CHAPTER 3
The International Trade Theory
PART 1:
INTERNATIONAL TRADE AMONG NATIONS
INTRODUCTION
Objectives: The pattern of international trade in the world economy Review some theories that explain why it is beneficial for a country to engage in intl trade.
PATTERN & BENEFIT OF TRADE
FREE TRADE??
A situation where a government does not attempt to influence, through quotas or duties, what its citizens can buy from another country or what they can produce and sell to another country.
ARGUMENT AGAINST FREE TRADE
BENEFIT OF TRADE?? Allow a country to specialize in the manufacture and export of products that can be produced most efficiently in that country. PATTERN OF INTERNATIONAL TRADE?? Some displays patterns that are easy to understand
Others are not so easy to understand
COMPARATIVE ADVANTAGE & HECKSCHER OHLIN THEORY
COMPARATIVE ADVANTAGE
Theory:
It make sense for a country to specialize in production of goods that it produces most efficiently & buy goods that it produces less efficiently from other countries.
Import even if the country is efficient in products
production than the country from which its buying.
Example from textbook between Ghana & South Korea
COMPARATIVE ADVANTAGE & THE GAIN FROM TRADE
Assume both Ghana & Korea have 200 resources each
150 Cocoa, 50 Rice
HECKSCHER OHLIN THEORY
Comparative advantage arises from differences in national factor endowments. (Land, labor, capital)
Patterns of trade are determined by differences in factor endowments - not productivity.
Export goods that intensively use factors of production which are locally abundant & import goods made from locally scarce factors. Ex: Saudi oil exports, Canada lumber export
NATIONAL COMPETITIVE ADVANTAGE: PORTERS DIAMOND
IMPLICATIONS FOR MANAGERS
Different countries have advantages in different productive activities Make sense for a firm to disperse productive activities to countries where they can be performed most efficiently
Government policies with respect to free trade or protecting domestic industries can significantly impact global competitiveness Businesses should encourage governmental policies that support free trade Also lobby the government to adopt policies that have a favorable impact on each component of the diamond
SECTION 2:
TRADE POLICY, GATT & WTO
Why
government interfere in trade? Instrument of trade policy. Arguments for intervention. Modern international trade system, based on GATT & WTO
INSTRUMENTS OF TRADE POLICY
Specific or Advelorem Import quotas Voluntary export restraints Local content requirements Administrative policies
Tariffs
ARGUMENTS FOR INTERVENTION
Protecting jobs & industries National security Retaliation Protecting consumers Furthering foreign policy objectives Protecting human rights Infant industry protection Strategic trade policy
WORLD TRADING SYSTEM
How has the current world trade system emerged? From Smith To The Great Depression Smoot-Hawley Act 1930 1947-79: GATT, Trade Liberalization, And Economic Growth. 1980-1993: Protectionist Trends The Uruguay Round And The World Trade Organization
WTO: EXPERIENCE TO DATE
An effective advocate & facilitator of trade deals, particularly in such areas as services Policing & enforcement mechanisms are having a positive effect adoption of WTO recommendations for trade disputes 1997 Open up if telecommunication industry to foreign competition - common rules for fair competition in telecommunications 102 countries pledged to open to varying degrees their banking, securities, insurance sectors to foreign competition
PART 3:
REGIONAL ECONOMIC INTEGRATION
INTRODUCTION
Regional economic integration Agreements between countries in a geographic region to reduce tariff and non-tariff barriers to the free flow of goods, services, and factors of production between each other
LEVELS OF ECONOMIC INTEGRATION
There are five levels of economic integration: 1. Free trade area Eliminates barriers to the trade among member countries, but members determine their own trade policies for non-members
The European Free Trade Association (between Norway, Iceland, Liechtenstein, and Switzerland), and the North American Free Trade Agreement (between the U.S., Canada, and Mexico) are both free trade areas
Asean Free Trade Area (AFTA)
LEVELS OF ECONOMIC INTEGRATION
2. Customs union Eliminates trade barriers between member countries & adopts a common external trade policy
The Andean Pact (between Bolivia, Columbia, Ecuador and Peru).
3. Common market
No barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production.
MERCOSUR
(between Brazil, Argentina, Paraguay, and Uruguay) is aiming for common market status
LEVELS OF ECONOMIC INTEGRATION
4. Economic union Free flow of products and factors of production between members, common external trade policy A common currency, harmonized tax rates, common monetary and fiscal policy The European Union (EU) is an imperfect economic union 5. Political union Involves a central political apparatus that coordinates the economic, social, and foreign policy of member states The EU is headed toward at least partial political union. United States is an example of political union
THE CASE FOR REGIONAL INTEGRATION
Economic case All countries gain from free trade and investment Regional economic integration is an attempt to exploit the gains from free trade and investment Political case Linking countries together, making them more dependent on each other. Creates incentives for political cooperation and reduces the likelihood of violent conflict Gives countries greater political clout when dealing with other nations
IMPEDIMENTS TO INTEGRATION
Economic integration can be difficult because:
while
a nation as a whole may benefit from a regional free trade agreement, certain groups may lose
it
implies a loss of national sovereignty
Implications & Opportunities For Managers
The EU and NAFTA currently have the most immediate implications for business
Opportunities: opens new markets makes it possible for firms to realize potentially enormous cost economies by centralizing production in those locations where the mix of factor costs and skills is optimal
THREATS
Within each grouping, the business environment becomes competitive
EU companies are becoming more capable
There is a risk of being shut out of the single market by the creation of a trade fortress EU intervention and impose conditions on companies proposing mergers and acquisitions which could limit the ability of firms to follow the strategy of their choice