Module - 4

International Trade Patterns and

Balance of Payments

Dr Siva Krishna G
Assistant Professor
School of Commerce
NMIMS-HYD
 Contents of the Module
• The Pattern of International Trade
• Theories of International Trade
• Mercantilism
• Absolute Advantage Theory
• Comparative Advantage
• Heckscher-Ohlin Theory
• Product Life Cycle Theory
• New Trade Theory
• Porter’s Diamond Of Competitive Advantage
• Instruments of Trade Policy
 Introduction
International trade theory
• explains why it is beneficial for countries to engage in international trade
• helps countries formulate their economic policy
• explains the pattern of international trade in the world economy
• You already know that countries trade with each other, but do you know why they
trade? U.S. manufacturers know how to make clothing, in fact, much of clothing worn
by Americans used to be made in the U.S. Now, however, the U.S. buys a lot of its
textiles from places like Honduras and Guatemala. Why does Ford assemble cars
made for the American market in Mexico, while BMW and Nissan manufacture cars
for Americans in the U.S.?
• These are questions that economists have tried to answer for many years, and in this
chapter we’ll look at patterns of trade and explore some of the theories that have been
used to explain those patterns.
 Limitations of Absolute Advantage
• Absence of absolute advantage for technologically weak nations will not lead to
any advantage in free trade

• Assumption on resources does not hold true

• Only focuses on Inter-industry trade between countries but the countries also
engage in Intra-industry trade based on market power and economies of scale
 Porter’s Competitive Advantage
• In addition to the 4 factors in the national diamond, Porter maintains that 2
additional variables are influential.
• Chance events like major innovations and technological know-how
• Government Policy such as policies
• Government policy can
• Affect demand through product standards
• Influence rivalry through regulation and antitrust laws
• Impact the availability of highly educated workers and advanced transportation
infrastructure.
• The four attributes, government policy, and chance work as a reinforcing
system, complementing each other and in combination creating the conditions
appropriate for competitive advantage
• So far, Porter’s theory has not been sufficiently tested to know how well it holds
up
• Example: Germany’s Luxury Car Manufacturing Industry
• An example where Porter’s Diamond can be used to explain a regional advantage is in
Germany’s luxury high power car manufacturing industry, for brands such as Audi.
• The car manufacturing industry in German has a regional advantage because it satisfies the
four key factors in Porter’s Diamond. With firm strategy and rivalry, we see that there is
strong rivalry amongst lots of car manufacturers and so they compete intensely and keep
developing more innovative and quality products.
• There are certain demand conditions amongst the homebuyers. In parts of Germany, there
are no speed limits, so the sophisticated homebuyers want more powerful cars.
Consequently, the industry aims to cater for this particular need by developing innovative
engines.
• There are also related and supporting industries such as the iron and steel industry which
provide materials for car manufacturers, high level of education and training in the
workforce, banks for capital, component suppliers and IT infrastructure.
• There are also factor conditions, which include skilled engineers from renowned German
universities and the government’s focus on scientific research, which helps to push the car
manufacturing industry.
• The government has played a major role in creating the regional advantage as it supported
and funded scientific research and launched the construction of more roads and canals in
the 19th century. By, satisfying all these factors in Porter’s Diamond it, therefore, helps to
explain why Germany’s luxury high power car manufacturing industry has a regional
advantage.
• Porter, M. (2008) The Five Competitive Forces That Shape Strategies, Harvard
Business Review.
 Implications Of Trade Theories For Managers
• Location implications - a firm should disperse its various productive activities to
those countries where they can be performed most efficiently
• Firms that do not, may be at a competitive disadvantage
• First-mover implications - a first-mover advantage can help a firm dominate
global trade in that product
• Policy implications - firms should work to encourage governmental policies that
support free trade
• Firms should lobby the government to adopt policies that have a favorable impact on each
component of the diamond
 What is Commercial Policy?
• A commercial policy or trade policy is a governmental policy governing trade with
other countries.
• This covers tariffs, trade subsidies, import quotas, voluntary export restraints, and
restrictions on the establishment of foreign-owned businesses, regulation of trade in
service, and other barriers to international trade.
• Countries that are part of an economic union often have a single commercial policy
that determines how member countries can interact with non-member countries.
• For example, member countries of the European Union have a common commercial
policy.
• In modern times, the commercial policy of every country is generally based on the
encouragement of exports and the discouragement of imports. The exports are
encouraged by giving preferential freight rates on exports, subsidies, etc. Imports are
hindered by erecting the tariffs walls, exchange controls, quota system, buy at the
home campaign, etc.
 Case on Local Content Requirement in India
• Guidelines were issued by Indian Government for the solar mission mandated cells and modules for solar PV projects
based on crystalline silicon to be manufactured in India. That accounts to over 60% of total system costs. For solar
thermal, guidelines mandated 30% project to have domestic content. A vigorous controversy emerged between power
project developers and solar PV equipment manufacturers.
• The Power Project developers prefers to source modules by accessing highly competitive global market to attain
flexible pricing, better quality, predictable delivery and use of latest technologies.
• The Solar PV equipment manufacturers prefers a controlled/planned environment to force developers to purchase
modules from a small, albeit growing, group of module manufacturers in India. Manufacturers want to avoid
competition with global players and are lobbying the government to incentivise growth of local industry.
• Market responded to domestic content requirement by choosing to procure thin film modules from well established
international players. A significant number of announced project completions are using modules from outside India.
• US Trade Representative has filed a complaint at World Trade Organization challenging India’s domestic content
requirements in Phase II of this Mission, citing discrimination against US exports and that industry in US which has
invested hugely will be at loss. US insists that such restrictions are prohibited by WTO. India however claims that it is
only an attempt to grow local potential and to ensure self sustenance and reduce dependence
 Important links to know the tariff on products
• http://icegate.gov.in
• This is a portal for Indian Customs Ecommerce Gateway where tariff on any
products can be found.
• This portal also has an integrated payment gateway and the duties and taxes can
be paid through this portal.
• Through this portal all the export import documentation can be done online than
paper documentation.
End of the Module