International Trade Flashcards
Why do people trade?
People trade physical goods and services to clearly see the gains from trade, and these gains mean that countries can specialise in the production of goods and services that they produce most efficiently. This increases efficiency in production, which may lead to economic growth and potentially benefiting all countries participating in the global trading system.
Explain Mercantilism (Trade theory)
- The main idea is that it was in a countries best interest to maintain a trade surplus, by exporting more than it was importing, so the country would accumulate gold and silver and increase their wealth and power.
Mercantilism saw trade as a “zero-sum game” where one country’s loss was another’s gain, whereas later on it was demonstrated that trade could benefit everyone involved.
(Emerging in England in the mid-16th century, when gold and Silver were considered essential to commerce)
What is the theory of Absolute Advantage? (1776)
In the wealth of nations, 1776, Adam smith argued that countries differ in their ability to produce goods efficiently. He decided that:
- A country has an absolute advantage in the production of a product when it is more efficient than any other country at producing it, so a country should specialise in the production of goods for which that have an absolute advantage, and trade for other goods.
What is the theory of comparative advantage? (1817)
In 1817 David Ricardo introduced the theory of Comparative Advantage.
This is where a country specialises in the production of those goods that it produces most efficiently and buy goods it produces less efficiently form other countries even if it could have produced those goods more efficiently itself, meaning every country uses its resources to the production of the goods it produces more efficiently.
Ricardo: Comparative advantages arise from differences in productivity.
Hecksher-Ohlin Theroy? (Theory of Trade)
Hecksher and Ohlin argued that comparative advantage arises form difference in national factor endowments (CELL).
The more abundant the factor, the lower its costs, and countries export goods that are made by the factors that are locally abundant and import goods that are made by factors that locally scarce. (Therefore natural factors give a competitive advantage in trading).
The New trade theory (1970)? - Theory of trade
New trade theory (1970) realised the importance of economies of scale for international trade. The theory makes 2 important points:
1 - Trade can increase the variety of goods available to consumers whilst decreasing the average costs of those goods (induces R&D, improves choice and quality)
2 - Trade results in larger markets - First mover advantage: The economic and strategic advantages of early entrants into an industry (In terms of economies of scale)
Porter’s Diamond - what question was Porter trying to answer? (Theory of Trade)
Porter tried to answer the question “why a nation achieves international success in a particular industry”.
Porter’s Diamond (Theory of Trade) Explain it.
Porter argued there are four attributes that promote (or impede) the creation of competitive advantage:
1 - Factor Endowments: A nations position in factors of production, such as skilled labour or infrastructure
2 - Demand Conditions: Home demand for the industries product/service
3 - Related and supporting industries: Supplier industries and related industries that provide International Competition
4 - Firm strategy, structure, and rivalry: The conditions governing how companies are created, organised, and managed, and the nature of domestic rivalry
What are the managerial Implications?
1 - Location: Can be beneficial for a firm to disperse it productive activities to those countries where they can be performed most efficiently
2 - First-mover Advantages: It pays to invest substantial financial resources into trying to build a first-mover advantage (high potential risks too)
3 - Government Policy: Firms may need to lobby for particular government policies to promote their interests
4 - Changes in government Policy, Investments, and Business Strategy: Creates uncertainty in international business, where businesses respond in three ways, Reducing investments in risky projects, hedge their bets, and lobby (influence) governments.
Is trade always good?
Theory states that free trade is best for all, but governments often push for free trade where they have a comparative advantage, and resist other areas in order to protect jobs and local industries.
Define protectionism
Opposition to free trade, intended to protect a country’s economy from foreign competitors
What are the arguments for the intervention of trade? (9)
- Protecting Jobs and industries from unfair competition
- Protecting national security (industries)
- Protecting consumers from unsafe products
- Retaliating by using trade policy to support foreign policy objectives
- Furthering Foreign Policy Objectives by using trade policy to support foreign policy objectives
- Protecting Human Rights via trade agreements as part of foreign policy
- Antidumping Policies
- Protecting infant industries
- Protect strategic industries (Helps domestic firms gain first-mover advantage)
Protectionism instruments (6)
1 - Quotas - restriction of the quantity of some goods imported
2 - Import Tariffs - a tax levied on imports
3 - Export Tariffs - A tax placed on the export of a good
4 - Subsidies - government payment to a domestic producer to lower production costs and help domestic producers to compete against imports and gain export markets.
5 - Local content requirement - requirement that some specific fraction of a good be produced domestically
6 - Administrative polices - bureaucratic rules that make it difficult for imports to enter a country
Tell me about the World Trade Organisation (WTO)
- Created in 1995 (grew out of previous General Agreement on Tariffs and Trade)
- Deals with global rules of trade between nations
- 164 member countries (representing over 96% of global trade)
- Has helped reduce tariffs from around 40% to 5%
What are the key features and Criticisms of the WTO?
Features:
- Multilateral, global rules-based system of trade
- Trade without discrimination
- Freer trade
- Promoting fair competition
- Encouraging development and economic reform
Criticisms:
- Too powerful
- Neo Liberal orthodox view of Global System
- Run by the rich for the rich
- Decision making is too slow
- Labour and the environment
