„
 

’



 
 ’

Dr. Bernadette Warner

|
|
| 
   m
înternational Trade
¦ ½
ectives
¦ întroduction
¦ înternational trade theory
¦ Barriers to trade
¦ Non-tariff arriers to trade
¦ ½ther economic developments
|
|
| 
   
½
ectives
¦ 3
 the term   
and discuss the role of
mercantilism in modern international trade.
¦ 2the theories of a solute advantage and comparative
advantage.
¦ £  the importance of international product life cycle theory to
the study of international economics.
¦ º
some of the most commonly used arriers to trade and
other economic developments that affect international economics.
¦ 3 some of the reasons for the tensions etween the theory of
free trade and the widespread practice of national trade arriers.

|
|
| 
   
întroduction
¦ înternational trade: d
  




d d


 
   

d 

d

¦ We will focus on:
- îd
dd
d

-
|
|
|

dd


   
Dn ½verview ½f Trade Theory
¦[ree trade refers to a situation where a
government does not attempt to
influence through quotas or duties what
its citizens can uy from another country
or what they can produce and sell to
another country

|
|
| 
  
 Why do nations trade?
Trade theories:
¦ Îercantilism;

¦ Theory of a solute advantage;

¦ Theory of comparative advantage;

¦ [actor endowment theory;

¦ înternational product cycle theory;

¦ ½ther considerations.

|
|
| 
   
Îercantilism
¦ D trade theory which holds that a
government can improve the well-
eing of the country y encouraging
exports and stifling imports.

Cf.) Neo mercantilism: without the

reliance on precious metal (gold).
|
|
| 
   
Îercantilism
¦Îercantilism suggests that it is in a country¶s est
interest to maintain a trade surplus -- to export more
than it imports
¦Îercantilism advocates government intervention to
achieve a surplus in the alance of trade
¦ît views trade as a zero-sum game - one in which a

gain y one country results in a loss y another

|
|
| 
   
Theory of D solute Ddvantage
¦ D trade theory which holds that y specializing in
the production of goods, which they can produce
more efficiently than any others, nations can
increase their economic well- eing.
Dn example
¦ Dssume:
- la our is the only cost of production;
- lower la our-hours per unit of production
means lower production costs and higher
productivity of la our.
|
|
| 
   
 Theory of D solute Ddvantage

North has an a solute advantage in the production of cloth.

South has an a solute advantage in the production of grain.

ît follows that:
îf North produces cloth and South produces grain, and an
exchange ratio can e arranged, oth the countries will enefit
from trade.
|
|
| 
   |
 Comparative Ddvantage
¦David Ricardo asked what might happen when one
country has an a solute advantage in the production of
all goods
¦Ricardo¶s theory of comparative advantage suggests
that countries should specialize in the production of those
goods they produce most efficiently and uy goods that
they produce less efficiently from other countries, even if
this means uying goods from other countries that they
could produce more efficiently at home
|
|
| 
   
Theory of Comparative Ddvantage
¦ D trade theory which holds that nations should
produce those goods for which they have the
greatest relative advantage.
Dn example
¦ Dssume:
- la our is the only cost of production;
- lower la our-hours per unit of production
means lower production costs and higher
productivity of la our.
|
|
| 
   
Theory of Comparative Ddvantage

North has an a solute advantage in the production of oth cloth and grain Ô  the
relative costs differ (i.e. gains from trade).
în North, one unit of cloth costs 50/100 hours of grain.
în South, one unit of cloth costs 100/100 hours of grain.

ît follows that:
îf North can import more than a half unit of grain for one unit of cloth, it will gain
from trade.
îf South can import one unit of cloth for less than one unit of grain, it will also gain
from trade.
Under the circumstance presented in the a ove example, oth countries can enefit from trade.
|
|
| 
   
6ualifications Dnd Dssumptions
The simple example of comparative advantage assumes:
¦only two countries and two goods

¦zero transportation costs

¦similar prices and values

¦resources are mo ile etween goods within countries, ut not

across countries
¦constant returns to scale

¦fixed stocks of resources

¦no effects on income distri ution within countries

|
|
| 
   
 ºxtensions ½f The Ricardian Îodel
¦Resources do not always move freely from one economic activity
to another, and
o losses may occur
¦Unrestricted free trade is eneficial, ut ecause of diminishing
returns, the gains may not e as great as the simple model would
suggest
½pening a country to trade:
¦might increase a country's stock of resources as increased
supplies ecome availa le from a road
¦might increase the efficiency of resource utilization, and free up
resources for other uses
¦might increase economic growth
|
|
| 
   
 [actor ºndowment Theory
¦ Dlso known as the Heckscher-½hlin theory†
- îd
d
 d

d 
d
 d
d

dd

 

d d  d  d 

d
 dd 
d

 

dd

 d

 †

†d
d 
d



dd 

dd

 

¦ Weaknesses of factor endowment theory:

- 

d
 




d d
d  
 

d
 d
- The Leontief paradox: d

d
d
dd
d
d

d


d

  
ddd

 


d

d

 


 dd
d


|
|
| 
   
înternational Product Life
Cycle Theory (îPLC)
¦ D theory of the stages of production for a product
with new ³know-how´: it is first produced y the
parent firm, then y its foreign su sidiaries and
finally anywhere in the world where costs are the
lowest; it helps to explain why a product that
egins as a nation¶s export often ends up as an
import.

|
|
| 
   
 The Product Life Cycle Theory
¦The product life-cycle theory, proposed y Raymond Vernon, suggested that
as products mature oth the location of sales and the optimal production
location will change affecting the flow and direction of trade
¦Vernon argued that the size and wealth of the U.S. market gave U.S. firms a
strong incentive to develop new products
¦Vernon argued that initially, the product would e produced and sold in the
U.S., later, as demand grew in other developed countries, U.S. firms would
egin to export
¦½ver time, demand for the new product would grow in other advanced
countries making it worthwhile for foreign producers to egin producing for
their home markets

|
|
| 
   
New Trade Theory
¦New trade theory suggests that the a ility of firms to gain
economies of scale (unit cost reductions associated with a
large scale of output) can have important implications for
international trade

New trade theory suggests that:

¦through its impact on economies of scale, trade can increase
the variety of goods availa le to consumers and decrease the
average cost of those goods
¦in those industries when output required to attain economies
of scale represents a significant proportion of total world
demand, the glo al market may only e a le to support a
small num er of enterprises
|
|
| 
   
î
 d

d 
!d
¦Without trade, nations might not e a le to produce those
products where economies of scale are important
¦With trade, markets are large enough to support the
production necessary to achieve economies of scale
¦So, trade is mutually eneficial ecause it allows for the
specialization of production, the realization of scale
economies, and the production of a greater variety of
products at lower prices

|
|
| 
   |
ºconomies ½f Scale, [irst Îover
Ddvantages, Dnd The Pattern ½f Trade
¦The pattern of trade we o serve in the world
economy may e the result of first mover advantages
(the economic an strategic advantages that accrue to
early entrants into an industry) and economies of
scale
¦New trade theory suggests that for those products
where economies of scale are significant and
represent a su stantial proportion of world demand,
first movers can gain a scale ased cost advantage
that later entrants find difficult to match
|
|
| 
   
împlications ½f New Trade Theory
¦Nations may enefit from trade even when they do not differ
in resource endowments or technology
¦D country may dominate in the export of a good simply
ecause it was lucky enough to have one or more firms
among the first to produce that good
¦While this is at variance with the Heckscher-½hlin theory, it
does not contradict comparative advantage theory, ut
instead identifies a source of comparative advantage
¦ Dn extension of the theory is the implication that
governments should consider strategic trade policies that
nurture and protect firms and industries where first mover
advantages and economies of scale are important
|
|
| 
   
National Competitive
Ddvantage: Porter¶s Diamond
[igure 5.6: Determinants of National Competitive
Ddvantage: Porter¶s Diamond

|
|
| 
   
ºvaluating Porter¶s Theory
Government policy can:
¦affect demand through product standards

¦influence rivalry through regulation and antitrust laws

¦impact the availa ility of highly educated workers and

advanced transportation infrastructure.

¦The four attri utes, government policy, and chance work as

a reinforcing system, complementing each other and in
com ination creating the conditions appropriate for
competitive advantage
|
|
| 
   
împlications [or Îanagers
There are three main implications for
international
usinesses:
¦location implications

¦first-mover implications

¦policy implications

|
|
| 
   
Location
¦Different countries have advantages in different
productive activities
¦ît makes sense for a firm to disperse its various
productive activities to those countries where they
can e performed most efficiently
¦înternational trade theory suggests that firm sthat
fail to do this, may e at a competitive disadvantage

|
|
| 
   
[irst-Îover Ddvantages
¦Being a first mover can have important
competitive implications, especially if
there are economies of scale and the
glo al industry will only support a few
competitors
¦[irms that esta lish a first-mover
advantage may dominate glo al trade in
that product
|
|
| 
   
Government Policy
¦Government policies with respect to free trade or
protecting domestic industries can significantly
impact glo al competitiveness
¦Businesses should work to encourage governmental
policies that support free trade
¦[irms should also lo y the government to adopt
policies that have a favora le impact on each
component of the diamond

|
|
| 
   
 Barriers to trade

|
|
| 
   
Reasons for Barriers to Trade
¦ Protect local
o s y shielding home-country usiness from foreign
competition.
¦ ºncourage local production to replace imports.
¦ Protect infant industries that are
ust getting started.
¦ Reduce reliance on foreign suppliers.
¦ ºncourage local and foreign direct investment.
¦ Reduce alance of payments pro lems.
¦ Promote export activity.
¦ Prevent foreign firms from dumping, that is, selling goods elow cost
in order to achieve market share.
¦ Promote political o
ectives such as refusing to trade with countries
that practice apartheid or deny civil li erties to their citizens.

|
|
| 
   |
 Commonly Used Barriers to Trade
¦ 



- Tariffs: d  
d
d
¦ 6dd
d
- 6uotas: "dd
d
d
 
- ºm argos: "d
dd

¦ îd
d
 
- D cartel:   
d d
d


d 

"dd
 
ddd

¦ d 

¦ #
d
- ºxchange controls: dd d
ddd
  

¦ #

d

dd
- $
d#%î
- $
dd


dd
   
|
|
| 
   
Non-Tariff Barriers to Trade
¦ 6uotas
¦ ³Buy national´ restrictions
¦ Customs valuation
¦ Technical arriers
¦ Dntidumping legislation, su sidies and
countervailing duties
¦ Dgricultural product regulations and su sidies
¦ ºxport restraints.
|
|
| 
   
½ther ºconomic Developments
¦ Counter-trade: arter trade in which the exporting
firm receives payments in products from the
importing country.
¦ Trade in services: as high-income countries move
toward a service economy, trade in services has
grown.
¦ [ree trade zones: a designated area where importers
can defer payment of customs duty while further
processing of products takes place (as a foreign trade
zone).
|
|
|