CHAPTER 4 Trade Theory and Barrier

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