Block 1 -International Trade Theory Flashcards
What is the definition of globalisation?
The integration of markets and market mechanisms to facilitate market activity
‘The shift toward a more integrated and interdependent world economy’ (Hill 2021)
What are the two aspects of globalisation?
The Globalisation of markets and the globalisation of production
Explain the globalisation of markets?
Lowering of trade barriers
Standardised offerings across nations and segments
Explain the globalisation of production?
Sourcing factors of production from diverse locations around the world
This improves time to marketovercoming the logistical limitations of a global reach
It improves cost management by giving access to cheaper sources
What is the IMF?
A lender of last resort to troubled economies
Head - Kristalina Georgiva
What is the WTO?
Intermediary and negotiator to ensure trade agreements are abided by
Head: Dr Okonio-Iweala
Why are the WTO not happy with Trump at the moment?
He is breaching current trade agreements, acting in contrary to the WTOs overall aim
What are the purposes of the UN?
Maintain peace and security
Develop friendly relations among nations
Achieve international cooperation in solving economic, social, cultural or humanitarian issues
Be a centre for harmonzing the actions of nations
Which institutions help to facilitate globalisation?
IMF
WTO
UN
What do international markets offer us?
Higher uncertainty and risk
Variation on law and organisational rights
Barriers to market and securing payment
High competition
Low visbility
Potential for higher profitability and expansion
What are the gains of trade?
Allows countries to specialise in production of goods they produce most efficiently, whilt importing those it does not produce most efficiently
What is Mercantilism?
An advocation that countries should simultaneously encourage exports and discourage imports
Remains relevant despite its age
Countries subsidise exports and placed quotas on imports
What did mercantilists initially overlook?
The inflationary effects of subsidising exports and placing quotas on imports
This had a resulting impact on trade surpluses as theirgoods became too expensie for other country and imports began to look attractive
Explain Adam Smiths absolute advantage?
Explains why unrestricted free trade is beneficial
It is not a zero sum game, and some countries can produce goods at a lower cost
So. if a country has an absolute advantage in something it should specialise in its production, and import the rest from other countries
Explain David Ricardos comparative advantage?
Provides an intellectual basis of modern argument for unrestricted free trade
Counteracted Smith by saying a country should produce what they are most efficient at and trade the rest, even if that means importing goods they could produce more efficiently themselves
Suggests that trade is a positive sum game in which al participants realise economic gains
What assumptions does Smith apply in his absolute advantage principle?
1) The quantity of any industry is limited by its capital
2) He applies opportunity cost to individuals (e.g. the farmer doesnt make his own shoes)
3) He applies opportunity cost to international commercial policy (nations should also specialise)
4) Perfect competition (no trade frictions) and also that trade products can be achieved in equivalent value
What are other considerations of Ricardos comparative advantage principle?
1)Immobile resources - not all potential capacity can be switched to production of most efficient goods
2) Diminishing returns - at high levels of production we may need more resources to produce each additional unit
3) Dynamic effects and economic growth - the country may grow its economy, increase the stockl of some resources such as labour as the population grows
What is the Heckscher-Olin theory
Took ricardo and smiths theories further
Suggested that the comparative advantage through productivity efficiency could be attributed in part atleast to factor endowments
Emphasises the interplay between proportions in which factors of production (land, labour, capital etc) are available in different countries and proportions in which they are needed
still emphasises unrestricted free trade
What is the Leontief paradox?
The observation that some countries dont necessarily export in the ways that Hecksher-Olin suggests
for example, wealthy countries may produce laboour intensive products when we would expect them to import these
is an important observation as it begins to identify frictions that occur within otherwise neat economic explanations previously given
What is the product lifecycle theory?
supports the production of labour intensive goods by a wealthy nation (contrary to Hecksher-Olin) as producers may want to keep production close to domestic market initially
As product matures, production may globalise
Late in lifecycle, where cost becomes main competitive element, production in poorer countries becomes more attractive and original domestic market may import instead
What is the new trade theory?
In some cases countries specialise in production and export of particular products not because of underlying differences in factor endowments but because certain industries in the world market can support only a limited number of firms
Firms with first mover advantage are difficult to challenge
What is Porters diamond?
Theorises that 4 broad attributes of a nation shape the environment in which local firms compete, and these attributes increase or decrease competitive advantage
Argues that firms are most likely to succeed in industries where dimaond is most favourable, and that the diamond is a mutually reinforcing system, meaning that the effect of one attribute is contingent on the state of the others
What are the attributes within Porters diamond?
1) Factor endowments - a nations position in factors of production such as labour, land, capital and infrastructure
2) Demand conditions - the nature of home country demand for an industrys product or service
3) Related and supporting industries - the presence or absence of supplier industries and related industries that are internationally competitive
4) Firm strategy, structure and rivalry - the conditions governing how companies are created, organised, and managed and the nature of domestic rivalry
What are two additional variables of Porters diamond?
1) Chance events - such as major innovations, can reshape industry structure
2) Government - by policy choices, can detract from or improve competitive advantage
How does Porter use factor endowments in his diamond argument?
Doesnt propose anything new to Hecksher-Ohlin, yet he analyses the characteristics of factors of production through distinguishing between basic factors and advanced factors
What are basic and advanced factors (Porter 1998)?
Basic factors - Natural resources, climate, location and demographic
Advanced factors - communication infrastructure, skilled labour, research facilities, tech know how
Advanced factors are most significant for competitive advantage, as they tre the product of investment by human capital
How would one characterise the relationship between basic and advanced factors (Porter 1998)?
It is a complex relationship
Basic factors can provide an initial advantage that is subsequently reinforced and extended by advanced factors.
Also disadvantages in basic factors can create pressures to invest in advanced factors
How does Porter use demand conditions as part of his diamond argument?
Emphasises the role home demand plays in upgrading competitive advantage, as firms tend to be most sensitive to their closest consumers
How does Porter use related and supporting industries in his diamond argument?
Benefits of investment in advanced factors by these industries can spill over into an industry, helping it achieve a strong competitibe position
Successful industrues wuthin a country tend to be in clusters - these clusters are important as valuable knowledge can flow
How does Porter use firm strategy, structure and rivalry in his diamond argument?
Makes 2 points:
1) Different nations are characterised by different managerial ideologies, either helping or not to build competitive advantage
2) There is a strong association between vigorous domestic rivalry and the creation and persistence of competitive advantage
what is the OECD definition of a political economy?
the study of the economic aspects of government
How does Hill (2021) define the political economy?
Interdependence of politica, economic and legal systems of a country
How would one integrate the political economy and international business?
We are happy to enjoy the integration of the factors of production, and benefits of integration of the consumption function
All we need to do is navigate the conditions of the overseas market
Name some political systems
Collectivism, Individualism, Democracy, and Totalitarianism
What is collectivism?
Prioritising collective goals over those of the individual
Name some subtypes of colectivism?
Socialism - achieving this through democracy
Communism - achieving this through revolution followed by totalitarianism (subservience to the state)
What is individualism?
Prioritising freedom of expression and private ownership over collectivism
Generates greater productivity, and is the basis of the market economy philosophy
What is a democracy?
When citizens are involved in decision making, meaning they elect representatives to act on their behalf
What is totalitarianism?
Democratic rights to self expression and private ownership dont exist
Is upheld by active repression of political activity, press and broadcast media are censored to support messages of the state
State opposition is dealt with harshly through imprisonment, torture and execution
Name some economic systems
Market economy and command economy
What is a market economy?
Private ownership, frictionless transactions characterised by free market principles of perfect knowledge and endless alternatives
Yet there are still some state controlled activities
States role in this economy is to facilitate free market conditions by supporting enterprise and restricting anti competitive practice
What is a command economy?
State planned production, where the states sets prices and not the market
Production tends to be steady
Little incentive for innovation or efficiency
Low efficiency is typical compared to a market economy
Provide an example of a mixed economy
British Overseas Airways Corporation
State owned airline in an era of state run airlines
Government changes to restrictions allowed entry of new private airlines and introduction of Virgin Atlantic
What has a shift to a market economy model brought on for the airline sector?
Costs to consumers have come down in real terms
Flight desinations increased
Alternative providers increased
Service proposition has improved
Planes have become more fuel efficient and less noisy, in part due to additional private investment in R&D supported by industry expansion
Yet pollution has increased overall
Name some legal systems
Common law
Civil law
Theocratic law
Explain market economy law
A combination of common law and civil law, with a bunch of codes to comply with
These codes are comminictaed through emails etc
What is common law also known as?
Custom law
What is civil law also known as?
Treaties
What are contracts?
the tool used to govern a transaction, contains clauses detailing actions that should be taken if certain expectations are not met (contingencies)
Structures and manages relationship between two firms
Work less well in international context
How may contract law be implemented?
Disputes may arise if clauses are throught to have not been met, so adjudication is a possible solution
An adjudicating body will look at claim and make a decision, not legally binding but credibility usually justifies compliance
In trading blocks such as EU there will be international trading blocks for specific industries
Why do we need contract law?
Transactions carry some friction, which is the need to monitor and control our partner firm
Contracts give clarity on whether partner firm will do what they say
Give 3 reasons for contracts
1) Sovereign states may change the legal framework for a deal
2) Partners act opportunistically - self interest seeking with guile (Williamson 1975)
3) Managers operate under human limits of predicting future scenrios - bounded rationality
What are some limitatios of contracts?
Contracts are limited by the time is takes to construct them, and a limited knowledge of the future
Fast moving scenarios dont lend themselves to contractual governance
What is an alternative to a contract?
Trust
Affective trust - covers opportunism
Competence trust - covers ability
Allows futurity
Could also increase monitoring, reduce exposure to risk with staggered resource commitment
What is a tariff?
A tax on a good/ service
Why must trade be governed?
Unlike free market economies, real world market economies carry trade frictions, so must be managed
Management falls to states and also supranational organisations such as WTO, IMF and UN
What is the overall objective of the nation state?
To promote domestic GDP, ultimately by penalising imports and favouring exports
A less extreme form of mercantilism
Trump is a naive mercantilist
What is the defensive rationale of a government?
Protect national economy
Protect an emerging industry
National security, culture and identity
What is the offensive rationale of a government?
National strategy e.g. a shift to develop domestic technology start ups
Increasing employment
Explain how a government may restrict foreign competition in domestic industries, and use trade as a weapon of diplomacy to restrict imports?
They impose quotas restricting the volume of goods that can be imported by the overseas firm
They create policy that favours domestic firms such as restrictions on overseas employees
They create policy that compels overseas companies to use locally sourced process inputs
In what scenario would government restrictions on trade be illegal?
In a free trade area such as EU, it is a breach of anti trust regulation
What is fiscal policy?
Government restricts foreign competition by increading costs to foreign competitors
The primary intent may not be restriction of competition, instead taxation may be designed to generate additional government reveue and also to manage balance of payments
Government may impose fiscal policy through tariffs
What is a quota?
A quantity restriction
What are local content requirements?
% of product must be locally sourced
What is countervailing duty?
Process of taxing foreign firms and use the proceeds to support local firms
What is anti dumping duty?
The process of reducing excessive low cost supplies from foreign firms
What is the rationale behind the WTO?
To promote trade, expand markets for trade, and resolve disputes among members
What is the rationale behind the IMF?
To promote international monetary cooperation, facilitate the expansion and balanced growth of international trade. promote exchange stability, assist in establishment of multilateral system of payments, and make resources available to members experiencing balance of payment difficulties
What is the rationale behind the OECD?
A shared commitment to market economies backed by democratiic institutions, focused on wellbeing of all citizens
Make life harder for terrorists, tax dodgers, crooked business,men
What is the rationale behind the UN?
Maintain international peace and security, and take measures to remove threats to that
Suppress acts of aggression
Bring about peaceful means within principles of international law, to adjust disputes which may breach peace
Fevelop friendly relations based on respect for equal rights principle and self determination of peoples
Achieve international cooperation in solving international issues of all character, promoting respect for human rights and fundamental freedoms
What does a decline in manufacturing exports among developed nations correlate with?
Declining support for globalisation and a belief that outsourcing causes job losses
According to Gereffi & Fernandez Stark, what are GVCs?
The full range of activities that firms and workers perform to bring a product from its conception to end use and beyond
According to Gereffi & Fernandez Stark, why are GVCs so important?
Global economy increasingly structured around them, as they account for rising share of trade, GDP and employment
They link all forms of employment globally, providing a stepping stone for developing countries to compete globally
What is the definition of FDI?
Taking an ownership stake in order to gain some control over organisation
What distinguishes FDI from portfolio investment?
The management dimension is what distinguishes FDI from portfolio investment in stocks and bonds and other financial instruments
What are the typically cited problems with FDI?
Loss of jobs
Expropriation of profits out of the country
Damage to local firms
Environmental damage
Tax domicile activities that reduce national tax take
Neocolonial land grab (Pilling 2017)
What are some factors that threaten world trade and development?
Divergence in climate technical standards
Trade diverging along geopolitical lines
Increased military conflict globally and involving major economies
What are some reasons for rapid growth in FDI?
Firms still fear protectionist pressures
Political and economic changes occuring in developed nations, and a general shift toowards democratic political institutions and free market economies
Economic growth and deregulation, privitisation programs
Globalisation
What is a greenfield investment?
The establishment of a new operation in a foreign country
What is an acquisition?
Acquiring or merging with an existint firm in a foreign country
Why do firms prefer FDI over exporting and licensing?
Both have limitations
What are the limitations of exporting?
Constrained by transportation costs and trade barriers
What is licensing?
Granting a foreign entity the right to produce and sell the firms product in return for a royalty fee on every unit sold
What is multipoint competition?
A situation that arises when two or more enterprises encounter eachother in a different regional market, national market, or industries
What is horizontal FDI?
Take overs or investment in organisations at the same stage in the value chain
What is vertical FDI?
The investment in a value chain activity on the supply side or buyer side
Provide an example of horizontal FDI
Barclays purchase of Russia’s ExpoBank
Provide an example of vertical FDI
BP holds ownership of both oil extraction and of processing and retail sales of petrol and diesel
What are some typical issues with FDI?
Loss of jobs
Expropriation of profits out of the country
Damage to local firms
Environmental damage
Tax domicile activities that reduce national tax take
‘Neocolonial land grab’ (Piling 2017)
What are some factors that threaten world trade and development?
Divergence in climate technical standards
Trade diverging along geopolitical lines
Increased military conflict globally and involving major economies
