Theories of International Trade and Investment Chapter 3

International Trade Theory Mercantilism Mercantilism Goals Goals Effects on today Effects on today Economic nationalism Economic nationalism Theory of Absolute Advantage Theory of Absolute Advantage Adam Smith Adam Smith Specialize Specialize

International Trade Theory Heckscher- Ohlin Theory of Factor Endowment Heckscher- Ohlin Theory of Factor Endowment Countries export Countries export Countries import Countries import Assumptions Assumptions Perfect market Perfect market Technology Technology Leontief Paradox Leontief Paradox U.s. is capital-intensive U.s. is capital-intensive Why? Why? Outcome Outcome Differences in Taste Differences in Taste Money can change flow of trade Money can change flow of trade Exchange rates Exchange rates Currency devaluation Currency devaluation

International Trade Theory New Explanations for Direction of Trade New Explanations for Direction of Trade Economies of scale and experience curve Economies of scale and experience curve Why? Why? First-mover theory First-mover theory Linder Theory of Overlapping Demand Linder Theory of Overlapping Demand Manufacturing goods Manufacturing goods Income levels Income levels

International Product Life Cycle What is it? What is it? Exports  imports Exports  imports Process Process U.S. exports U.S. exports Foreign production begins Foreign production begins Foreign competition in export markets Foreign competition in export markets Import competition in U.S. Import competition in U.S. Technology Life Cycle Technology Life Cycle U.S develops U.S develops Other developed Other developed Developing Developing

Porter’s Competitive Advantage of Nations What is it? What is it? Factors Factors Demand conditions Demand conditions Factor conditions Factor conditions Related and supporting industries Related and supporting industries Firm strategy, structure, and rivalry Firm strategy, structure, and rivalry

Summary Differences in endowments of factors of production Differences in endowments of factors of production Differences in level of technology Differences in level of technology Differences in efficiencies with which factor intensities are utilized Differences in efficiencies with which factor intensities are utilized Foreign exchange rates Foreign exchange rates

Trade Restrictions Arguments for Restriction Arguments for Restriction National Defense National Defense Sanctions to Punish Offending Nations Sanctions to Punish Offending Nations Protect Infant Industries Protect Infant Industries Protect Declining Industries Protect Declining Industries Protect Domestic Jobs Protect Domestic Jobs Scientific Tariff or “Fair Competition” Scientific Tariff or “Fair Competition” Retaliation Retaliation Dumping Dumping Five types Five types Subsidies Subsidies Countervailing duties Countervailing duties

Trade Barriers Tariffs Tariffs Ad valorem Ad valorem Specific duty Specific duty Compound duty Compound duty Official prices Official prices Variable levy Variable levy Lower duty for more local input Lower duty for more local input

Trade Barriers Nontariff Barriers Nontariff Barriers Quantitative Quantitative Quotas Quotas Absolute Absolute Tariff-rate Tariff-rate Global Global Voluntary export restraints Voluntary export restraints Orderly marketing arrangements Orderly marketing arrangements Multifiber Arrangement Multifiber Arrangement

Trade Barriers Nontariff Barriers Nontariff Barriers Nonquantitative Nonquantitative Direct government participation in trade Direct government participation in trade Agriculture procurement policies Agriculture procurement policies Government procurement policies Government procurement policies 1920 Jones Act 1920 Jones Act Customs and other administrative procedures Customs and other administrative procedures Standards Standards Managers must be aware of barriers!!!!!! Managers must be aware of barriers!!!!!!

Trade Barriers Multinational  Global Manufacturing Systems Multinational  Global Manufacturing Systems Two options Two options Costs of Barriers Costs of Barriers Consumer costs Consumer costs

Economic Development Categories Categories Developed Developed Developing Developing New Industrialized Countries New Industrialized Countries Three characteristics Three characteristics Newly Industrialized Economies Newly Industrialized Economies IMF Classifications IMF Classifications World Bank World Bank GNP/capita GNP/capita Problems with that Problems with that Underground market Underground market Exchange rates Exchange rates Purchasing power parity Purchasing power parity Atlas conversion factors Atlas conversion factors

Characteristics of Developing Nations GNP/ capita of less than $9,075 GNP/ capita of less than $9,075 Unequal distribution of income, small middle class Unequal distribution of income, small middle class Technological dualism Technological dualism Regionalism dualism Regionalism dualism 80-85% of population in unproductive agricultural sector 80-85% of population in unproductive agricultural sector Disguised unemployment or underemployment- two people doing what one can do Disguised unemployment or underemployment- two people doing what one can do High population growth (2.5-4%) High population growth (2.5-4%) High rate of illiteracy High rate of illiteracy Widespread malnutrition Widespread malnutrition Political instability Political instability High dependence on few exports (agriculture and minerals) High dependence on few exports (agriculture and minerals) Inhospitable topography Inhospitable topography Low savings rates and inadequate banks Low savings rates and inadequate banks

Human-Needs Approach Goals Goals Human Development Index Human Development Index Investment in Human Capital Investment in Human Capital Return Return

International Investment Theories Monopolistic Advantage Theory Monopolistic Advantage Theory Product and Factor Market Imperfections Product and Factor Market Imperfections International Product Life Cycle International Product Life Cycle Other Theories Other Theories Follow-the-leader theory Follow-the-leader theory Cross investment Cross investment Internationalism theory Internationalism theory Dunning’s Eclectic Theory of International Production Dunning’s Eclectic Theory of International Production Ownership-specific Ownership-specific Internalization Internalization Location-specific Location-specific