Wilfred J. Ethier

The new regionalism

Once again, regionalism is afoot. Twin late-1980s announcements, by the United States and Canada of negotiations for a free-trade area, and by the EU of an attempt to complete its internal market, ignited a conflagration of regional integration. Well over a hundred regional arrangements, involving most nations, now exist. Deja vu: the 1950s and 1960s had likewise witnessed many ‘old regionalism’ initiatives. Except for Western Europe, these in the end amounted to little, however, and efforts for preferential trade became quiescent, until the dramatic advent of the ‘new regionalism’.

Multinational firms, technology diffusion and trade

Empirical evidence indicates a close association between multinational firms and knowledge capital, a public good within the firm. We model a firm which wishes to exploit its knowledge capital abroad, but whose workers learn all the knowledge necessary for production and can defect and produce the good themselves. The home firm must then choose between costly exporting and the possible dissipation of its knowledge capital by producing abroad. The paper examines the choice between exporting, licensing, and acquiring a subsidiary in this environment. We analyze the cost and technology parameters that support the alternative modes of serving the foreign market, and we describe the international equilibrium that jointly determines the pattern of specialization and the market mode.

Higher dimensional issues in trade theory

Publisher Summary The extensive structure of modern trade theory has been built on a foundation of several extreme assumptions, including that of low and even dimensionality. This chapter is concerned with Heckscher–Ohlin theory of international trade in higher dimensions. This theory, in its standard two-commodity, two-factor version has dominated international trade theory for over 30 years. But this dominance has long been made uneasy by a widespread suspicion that world commerce does not accord well with the theoretical structure. There are two particular areas of concern. The first stems from the fact that the largest part of world trade involves the exchange of roughly similar products among similar economies, whereas the factor endowment theory, and comparative cost theory, generally teaches to look to international dissimilarities for the causes of trade. A large part of this actual trade is classified as intraindustry even with significant disaggregation. Thus probing its causes requires a high degree of disaggregation—that is, the explicit consideration of a large number of goods. The second area of concern stems from the Leontief Paradox. The sensitivity to higher dimensions of the basic propositions of the modern theory of international trade is the key issue for the practical relevance of the logical structure that has dominated trade theory in the past 30 years.

Internationally decreasing costs and world trade

Abstract This paper seeks to reformulate the existing theory of international trade and increasing returns by arguing that such returns depend upon the size of the world market rather than national output. The result is the disappearance of the tendency towards interindustry specialization and multiple equilibrium and the emergence of a theory of trade in intermediate goods. A new analytical tool — the allocation curve — is developed for this context.

Regionalism in A Multilateral World

Recent regional initiatives have been addressed from a Vinerian perspective of regional integration as a combination of trade creation and trade diversion. This is true both of policy-oriented economists, who tend to be critical of the initiatives, and of theorists, who have added dynamic and game-theoretic elements to the Vinerian structure. This paper describes the stylized facts of much recent regional integration, and develops an alternative model. The analysis suggests the possibility that regional integration, far from threatening multilateral liberalism, may in fact be a direct consequence of the success of past multilateralism and an added guarantee for its survival.

The Theorems of International Trade with Factor Mobility

This paper addresses the relation between goods trade and international factor mobility in general terms. Conditions for factor price equalization are derived for situations with tradein both goods and factors,as well as Rybczynski and Stolper-Sarnuel Sofl theorems. A weak price versionof the Heckscher-Ohlifl theorem is presented, as well as stronger quantity versions.The basic theorems of international trade, suitably interpreted,are shown to hold in their strong versions ifthe number of international markets is at least as large as the number of factors.The crucial dimensionality issue is hence not the relative number of goods and factors per se, but the number of international markets relative to the number of factors. Only the price version of the Heckscher-Ohlifl theorem fails to be essentially preserved by this condition.

Nontraded Goods and the Heckscher-Ohlin Model

ECONOMISTS HAVE LONG RECOGNIZED that nontraded goods play an essential role in the analysis of many problems of international economics, such as devaluation, the purchasing power parity doctrine, and certain questions in international monetary theory. Yet only recently2 have nontraded goods begun to be integrated into those models used in the analysis of the pure theory. Perhaps the best known of these is the Heckscher-Ohlin or factor endowments approach. As refined by Samuelson and others this model of the production structure of a trading economy yields four basic results: the factor price equalization theorem, the Rybczynski effect concerning the impact of endowment changes on outputs at constant commodity prices, the Stolper-Samuelson effect concerning the impact of commodity price changes on factor rewards with endowments fixed, and the proposition that with fixed endowments a change in the terms of trade will cause an increase in the output of that good whose relative price has risen and a decline in the output of the other. These results all depend upon the production structure independently of demand and upon the assumption that exactly two goods are being produced. Both of these descriptions are violated in the case of a nontraded good, as the addition of the nontraded commodity ipso facto implies an increase in the number of goods, and as determination of the pattern of production now requires that demand conditions for the nontraded good be considered explicitly. In this paper I attempt to comprehensively analyze these four basic properties in the presence of nontraded goods. I shall consider the usual two-commodity, two-factor Heckscher Ohlin model with the addition of a nontraded third good and a domestric demand function for its output. Most of the results can be extended, and I shall indicate in footnotes how they are affected when there are an arbitrary number of nontraded goods and/or of factors and traded goods. The extension to cases involving arbitrary but unequal numbers of factors and traded goods will, however, be largely ignored.

Unilateralism in a Multilateral World

This paper addresses the interplay between unilateralism and multilateralism. I first describe theirrespective stylized facts. I next present a simple, multi-country model with high initial tariffbarriers and with the features that have always been of paramount concern to policymakers, allowgovernments to negotiate multilateral agreements, and analyze the resulting equilibrium. I thenconsider the possibility of unilateralism and find a role for a system with features remarkablysimilar to contemporary unilateralism. The relationships between multilateralism and unilateralismare subtle: Unilateralism has the properties it has because the world is multilateral (the insurancetriangle); to be useful unilateralism requires a multilateral component of some type; this typeresults from a basic compatibility problem between those who negotiate multilaterally and thosewho establish unilateralism.

The Theory of Trade Policy and Trade Agreements: A Critique

During the past half century, multilateral trade liberalization has reduced tariffs to historically low levels. The Received Theory of multilateral trade agreements, based solely on terms-of-trade externalities between national governments, offers an explanation that has become the conventional wisdom among international trade theorists. But it displays two puzzles that cast doubt on its practical relevance: the Terms-of-Trade Puzzle and the Anti-Trade-Bias Puzzle. This paper examines the consistency of the implications of the Received Theory with actual trade policy. The basic conclusion is that the theory is inconsistent with reality. Furthermore, it is the role of terms-of-trade externalities — the central component of the Received Theory — that is the sole cause of this inconsistency.

Theoretical problems in negotiating trade liberalization

Abstract This paper points out that the General Agreement on Tariffs and Trade (GATT)/World Trade Organization (WTO) trade liberalization possesses very special characteristics. I argue that these characteristics are responses to a set of problems inherent to contemporary trade liberalization. This is not a matter of mere historical interest. These problems remain very much with us, and recognition of this fact should influence our approach to future trade negotiations.