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InternationalTradeTheoryWhatisinternationaltrade?

Exchangeofrawmaterialsandmanufacturedgoods(andservices)acrossnationalborders

InternationalTradeTheory Classicaltradetheories:

explainnationaleconomyconditionscountryadvantagesthatenablesuchexchangetohappen

Newtradetheories: explainlinksamongnaturalcountryadvantages,governmentaction,andindustrycharacteristicsthatenablesuchexchangetohappen

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ClassicalTradeTheories Mercantilism(pre16thcentury)

Takesanusversusthemviewoftrade Othercountrysgainisourcountrysloss

FreeTradetheories AbsoluteAdvantage(AdamSmith,1776) ComparativeAdvantage(DavidRicardo,1817) Specializationofproductionandfreeflowofgoods

benefitalltradingpartnerseconomies FreeTraderefined

Factorproportions(HeckscherOhlin,191933) Internationalproductlifecycle(RayVernon,1966)

Mercantilism

Fromthemid16th Centurytill19th Century Anationswealthdependsonitsaccumulatedtreasure,basicallyGold&Silver

Goldandsilverarethecurrencyoftrade. Exportmoretostrangersthanweimporttoamasstreasure,expandkingdom

Tradeiswinorlose;azerosumgame. TheinterestoftheStateisdominant

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MercantilismGovernmentintervenestoachieveasurplusinexports Theorysaysyoushouldhaveatradesurplus.

Maximize exportsthroughsubsidies. Minimize importsthroughtariffsandquotas.

King,exporters,domesticproducers:happy Subjects:unhappybecausedomesticgoodsstayexpensiveandoflimitedvariety

Fitquitewellwithanageofexploration,colonialism,imperialism,andcapitalism.(EastIndiaCompanies)

DavidHume 1752 Increasedexportsleadstoinflationandhigherprices.

Increasedimportsleadtolowerprices. Result:CountryAsellslessbecauseofhighpricesandCountryBsellsmorebecauseoflowerprices.

Inthelongrun,noonecankeepatradesurplus.

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FreeTradeTheory FreeTrade occurswhenagovernmentdoesnot

attempttoinfluence,throughquotasorduties,whatitscitizenscanbuyfromanothercountryorwhattheycanproduceandselltoanothercountry.

TheBenefitsofTrade allowacountrytospecializeinthemanufactureandexportofproductsthatcanbeproducedmostefficientlyinthatcountry.

ThepatternofInternationalTradedisplayspatternsthatareeasytounderstand(SaudiArabia/oilorBangladesh/laborintensivegoods).Othersarenotsoeasytounderstand(Japanandcars).

TheoryofAbsoluteAdvantage AdamSmith:WealthofNations(1776). Capabilityofonecountrytoproducemoreofaproduct

withthesameamountofinputthananothercountry. Acountry

Shouldspecializeinproductionofandexportproductsforwhichithasabsoluteadvantage;importotherproducts

Hasabsoluteadvantagewhenitismoreproductivethananothercountryinproducingaparticularproduct

Tradebetweencountriesis,therefore,beneficial. Assumesthereisanabsoluteadvantagebalanceamong

nations. Nolongerzerosum;everybodywins! Ghana/cocoa.

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ComparativeAdvantage DavidRicardo:PrinciplesofPolitical Economy,1817

Extendsfreetradeargument Efficiencyofresourceutilizationleadstomoreproductivity. Shouldimportevenifcountryismoreefficientintheproducts

productionthancountryfromwhichitisbuying. Looktoseehowmuchmoreefficient.Ifonlycomparativelyefficient,thanimport.

Countryshouldspecializeintheproductionofthosegoodsinwhichitisrelatively moreproductive...evenifithasabsoluteadvantageinallgoodsitproduces

Makesbetteruseofresources AbsoluteAdvantage isaspecialcaseofComparative

Advantage

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FactorEndowmentsTradeTheoryDeveloped by Eli Heckscher (1919) Expanded by Bertil Ohlin (1933)

FactorEndowmentsTradeTheoryoriginallyconsideredtwofactorsofProduction Labor&Capital

Factorsofproduction:labor,capital,land,humanresources,technologyDifferencesinfactorendowmentsnotondifferencesinproductivitydeterminepatternsoftrade

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FactorEndowmentsTradeTheory Acountryhasacomparativeadvantageinproducingproductsthatintensivelyusefactorsofproduction(resources)ithasinabundance

Exportgoodsthatintensivelyusefactorendowmentswhicharelocallyabundant. Corollary:importgoodsmadefromlocallyscarcefactors.

Patternsoftradearedeterminedbydifferencesinfactorendowments notproductivity.

LeontiefparadoxAcountrythatisrelativelylaborabundant(capitalabundant)shouldspecializeintheproductionandexportofthatproductwhichisrelativelylaborintensive(capitalintensive).UShasrelativelymoreabundantcapitalyetimportsgoodsmorecapitalintensivethanthoseitexports

Thelaborcostishigh,butexportsmorelaborintensivegoods

Explanation(?): UShasspecialadvantageonproducingnewproductsmadewithinnovativetechnologies

Thesemaybelesscapitalintensive,butmorelaborintensivetilltheyreachmassproductionstate

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ProductLifeCycleTheory(RaymondVernon,1966)

Asproductsmature,bothlocationofsalesandoptimalproductionchanges.

Affectsthedirectionandflowofimportsandexports.

Globalizationandintegrationoftheeconomymakesthistheorylessvalid.

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ProductCycleTheory:VernonsPremises

Technicalinnovationsleadingtonewandprofitableproductsrequirelargequantitiesofcapitalandskilledlabor

Theproductandthemethodsformanufacturegothroughthreestagesofmaturation

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International Product Trade Cycle Model

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

1 3 4 5 6 7 8 9 10 11 12 13 14 15

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

HighIncomeCountries

MediumIncomeCountries

LowIncomeCountries

Time

Stages of Production Development

New Product Standardized ProductMaturing Product

Quantity

production

consumption

2

Exports Imports

Imports

Exports

Exports

Imports

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TheProductCycleandTradeImplications Increasedemphasisontechnologysimpactonproductcost

Explainedinternationalinvestment Limitations

Mostappropriatefortechnologybasedproducts Someproductsnoteasilycharacterizedbystagesofmaturity

Mostrelevanttoproductsproducedthroughmassproduction

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ClassicTheoryConclusionFreeTradeexpandstheworldpieforgoods/services

TheoryLimitations: Simpleworld(twocountries,twoproducts) notransportationcosts nopricedifferencesinresources resourcesimmobileacrosscountries constantreturnstoscale eachcountryhasafixedstockofresourcesandnoefficiency

gainsinresourceusefromtrade fullemployment

TheNewTradeTheory Begantoberecognizedinthe1970s. Dealswiththereturnsonspecializationwheresubstantialeconomiesofscalearepresent. Specializationincreasesoutput,abilitytoenhanceeconomiesofscaleincrease.

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ApplicationoftheNewTradeTheory Typically,requiresindustrieswithhigh,fixedcosts.

Worlddemandwillsupportfewcompetitors. Competitorsmayemergebecausetheygottherefirst. firstmoveradvantage.

Somearguethatitgeneratesgovernmentinterventionandstrategictradepolicy.

FirstMoverAdvantage Economiesofscalemayprecludenewentrants.

Roleofthegovernment.

Boeing&Airbus

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PortersDiamond (1990) TheCompetitiveAdvantageofNations. Lookedat100industriesin10nations.

existingtheoriesdidntgofarenough. Question:Whydoesanationachieveinternationalsuccessinaparticularindustry?

DeterminantsofNationalCompetitiveAdvantage

Factorendowments:nationspositioninfactorsofproductionsuchasskilledlabororinfrastructurenecessarytocompeteinagivenindustry.

Demandconditions:thenatureofhomedemandfortheindustrysproductorservice.

Firmstrategy,structureandrivalry:theconditionsinthenationgoverninghowcompaniesarecreated,organized,andmanagedandthenatureofdomesticrivalry.

Relatedandsupportingindustries:thepresenceorabsenceinanationofsupplierindustriesorrelatedindustriesthatarenationallycompetitive.

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PortersDiamond

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FactorEndowments Factorsofproduction:theinputsnecessarytocompeteinanyindustry

Basicfactorsnatural,capitalandlaborresources(HeckscherOlin) arelargelyinherited

Advancedfactorssupportiveinfrastructure,technology&communicationsystemsandaneducatedworkforce

Advancedfactorsleadtocompetitiveadvantage createdasaresultofinvestmentbypeople,companies,government. Porteralsomakesadistinctionbetween

Generalizedfactorscanbeusedinanumberofdifferentindustries Specializedfactorstailoredforuseinspecificindustries

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FactorEndowments Selectivedisadvantagesmayleadtoadvantagesinfactorsofproductionundercertainconditions

RelationshipofBasictoAdvancedFactors Basiccanprovideaninitialadvantage. Mustbesupportedbyadvancedfactorstomaintainsuccess.

Nobasics,thenmustinvestinadvancedfactors.

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DeterminantsofNationalAdvantageDemandconditions:characterizedbythenatureandsizeofbuyersneedsinthehomemarketfortheindustrysgoodsorservices Sizeofthemarketsegmentcanleadtoscaleefficientfacilities

Efficiencycanleadtodominationoftheindustryinothercountries

Demandingconsumersmayleadtoefficientproduct

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RelatedandsupportingindustriesCreatesclustersofsupportingindustriesthatareinternationallycompetitive.

supportingservices,facilities,suppliersandsoon

Supportindesign Supportindistribution Relatedindustriesassuppliersandbuyers

Relatedandsupportingindustries Supplyingindustriesinthehomebasehasseveraladvantagesindownstreamindustries

Efficient,early,rapid,andsometimespreferentialaccesstothemostcosteffectiveinputs

Ongoingcoordination Innovationandupgrading

Acompetitivedomesticsupplierindustryisbetterthanrelyingonwellqualifiedforeignsuppliers

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Firmstrategy,structure,andrivalry Onecountrydiffersfromanotherwithregardtomanagerialsystemsandphilosophiesandwithregardtocapitalmarkets

Institutionalenvironmentsthatallowfirmstotakealongtermviewcontributepositivelytocompetitiveness

Presenceofalargenumberofcompetingfirmsorrivalsinthedomesticindustry

Competitionamongfirmsisnecessaryforallocative efficiencyinamarketsystem,butdomesticrivalrycontributestodynamic,technologicalefficiency

Reinert/WindowsontheWorldEconomy,2005 30

PorterDiamondInteractions MostimportantInteractionsallrelatedtorivalry

Domesticrivalsparticularlywhenclusteredinageographicregioncontributetothecreationoffactors

Especiallyspecialized,advancedfactors Agroupofdomesticrivalscontributetothepresenceofspecializedandsophisticatedsuppliers

Rivalryamongdomesticfirmsproducingdifferentiatedproductsenlargeshomedemandandmakesitmoresophisticated

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SpatialClustersintheWorldEconomy

Flexibilityandhomebaseconceptsconvergeinspatialclustering Interlinkedfirms/activitiesthatexistinthesamelocalandregional

setting(intermsofeconomic,social,culturalandinstitutionalfactors) AKAclusters,networks,centersofexcellence,andindustrialdistricts

FirstnoticedinSiliconValleyintheUnitedStates,inwhatisnowknownastheThirdItaly,inSouthernGermany,andinEastAsia

Muchproductiveknowledgecannotbecodifiedintoexplicitforms Rather,communicatedviaahighlysocialprocessoffacetoface

interactionoverarelativelylongperiodoftime Consequently,innovationandlearningisaspatiallylocated,socialand

collectiveprocessamongagroupoffirms

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SpatialClustersintheWorldEconomy

Whydospatialclusterscontributetotheproductivityoffirms? Concentratedcommunicationmadepossiblebyaclusterincreaseslearningandinnovation

Contributestothedynamic,technologicalefficiencyoffirmsinthecluster

Trustincreasesovertimewhichfacilitatescontractingandexchangeamongfirms

Commonbusinessculturedevelopswhichreducesuncertainty

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EvaluatingPortersTheory IfPorterisright,countryexportsshouldreflectthepresenceofthefourdiamondcomponents.Countrieswillimportgoodsfromindustrieswheresomeorallthecomponentsaremissing.

Toosoontotell.

ImplicationsforBusiness Locationimplications:makessensetodisperseproductionactivitiestocountrieswheretheycanbeperformedmostefficiently.

Firstmoverimplications:Itpaystoinvestsubstantialfinancialresourcesinbuildingafirstmover,orearlymover,advantage.

Policyimplications:promotingfreetradeisgenerallyinthebestinterestsofthehomecountry,althoughnotalwaysinthebestinterestsofthefirm.Eventhough,manyfirmspromoteopenmarkets.

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InternationalBusiness Internationalbusinessconsistsofallcommercialtransactionsincludingsales,investments,andtransportationthattakeplacebetweentwoormorecountriestosatisfytheprofitmotivesofindividuals,companies,andorganizations

WhyfirmsengageinInternationalBusiness ToExpandSales:pursuinginternationalsalesincreasesthepotentialmarketandpotentialprofits

ToAcquireResources:maygivecompanieslowercosts,newandbetterproducts,additionaloperatingknowledge

ToDiversifyorReduceRisks:internationaloperationsmayreduceoperatingriskbysmoothingsalesandprofits,preventingcompetitorsfromgainingadvantage

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WhatsdifferentaboutInternationalStrategy

CorporateStrategy&InternationalStrategy Heterogeneity Scale Volatility