Transcript
CHAPTER 4
INTERNATIONAL TRADE THEORY, APPLICATION AND TRADE BARRIER
LEARNING OBJECTIVES
At the end of this chapter, the reader should be able to:• Identify some of the major trade theories• Explain protectionism and the importance of government
intervention• Discuss instruments of government intervention in
creating barriers to trade
TRADITIONAL TRADE THEORY
• Mercantilism• Absolute advantage• Comparative advantage• Hecksher-Ohlin Theory• The product life cycle theory
CONTEMPORARY THEORY
• Michael Porter’s Diamond Model• Dunning Eclectic Paradigm• New Trade Theory• National Industrial Policy
TRADITIONAL THEORY…MERCANTILISM
• Emerged in England, 16th century.• Emphasized on export activities to accumulate
wealth.• Government intervenes to maximize exports
and minimize imports.• How?– Subsidies– Tariffs and quotas
TRADITIONAL THEORY…ABSOLUTE ADVANTAGE
• Adam Smith disagreed with the idea of mercantilism.
• Argument: each country is unique in FOP.• Countries should specialize in the production
of goods for which they have an absolute advantage and then trade these goods produced by other countries.
TRADITIONAL THEORY…ABSOLUTE ADVANTAGE
COUNTRY REQUIRED RESOURCES(No. of Days)
REQUIRED RESOURCES(No. of Days)
Cocoa Rice
Ghana 10 20
South Korea 40 10
TRADITIONAL THEORY…COMPARATIVE ADVANTAGE
• David Ricardo • Countries specialize in the production of those
goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries.
TRADITIONAL THEORY…COMPARATIVE ADVANTAGE
COUNTRY REQUIRED RESOURCES(No. of Days)
REQUIRED RESOURCES(No. of Days)
Cocoa Rice
Ghana 10 15
South Korea 40 20
TRADITIONAL THEORY…HECKSHER-OHLIN THEORY
• Hecksher and Ohlin argued that comparative advantage arises from differences in national factor endowments.
• Factor endowments-the extent to which a country is endowed with such resources as land, labour and capital.
TRADITIONAL THEORY…HECKSHER-OHLIN THEORY
• The leontief paradox
TRADITIONAL THEORY…THE PRODUCT LIFE-CYCLE THEORY
• By Vernon in 1960s.– Introduction stage– Growth stage– Maturity stage
CONTEMPORARY THEORY…NATIONAL COMPETITIVE ADVANTAGE:
PORTER’S DIAMOND• Factor endowments• Demand conditions• Relating and supporting industries• Firm strategy, structure and rivalry
CONTEMPORARY THEORY…DUNNING ECLECTIC PARADIGM
• Ownership-specific advantages (unique to the firm)
• Location-specific advantages • Internalization advantages
CONTEMPORARY THEORY… NEW TRADE THEORY
• Led by Paul Krugman in 1970• economies of scale
CONTEMPORARY THEORY… NATIONAL INDUSTRIAL POLICY
• A proactive economic development plan, often in collaboration with the private sector, that aims to develop or support particular industries within the nation.– Tax incentives– Monetary and fiscal policy
Government Intervention and Protectionism
• Government does intervene through protectionism policy.
• Protectionism is against the concept of free trade.
• Protectionism is the practice of protecting domestic goods and service industries from foreign competition with tariff and non-tariff barriers.
Reasons Why Government Intervenes with International Business
• To protect the economic condition of one country
• To protect infant industries• To protect the country’s national security• To preserve its national culture
TRADE BARRIERS
• Tariffs barriers– Quotas– Export controls– Dumping and anti-dumping
TRADE BARRIERS
• Non-tariff barriers– Administration barriers– Production subsidies– Emergency import protection– Embargoes and boycotts– Technical standards– Barriers to service trade
References
• Hill, International Business, 8th Edition, McGraw Hill International Edition
• Cavusgil, et al., International Business, Prentice Hall.
• Shenkar and Luo, International Business, Wiley
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