PERSPECTIVES ON INTERNATIONAL TRADE BA 447 Day 4

Plan Theory of comparative advantage Ch 4: The Great Sorting Out Ch 5: America and Free Trade

Related Concepts/Theories Theory of comparative advantage Tariff and non-tariff barriers

Theory of comparative advantage Simply stated: two countries are ahead in terms of providing for the common good, if –Each country produces a product where it has comparative advantage, i.e. land, skills, etc. –Uses the revenues to purchase other products Factors of production have changed –Labor costs and skill –Transportation costs –Communication and reduction of lead times

Tariff and non-tariff barriers Tariff duties are levied on incoming products, has the effect of increasing cost Non-tariff barriers come in different forms; the intent is to protect local production Related issues –WTO –Relative influence of industry groups in each country –Political stability: impact on cost of doing business

Chapter 4 The dynamics between national boundaries and international trade National identity of a corporation Changing roles of the individual –Buyer –Employee –Powell and his aide

Chapter 4 National boundaries are less important –Reduction in tariffs (WTO) –Production or processing cost advantage make-up for transportation cost –Reductions in transport cost –Open boundaries and greater education Difference in living standards, aspirations –In countries where skills can be developed and in industries where labor cost are important, there can be an advantage

Assume we all consume burgers and shakes

Comparative Advantage Total Price = –production cost + –transportation cost + –processing cost + –producer and processor profit + –tariffs where applicable Exchange rates – –parity and predictability –potential source of profits if managed properly

Comparative Advantage - continued Everyone has access to cheap burgers and milk Barriers may exist to protect local industries: –Tariffs –Non-tariff barriers Jobs are secured for the time being Prices known mostly to those in trade Equilibrium occurs when supply = demand, i.e. given employment levels in each country, salaries translate to propensity to buy, supply and demand relationships, etc.

Return to Ch 4 With “flatteners”, comparative advantage of low labor cost is accentuated because knowledge is easily transferable. Assumes –Adequate labor pool –Infrastructure –Cooperative government –Active participation of private sector. Multi-nationals Entrepreneurs

Chapter 4 The world as one “market” Search for ideal locations to produce goods and services for different national markets –NIKE produces shoes in China for southeast asian markets Movement of factories a combination of numerous factors already mentioned, e.g. labor costs, taxes and tariffs, etc. Also consider –Proximity to markets –Aging of physical plants

Chapter 4 Nationalities of multinationals blur: –Rolls Royce –IBM/Lenovo –Daimler Chrysler Competition becomes global –Adidas has Europe, NIKE has US in types of shoes –GM and Holden –Yahoo and Alibaba (China) Emergence of new players, new transactions –Tata of India doing business in Indiana –CNOOC’s attempt to acquire UNOCAL

Ch 4 Implies loss of jobs Who is exploiting whom? –Company with Indian workers looking for opportunities in Indiana, or Indiana exploiting cheap labor??? Issues surrounding ownership –Property rights Loss or reduction of services or functions –Tellers started to go much earlier –Sales persons –Help desk personnel

Additional Perspectives on International Trade To pursue “global strategy” managing components and assemblies provide ability to take advantage of location economies Trade in tasks, not final products (see Economist article) –First unbundling was when one country did not have to produce wine for its citizens to consume wine –Second unbundling, production is broken up (the article uses the term “spliced”) into tasks that can be spread around the world This is what makes it hard to define “safe jobs:” it is now difficult to predict what class of tasks can not be offshored

Chapter 5 Benefits of offshoring to a US company? –Retain competitiveness in US and foreign markets –Flexibility –Differentiation –Long-term survival Benefits/harm to society? –Cheaper goods –Lost jobs –Foreign exchange

Offshoring: general comments Does it result in net loss of jobs? –Claim: 3.3m jobs lost to outsourcing, over several years –Jobs may also be created in the sense of company remaining competitive, other jobs becoming more practical –Jobs may also be lost because of productivity improvements, e.g. reengineering, rightsizing –Scale: there are 150 million jobs in US economy and it creates a couple million jobs a month

Economic perspective on offshoring Does it really help? ontent/07_25/b htm

International Trade before the 1900s Trade in ancient times – spice, silk The History of the World in Six Glasses –Trade in beer and wine –Trade in coffee and tea The galleon trade

Industries on the move Since the 1960s, industries have searched for ideal production sites. Considerations: –Production or processing cost –Transportation and proximity to markets –Tariff or tax advantages –Political regime, including “friendly” laws, for example pollution controls, and their impact on costs Examples: steel and iron, automobiles, appliances, semi-conductors, software, etc. What has been the contribution of the “web- enabled playing field” to this process?

Offshoring: China perspective Think of this as part of a process of understanding how trade emerges and additional insights on the trade relationship between the US and China Film on Wal-Mart (PBS, Frontline)

Comments on film Premise behind opening of US-China relationship – market for US goods. Reality is a bit more complex: –Disparity in incomes between the two countries –Profit opportunities for industries with few players – the retail industry is not an example of perfect competition –Chinese markets could be served by production from within China and neighboring countries, with participation of US companies –Foreign exchange regimes in both countries –Comparative advantage evolves over time Other comments?

In-class Friedman: countries like China will (eventually) consume US products if they have not already doing so. Wal-Mart film: the Clinton administration assumed that China would provide a market for US produced goods. However because the disparity of income, the US ended up to be a net importer of Chinese-made goods. Resolve