International trade theory seeks to explain why trade occurs between countries. Classical theories focus on comparative advantages from differences in resources and costs. New trade theories examine increasing returns from scale economies, network effects, and first-mover advantages that allow some industries to be dominated by a few large firms. National competitive advantage looks at factor conditions, demand conditions, related industries, and domestic rivalry that influence a country's competitive positions in international trade.
International trade theories are simply different theories to explain international trade. Trade is the concept of exchanging goods and services between two people or entities. International trade is then the concept of this exchange between people or entities in two different countries.
Globalization and Free TradeChapter ElevenShift in course .docxshericehewat
Globalization and
Free Trade
Chapter Eleven
Shift in course to international level
This chapter:
globalization & neoliberalism,
free trade versus protectionism,
trade regimes
1
Definition
Globalization is an umbrella term for a complex series of economic, social, technological, cultural, and political changes that are seen as increasing interdependence, integration, and interaction between people and companies in disparate locations.
Video: https://www.youtube.com/watch?v=xPD477FuqtY
Today is a
great age of globalism.
For perspective, remember that this is NOT the first age of globalism. Consider:
Alexander the Great
The Romans
The Age of Exploration and Colonization (1492-1650)
Past and present drivers of globalism
Military force
Trade opportunities and wealth creation
Technology enhancements
Public awareness of the globe
New waves of globalization brought increasingly intensive levels of integration
Alexandrian empire: conquest and temporary subjugation
Roman empire: conquest, followed by internal trade and some technological advancements in roads, bridges, infrastructure, increased awareness among elite
Age of exploration: conquest of new lands, resource extraction and trade opportunities, technology (improved navigation and tools of war), increased awareness (e.g., increased literacy and widespread use of the printing press)
Current age (defined here as after the Cold War): little conquest and an emphasis on trade, massive technological advancements in machinery and computers, and increased mobility of interaction and ideas around the world via globalized communication systems.
Neoliberalism and globalism
Elevates the (global) market and downplays the importance of the nation state. Specifically:
Free trade: removal of trade barriers, like tariffs, subsidies, and regulatory restrictions
Privatization: transfer of previously-public-owned enterprises, goods, and services to the private sector
Competitive exchange rates: accepting market-determined exchange rates, as opposed to government-fixed exchange rates
Undistorted market prices: refraining from policies that would alter market prices
Limited intervention: with only exceptions for promoting exports, education, or infrastructural development
Fiscal rectitude: cutting government expenditures and/or raising taxes to maintain a budget surplus
Free Trade
Free trade, advanced by neoliberalism, refers to a policy by which governments do not discriminate against imports or exports. It has long been a debatable topic. Three simple arguments for free trade:
As the market served expands from a national to world stage, there are gains, with declining per-unit production (greater efficiency)
Gains result from the reduction in declining monopoly power of domestic firms (less market distortion)
Consumers gain with increased product variety and lower market costs (greater consumer variety)
Side benefits include increased investment and savings and b ...
International trade theories are simply different theories to explain international trade. Trade is the concept of exchanging goods and services between two people or entities. International trade is then the concept of this exchange between people or entities in two different countries.
Globalization and Free TradeChapter ElevenShift in course .docxshericehewat
Globalization and
Free Trade
Chapter Eleven
Shift in course to international level
This chapter:
globalization & neoliberalism,
free trade versus protectionism,
trade regimes
1
Definition
Globalization is an umbrella term for a complex series of economic, social, technological, cultural, and political changes that are seen as increasing interdependence, integration, and interaction between people and companies in disparate locations.
Video: https://www.youtube.com/watch?v=xPD477FuqtY
Today is a
great age of globalism.
For perspective, remember that this is NOT the first age of globalism. Consider:
Alexander the Great
The Romans
The Age of Exploration and Colonization (1492-1650)
Past and present drivers of globalism
Military force
Trade opportunities and wealth creation
Technology enhancements
Public awareness of the globe
New waves of globalization brought increasingly intensive levels of integration
Alexandrian empire: conquest and temporary subjugation
Roman empire: conquest, followed by internal trade and some technological advancements in roads, bridges, infrastructure, increased awareness among elite
Age of exploration: conquest of new lands, resource extraction and trade opportunities, technology (improved navigation and tools of war), increased awareness (e.g., increased literacy and widespread use of the printing press)
Current age (defined here as after the Cold War): little conquest and an emphasis on trade, massive technological advancements in machinery and computers, and increased mobility of interaction and ideas around the world via globalized communication systems.
Neoliberalism and globalism
Elevates the (global) market and downplays the importance of the nation state. Specifically:
Free trade: removal of trade barriers, like tariffs, subsidies, and regulatory restrictions
Privatization: transfer of previously-public-owned enterprises, goods, and services to the private sector
Competitive exchange rates: accepting market-determined exchange rates, as opposed to government-fixed exchange rates
Undistorted market prices: refraining from policies that would alter market prices
Limited intervention: with only exceptions for promoting exports, education, or infrastructural development
Fiscal rectitude: cutting government expenditures and/or raising taxes to maintain a budget surplus
Free Trade
Free trade, advanced by neoliberalism, refers to a policy by which governments do not discriminate against imports or exports. It has long been a debatable topic. Three simple arguments for free trade:
As the market served expands from a national to world stage, there are gains, with declining per-unit production (greater efficiency)
Gains result from the reduction in declining monopoly power of domestic firms (less market distortion)
Consumers gain with increased product variety and lower market costs (greater consumer variety)
Side benefits include increased investment and savings and b ...
Fiduciary or paper money is issued by the Central Bank on the basis of
computation of estimated demand for cash. Monetary policy guides the Central
Bank’s supply of money in order to achieve the objectives of price stability (or low
inflation rate), full employment, and growth in aggregate income.
Enterprise Excellence is Inclusive Excellence.pdfKaiNexus
Enterprise excellence and inclusive excellence are closely linked, and real-world challenges have shown that both are essential to the success of any organization. To achieve enterprise excellence, organizations must focus on improving their operations and processes while creating an inclusive environment that engages everyone. In this interactive session, the facilitator will highlight commonly established business practices and how they limit our ability to engage everyone every day. More importantly, though, participants will likely gain increased awareness of what we can do differently to maximize enterprise excellence through deliberate inclusion.
What is Enterprise Excellence?
Enterprise Excellence is a holistic approach that's aimed at achieving world-class performance across all aspects of the organization.
What might I learn?
A way to engage all in creating Inclusive Excellence. Lessons from the US military and their parallels to the story of Harry Potter. How belt systems and CI teams can destroy inclusive practices. How leadership language invites people to the party. There are three things leaders can do to engage everyone every day: maximizing psychological safety to create environments where folks learn, contribute, and challenge the status quo.
Who might benefit? Anyone and everyone leading folks from the shop floor to top floor.
Dr. William Harvey is a seasoned Operations Leader with extensive experience in chemical processing, manufacturing, and operations management. At Michelman, he currently oversees multiple sites, leading teams in strategic planning and coaching/practicing continuous improvement. William is set to start his eighth year of teaching at the University of Cincinnati where he teaches marketing, finance, and management. William holds various certifications in change management, quality, leadership, operational excellence, team building, and DiSC, among others.
Fiduciary or paper money is issued by the Central Bank on the basis of
computation of estimated demand for cash. Monetary policy guides the Central
Bank’s supply of money in order to achieve the objectives of price stability (or low
inflation rate), full employment, and growth in aggregate income.
Enterprise Excellence is Inclusive Excellence.pdfKaiNexus
Enterprise excellence and inclusive excellence are closely linked, and real-world challenges have shown that both are essential to the success of any organization. To achieve enterprise excellence, organizations must focus on improving their operations and processes while creating an inclusive environment that engages everyone. In this interactive session, the facilitator will highlight commonly established business practices and how they limit our ability to engage everyone every day. More importantly, though, participants will likely gain increased awareness of what we can do differently to maximize enterprise excellence through deliberate inclusion.
What is Enterprise Excellence?
Enterprise Excellence is a holistic approach that's aimed at achieving world-class performance across all aspects of the organization.
What might I learn?
A way to engage all in creating Inclusive Excellence. Lessons from the US military and their parallels to the story of Harry Potter. How belt systems and CI teams can destroy inclusive practices. How leadership language invites people to the party. There are three things leaders can do to engage everyone every day: maximizing psychological safety to create environments where folks learn, contribute, and challenge the status quo.
Who might benefit? Anyone and everyone leading folks from the shop floor to top floor.
Dr. William Harvey is a seasoned Operations Leader with extensive experience in chemical processing, manufacturing, and operations management. At Michelman, he currently oversees multiple sites, leading teams in strategic planning and coaching/practicing continuous improvement. William is set to start his eighth year of teaching at the University of Cincinnati where he teaches marketing, finance, and management. William holds various certifications in change management, quality, leadership, operational excellence, team building, and DiSC, among others.
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2. International Trade Theory
What is international trade?
– Exchange of raw materials and manufactured
goods (and services) across national borders
Classical trade theories:
– explain national economy conditions--country
advantages--that enable such exchange to happen
New trade theories:
– explain links among natural country advantages,
government action, and industry characteristics
that enable such exchange to happen
Implications for International Business
3. Classical Trade Theories
Mercantilism (pre-16th century)
– Takes an us-versus-them view of trade
– Other country’s gain is our country’s loss
Free Trade theories
– Absolute Advantage (Adam Smith, 1776)
– Comparative Advantage (David Ricardo, 1817)
– Specialization of production and free flow of goods
benefit all trading partners’ economies
Free Trade refined
– Factor-proportions (Heckscher-Ohlin, 1919)
– International product life cycle (Ray Vernon, 1966)
4. The New Trade Theory
As output expands with specialization, an
industry’s ability to realize economies of scale
increases and unit costs decrease
Because of scale economies, world demand
supports only a few firms in such industries
(e.g., commercial aircraft, automobiles)
Countries that had an early entrant to such an
industry have an advantage:
– Fist-mover advantage
– Barrier to entry
5. New Trade Theory
Global Strategic Rivalry
– Firms gain competitive advantage trough:
intellectual property, R&D, economies of
scale and scope, experience
National Competitive Advantage
(Porter, 1990)
6. Mercantilism/Neomercantilism
Prevailed in 1500 - 1800
– Export more to “strangers” than we import to
amass treasure, expand kingdom
– Zero-sum vs positive-sum game view of trade
Government intervenes to achieve a surplus in
exports
– King, exporters, domestic producers: happy
– Subjects: unhappy because domestic goods stay
expensive and of limited variety
Today neo-mercantilists = protectionists: some
segments of society shielded short term
7. Absolute Advantage
Adam Smith: The Wealth of Nations, 1776
Mercantilism weakens country in long run; enriches only
a few
A country
– Should specialize in production of and export products for
which it has absolute advantage; import other products
– Has absolute advantage when it is more productive than
another country in producing a particular product
Rice
Cocoa
G
G'
K
K'
G: Ghana
K: S. Korea
8.
9. Comparative Advantage
David Ricardo: Principles of Political Economy, 1817
Country should specialize in the production of those
goods in which it is relatively more productive... even
if it has absolute advantage in all goods it produces
Absolute Advantage is a special case of
Comparative Advantage
Rice
Cocoa
G
K
K' G'
G: Ghana
K: S. Korea
10.
11. Heckscher (1919)-Ohlin (1933)
Differences in factor endowments not on differences
in productivity determine patterns of trade
Absolute amounts of factor endowments matter
Leontief paradox:
– US has relatively more abundant capital yet imports
goods more capital intensive than those it exports
– Explanation(?):
US has special advantage on producing new products
made with innovative technologies
These may be less capital intensive till they reach mass-
production state
12. Theory of Relative Factor Endowments
(Heckscher-Ohlin)
Factor endowments vary among countries
Products differ according to the types of factors that
they need as inputs
A country has a comparative advantage in
producing products that intensively use factors of
production (resources) it has in abundance
Factors of production: labor, capital, land, human
resources, technology
13. International Product Life-Cycle (Vernon)
Most new products conceived / produced in the US in 20th
century
US firms kept production close to their market initially
Aid decisions; minimize risk of new product introductions
Demand not based on price; low product cost not an issue
Limited initial demand in other advanced countries initially
Exports more attractive than overseas production
When demand increases in advanced countries, production
follows
With demand expansion in secondary markets
Product becomes standardized
production moves to low production cost areas
Product now imported to US and to advanced countries
14.
15. Classic Theory Conclusion
Free Trade expands the world “pie” for goods/services
Theory Limitations:
Simple world (two countries, two products)
no transportation costs
no price differences in resources
resources immobile across countries
constant returns to scale
each country has a fixed stock of resources and no efficiency
gains in resource use from trade
full employment
16. New Trade Theories
Increasing returns of specialization due to economies
of scale (unit costs of production decrease)
First mover advantages (economies of scale such that
barrier to entry crated for second or third company)
Luck... first mover may be simply lucky.
Government intervention: strategic trade policy
17. National Competitive Advantage
(Porter, 1990)
Factor endowments
land, labor, capital, workforce, infrastructure
(some factors can be created...)
Demand conditions
large, sophisticated domestic consumer base: offers an
innovation friendly environment and a testing ground
Related and supporting industries
local suppliers cluster around producers and add to
innovation
Firm strategy, structure, rivalry
competition good, national governments can create
conditions which facilitate and nurture such conditions