BUSI2025 Chapter Notes - Chapter 6-7: New Trade Theory, Dangerous Goods, Price Premium
International Trade: Theory and Practice
Government Policy and International Trade
Why firms engage in foreign trade?
- Only profitability?
- Export incentives
• Reduced per unit production costs
• Use of excess production capacity
• Price premium in foreign market
• Risk spreading
- Import incentives
• Cheaper suppliers
• Additions to product line
• Reducing risk in the supply chain
Trends in International Trade
- Most of world merchandise trade (approx. 71%) is represented by manufactured
goods
- After WWII: strong growth in world trade volume (manufactures)
- Since 1980s: strong growth in services trade, approximately 29% of total world trade
in 2016
- Trade and world output
• International trade influences level of world output (GDP)
• Higher growth in international trade = higher growth in world output
Trade Independence?
- All countries fall on a continuum of trade interdependencies:
• High dependence at one end (mainly small nations e.g. Singapore)
• High independence at the other end (autarchic/poor countries, e.g. North
Korea)
- Issues
• Neighbouring countries trade more
• Effect on developing and transition economies
• Dangers of trade dependency
• Balance between dependence-independence
Trade theory
- Trade theory shows why it is beneficial for a country to engage in international trade
even for products it is able to produce for itself
- Trade theory also helps to explain patterns of trade between countries
- Key trade theories in the chapter:
• Mercantilism
• Absolute Advantage
• Comparative advantage
• Hecksher & Ohlin theory of factor endowments
• Product-life cycle Theory
• New trade theories
• Porter’s national competitive advantage
Theories of Specialisation
- Both absolute and comparative advantage theories are based on specialisation
- Assumptions that policymakers question:
• Full employment
• Economic efficiency
• Division of gains
• Two countries, two commodities
• Transport costs
• Statics and dynamics
• Services
• Production networks
• Factor mobility
- Some trade patterns are unexpected – Example: Georgia Chopsticks
National Competitive Advantage
Why governments intervene in Markets
1. Political arguments
• Protecting jobs
• Protecting industries important for national security
• Retaliation for unfair competition
• Protection consumers from dangerous goods
• Furthering foreign policy goals
• Protecting human rights in exporting countries
• Protecting the environment
2. Economic arguments
• Raising revenue, particularly in low income countries
• Protecting infant industries
• Strategic trade policy
Promoting and restricting trade
Subsidies
- Financial assistance to domestic producers
• Cash payments, tax breaks, low interest loans, price support
• Nation, province/ state, city level
• Lower costs to compete against cheaper imports and to gain export markets
Document Summary
Export incentives: reduced per unit production costs, use of excess production capacity, price premium in foreign market, risk spreading. Import incentives: cheaper suppliers, additions to product line, reducing risk in the supply chain. After wwii: strong growth in world trade volume (manufactures) Since 1980s: strong growth in services trade, approximately 29% of total world trade in 2016. International trade influences level of world output (gdp: higher growth in international trade = higher growth in world output. All countries fall on a continuum of trade interdependencies: high dependence at one end (mainly small nations e. g. singapore, high independence at the other end (autarchic/poor countries, e. g. north. Issues: neighbouring countries trade more, effect on developing and transition economies, dangers of trade dependency, balance between dependence-independence. Trade theory shows why it is beneficial for a country to engage in international trade even for products it is able to produce for itself. Trade theory also helps to explain patterns of trade between countries.
