International Business 10e Daniels/Radebaugh/Sullivan

International Business
Chapter Five International Trade Theory

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Chapter Objectives

Explain trade theories Discuss how global efficiency can be increased through free trade Introduce prescriptions for altering trade patterns Explore how business decisions influence international trade
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General Types of Trade Theories

Descriptive: the natural order of trade

Laissez-faire conditions Which products, how much, and with whom a country will trade in the absence of restrictions

Prescriptive: questions whether governments should interfere with the free movement of goods and services
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Mercantilism

Initial trade theory that formed the foundation of economic thought from 1500 1800 Based on concept that a nations wealth is measured by its holding of treasure (gold) Nations often imposed restrictions on imports since they did not want their treasure moving to another country to pay for the imports It was also advantageous to run a trade surplus with colonies
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Mercantilism Terms

Favorable balance of trade: country is exporting more than it is importing Unfavorable balance of trade: country is importing more than it is exporting, i.e. a trade deficit Neomercantilism: current term to describe the approach of countries that try to run favorable balances of trade to achieve some social or political gains
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Absolute Advantage

Absolute advantage holds that different countries produce some goods more efficiently than other countries Thus, global efficiency can be increased through international free trade

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Country Specialization

Under the concept of absolute advantage countries could increase efficiency because:

Labor could become more skilled by repeating the same tasks Labor would not lose time in switching from the production of one kind of product to another Long production runs would provide incentives for the development of more effective working methods
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Natural Advantage

Countries have inherent advantages

Climate Natural resources Labor forces

Two countries that have opposite natural advantages should favor trade with one another

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Acquired Advantage

Most contemporary trade is manufactured goods and services rather than agricultural goods or natural resources Countries with an acquired advantage produce manufactured goods and services competitively
Product technology Process technology

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Absolute Trade Advantage

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Figure 5.2

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Comparative Advantage

There are still global gains to be made if a country specializes in products it produces more efficiently than other products Regardless of whether other countries can produce those same products even more efficiently

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Comparative Advantage

Figure 5.3
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Basic Assumptions

Full employment Economic efficiency is sought Division of gains Two countries/two commodities Transportation costs Mobility Statics and dynamics Services Country size/variety of resources
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Factor Proportions

Land-labor relationship Labor-capital relationship Technological complexities

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Global Competitive Advantage

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Product Life Cycle Theory

Production Location Market Location Competitive Factors Production Technology

Introduction Growth Maturity Decline

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Limitations of Product Life Cycle Theory

Products with extremely short PLCs Luxury products where cost may be of little concern Businesses with products that follow a differentiation strategy Products that require specialized technical labor for subsequent generations
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Looking to the Future

Protectionist sentiment is growing Economies are growing, therefore efficiencies of multiple production locations grow Flexible, small-scale production methods are on the rise (robotics/automation processes) Services are growing faster than production in industrial countries
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Categories of World Trade

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Economically Linking Countries

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Chapter Review

Explain trade theories Discuss how global efficiency can be increased through free trade Introduce prescriptions for altering trade patterns Explore how business decisions influence international trade
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