ch05 international trade

8/2/2019 CH05 International Trade

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Chapter 5International Trade


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International Business 4e Chapter 5 - 2

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Discuss the volume and patterns of world trade

Identify the inherent flaws of mercantilism

Explain the absolute and comparative

advantage theories

Describe the factor proportions and

international product life cycle theories

Explain the new trade and national competitive

advantage theories


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International Trade

Purchase, sale, or exchange of goods andservices across national borders

People have larger selection of products

Important engine for job creation


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Trade and World Output

World trade 80% merchandise

20% services

World output impacts trade Growing output = growing trade

Sluggish output = sluggish trade

World trade grows faster

than world output


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20% services




than world output

Trade is impacted by

the global business

cycle.Trade slows in a recessionas people are uncertain

about the future and buy

less.

Also, when an economy isin recession the currency is

weak; slowing imports

because they are more

expensive.


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20% services




than world output

Example: The US economy

is in a recession and the US

dollar has fallen some 34%

since its peak in 2002 againsta basket of currencies.


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60

70

80

90

100

110

120

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Major Currency Index

FRB

34% drop


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20% services




than world output

Example:

That decline is helping to

shrink its external deficit.

As of Nov 10 trade showedexports growing at a 15%

annual rate, whereas imports

grew by 13.6%.


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It seems that themajority of the offset

from the US trade deficitcomes from developingeconomies.


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20% services




than world output

This means that

economies are more

interconnected via trade.


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Worlds Top Exporters


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Trade Patterns

60%

34%

6%

Merchandise trade among:Western European

trade is mostly intra-

regional trade

Low- and

middle-incomenations High-incomenations

High-income and low- andmiddle-income nations

North America

imports twice asmuch from Asia as it

exports to Asia


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Trade Patterns

60%

34%

6%

Merchandise trade among: This low figure reveals thelow purchasing power ofthe poor nations and lack

of development

Low- and

middle-incomenations High-incomenations

High-income and low- andmiddle-income nations


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Who Trades with Whom?

Who trades with whom?


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Intra-regional trade accounts for over 74 percent of Europes exports

2973


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and56% of North Americas exports.

742


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This data also shows the trade imbalance between Asiaand North America (and reasons for friction)


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North America exports $249 billion to Asia

249


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While Asia exports $533 billion to North America

533


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Trade and theDependent Nation

Totaldependence

Potential effects of dependence:

+ Infuses needed capital+ Creates jobs and raises wages+ Imports technology and skills

Economic problems transferred Political turmoil can spill over

Totalindependence


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Total dependence

Developing and transition nations often depend ontheir developed neighbors with whom they share

borders.Germany is the single most important trading partnerof central and eastern European nations.Mexico is extremely dependent on the US for itsexports.

If a nation experiences economic recession orpolitical turmoil, the dependent nation can experienceeconomic problems.


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-4%

-2%

0%

2%

4%

6%

8%

An

nualPercentChange

Canada

USA



How connected are the NAFTA countries?

Annual Change in GDP

-4%

-2%

0%

2%

4%

6%

8%

An

nualPercentChange

Canada

USA

US $, constant prices, constant PPPs, OECD base year, millions


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-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

USA

Mexico

Annual Change in GDP

US $, constant prices, constant PPPs, OECD base year, millions


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Total dependence

Is your country overly export-dependant on one ortwo countries?

Which country represents the largest export market?


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Trade Theory Timeline


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Mercantilism

Nations accumulate financial wealth byencouraging exports and discouraging imports

Three pillars

Maintain tradesurplus

Governmentintervention

Exploit colonies

Inherent flaws

World trade iszero-sum game

Constrains output

and consumption Limits colonies

market potential


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Mercantilism

Is China a mercantilist state?

Chinas

trade frictions with the rest of the world is heating up.

Foreigners insist that the main reason for Chinas growingmarket share is that the government in Beijing has kept itscurrency weak.


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Mercantilism


But there are several other reasons why Chinas exports held

up better than those of its competitors during the globalrecession:

Lower incomes encouraged consumers to trade down tocheaper goodsElimination of global textile quotas in January 2009 allowedChina to increase its slice of that market


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Mercantilism


How high could Chinas market share

go?Over the ten years to 2008 Chinas

exports grew by an annual average of23% in dollar terms, more than twice asfast as world trade.

Projections in the IMFs World

Economic Outlook imply that Chinas

exports will account for 12% of worldtrade by 2014.


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Mercantilism


An IMF working paper published in 2009 calculated that if

China remained as dependent on exports as in recent years,then to sustain annual GDP growth of 8% its share of worldexports would rise to about 17% by 2020. w high could Chinas

market share go?They concluded that to achieve the required export growth,China would have to reduce prices, which would beincreasingly hard to manage, whether through productivitygains or a squeeze in profits.


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Mercantilism

Nations accumulate financial wealth byencouraging exports and discouraging imports

Inherent flaws

World trade is zero-sum game

A nation benefits only at the expense of other nationsBut if all nations barricade their markets from imports and pushtheir exports onto others, international trade would be severely

restricted.It kept colonial markets poor.


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Absolute Advantage

Ability of a nation to produce a good more efficientlythan any other nation (greater output using same orfewer resources)

Adam Smith reasoned that international trade shouldnot be burdened by tariffs and quotas, but should flowaccording to market forces.

A country should produce the goods in which it holdsan absolute advantage and trade with others to obtainthe goods it needs but does not produce efficiently.


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Absolute Advantage

Ability of a nation to produce a good more efficiently than anyother nation (greater output using same or fewer resources)

Specialization and trade allows each toproduce and consume more

1 resource unit = 1 ton rice or

1/5 ton tea

Riceland

1 resource unit = 1/6 ton rice or

1/3 ton tea

Tealand


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Absolute Advantage

Lets say that Riceland uses one resource unit to produce1 ton of rice and trades for 1 ton of tea

1 ton tea


1/5 ton tea

Riceland


1/3 ton tea

Tealand

1 ton rice


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Absolute Advantage

We see that Riceland is better off because if it used its one resourceunit to produce tea it would have received only 1/5 ton.

1 ton tea


1/5 ton tea

Riceland


1/3 ton tea

Tealand

1 ton rice


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Absolute Advantage

What about Tealand? Lets say that Tealand uses one resource unitto produce 1/3 ton of tea and trades for 1/3 ton of rice

1/3 ton tea


1/5 ton tea

Riceland


1/3 ton tea

Tealand

1/3 ton rice


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Absolute Advantage

We see that Tealand is also better off because if it used its oneresource unit to produce rice it would have received only 1/6 ton.

1/3 ton tea


1/5 ton tea

Riceland


1/3 ton tea

Tealand

1/3 ton rice


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Comparative Advantage

Comparative advantageis the ability of acountry to produce a specific good at alower opportunity cost than its tradingpartners.


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Lets say China and US can produce the same car but

at different costs. Assume that the car retails for$10,000.

Should the US produce the car or trade for a Chinesemodel?

$4,000 $3,500

China US

cost


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It depends.

What is the US giving up if it producesits own car?

The opportunity cost will determine if itis a good idea for the US to produce ortrade.


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Since the US can produce the car forless, it seems logical that it shouldproduce, consume, and/or trade it with

China.

But by producing this car it is denying

resources to the production process ofother goods.


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Lets say that if the US did not produce the car, its

most valued alternative is to produce a jumbo jetvalued at $5,000.000.

$10,000

US

$5,000,000

or


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So, even though the US can produce a car at a lowercost than China, it would be in its own best interestto produce planes and trade China for cars.


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Assumptions and Limitations

1. Nations strive only to maximizeproduction and consumption

2. Only two countries produce and

consume just two goods

3. No transportation costs of tradinggoods

4. Labor is the only resource used to

produce goods

5. Ignores efficiency and improvementgains from producing just one good


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International Product Life Cycle

A company begins by exporting its product and later undertakesforeign direct investment as a product moves through its life cycle


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In new product stage, stage 1, the high purchasing powerand demand of spur a company to design and introduce anew product concept

Consumption


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Although initially there is virtually no export market, exportsincrease late in the new product stage.

Exports are small

Because the import markets are small


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In the maturing product stage, stage 2,

Imports are growing

the domestic market and markets abroad become fullyaware of the existence of the product and its benefits.


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In the standardized product stage, stage 3,

Look at the levels of production in countries

competition from other companies selling similar productspressures companies to lower prices in order to maintain sales

levels.


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An aggressive search for low-cost production bases abroadbegins and the home market may begin importing.

And other countries become net exporters


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The theory is challenged by the fact that more companiesare operating in international markets from their inception.

The Internet has made this easier particularly for small and

midsize companies.

Also, small companies are more often teaming up withcompanies in other markets to develop new products orproduction technologies.

Yet the theory retains explanatory power when applied totechnology-based products that are eventually mass-produced.


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Chapter Review

Discuss the volume and patterns of world trade

Identify the inherent flaws of mercantilism

Explain the absolute and comparativeadvantage theories

Describe the factor proportions and

international product life cycle theories Explain the new trade and national competitive

advantage theories

ch05 international trade

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