International Trade Theory

By: Kayla Sutter

Outline

Key TermsComparative AdvantageHeckscer-Ohlin TheoryThe Product Life-Cycle TheoryNew Trade TheoryNational Competitive Advantage: Porter’s

DiamondArticleDiscussionQuiz

Key Terms

Constant returns to specialization The units of resources required to produce a good are assumed to remain constant no matter where one is on a country’s production possibility frontier.

Factor endowments A country’s endowment with resources such as land, labor, and capital

Economies of Scale Cost advantage associated with large-scale production

First-mover Advantages accruing to the first to enter a market

Comparative advantage

Comparative advantage suggests that even if a country has absolute advantage of two products they can still benefit from trade

Gains From Trade

Combined output increases from both countries

Consumption increases

On a global scale:Potential world production is greater with

unrestricted free trade than it is with restricted trade.

Qualifications and Assumptions

Unrealistic assumptionsIt is possible for many countries with many

different goods to still benefitA rich country could possibly be worse off by

trading

Evidence of the Link Between Trade & Growth

Countries with a more open stance on international trade have better growth rates

Open vs. Closed Growth RatesConcludes that living standards and greater

economic results come from open trade policies

Heckscher-Ohlin Theory

• Eli Heckscher and Bertil Ohlin argued that comparative advantages arise from differences in national factor endowments (more abundant a factor, the lower the cost)

Heckscher-Ohlin TheoryThe Leontief Paradox

Found U.S. exports were less capital intensive than U.S. imports

Produce what you are more efficient in, not necessarily what your endowments favor

The U.S. exports commercial aircrafts and imports textiles because they are relatively more efficient atproducing aircrafts

The Product Life-Cycle Theory

Proposed by Raymond VernonWealth and size = incentive to develop

consumer productsCost of labor = incentive to develop cost-

saving process innovations

The Product Life-Cycle TheoryEvaluation

Exports began to decline because of other countries entering the market quicker or simultaneously

Product Life Cycle Theory more accurate when U.S. was dominating the global economies (1945-1975)

Relevance in modern world more limited

New Trade Theory

Focuses on Economies of ScaleStudied by Nobel Prize winner Paul KrugmanTrade increases variety available to

consumer, and decreases average cost of goods

New Trade TheoryIncreasing Product Variety & Reducing Costs

Only valid where economies of scale is a factor

Trade offers mutual gain even when there are not differences in resources or technology

Minivans vs. Sports CarsCountry A needs 80,000 minivans but must produce 100,000 for economies of scale to be reached

New Trade TheoryEconomies of Scale, First-Mover Advantages & The Pattern of Trade

Ability to capture scale economies ahead of later entrants and benefit from lower cost structure

Global market may only be able to support one producer of certain products

The first mover advantage can lead to becoming a leading exporter

“Whoever is first in the field will be fresh for the fight. Whoever is second in the field and has to hasten to battle will arrive exhausted.” Sun Tzu

New Trade TheoryImplications of New Trade Theory

• Government intervention and strategic trade policy

• Boeing was largely paid for by U.S. from a spin off of a government-funded military program

National Competitive Advantage:Porter’s Diamond

Four attributes that explain why nations have success in particular industries – beyond the N.T.T.Factor endowmentsDemand ConditionsRelated and Supporting IndustriesFirm Strategy, Structure, and Rivalry

Two Additional Factors

National Competitive Advantage: Porter’s Diamond

Evaluating Porter’s Theory

Argues presence of all factors is usually required

Government can positively or negatively effect all four factors

If correct mirror Real World Trade, but is he?

“Australian Election: How do the Major Parties Stack Up On Fair Trade”

As the election draws near, The Australian Fair Trade and Investment Network (AFTINET) has analysed how the trade policies of our major political parties compare in relation to fair trade and free trade.

Both the Labor party and the Coalition are committed to trade liberalization, but differ in their approach. Labor policy emphasizes sharing the benefits of trade liberalization both domestically and between countries. The policy recognizes that short-term support is needed to assist some workers and sectors to adjust and that although trade is important, it is not always sufficient for developing countries. On the other hand, the Coalition focuses on increasing Australia’s exports through “fast tracking” Free Trade Agreements especially in Asia and particularly with China, Indonesia, Japan and India. The Coalition aims to increase Australia’s reputation as “a safe place to invest”. The Greens emphasize the importance of fairness and democracy in their approach to international trade and highlight the need to assist developing countries.

To compare the parties on key fair trade issues, we examined the policy documents of each party, as well as pre-election statements and publications on nine key issues. They are labour rights, the environment, health care and access to medicines, investor rights to sue governments (ISDS), intellectual property, Australia’s cultural industries, transparency, the Trans-Pacific Partnership and Multilateral versus bilateral and regional agreements.

Article Complications

All parties in favor of trade liberalizationEach party has different policies and views on

achieving it

Background

The Labor and Green parties have specific policies for all issues related to international trade

Liberals have no specific policies and have a negative policy on investor state dispute

How is this Relevant?

To our class: International trade is a major topic of our course

To Australia: To see if parties stick to their policies and to see how trade is effected by the elections

Implications Raised

If Liberal Party wins: International trade will be less structured, they will focus on fast-tracking free trade agreements

If Labor Party wins: Benefits of trade will be shared both domestically and with other countries

If the Green Party wins: Fairness and democracy will be implemented and they will enforce the need to assist developing countries

Q&A

Any Questions?