC – including the
evidence of trade colonies
• 3000 BC – The Persian Gulf already used as a major artery for commerce
• Egyptians – traded alongside the Red Sea as far as current Yemen and
Somalia as early as 2500 BC
• 1479 BC famous expedition by Queen Hatshepsut
• Phoenicians were probably the first people who engaged in direct long-
distance trade
• 600 BC: Circumnavigation of Africa
• By 400 BC: west-European coastline, coast of eastern and western Africa
• Relatively intensive indirect trade between Romans and Han Empire before
200 AD
Source: Bernstein
Translated Clay Tablet from about
1800 BC
• Deals with a shipment of 20 tons of metal (and
traditional business troubles) by a merchant from Ur:

• You said, “I will give good ingots to Gimil-Sin.” That is

what you said, but you have not done so; you offered
bad ingots to my messenger saying “Take it or leave
it.” Who am I that you should treat me so? Are we not
both gentlemen?

Source: Bernstein – A Splendid Exchange

Source: Bernstein
 Early Trade: What has been Traded?
• Metals and early metal products
• Agriculture and food commodities
• Animals
• Human beings (slaves)
• Precious metals
• Special products
• Silk
• Spices

• Due to high costs (and risks): many traded commodities were

very pricey (and intended for rich individuals only)
Ancient International Trade: Summary
• Indeed, we can say that:
• Trade formed our current civilization
• Built magnificent cities (Venice, Hong Kong)
• It contributed to shaping of political institutions of many countries (USA
in 1780s)
• Trade determined survival/demise of species
• Trade shaped the landscapes in which we live
• …..
 How and Why do we Trade?
• International/interregional trade is so ancient that many
believe that exchanging/trading is an inherent part of human
nature!
• Try to observe small kids and their exchanges…
• Simple answer: we must have something that other countries
want (and vice versa)
• It can be unavailable in other countries, or we have it cheaper, or it is
simply different…
• There are a few basic historical reasons for trading which are
still relevant (and which appear in modern trade theories)
• Differences in skills
• Hunters and gatherers
• Differences in endowments
• Flint, obsidian, copper
• Enrichment of supply which enables us to become a bit different
• “Think different”….
 Main Trends in International Environment
• Technological progress
• New products
• Technologies for production
• Transportation & storage (e.g. cooling) technologies
• Decreasing costs of trading
• Reduction of tariffs (and partially non-tariff measures)
• Reduction of transportation costs
• Significantly lower risks
• Independence on natural phenomena (trade winds)
• International information flows
• Faster exchange of ideas and possibly to the homogenization of preferences
• Facilitates coordination
• Dramatic increases in wealth/incomes/endowments of average
individuals
• New countries started to play a more important global role
• Increasing importance of international institutions (treaties,
organizations) focused on the reduction of trade costs
• Multilateral level: GATT, WTO
• Bilateral/plurilateral level: NAFTA, EU, ASEAN, CETA, TPP, DCFTA ….
Space/Time Convergence
World trade cost index, chained
estimates from two-year balanced samples

Source: (Fouquin & Hugot - Back to the Future: International Trade

Costs and the Two Globalizations, 2016)
 Implications of the Trends (1)
• Dramatic increases in the value and volume of
international trade
• Trade typically grew faster than GDP → our economies were
becoming more open
• Exception: 2015, 2009
• Both intensive and extensive growth in international trade
• In no so distant past, most consumed commodities were of
local/regional origin
• Imported goods were rarer, more likely to be consumed by rich
individuals (if there was a local substitute) in the past
• Very high role of intra-industry trade (countries are often
exporting and importing the same commodities)
 Implications of the Trends (2)
• Decreasing costs + increased reliability lead to
fragmentation of value chains
• Who actually produces Iphones/Ipods?
• Increasing inter-dependence
• Dangers of economic coercion
• “Weaponization of trade dependencies”
• Another interesting issue – a very direct participation of
individual consumers in international trade
• International transactions via Alibaba, E-bay, DealeXtreme, Amazon
• In-apps payments/purchases
Trade/GDP: 1890 - 2013

Source: F & T, p. 62
Global Supply Chains: First Unbundling
• Steam made it possible, scale economies made it
profitable
• The steam (railroads and steamships), made it
feasible to spatially separate production and
consumption
• Timing since 1830s and accelerating in the 1870s (the
Trans-America line was completed in 1869).
• Once feasible, scale economies and comparative
advantage made separation profitable.

Based on Baldwin (2006, 2012)

 First Unbundling: Features
• North industrialization and South de-industrialization
• Growth take-off
• “Big time” international income divergence/convergence
• International trade and labour migration boomed
• Production clustered locally as it dispersed globally
• The world’s economic geography went from homogenous
(subsistence agriculture everywhere but a few cities) to “spiky”
(Florida, 2005).

Based on Baldwin (2006, 2012)

Global Supply Chains:
Second Unbundling

• ICT made it possible, wage differences made it profitable

• The ICT revolution made it possible to coordinate complexity at distance
• The vast wage differences between developed and developing nations made
separation profitable
• Some production stages previously performed in close proximity were
dispersed geographically
• ICT facilitated control that reduced the costs and risks of combining
developed-economy technology with developing-nation labour.

Based on Baldwin (2006, 2012)

Global Supply Chains
• Global supply chains have transformed the world. They
revolutionized development options facing poor nations; now they
can join supply chains rather than having to invest decades in
building their own. The offshoring of labour-intensive
manufacturing stages and the attendant international mobility of
technology launched era-defining growth in emerging markets, a
change that fosters and is fostered by domestic policy reform
• (Cattaneo et al., 2010 and Baldwin, 2011b).
Fragmentation of Production:
the Example of the Boeing 787 Dreamliner

Source: Meng & Miroudot

GSC: Asymmetries
• There are “headquarter” economies (whose exports contain
relatively little imported intermediates) and “factory” economies
(whose exports contain a large share of imported intermediates)
• The global supply chain is really not very global – it’s regional
• There is a hub-and-spoke asymmetry in the dependence of factory
economies on headquarter economy’s intermediate exports

Based on Baldwin (2006, 2012)

The Smiling Curve:
Value Added along the GVC
 Innovations, Progress &
the Future of Trade?
• Some food for thought (voluntary):

• TradeTalk Podcast #110 (2019):Will 3D Printing Increase

Trade? Hear All About It
• https://www.tradetalkspodcast.com/podcast/110-will-3d-printing-
increase-trade-hear-all-about-it/
Trade Data: Sources, Logic, Standards
Typical News about Trade….
A Few Recent Headlines
• US Trade Deficit Widens to $78.8 Billion, Largest in
Two Years (Bloomberg, September 4th 2024)
• China Says Europe's Soaring Trade Deficit Is Its Own
Fault(Bloomberg, August 8th, 2023)
Balance of Payments Balance of Trade

Item Credit Debit Macrostructure

Trade in goods
Services
Current Account
Primary income
Secondary income
Capital account Capital Account
Direct inv.
Portfolio inv. Financial Account
Other capital
Errors & omissions
Change in reserves Reserves
Implications: the balance of trade is a too narrow concept to be truly meaningful!
 Do Trade Balance Deficits matter?
• Overall deficits?
• Czech overall balance of trade in 2023: +290.4 bil CZK
• The is a CNB number, ČSÚ sees it slightly differently (+529.4 bil.
CZK)
• Balance in goods and services (2023): +383.8 bil. CZK
• Current account (2023): +23.7 bil. CZK

• Bilateral deficits?
• Trade balance with China in 2023 (ČSÚ): -823.8 bil. CZK
• Trade balance with Europe in 2021: +1 666.9 bil. CZK
 Mutual Trade: Two Perspectives
2017 2017
USD mil.
US data Czech data
US exports to the Czech imports from
2,274 3,994
Czech Republic the USA
US imports from the Czech exports to the
4,740 3,763
Czech Republic USA
Balance (US
perspective) -2,466 231

Source: COMTRADE, STAZO

Czech Balance of Trade with China
in 2014, mil. USD
Rotterdam effect involved?
20000

15000

10000

5000

0
Czech exports Chinese Czech imports Chinese Balance: Czech Balance:
to China imports from from China exports to the data Chinese data
-5000 the Czech Czech Republic
Republic

-10000

-15000

-20000

Source of data: CZSO STAZO, Comtrade

 Explanations:
• Errors and omissions
• Smuggling, tax frauds
• “Parallel imports”
• This article is more than 1 month old
• The grey Zara market: how ‘parallel imports’ give comfort to Russian
consumers: https://www.theguardian.com/world/2022/aug/12/russia-
grey-market-parallel-imports-consumers-western-brands-zara
• Currency conversions
• Differences in statistical processing
• But: one very interesting issue:
• Export data: FOB prices (Free on Board)
• Import data: CIF prices (Costs, Insurance, Freight)
Global Trade 2017: Trade with Mars
• If we compare total global merchandise exports with
total global merchandise imports, we find out that
they are not equal
• Can you think of possible explanations?

Value in USD
World Exports in 2017
billions
World merchandise exports (intra-EU trade included) 17 730
World merchandise imports (intra-EU trade included) 18 024
“Balance” - 294

Source: WTO Trade Statistical Review, 2018

 Sources of Trade Data
• Trade data – seemingly abundant and easy to get (esp. for
merchandise trade), but include lots of inherent problems
• Main sources:
• WTO
• International trade statistics – WTO STATS
• https://stats.wto.org/
• Statistical database
• http://stat.wto.org/StatisticalProgram/WSDBStatProgramHome.aspx?Language=E
• Trade profiles, tariff data
• https://www.wto.org/english/res_e/statis_e/trade_profiles_list_e.htm
• IMF
• Directions of Trade (DOTS) statistics
• https://data.imf.org/?sk=9d6028d4-f14a-464c-a2f2-59b2cd424b85
• Eurostat
• COMEXT: http://epp.eurostat.ec.europa.eu/newxtweb/
• U.N.
• COMTRADE: http://comtrade.un.org/
• CEPII
• BACI dataset:
https://www.cepii.fr/CEPII/en/bdd_modele/bdd_modele_item.asp?id=37
Example: HS data e.g. from BACI…
Specifically: HS92 version of 2021 data
t (Year) i (Exporter) j (Importer) k (HS code) v (Export value) q (“Quantity”)

2021 4 24 382390 52.051 13.235

2021 4 24 392410 0.264 1.854

2021 4 24 481890 0.041 0.022

2021 4 24 570232 0.2 1.854

2021 4 24 690790 3.403 1.854

2021 4 24 732310 0.02 1.854

2021 4 24 732393 0.122 1.854

2021 4 24 761510 0.483 1.854

2021 4 24 841460 0.163 1.854

2021 4 24 842121 0.862 1.854

2021 4 24 851660 0.222 1.854

2021 4 24 853669 5.455 0.022

2021 4 24 860900 1.823 13.235

2021 4 24 902610 1.878 0.173

2021 4 24 940161 0.938 1.854

2021 4 24 940340 3.447 1.854

2021 4 24 940350 2.697 1.854

2021 4 24 940360 0.419 1.854

2021 4 24 940429 0.666 1.854

2021 4 24 961700 0.067 1.854

Definitely try the visualizations:
• Atlast of Economic Complexity:
https://atlas.cid.harvard.edu

• Observatory of Economic Complexity:

https://oec.world/
Chinese Trade Partners (2021)

Source: OEC
Chinese Exports to the US (2021):

Source: OEC
Traditional Trade Data Classifications
• Two main approaches to classifications:

• Product based
• HS - Harmonized Commodity Description and Coding System
• CN – Combined Nomenclature
• SITC – Standard International Trade Classification
• BEC – Broad Economic Activities
• Activities based
• CPA – Classification of Products by Activities
• ISIC - International Standard Industrial Classification of All Economic
Activities
 Features of the Data
• Several versions of each classification exist
• HS 1992, HS 2017, HS 2002, HS 2007, HS 2012, HS 2022
• Classifications are hierarchical
• HS 2022
• 21 Sections
• 96 Chapters (2-digit)
• 1228 Headings (4-digit)
• 5612 Subheadings (6-digit)

• We need to choose the right level of detail

• Six digit HS (as in previous slide): very detailed, but it can include also “noise” and imprecisions, and it
can be harder to work with
• Aggregated trade (e.g. chapters): we can lose details
• Especially the bulk downloads may only include HS codes and country ISO codes
• But tables which explain the codes are provided
• Annual or monthly?
• Problems with mirror statistics
• Beware: trade with commodities like gas might not be fully depicted in the data
• https://www.cepii.fr/blog/en/post.asp?IDcommunique=929
• And: how about services?
 How to Get the Data?
• Download pre-prepared files with bulk data
• CEPII BACI data
• WITS/Comtrade (with subscription)
• Typically zipped and in csv (or Stata) format
• Use an online interface to select which data you want and
then download the resulting selection
• WITS/Comtrade (free version: 10000 lines in one batch)
• EU/Comext
• Comtrade (free version with substantial limitations now)
• Use the API access, get the data directly to your software
• Comtrade (current version with limitations: examples will be
provided)
• Comext
• WB WDI data (see the sample scripts and do-files)
 0
10
20
30
40
60
70

50
Hong Kong SAR, China
Philippines
Malaysia
Palau
Singapore
Sao Tome and Principe
Vietnam
Lao PDR
Korea, Rep.
Malta
China
Central African Republic
Andorra
France
Angola
Ireland
Thailand
Iceland
Tech Exports in 2018

Kazakhstan
Israel
Netherlands
United Kingdom
Kiribati
Norway
Mexico
Latvia
Cyprus
Czechia
United States
This kind of data is becoming less and less relevant!

Costa Rica
Estonia
Australia
Japan
High-technology Exports (% of Manufactured Exports)

Sweden
Austria
Hungary
Countries with the Highest Share of High-

Source of data: WDI

Australia
 0
10
20
30
40
60
70

50
Niger
Philippines
Singapore
Malaysia
Kazakhstan
Malta
Bermuda
Vietnam
Korea, Rep.
Switzerland
France
China
Ireland
Suriname
Norway
United Kingdom
Thailand
Palau
Tech Exports in 2014

Netherlands
Mongolia
United States
North America
Iceland
Japan
Barbados
Israel
Germany
Mexico
Latvia
This kind of data is becoming less and less relevant!

Czech Republic
Canada
French Polynesia
Denmark
High-technology Exports (% of Manufactured Exports)

Sweden
Austria
Hungary
Countries with the Highest Share of High-

Source of data: WDI

Australia
 Example: US Trade Balance in iPhones
USD millions, 2009 data

China Japan Korea Germany Rest of World World Total

Traditional
-1,901.2 0 0 0 0 -1,901.2
measure

Value added
-73.5 -684.8 -259.4 -340.7 -542.8 -1,901.2
measure

Traditional trade statistics: China exports the high technology product to the USA,
US have a deep trade deficit with China
Reality: only a small fraction of the value actually stays in China, the rest is spent on
imports of components and payments for patents/technologies to Korea, Japan, Germany

Source: Miroudot, S., Global Forum on Trade Statistics, 2-4 April 2011
 Reality of Modern Trade Relations….
How can a component of a tail lamp produced in the Czech Republic end up e.g. in China?

German company

Slovak company
(owned by a
German owner)
Direct supply (e.g. spare parts)
Czech Chinese
Producer market
French
company
German
producer of car
parts French-owned car
producer in Eastern
Europe
Note: simplified example – partially inspired by real flows
Source: Li et al. (2019):
 References and Sources of Data
• Czech Statistical Office: STAZO database
• Eurostat: COMEXT trade database
• UN COMTRADE Database
• World Bank WITS
• WDI – World Bank World Development Indicators database
• WTO: Trade Profiles
• WTO: Statistics Database – Time Series
• Krugman: Ricardo’s difficult idea
• KOM – chapter 3
• Feenstra & Taylor – chapters 2-3
• A. Smith – Wealth of Nations
• A Practical Guide to Trade Policy Analysis – Chapter 1 (details on RCA indices)
• Data: Comtrade
• Baldwin (2012): Global Supply Chains: Why They Emerged, Why They Matter, and Where They Are
Going
Fouquin & Hugot (2016): Back to the Future: International Trade
Costs and the Two Globalizations, CEPII working paper 2016