Theories of International Trade and Investment

Chapter 3

International Trade Theory

Mercantilism

Goals Effects on today Economic nationalism Adam Smith Specialize

Theory of Absolute Advantage

International Trade Theory

Heckscher- Ohlin Theory of Factor Endowment

Countries export Countries import Assumptions

Leontief Paradox

Perfect market Technology U.s. is capital-intensive Why? Outcome

Money can change flow of trade

Differences in Taste

Exchange rates Currency devaluation

International Trade Theory

New Explanations for Direction of Trade

Economies of scale and experience curve

Why?

First-mover theory
Manufacturing goods Income levels

Linder Theory of Overlapping Demand

International Product Life Cycle

What is it?

Exports imports U.S. exports Foreign production begins Foreign competition in export markets Import competition in U.S. U.S develops Other developed Developing

Process

Technology Life Cycle

Porters Competitive Advantage of Nations

What is it? Factors

Demand conditions Factor conditions Related and supporting industries Firm strategy, structure, and rivalry

Summary

Differences in endowments of factors of production Differences in level of technology Differences in efficiencies with which factor intensities are utilized Foreign exchange rates

Trade Restrictions

Arguments for Restriction

National Defense Sanctions to Punish Offending Nations Protect Infant Industries Protect Declining Industries Protect Domestic Jobs Scientific Tariff or Fair Competition Retaliation

Dumping

Five types Countervailing duties

Subsidies

Trade Barriers

Tariffs

Ad valorem Specific duty Compound duty Official prices Variable levy Lower duty for more local input

Trade Barriers

Nontariff Barriers

Quantitative

Quotas

Absolute Tariff-rate Global

Voluntary export restraints Orderly marketing arrangements

Multifiber Arrangement

Trade Barriers

Nontariff Barriers

Nonquantitative

Direct government participation in trade

Agriculture procurement policies Government procurement policies 1920 Jones Act

Customs and other administrative procedures Standards

Managers must be aware of barriers!!!!!!

Trade Barriers

Multinational Global Manufacturing Systems

Two options

Costs of Barriers

Consumer costs

Economic Development

Categories

Developed Developing New Industrialized Countries

Newly Industrialized Economies IMF Classifications World Bank

Three characteristics

GNP/capita Problems with that

Atlas conversion factors

Purchasing power parity

Underground market Exchange rates

Characteristics of Developing Nations

GNP/ capita of less than $9,075 Unequal distribution of income, small middle class Technological dualism Regionalism dualism 80-85% of population in unproductive agricultural sector Disguised unemployment or underemployment- two people doing what one can do High population growth (2.5-4%) High rate of illiteracy Widespread malnutrition Political instability High dependence on few exports (agriculture and minerals) Inhospitable topography Low savings rates and inadequate banks

Human-Needs Approach

Goals Human Development Index Investment in Human Capital

Return

International Investment Theories

Monopolistic Advantage Theory Product and Factor Market Imperfections International Product Life Cycle Other Theories

Follow-the-leader theory Cross investment Internationalism theory Dunnings Eclectic Theory of International Production

Ownership-specific Internalization Location-specific