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Chapter Six:

International Trade and Factor Mobility Theory

&Chapter Seven:

Governmental Influence On Trade

Dr. Mayur Shah

International Business

Part Three

Theories and Institutions: Trade and

Investment

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Chapter Objectives

To understand theories of international trade

To explain how global efficiency can be improved through free trade

To identify factors affecting national trade patterns

To explain why a countrys export capabilities are dynamic

To understand why production factors

To explain the relationship between foreign trade and international factormobility

To explain the rationales for governmental policies that enhance andrestrict trade

To show the effects of pressure groups on trade policies

To describe the potential and actual effects of governmental interventionon the free flow of trade

To illustrate the major means by which trade is restricted and regulated

To demonstrate the business uncertainties and business opportunitiescreated by governmental trade policies

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Chapter 6:

International Operations and

Economic Connections

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Laissez-Faire versus Interventionist

Approaches to Exports & Imports

Interventionist:

Mercantilism

Neomercantilism

Free-trade theories:

Absolute advantage

Comparative advantage

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Theories of Trade Patterns

Explaining trade patterns:

Country size

Factor proportions

Country similarity

Trade competitiveness:

Product life cycle theory

Porter diamond

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What the major trade theories Do

and Dont discuss

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Mercantilist Theory

Mercantilist theory proposed that a country

should try to achieve a favorable balance

of trade (export more than it imports)

Neomercantilist policy also seeks a

favorable balance of trade, but its purpose

is to achieve some social or political

objective

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Theory of Absolute Advantage

Suggests specialization through free trade

because consumers will be better off if

they can buy foreign-made products that

are priced more cheaply than domesticones

A country may produce goods more

efficiently because of a natural advantageor because of an acquired advantage

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Theory of Comparative Advantage

Also proposes specialization through free

trade because it says that total global

output can increase even if one country

has an absolute advantage in theproduction of all products

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Theories of Specialization

Both absolute and comparative advantagetheories are based on specialization

Assumptions policymakers question: full employment

economic efficiency division of gains

transport costs

statics and dynamics

services production networks

mobility

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Trade Pattern Theories

How much a country will depend on trade

if it follows a free trade policy

What types of products countries will

export and import

With which partners countries will primarily

trade

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Theory Of Country Size

Countries with large land areas are apt tohave varied climates and naturalresources

They are generally more self-sufficientthan smaller countries are

Large countries production and market

centers are more likely to be located at agreater distance from other countries,raising the transport costs of foreign trade

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Factor-Proportions Theory

A countrys relative endowments of land,

labor, and capital will determine the

relative costs of these factors

Factor costs will determine which goods

the country can produce most efficiently

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Worldwide trade of major

manufactured goods

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Country-similarity Theory

Most trade today occurs among high-income

countries because they share similar market

segments and because they produce and

consume so much more than emergingeconomies

Much of the pattern of two-way trading partners

may be explained by cultural similarity between

the countries, political and economicagreements, and by the distance between them

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Product Life Cycle (PLC)

Theory Companies will manufacture products first

in the countries in which they were

researched and developed, almost always

developed countries

Over the products life cycle, production

will shift to foreign locations, especially to

developing economies as the productreaches the stages of maturity and decline

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Life Cycle of the International

Product

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The Porter Diamond

Four conditions as important for

competitive superiority:

demand conditions

factor conditions

related and supporting industries

firm strategy, structure, and rivalry

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Limitations of the Porter Diamond

Theory

Production factors and finished goods are

only partially mobile internationally

The cost and feasibility of transferring

production factors rather than exporting

finished goods internationally will

determine which alternative is better

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The Relationship

between Trade and Factor Mobility

Capital and labor move internationally to

gain more income and flee adverse

political situations

Although international mobility of

production factors may be a substitute for

trade, the mobility may stimulate trade

through sales of components, equipment,and complementary products

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Chapter 7

Government restrictions on foreign tradethrough trade policies are known asprotectionism

Government take measures to restrict (orenhance) international trade which will invariably

affect the companies capacity to compete on aninternational scale

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Physical and Social Factors Affecting

the Flow of Goods and Services

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Why Governments Intervene in

Trade

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Possible impacts of import restrictions

designed to create domestic employment

May lead to retaliation by other countries.

Are less likely retaliated against effectively by

small economies.

Are less likely to be met with retaliation ifimplemented by small economies.

May decrease export jobs because of price

increases for components. May decrease export jobs because of lower

incomes abroad.

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Protecting Infant-Industries

The infant-industry argument for protection

holds that governmental prevention of

import competition is necessary to help

certain industries move from high-cost tolow-cost production

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Developing an Industrial Base

Countries seek protection to promote

industrialization because that type of production:

Brings faster growth than agriculture.

Brings in investment funds. Diversifies the economy.

Brings more income than primary products do.

Reduces imports and promotes exports.

Helps the nation-building process.

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Economic Relationships

with Other Countries

Trade controls are used to improve economic

relations with other countries

Their objectives include improving the balance

of: payments

raising prices to foreign consumers

gaining fair access to foreign markets

preventing foreign monopoly prices

assuring that domestic consumers get low prices

lowering profit margins for foreign producers

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Maintaining essential industries

In protecting essential industries, countries

must:

Determine which ones are essential.

Consider costs and alternatives.

Consider political consequences.

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Preventing Shipments to

Unfriendly Countries

Considerable governmental interference in

international trade is motivated by:

political rather than economic concerns

maintaining domestic supplies of essential

goods

preventing potential enemies from gaining

goods that would help them achieve theirobjectives

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Maintaining or extending spheres

of influence

Governments give aid and credits to, and

encourage imports from, countries that join a

political alliance or vote a preferred way within

international bodies. A countrys trade restrictions may coerce

governments to follow certain political actions or

punish companies whose governments do not.

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Preserving national identity

To sustain this collective identity that sets

their citizens apart from those in other

nations, countries limit foreign products

and services in certain sectors.

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Instruments of Trade Control

Trade controls that directly affect price and

indirectly affect quantity include:

Tariffs (Export, Import, Transit) Specific duty, ad valorem duty, compound duty

Subsidies (overcoming market imperfections)

customs-valuation methods special fees

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Nontariff Barriers: Quantity

Controls Trade controls that directly affect quantity and

indirectly affect price include: quotas

voluntary export restraint (VERs)

Embargoes buy local legislation

standards and labels

licensing arrangements

specific permission requirements administrative delays

reciprocal requirements

restrictions on services

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Dealing With Governmental Trade

Influences

When facing import competition,

companies can:

Move abroad

Seek other market niches

Make domestic output competitive

Try to get protection