Trading Internationally 5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible

Trading Internationally

5Chapter 5, Trading Internationally

Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly

accessible website, in whole or in part.

LEARNING OUTCOMES

2Copyright ©2016 Cengage Learning. Al l Rights Reserved. May not be scanned, copied or dupl icated, or posted to a publ icly accessible websi te, in whole or in part. GLOBAL3 | CH5

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

Learning Outcomes

3GLOBAL3 | CH5Copyright ©2016 Cengage Learning. Al l Rights Reserved. May not be scanned, copied or dupl icated, or posted to a publ icly accessible websi te, in whole or in part.

Important Terms Related to Trade

• Trade - Exports and imports• Consists of:

- Merchandise trade: Tangible products being bought and sold

- Service trade: Intangible services being bought and sold


Important Terms Related to Trade (continued)

• Balance of trade: Country-level trade surplus or deficit• Trade deficit: Occurs when a nation imports

more than it exports• Trade surplus: Occurs when a nation exports

more than it imports


Need for International Trade

• Resource-based view• Firms in one nation generate exports that are

valuable, unique, and hard to imitate- Beneficial for foreign firms to import

• Institution-based view• Different rules governing trade are designed to

determine how gains are shared or not shared• Both sides must have economic gains


Theories of International Trade - Mercantilism

• Holds that wealth of the world is fixed• Nation that exports more than it imports

will enjoy the net inflows of gold and silver and becomes richer

• Intellectual ancestor of modern-day theory• Protectionism: Idea that governments should

actively protect domestic industries from imports and promote exports


Theories of International Trade - Absolute Advantage

• Proposed by Adam Smith• Under free trade, each nation gains by

specializing in economic activities in which it is the most efficient producer• Free trade: Free market forces should determine

the buying and selling of goods and services- There is little or no government intervention

8

Exhibit

Copyright ©2016 Cengage Learning. Al l Rights Reserved. May not be scanned, copied or dupl icated, or posted to a publ icly accessible websi te, in whole or in part. GLOBAL3 | CH5

5.2 Absolute Advantage

9

Exhibit


5.3 Absolute Advantage


Theories of International Trade - Comparative Advantage

• Nation gains by specializing in production of one good in which it has comparative advantage• Comparative advantage: Relative advantage in

one economic activity that one nation enjoys in comparison with other nations

• Developed by David Ricardo


Theories of International Trade - Comparative Advantage (continued 1)

• Net gains are availed through trade• Opportunity cost: Cost of pursuing one activity

at the expense of another activity• Counterintuitive

• Realistic and useful during application• Absolute and comparative advantages arise

from:• Productivity

- Absolute advantage deals with productivity differences


Theories of International Trade - Comparative Advantage (continued 2)

- Comparative advantage emphasizes relative productivity differences

• Factor endowment: Extent to which different countries possess various factors of production- Labor, land, and technology- Factor endowment theory: Nations will

develop comparative advantages based on locally abundant factors

13

Exhibit


5.4 Comparative Advantage

14

Exhibit


5.5 Comparative Advantage


Theories of International Trade - Product Life Cycle

• Patterns of trade change over time as production shifts and product moves from new to maturing to standardized stages

• Developed by Raymond Vernon• Dynamic theory• Divided the world into three categories

• Lead innovation nation, developed nations, and developing nations


Theories of International Trade - Product Life Cycle (continued)

• Criticism of product life cycle theory• Assumption of:

- United States’ permanent position as lead innovation nation for new products

- Stage-by-stage migration of production that takes a longer duration


Theories of International Trade - Strategic Trade

• Strategic government intervention in certain industries enhance their odds for international success

• Strategic trade policy: Provides companies a strategic advantage through government subsidies


Theories of International Trade - Strategic Trade (continued)

• Criticism• Scholars and policy makers are uncomfortable

with government intervention• Industries claim they are strategically important

19

Exhibit


5.7 Entering the Very Large, Super Jumbo Market

20

Exhibit


5.7 Entering the Very Large, Super Jumbo Market (continued)


Theories of International Trade - National Competitive Advantage of Industries

• Competitive advantage of certain industries in different nations depends on four aspects• Form a diamond shape when diagrammed

• Proposed by Michael Porter• Known as diamond theory

22

Exhibit


5.8 National Competitive Advantage of Industries: The Porter Diamond


Evaluation of Classical Theories of International Trade

• Considered as revolutionary theories when the world was dominated by mercantilistic thinking

• Rely on simplistic assumptions of a model consisting of only two nations and two goods

• Assumption of perfect resource mobility• Assumption of no foreign exchange issues

and zero transportation costs


Tariff Barriers

• Discourage imports by placing a tariff or tax on imported goods• Import tariff: Tax imposed on imports• Deadweight costs: Net losses that occur in an

economy as the result of tariffs


Non-Tariff Barriers

• Discourage imports by means other than tariffs on imposed goods• Subsidy: Government payment to domestic firms• Import quota: Restriction on the quantity of

goods brought into a country• Voluntary export restraint (VER): International

agreement to show that an exporting country voluntarily agrees to restrict its exports


Non-Tariff Barriers (continued)

• Local content requirement: Rule stipulating certain proportion of the value of a good must originate from the domestic market

• Administrative policy: Bureaucratic rule that makes it harder to import foreign goods

• Antidumping duty: Cost levied on imports that have been dumped or sold below cost- Drives domestic firms out of business


Economic Arguments Against Free Trade

• Need to:• Protect domestic industries• Shield infant industries


Political Arguments Against Free Trade

• National security concerns are invoked to protect defense-related industries

• Consumer protection is frequently used to erect trade barriers

• Trade intervention is used to meet foreign policy objectives

• Environmental and social responsibility


Factors That Determine the Success and Failure of Firms’ Exports

• Resource-based view• Successful exports are valuable, unique, hard-to-

imitate products• Institution-based view

• Laws and regulations promoted by special interest groups can:- Protect certain domestic industries- Erect trade boundaries- Make the nation as a whole worse off

30

Exhibit


5.11 Implications for Action


Debate: Trade Deficit

For

• Trading partners mutually benefit by developing a deeper division of labor based on comparative advantage

Against

• Trade deficits are attributed to countries with which the United States holds large deficits

KEY TERMS


Key Terms

• Export• Import• Merchandise trade• Service trade• Trade deficit• Trade surplus• Balance of trade• Mercantilism• Protectionism

• Free trade• Theory of absolute

advantage• Absolute advantage• Theory of

comparative advantage

• Comparative advantage

KEY TERMS


• Opportunity cost• Factor endowment• Factor endowment

theory• Product life cycle

theory• Strategic trade

theory• First-mover

advantage

• Strategic trade policy• Theory of national

competitive advantage of industries

• Resource mobility• Tariff barrier• Import tariff• Deadweight cost

Key Terms (continued 1)

KEY TERMS


• Non-tariff barrier (NTB)

• Subsidy• Import quota• Voluntary export

restraint (VER)

• Local content requirement

• Administrative policy• Antidumping duty• Trade embargo

Key Terms (continued 2)

SUMMARY


• International trade provides economic gains• Gains are shared by both exporters and

importers• Theories of international trade

• Classical theories - Mercantilism, absolute advantage, and comparative advantage

• Modern theories - Product life cycle, strategic trade, and national competitive advantage of industries

Summary

SUMMARY


• Trade barriers include tariff and non-tariff barriers

• Managers must leverage the comparative advantage of world-class locations

Summary (Continued 1)


Documents

Trading Internationally 5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible