IBUS 311--Chapter 5: Trading Internationally

After studying this chapter you should be able to:
Use the resource- and institution-based views to explain why nations trade
Understand classical and modern theories of international trade
Realize the importance of political and economic realities governing international trade
Participate in two leading debates on international trade
Draw implications for action

Selling abroad

Buying from abroad

physical goods

acts, efforts, or performances exchanged from producer to user without ownership rights

An economic condition in which a nation imports more than it exports

An economic condition
in which a nation exports more than it imports

The aggregation of buying (importing) and selling (exporting) by both sides leads to the country-level trade surplus or deficit.

1. Germany
2. United States
3. China
4. Japan
5. France
6. Netherlands
7. UK
8. Italy
9. Canada
10. Belgium

1. United States
2. UK
3. Germany
4. Japan
5. France
6. Italy
7. Spain
8. China
9. Netherlands
10. India

major theories typically studied consist of mercantilism, absolute advantage, and comparative advantage

major theories typically studied consist of product life cycle, strategic trade, and national competitive advantage

belief that held that the wealth of the world (measured in gold and silver) was fixed, and that a nation that exported more and imported less would enjoy the net inflows of gold and silver and thus become richer

idea that governments should actively protect domestic industries from imports and vigorously promote exports

idea that free market forces should determine how much to trade with little (or no) government intervention

economic advantage one nation enjoys that is absolutely superior to other nations

relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations

given the alternatives, the cost
of pursuing one activity at the expense of another activity

extent to which different countries possess various factors, such as labor, land, and technology

The proposition that nations will develop comparative advantage based on their locally abundant factors

assumption that a resource
removed from one industry can be moved to another

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

theory that suggests that
strategic intervention by governments in certain industries can enhance their odds for international success

Advantages that first entrants enjoy and do not share with late entrants

Economic policies that provide companies a strategic advantage through government
subsidies

The theory that the competitive advantage of certain industries in different nations depends on four aspects that form a “diamond”

All are related:
Firm Strategy
Domestic demand conditions
Related and supporting industries
Country factor endowments

A tax imposed on imports

restrict imports but are not in the usual form of a tariff:
subsidies, import quotas, export restraints, local content requirements, administrative policies, antidumping duties, over-elaborate or inadequate infrastructure, “buy national" policy, bribery and corruption, unfair customs procedures, restrictive licenses, etc.

Net losses that occur in an economy as the result of tariffs

Restrictions on the quantity
of imports for specific period of time

superficial policy to show that exporting countries voluntarily agree to restrict their exports

A requirement that a certain - proportion of the value of the goods made in one country originate from that country.

Costs levied on imports that have been “dumped” (selling
below costs or below exporter’s home market price to “unfairly” drive domestic firms out of business)

Prominent among economic arguments against free trade include:

The need to protect domestic industries - The oldest and most frequently used economic argument against free trade is the urge to protect domestic industries, firms, and jobs from “unfair” foreign competition - in short, protectionism

The necessity to shield infant industries - belief that if domestic firms are as young as “infants,” in the absence of government intervention, they stand no chance of surviving and will be crushed by mature foreign rivals

Political arguments against free trade advance a nation’s political, social, and environmental agenda regardless of possible economic gains from trade
These arguments include:
(1) national security
(2) consumer protection
(3) foreign policy
(4) environmental and social responsibility

Classical theorists and their modern-day disciples argue that the United States and India trade by tapping into each other’s comparative advantage.
India leverages its abundant, high-skill, and low-wage labor. Americans will channel their energy and resources to higher skill, higher paying jobs.
Regrettably, certain Americans will lose jobs, but the nation as a whole benefits.
Are the theories still valid?

Discover and leverage comparative advantage of world-class locations
Monitor and nurture the current comparative advantage of certain locations and take advantage of new locations
Be politically active to demonstrate, safeguard, and advance the gains from international trade