Intro to International Business

🌍Intro to International Business Unit 3 – International Trade Theories & Policies

International trade theories explain how countries benefit from exchanging goods and services. These theories, from mercantilism to Porter's diamond model, highlight concepts like absolute and comparative advantage, factor endowments, and national competitive advantage. Trade policies and organizations shape the global trading landscape. Instruments like tariffs, quotas, and subsidies influence trade flows, while organizations like the WTO and trade agreements aim to reduce barriers and promote economic cooperation among nations.

Key Concepts

  • International trade involves the exchange of goods and services across national borders
  • Absolute advantage refers to a country's ability to produce a good or service more efficiently than another country
  • Comparative advantage occurs when a country can produce a good or service at a lower opportunity cost than another country
  • Factor endowments include a country's resources such as land, labor, and capital that influence its comparative advantage
  • Tariffs are taxes imposed on imported goods to protect domestic industries and generate revenue for the government
  • Quotas limit the quantity or value of goods that can be imported or exported during a specific period
  • Subsidies are government payments to domestic producers to help them compete with foreign competitors
  • Trade agreements are treaties between two or more countries to reduce trade barriers and promote trade

Historical Context

  • International trade has existed for centuries, with early examples including the Silk Road and trans-Saharan trade routes
  • The Industrial Revolution in the 18th and 19th centuries led to increased production and trade of manufactured goods
  • The Great Depression of the 1930s led to a rise in protectionist policies and a decline in international trade
  • The Bretton Woods Conference in 1944 established the International Monetary Fund (IMF) and the World Bank to promote international economic cooperation
  • The General Agreement on Tariffs and Trade (GATT) was established in 1947 to reduce trade barriers and promote free trade
  • The World Trade Organization (WTO) was established in 1995 to oversee global trade rules and resolve trade disputes
  • Globalization has accelerated in recent decades due to advances in transportation, communication, and technology

Major Trade Theories

  • Mercantilism, popular in the 16th to 18th centuries, emphasized the importance of a positive balance of trade and the accumulation of gold and silver
  • Adam Smith's theory of absolute advantage suggests that countries should specialize in producing goods they can produce more efficiently than others
  • David Ricardo's theory of comparative advantage argues that countries should specialize in producing goods they can produce at a lower opportunity cost than others
  • The Heckscher-Ohlin model emphasizes the role of factor endowments in determining a country's comparative advantage
  • The product life-cycle theory suggests that the location of production shifts as a product moves through its life cycle
  • The new trade theory emphasizes the role of economies of scale, product differentiation, and imperfect competition in international trade
  • Michael Porter's diamond model identifies four key determinants of national competitive advantage: factor conditions, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry

Trade Policy Instruments

  • Tariffs are taxes imposed on imported goods to protect domestic industries and generate revenue for the government
    • Types of tariffs include specific tariffs (fixed amount per unit) and ad valorem tariffs (percentage of value)
  • Quotas limit the quantity or value of goods that can be imported or exported during a specific period
    • Types of quotas include absolute quotas (fixed quantity) and tariff-rate quotas (allow a certain quantity to be imported at a lower tariff rate)
  • Subsidies are government payments to domestic producers to help them compete with foreign competitors
    • Types of subsidies include direct subsidies (cash payments) and indirect subsidies (tax breaks or low-interest loans)
  • Voluntary export restraints (VERs) are agreements between countries to limit the quantity of exports to avoid trade disputes
  • Local content requirements mandate that a certain percentage of a product's components must be produced domestically
  • Administrative barriers include complex customs procedures, import licensing requirements, and technical standards that can hinder trade

Global Trade Organizations

  • The World Trade Organization (WTO) is an international organization that oversees global trade rules and resolves trade disputes
    • The WTO operates on the principles of non-discrimination, reciprocity, and transparency
    • The WTO's dispute settlement mechanism allows countries to resolve trade conflicts through consultation, mediation, and arbitration
  • The United Nations Conference on Trade and Development (UNCTAD) promotes the integration of developing countries into the global economy
  • The Organization for Economic Cooperation and Development (OECD) provides a forum for countries to discuss and coordinate economic policies
  • The International Trade Centre (ITC) is a joint agency of the WTO and the United Nations that provides technical assistance to developing countries to promote exports
  • Regional development banks, such as the African Development Bank and the Asian Development Bank, provide financing for trade-related projects in their respective regions

Trade Agreements and Blocs

  • Bilateral trade agreements are treaties between two countries to reduce trade barriers and promote trade
    • Examples include the US-Korea Free Trade Agreement (KORUS) and the Japan-EU Economic Partnership Agreement
  • Regional trade agreements (RTAs) are treaties between countries in a specific geographic region to reduce trade barriers and promote economic integration
    • Examples include the European Union (EU), the North American Free Trade Agreement (NAFTA), and the Association of Southeast Asian Nations (ASEAN)
  • Preferential trade agreements (PTAs) provide preferential access to certain products from participating countries
    • Examples include the Generalized System of Preferences (GSP) and the African Growth and Opportunity Act (AGOA)
  • Customs unions eliminate trade barriers between member countries and adopt a common external tariff on imports from non-members
    • Examples include the Gulf Cooperation Council (GCC) and the Southern African Customs Union (SACU)
  • Common markets allow for the free movement of goods, services, capital, and labor among member countries
    • The European Union (EU) is the most prominent example of a common market

Impact on Businesses

  • International trade allows businesses to access new markets, source inputs more efficiently, and achieve economies of scale
  • Trade barriers such as tariffs and quotas can increase the cost of importing goods and reduce the competitiveness of businesses in foreign markets
  • Trade agreements can create opportunities for businesses to expand into new markets and reduce the costs of exporting goods
  • Exchange rate fluctuations can affect the profitability of businesses engaged in international trade
    • A strong domestic currency can make exports more expensive and less competitive in foreign markets
    • A weak domestic currency can make imports more expensive and increase the cost of production for businesses that rely on imported inputs
  • Cultural differences can pose challenges for businesses operating in foreign markets
    • Businesses need to adapt their products, marketing strategies, and business practices to meet the preferences and expectations of local consumers
  • Political risks, such as changes in government policies or social unrest, can disrupt international trade and affect the operations of businesses in foreign markets
  • The rise of digital trade, including e-commerce and digital services, is creating new opportunities and challenges for international trade
    • Digital trade raises issues related to data privacy, cybersecurity, and the taxation of digital goods and services
  • The increasing importance of services trade, such as financial services and telecommunications, is changing the nature of international trade
  • The growing role of emerging markets, particularly China and India, is shifting the balance of power in the global trading system
  • The COVID-19 pandemic has disrupted global supply chains and highlighted the need for greater resilience and diversification in international trade
  • The increasing focus on sustainability and environmental protection is leading to the development of new trade rules and standards
    • Examples include the WTO's negotiations on fisheries subsidies and the EU's proposed carbon border adjustment mechanism
  • The rise of protectionist sentiments and trade tensions, particularly between the US and China, is creating uncertainty and challenges for businesses engaged in international trade
  • The need for greater inclusion and equity in international trade, particularly for small and medium-sized enterprises (SMEs) and developing countries, is driving efforts to reform the global trading system


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© 2024 Fiveable Inc. All rights reserved.
AP® and SAT® are trademarks registered by the College Board, which is not affiliated with, and does not endorse this website.