International Business LECTURE AGENDA Topic - 6 INTERNATIONAL TRADE Prof. Helal Nizami Page # 1 International Business TRADITIONAL THEORIES OF TRADE Focus on country level countries may gain from international trade Mercantilism restrict imports, maximize exports accumulation of wealth and power “neo-mercantilism” (protectionism) Classical trade theory (Smith and Ricardo) focus on labour as production factor absolute advantage (Adam Smith) comparative advantage (David Ricardo) Prof. Helal Nizami Page # 2 International Business THE ROLE OF FACTORPROPORTIONS Focus on country level Factor-proportions theory (Heckscher/Ohlin) focus of labour and capital as production factors competitive advantage derived from factor endowments The “Leontief paradox” disconfirming theory evidence regarding Prof. Helal Nizami factor-proportions Page # 3 International Business “NEW” TRADE THEORY How to explain intra-industry trade Overlapping product ranges theory (Linder) per capita income determines complexity of demand similarity in “sophistication of demand” leads to trade Economies of scales (Krugman) Product (Life) cycle theory (Vernon) Prof. Helal Nizami Page # 4 International Business PRODUCT (LIFE) CYCLE THEORY Stages of product (life) cycle new product (introduction, growth) maturign product (maturity) standardized product (decline) Early stages require capital and skilled labour Later stages require low-skill labour Countries of production and consumption depend on stages of the cycle Prof. Helal Nizami Page # 5 International Business PORTER’S “COMPETITIVE ADVANTAGE OF NATIONS” Firm strategy structure and rivalry Factor conditions Demand conditions Related and supporting industries Prof. Helal Nizami Page # 6 International Business ORIGINS OF PATTERNS OF TRADE Country differences vs. country similarity Political reasons Historical reasons Trade relationships independence interdependence dependence Geographical reasons Prof. Helal Nizami Page # 7 International Business THE BALANCE OF PAYMENTS Measures international economic transactions Cash flow statement based on double-entry bookkeeping Major accounts balance out (in theory) current account capital account No clear indication as to the benefits of account surpluses or deficits Often a political issue Prof. Helal Nizami Page # 8 International Business STRUCTURE OF THE BALANCE OF PAYMENTS Current account Capital account Export of merchandise Imports of merchandise Trade balance Exports of services Imports of services Service trade balance Income receipts on investments Income payments on investments Income balance Net unilateral transfers Balance on current account Direct investment in home country Direct investment abroad Net direct investment Net portfolio investment Other long-term capital Other short-term capital Balance on capital account Prof. Helal Nizami Page # 9 International Business COMPANY-LEVEL MOTIVES FOR VENTURING ABROAD Export opportunities vs. import opportunities Excess capacity Cost reduction Profitability Risk spreading/minimizing/risk share Diversification Prof. Helal Nizami Page # 10 International Business The Foreign Direct Investment (FDI) Decision Change competitive advantage Exploit abroad Production at home Production abroad Licensing, etc. Control assets abroad Joint venture Wholly owned afi Greenfield Prof. Helal Nizami Acquisition Page # 11 International Business RATIONALES FOR GOVERNMENT INFLUENCE ON TRADE Unemployment Industrial arguments “infant industries”, industrialization agriculture Economic relations with other countries “terms of trade” balance of payments price control Political objectives maintaining essential industries enemy countries, spheres of influence Prof. Helal Nizami Page # 12 International Business FORMS OF TRADE CONTROL Tariffs, duties Nontariff barriers subsidies customs valuation quotas standards “buy local” legislation administrative delay Prof. Helal Nizami Page # 13 International Business THE GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT) begun in 1947, most important trade liberalization activity today: World Trade Organization (WTO) most-favored-nation-clause (MFN) apply most favorable concession to all countries many exceptions! Prof. Helal Nizami Page # 14 International Business DIFFERENT LEVELS OF ECONOMIC INTEGRATION Free-trade area abolish trade restrictions among members Customs union free-trade + common trade policy towards nonmembers Common market customs union + no restrictions on factor mobility Economic union common market + integration of fiscal and monetary policies, taxation, single currency Prof. Helal Nizami Page # 15 International Business EFFECTS OF ECONOMIC INTEGRATION Trade creation vs. Trade diversion impact on competitive advantage of firms, tariff revenues, consumer prices Reduced import prices stronger position of the trading bloc Increased efficiency increased competition, economies of scale due to larger markets, higher factor productivity Regionalism vs. Nationalism Prof. Helal Nizami Page # 16 International Business ECONOMIC INTEGRATION: EUROPE Started in 1952/1957 European Union (since 1994) 15 member countries “four freedoms” common market, moving towards economic union Monetary Union (Euro) starting 1999 Political Union (planned) “Fortress Europe”?! Prof. Helal Nizami Page # 17 International Business ECONOMIC INTEGRATION: THE AMERICAS NAFTA free-trade agreement Canada, Mexico between U.S., CARICOM, CACM Central America LAFTA, ALADI, MERCOSUR Latin America Prof. Helal Nizami Page # 18 International Business ECONOMIC INTEGRATION: ASIA AND AFRICA Asia: ASEAN, AFTA free-trade agreement goal of phasing out tariffs to a maximum of 5% by 2008, but yet not Africa: OAU, ECOWAS Prof. Helal Nizami Page # 19 International Business CARTELS AND COMMODITY PRICE AGREEMENTS market High volatility of prices for primary products (uncontrollable supply) Cartels association of producers restricting market forces by fixing prices, sales territories or production quotas OPEC Commodity price agreements “buffer stock” system used to control prices Prof. Helal Nizami Page # 20
