Lecture International business - Chapter 5: International trade

In this chapter, you will explore global patterns of international trade. You will also: Learn about mercantilism - the earliest theory of international trade, explore the theories of absolute and comparative advantage, and understand more recent trade theories and their implications for international business.

5 International

Trade

• Describe the relationship between international trade

volume and world output, and identify overall trade patterns

• Describe mercantilism and explain its impact on world

powers and their colonies

• Explain the theories of absolute advantage and comparative advantage

• Explain the factor proportions and international product life

• Walmart and others import from China

• China imports from other countries, too

• Causes dramatic growth in global trade

Purchase, sale, or exchange of goods and

services across national borders

• World trade

• 80% merchandise

• 20% services

• World output impacts trade

• Growing output = growing trade

• Sluggish output = sluggish trade

• World trade grows faster

than world output

World’s Top Exporters

High-income and low- and middle-income nations

Who Trades with Whom?

Independence

Potential effects of dependence:

+ Infuses needed capital

+ Creates jobs and raises wages

+ Imports technology and skills

– Economic problems transferred – Political turmoil can spill over

Total dependence

Total independence

What are the

patterns of global

and regional trade

flows that we see

among nations?

60 percent of world merchandise trade

occurs among high-income countries 34

percent of world merchandise trade occurs

among high-income countries and low- and

middle-income nations About 6 percent of

trade occurs only among low- and

middle-income nations

Intra-regional trade accounts for 71 percent

of Europe’s exports, 52 percent of Asia’s

exports, and around 48 percent of North

America’s exports

This century is called the “Pacific century”

due to expected growth in Asia and a shift in

trade from the Atlantic to the Pacific Ocean

Trade Theory Timeline

Nations accumulate financial wealth by encouraging

exports and discouraging imports

Three pillars:

▪ Maintain trade surplus

▪ Government intervention

▪ Exploit colonies

‒ World trade is a zero-sum game

‒ Limits colonies’ market potential

‒ Constrains output and consumption

Ability of a nation to produce a good more efficiently than any other nation (greater output using same or fewer resources)

Specialization and trade allows each to

produce and consume more

Absolute Advantage

Specialization and trade:

more tea than it would

have produced itself

more rice than it would

Inability of a nation to produce a good more efficiently than other nations, but an ability to produce that good more

efficiently than it does any other good

Specialization and trade allow each to

produce and consume more

Comparative Advantage

Specialization and trade:

more tea than it would

have produced itself

more rice than it would

• No transportation costs of traded goods

• Labor is the only resource used to produce goods and it cannot cross borders

• Specialization does not create efficiency and improvement gains

When a nation cannot produce

a good more efficiently than

other nations, but it can

produce that good more

efficiently than it does any

other good, we say this is a

case of .

a Absolute advantage

When a nation cannot produce

a good more efficiently than

other nations, but it can

produce that good more

efficiently than it does any

other good, we say this is a

case of .

a Absolute advantage

b Comparative advantage

c Mercantilism

Countries produce and export goods that require

resources (factors) in abundance, and import goods

that require resources in short supply

Two factor types

Land and Capital Labor

Research found evidence opposite of that predicted

by the factor proportions theory:

Research found evidence opposite of that predicted

by the factor proportions theory:

 U.S exports are more labor-intensive than U.S imports

Possible explanations:

 Theory assumes nation’s production

factors to be homogeneous

 Theory is better predictor when

expenditures on labor are considered

Possible explanations:

factors to be homogeneous

expenditures on labor are considered

A company begins by exporting its product and later undertakes foreign direct investment as a product moves through its life

cycle

Fundamentals

and economies of scale

create barriers to entry

assisting home companies

First-mover advantage

advantage of being first to enter an industry

barrier to market entry for potential rivals

Briefly describe the

new trade theory Does

its focus on productivity

put it at odds with the

theory of comparative

advantage and factor

New trade theory says that there are

gains from specialization and

economies of scale, companies first to

market create barriers to entry, and

government is helpful if it assists its

home-based companies.

Because new trade theory emphasizes

productivity rather than a nation’s

resources, it is in line with the theory of

comparative advantage and at odds

with factor proportions theory.

Basic Factors

Advanced Factors

Sophisticated home-market buyers drive companies to improve existing products and develop entirely new products

and technologies

Companies in an internationally competitive

industry do not exist in isolation

Supporting industries form “clusters” of economic activity in the geographic area

Each industry reinforces the competitiveness of

every other industry in the cluster

and Rivalry

 Highly skilled managers are

essential because strategy

has lasting effects on firm competitiveness

 Domestic industry whose

structure and rivalry create

National

theory states that a

nation’s competitiveness in

an industry depends on the

capacity of the industry to

innovate and upgrade.

a Product life cycle

b First-mover

c Competitive advantage

National

theory states that a

nation’s competitiveness in

an industry depends on the

capacity of the industry to

innovate and upgrade.

a Product life cycle

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