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International Business Part Three Theories and Institutions: Trade and Investment Chapter Six: International Trade and

Factor Mobility Theory

Chapter Seven: Governmental Influence On Trade Dr. Mayur Shah

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 factor mobility To explain the rationales for governmental policies that enhance and restrict trade To show the effects of pressure groups on trade policies To describe the potential and actual effects of governmental intervention on the free flow of trade To illustrate the major means by which trade is restricted and regulated To demonstrate the business uncertainties and business opportunities created by governmental trade policies

Chapter 6: International Operations and Economic Connections

Laissez-Faire versus Interventionist Approaches to Exports & Imports

Mercantilism Neomercantilism

Free-trade theories:
Absolute advantage Comparative advantage

Theories of Trade Patterns

Explaining trade patterns:
Country size Factor proportions Country similarity

Trade competitiveness:
Product life cycle theory Porter diamond

What the major trade theories Do and Dont discuss

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

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 domestic ones A country may produce goods more efficiently because of a natural advantage or because of an acquired advantage

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 the production of all products

Theories of Specialization
Both absolute and comparative advantage theories are based on specialization Assumptions policymakers question:
full employment economic efficiency division of gains transport costs statics and dynamics services production networks mobility

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


Theory Of Country Size

Countries with large land areas are apt to have varied climates and natural resources They are generally more self-sufficient than smaller countries are Large countries production and market centers are more likely to be located at a greater distance from other countries, raising the transport costs of foreign trade

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


Worldwide trade of major manufactured goods


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 emerging economies Much of the pattern of two-way trading partners may be explained by cultural similarity between the countries, political and economic agreements, and by the distance between them

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 product reaches the stages of maturity and decline

Life Cycle of the International Product


The Porter Diamond

Four conditions as important for competitive superiority:
demand conditions factor conditions related and supporting industries firm strategy, structure, and rivalry


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


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

Chapter 7
Government restrictions through trade policies protectionism on foreign trade are known as

Government take measures to restrict (or enhance) international trade which will invariably affect the companies capacity to compete on an international scale


Physical and Social Factors Affecting the Flow of Goods and Services


Why Governments Intervene in Trade


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 if implemented by small economies. May decrease export jobs because of price increases for components. May decrease export jobs because of lower incomes abroad.

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 to low-cost production


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.


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

Maintaining essential industries

In protecting essential industries, countries must:
Determine which ones are essential. Consider costs and alternatives. Consider political consequences.


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 their objectives


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.


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.


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

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

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