© 2013 Cengage Learning. All rights reserved. CHAPTER 5 GLOBAL2  PENG © OLIVER LANG/AFP/Getty Images 1

© 2013 Cengage Learning. All rights reserved. CHAPTER 5 LEARNING OBJECTIVES After studying this chapter you should be able to: 1.Use the resource-based and institution-based views to explain why nations trade. 2.Identify and define the classical and modern theories of international trade. 3.Explain the importance of political realities governing international trade. 4.Identify factors that should be considered when your firm participates in international trade. 2

© 2013 Cengage Learning. All rights reserved. LO1: WHY DO NATIONS TRADE? Terms to know:  Exporting  Importing  Merchandise trade  Service trade  Trade deficit  Trade surplus  Balance of trade 3

© 2013 Cengage Learning. All rights reserved. LO1: WHY DO NATIONS TRADE?  Must be economic gains from trade for both sides.  Resource-based view: nations trade because some firms in one nation generate exports that are valuable, unique, and hard to imitate.  Institution-based view: different rules governing trade are designed to determine how gains are shared or not shared. 4

© 2013 Cengage Learning. All rights reserved. LO1: WORLD MERCHANDISE EXPORTS 5 © iStockphoto.com/luoman In 2010, merchandise exports increased by 22% in value.

© 2013 Cengage Learning. All rights reserved. LO2: THEORIES OF INTERNATIONAL TRADE 6

© 2013 Cengage Learning. All rights reserved. LO2: THEORIES OF INTERNATIONAL TRADE 7

© 2013 Cengage Learning. All rights reserved. LO2: MERCANTILISM  Views international trade as a zero-sum game. A nation that exported more than it imported would enjoy net inflow of money.  Intellectual ancestor of protectionism – idea that governments should actively protect domestic industries from imports and promote exports. 8

© 2013 Cengage Learning. All rights reserved. LO2: ABSOLUTE ADVANTAGE With free trade, a nation gains by specializing in economic activities in which it has an absolute advantage. 9 © iStockphoto.com/ Stephen Strathdee

© 2013 Cengage Learning. All rights reserved. LO2: ABSOLUTE ADVANTAGE 10

© 2013 Cengage Learning. All rights reserved. LO2: COMPARATIVE ADVANTAGE The relative advantage in one economic activity that a nation enjoys over others. 11

© 2013 Cengage Learning. All rights reserved. LO2: COMPARATIVE ADVANTAGE 12

© 2013 Cengage Learning. All rights reserved. LO2: PRODUCT LIFE CYCLE THEORY Dynamic theory that accounts for changes in the patterns of trade over time. 13

© 2013 Cengage Learning. All rights reserved. LO2: PRODUCT LIFE CYCLE THEORY 14

© 2013 Cengage Learning. All rights reserved. LO2: PRODUCT LIFE CYCLE THEORY 15

© 2013 Cengage Learning. All rights reserved. LO2: PRODUCT LIFE CYCLE THEORY 16

© 2013 Cengage Learning. All rights reserved. LO2: STRATEGIC TRADE Suggests that strategic government intervention in certain industries can enhance their odds for international success. 17

© 2013 Cengage Learning. All rights reserved. LO2: STRATEGIC TRADE 18

© 2013 Cengage Learning. All rights reserved. LO2: STRATEGIC TRADE 19

© 2013 Cengage Learning. All rights reserved. LO2: NATIONAL COMPETITIVE ADVANTAGE OF INDUSTRIES Competitive advantage of certain industries in different nations depends on four factors: 20 Source: M. Porter, “The competitive advantage of nations,” Harvard Business Review (March-April 1990): 77. Reprinted with permission.

© 2013 Cengage Learning. All rights reserved. LO3: IMPORTANCE OF POLITICAL REALITIES Why do trade barriers remain?  Tariff Barriers – means of discouraging imports by placing a tariff (tax) on imported goods.  Costly to organize individuals and firms in scattered countries to make the case for free trade. 21

© 2013 Cengage Learning. All rights reserved. LO3: IMPORTANCE OF POLITICAL REALITIES Why do trade barriers remain?  Non-tariff barriers – discourages imports by means other than tariffs: Subsidies Import quotas Voluntary export restraints Local content requirements Administrative policies Antidumping duties 22

© 2013 Cengage Learning. All rights reserved. LO3: ARGUMENTS AGAINST FREE TRADE Economic: 1.Protect domestic industries 2.Shield infant industries 23

© 2013 Cengage Learning. All rights reserved. LO3: ARGUMENTS AGAINST FREE TRADE Political: 1.National security 2.Consumer protection 3.Foreign policy 4.Environmental responsibility 5.Social responsibility 24

© 2013 Cengage Learning. All rights reserved. LO4: FACTORS WHEN CONSIDERING BUSINESS WITH OTHER NATIONS  Resource-based view: successful exports are valuable, unique, hard-to-imitate products.  Institution-based view: rules of the game, laws, and regulations promoted by various special interest groups can protect certain domestic industries, erect trade boundaries, and make the nation worse off. 25

© 2013 Cengage Learning. All rights reserved. LO4: FACTORS WHEN CONSIDERING BUSINESS WITH OTHER NATIONS 26

© 2013 Cengage Learning. All rights reserved. DEBATE: SHOULD THE US/CHINA TRADE DEFICIT BE OF CONCERN? Based on classical theories, argue that US and trade partners are developing deeper division of labor based on comparative advantage. 27 Argue that international trade is about competition.