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CHAPTER 5

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CHAPTER 5 LEARNING OBJECTIVES

After studying this chapter you should be able to:

1. Use the resource-based and institution-based views to explain why nations trade.

2. Identify and define the classical and modern theories of international trade.

3. Explain the importance of political realities governing international trade.

4. Identify factors that should be considered when your firm participates in international trade.

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LO1: WHY DO NATIONS TRADE?

Terms to know: Exporting Importing Merchandise trade Service trade Trade deficit Trade surplus Balance of trade

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TERMS

ExportingSelling abroad

ImportingBuying from abroad

MerchandiseTangible products being traded

ServiceIntangible services being traded

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TERMS

Trade deficitWhen a nation imports more than it exports

Trade surplusWhen a nation exports more than it imports

Balance of tradeWhether a country has a trade surplus or

deficit

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LO1: WORLD MERCHANDISE EXPORTS

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In 2010, merchandise exports increased by 22% in value.

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THEORIES OF INTERNATIONAL TRADE

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THEORIES OF INTERNATIONAL TRADE

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LO2: MERCANTILISM

Views international trade as a zero-sum game. A nation that exported more than it imported would enjoy net inflow of money.

Intellectual ancestor of protectionism – idea that governments should actively protect domestic industries from imports and promote exports.

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LO2: ABSOLUTE ADVANTAGE

With free trade, a nation gains by specializing in

economic activities in which it has an absolute

advantage.

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ABSOLUTE ADVANTAGE

Free tradeBuying and selling of goods and services with

little or no government intervention

Absolute advantageTo be more efficient than anyoneelse in the production of any good or service

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LO2: COMPARATIVE ADVANTAGE

The relative advantage in one economic activity

that a nation enjoys over

others.

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COMPARATIVE ADVANTAGE

Nation A has an absolute advantage in production of all goods compared toNation B

As long as Nation B is not equally less efficient in the production of both goods, Nation B can still choose to specializein the production of one good in which it has comparative advantage

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LO2: PRODUCT LIFE CYCLE THEORY

Dynamic theory that accounts for changes in the patterns of trade over time.

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LO2: STRATEGIC TRADE

Suggests that strategic government intervention in certain industries

can enhance their odds for international success.

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NATIONAL COMPETITIVE ADVANTAGE OF INDUSTRIES(DIAMOND THEORY)

Competitive advantage of certain industries in different nations depends on four factors:

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Source: M. Porter, “The competitive advantage of nations,” Harvard Business Review (March-April 1990): 77. Reprinted with permission.

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LO3: IMPORTANCE OF POLITICAL REALITIES

Why do trade barriers remain?

Tariff Barriers – means of discouraging imports by placing a tariff (tax) on imported goods.

Costly to organize individuals and firms in scattered countries to make the case for free trade.

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LO3: IMPORTANCE OF POLITICAL REALITIES

Why do trade barriers remain?

Non-tariff barriers – discourages imports by means other than tariffs:

Subsidies Import quotas Voluntary export restraints Local content requirements Administrative policies Antidumping duties

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NONTARIFF BARRIERS (NTBs)Import quotaRestriction on the quantity of a good that can be

brought into a country

Voluntary export restraint (VER)Exporting countries voluntarily agree to restrict their

exports

Local content requirementRules stipulating that a certain proportion of the

value of the goods made in one country must originate from that country

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NONTARIFF BARRIERS (NTBs)

Administrative policyBureaucratic rules that make it harder to

import foreign goods

Antidumping duty

Costs levied on imports that have been “dumped” (selling below costs to “unfairly” drive domestic firms out of business

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LO3: ARGUMENTS AGAINST FREE TRADE

Economic:

1. Protect domestic industries

2. Shield infant industries

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ARGUMENTS AGAINST FREE TRADE

Trade embargoPolitically motivated trade sanctions

against foreign countries to signal displeasure

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ARGUMENTS AGAINST FREE TRADE

Infant industry argumentYoung domestic firms need government

protection because they stand no chance of surviving and will be crushed by mature foreign rivals

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LO3: ARGUMENTS AGAINST FREE TRADE

Political:

1. National security2. Consumer protection3. Foreign policy4. Environmental responsibility5. Social responsibility

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