International Trade and Agriculture

287 Pages·2005·1.36 MB·English

by  Won W. Koo

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International Trade and Agriculture
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To our families
Ji, Grace, and John Koo
Julie, John, Sean, and Eryn Kennedy
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INTERNATIONAL
TRADE AND
AGRICULTURE
WON W. KOO AND
P. LYNN KENNEDY
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© 2005 by Won W. Koo and P. Lynn Kennedy
BLACKWELL PUBLISHING
350 Main Street, Malden, MA 02148–5020, USA
108 Cowley Road, Oxford OX4 1JF, UK
550 Swanston Street, Carlton, Victoria 3053, Australia
The right of Won W. Koo and P. Lynn Kennedy to be identified as the Authors of this Work
has been asserted in accordance with the UK Copyright, Designs, and Patents Act 1988.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system,
or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or
otherwise, except as permitted by the UK Copyright, Designs, and Patents Act 1988, without the
prior permission of the publisher.
First published 2005 by Blackwell Publishing Ltd
Library of Congress Cataloging-in-Publication Data
ISBN 1-4051-0800-2 (hardback)
A catalogue record for this title is available from the British Library.
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Brief Contents
Preface and Acknowledgments xiii
1 Introduction 1
Part I Pure Theory of International Trade 9
2 Classical Theory of Comparative Advantage 11
3 Comparative Advantage with Two Factors of Production 30
4 Comparative Advantage and Factor Endowments: 46
The Heckscher–Ohlin Theorem
5 Imperfect Competition and Economies of Scale in Trade 58
Part II Protection of Domestic Industry and International Treaties 77
6 The Partial Equilibrium Analysis of International Trade 79
7 Trade Restrictions: Tariffs 95
8 Nontariff Trade Barriers 112
9 Domestic Support Policies and Trade 136
10 Multilateral Trade Negotiations and US Trade Policy 152
11 Economic Integration 167
Part III Foreign Exchange Markets 183
12 Foreign Exchange Markets and the Exchange Rate 185
13 Agricultural Trade and the Exchange Rate 210
Part IV Direct Foreign Investment, Economic Growth, and the Environment 225
14 International Capital Movements and Multinational Corporations 227
15 Agricultural Trade and Economic Development 238
16 Trade and the Environment 255
Index 268
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Contents
Preface and Acknowledgments xiii
1 Introduction 1
1.0 Introduction 1
1.1 The Pure Theory of International Trade 4
1.2 Protection of the Domestic Industry 5
1.3 Foreign Exchange Markets and the Balance of Payments 6
1.4 Direct Foreign Investment, Economic Growth, and Environment 7
Selected Bibliography 7
Part I Pure Theory of International Trade 9
2 Classical Theory of Comparative Advantage 11
2.0 Introduction 11
2.1 The Principle of Absolute Advantage 11
2.2 The Principle of Comparative Advantage 13
2.3 Opportunity Cost and Comparative Advantage 14
2.4 The Terms of Trade and the Trade Pattern 17
2.5 Production Possibilities Frontier and Constant Opportunity Cost 18
2.6 Production Equilibrium and the Consumption Possibilities Frontier 21
2.7 Consumption Equilibrium and the Social Indifference Curve 25
Summary 27
Key Concepts 28
Questions and Tasks for Review 29
Selected Bibliography 29
3 Comparative Advantage with Two Factors of Production 30
3.0 Introduction 30
3.1 A Production Possibilities Frontier with Increasing Opportunity Costs 30
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viii CONTENTS
3.2 Equilibrium in a Closed Economy 33
3.3 Production Equilibrium in an Open Economy 34
3.4 Consumption Equilibrium and the Pattern of Trade 36
3.5 Gains from Trade 38
3.6 Neoclassical Demonstration of Comparative Advantage 39
3.7 The Offer Curve and International Equilibrium 41
Summary 43
Key Concepts 44
Questions and Tasks for Review 44
Selected Bibliography 45
4 Comparative Advantage and Factor Endowments: The Heckscher–Ohlin
Theorem 46
4.0 Introduction 46
4.1 Assumptions of the Theorem 46
4.2 Factor Intensity and Abundance 47
4.3 The Heckscher–Ohlin Theorem 49
4.4 Equalization of Factor Prices 51
4.5 The Leontief Paradox 52
4.6 Factor Intensity Reversal 54
Summary 55
Key Concepts 56
Questions and Tasks for Review 56
Selected Bibliography 56
5 Imperfect Competition and Economies of Scale in Trade 58
5.0 Introduction 58
5.1 Economies of Scale and International Trade 58
5.2 Imperfect Competition and International Trade under Internal
Economies of Scale 60
5.3 External Economies and International Trade 66
5.4 Strategic Trade Policy, Economies of Scale, and Imperfect
Competition 72
Summary 73
Key Concepts 74
Questions and Tasks for Review 74
Selected Bibliography 75
Part II Protection of Domestic Industry and International Treaties 77
6 The Partial Equilibrium Analysis of International Trade 79
6.0 Introduction 79
6.1 Import Demand and Demand Elasticities 79
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CONTENTS ix
6.2 Export Supply and Elasticities 82
6.3 International Equilibrium 85
6.4 International Equilibrium in Small Importing and Exporting
Countries 85
6.5 Effects of Transfer Cost 86
Summary 91
Key Concepts 91
Questions and Tasks for Review 92
Selected Bibliography 92
Appendix 6.1 Derivation of Price Elasticity of Import Demand 92
Appendix 6.2 Derivation of Price Elasticity of Export Supply 93
Appendix 6.3 Derivation of the Incidence of Transportation Costs 93
7 Trade Restrictions: Tariffs 95
7.0 Introduction 95
7.1 Arguments for Protection 95
7.2 Tariffs
98
7.3 The Incidence of Tariffs 99
7.4 Welfare Implication of Tariffs 104
7.5 Optimal Tariff Policy 105
7.6 The Effective Rate of Protection 106
7.7 General Equilibrium Analysis of Tariffs 107
Summary 109
Key Concepts 110
Questions and Tasks for Review 110
Selected Bibliography 111
Appendix 7.1 Derivation of the Relationship between Effective and
Nominal Tariff Rates 111
8 Nontariff Trade Barriers 112
8.0 Introduction 112
8.1 Quotas 113
8.2 Tariff-Rate Quotas: A Two-Tier Tariff 120
8.3 Voluntary Export Restraints 122
8.4 International Cartels and Commodity Agreements 124
8.5 Price Discrimination and Dumping 126
8.6 Export Subsidies 128
8.7 Technical, Administrative, and Other Regulations 132
Summary 133
Key Concepts 134
Questions and Tasks for Review 135
Selected Bibliography 135
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x CONTENTS
9 Domestic Support Policies and Trade 136
9.0 Introduction 136
9.1 Specific Production Subsidy 137
9.2 Variable Production Subsidy 139
9.3 Domestic Subsidies in a Large Exporting or Importing Country 144
9.4 The Aggregate Measure of Support 145
9.5 Domestic Support and the WTO: The Green, Blue, and Amber Boxes 148
Summary 149
Key Concepts 150
Questions and Tasks for Review 150
Selected Bibliography 151
10 Multilateral Trade Negotiations and US Trade Policy 152
10.0 Introduction 152
10.1 The General Agreement on Tariffs and Trade (GATT) 153
10.2 Accomplishments in Agricultural Trade Liberalization 155
10.3 The World Trade Organization (WTO) 157
10.4 US Trade Policy and Trade Remedy Law under GATT and WTO 160
Summary 165
Key Concepts 165
Questions and Tasks for Review 166
Selected Bibliography 166
11 Economic Integration 167
11.0 Introduction 167
11.1 Forms of International Economic Integration 167
11.2 Effects of Economic Integration: Trade Creation and Diversion
Effects 174
11.3 Implications of RFTAs 177
11.4 Characteristics of Trade Flows under RFTAs 178
Summary 179
Key Concepts 180
Questions and Tasks for Review 181
Selected Bibliography 181
Part III Foreign Exchange Markets 183
12 Foreign Exchange Markets and the Exchange Rate 185
12.0 Introduction 185
12.1 The Currency Exchange Market and its Functions 186
12.2 Forward Exchange, Currency Exchange Risk, Hedging, and
Speculation 189
12.3 Exchange Rate Systems and Exchange Rate Determination 190
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CONTENTS xi
12.4 Macroeconomic Factors Affecting the Exchange Rate 197
12.5 The Exchange Rate and the Balance of Trade 203
Summary 207
Key Concepts 208
Questions and Tasks for Review 209
Select Bibliography 209
13 Agricultural Trade and the Exchange Rate 210
13.0 Introduction 210
13.1 Analyzing Exchange Rate Impacts: A General Equilibrium
Perspective 211
13.2 Analyzing Exchange Rate Impacts: A Partial Equilibrium
Perspective 216
Summary 223
Key Concepts 223
Questions and Tasks for Review 224
Selected Bibliography 224
Part IV Direct Foreign Investment, Economic Growth, and the Environment 225
14 International Capital Movements and Multinational Corporations 227
14.0 Introduction 227
14.1 Multinational Corporations 227
14.2 Movements of International Capital and Foreign Direct Investment 229
14.3 Outsourcing and the US Economy 232
14.4 Foreign Direct Investment in the Food Industry 233
Summary 236
Key Concepts 237
Questions and Tasks for Review 237
Selected Bibliography 237
15 Agricultural Trade and Economic Development 238
15.0 Introduction 238
15.1 The Economics of Agricultural Trade and Development 239
15.2 Technical Progress and Development 243
15.3 Economic Growth and Trade 246
15.4 Agriculture in Developed and Developing Economies 249
15.5 Development Issues in the WTO 249
Summary 252
Key Concepts 252
Questions and Tasks for Review 253
Selected Bibliography 253
Appendix 15.1 Proof of the Rybczynski Theorem 254