1. Trading Internationally 5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

2. LEARNING OUTCOMES 2 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GLOBAL3 | CH5 1Use the resource-based and institution- based views to explain why nations trade 2Identify and define the classical and modern theories of international trade 3Explain the importance of political realities governing international trade 4Identify factors that should be considered when your firm participates in international trade

3. 3 GLOBAL3 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Important Terms Related to Trade Trade - Exports and imports Consists of: -Merchandise trade: Tangible products being bought and sold -Service trade: Intangible services being bought and sold

4. 4 GLOBAL3 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Important Terms Related to Trade (continued) Balance of trade: Country-level trade surplus or deficit Trade deficit: Occurs when a nation imports more than it exports Trade surplus: Occurs when a nation exports more than it imports

5. 5 GLOBAL3 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Need for International Trade Resource-based view Firms in one nation generate exports that are valuable, unique, and hard to imitate -Beneficial for foreign firms to import Institution-based view Different rules governing trade are designed to determine how gains are shared or not shared Both sides must have economic gains

6. 6 GLOBAL3 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Theories of International Trade - Mercantilism Holds that wealth of the world is fixed Nation that exports more than it imports will enjoy the net inflows of gold and silver and becomes richer Intellectual ancestor of modern-day theory Protectionism: Idea that governments should actively protect domestic industries from imports and promote exports

7. 7 GLOBAL3 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Theories of International Trade - Absolute Advantage Proposed by Adam Smith Under free trade, each nation gains by specializing in economic activities in which it is the most efficient producer Free trade: Free market forces should determine the buying and selling of goods and services -There is little or no government intervention

8. 8 Exhibit Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GLOBAL3 | CH5 5.2 Absolute Advantage

9. 9 Exhibit Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GLOBAL3 | CH5 5.3 Absolute Advantage

10. 10 GLOBAL3 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Theories of International Trade - Comparative Advantage Nation gains by specializing in production of one good in which it has comparative advantage Comparative advantage: Relative advantage in one economic activity that one nation enjoys in comparison with other nations Developed by David Ricardo

11. 11 GLOBAL3 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Theories of International Trade - Comparative Advantage (continued 1) Net gains are availed through trade Opportunity cost: Cost of pursuing one activity at the expense of another activity Counterintuitive Realistic and useful during application Absolute and comparative advantages arise from: Productivity -Absolute advantage deals with productivity differences

12. 12 GLOBAL3 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Theories of International Trade - Comparative Advantage (continued 2) -Comparative advantage emphasizes relative productivity differences Factor endowment: Extent to which different countries possess various factors of production -Labor, land, and technology -Factor endowment theory: Nations will develop comparative advantages based on locally abundant factors

13. 13 Exhibit Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GLOBAL3 | CH5 5.4 Comparative Advantage

14. 14 Exhibit Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GLOBAL3 | CH5 5.5 Comparative Advantage

15. 15 GLOBAL3 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Theories of International Trade - Product Life Cycle Patterns of trade change over time as production shifts and product moves from new to maturing to standardized stages Developed by Raymond Vernon Dynamic theory Divided the world into three categories Lead innovation nation, developed nations, and developing nations

16. 16 GLOBAL3 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Theories of International Trade - Product Life Cycle (continued) Criticism of product life cycle theory Assumption of: -United States’ permanent position as lead innovation nation for new products -Stage-by-stage migration of production that takes a longer duration

17. 17 GLOBAL3 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Theories of International Trade - Strategic Trade Strategic government intervention in certain industries enhance their odds for international success Strategic trade policy: Provides companies a strategic advantage through government subsidies

18. 18 GLOBAL3 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Theories of International Trade - Strategic Trade (continued) Criticism Scholars and policy makers are uncomfortable with government intervention Industries claim they are strategically important

19. 19 Exhibit Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GLOBAL3 | CH5 5.7 Entering the Very Large, Super Jumbo Market

20. 20 Exhibit Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GLOBAL3 | CH5 5.7 Entering the Very Large, Super Jumbo Market (continued)

21. 21 GLOBAL3 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Theories of International Trade - National Competitive Advantage of Industries Competitive advantage of certain industries in different nations depends on four aspects Form a diamond shape when diagrammed Proposed by Michael Porter Known as diamond theory

22. 22 Exhibit Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GLOBAL3 | CH5 5.8 National Competitive Advantage of Industries: The Porter Diamond

23. 23 GLOBAL3 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Evaluation of Classical Theories of International Trade Considered as revolutionary theories when the world was dominated by mercantilistic thinking Rely on simplistic assumptions of a model consisting of only two nations and two goods Assumption of perfect resource mobility Assumption of no foreign exchange issues and zero transportation costs

24. 24 GLOBAL3 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Tariff Barriers Discourage imports by placing a tariff or tax on imported goods Import tariff: Tax imposed on imports Deadweight costs: Net losses that occur in an economy as the result of tariffs

25. 25 GLOBAL3 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Non-Tariff Barriers Discourage imports by means other than tariffs on imposed goods Subsidy: Government payment to domestic firms Import quota: Restriction on the quantity of goods brought into a country Voluntary export restraint (VER): International agreement to show that an exporting country voluntarily agrees to restrict its exports

26. 26 GLOBAL3 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Non-Tariff Barriers (continued) Local content requirement: Rule stipulating certain proportion of the value of a good must originate from the domestic market Administrative policy: Bureaucratic rule that makes it harder to import foreign goods Antidumping duty: Cost levied on imports that have been dumped or sold below cost -Drives domestic firms out of business

27. 27 GLOBAL3 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Economic Arguments Against Free Trade Need to: Protect domestic industries Shield infant industries

28. 28 GLOBAL3 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Political Arguments Against Free Trade National security concerns are invoked to protect defense-related industries Consumer protection is frequently used to erect trade barriers Trade intervention is used to meet foreign policy objectives Environmental and social responsibility

29. 29 GLOBAL3 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Factors That Determine the Success and Failure of Firms’ Exports Resource-based view Successful exports are valuable, unique, hard-to- imitate products Institution-based view Laws and regulations promoted by special interest groups can: -Protect certain domestic industries -Erect trade boundaries -Make the nation as a whole worse off

30. 30 Exhibit Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GLOBAL3 | CH5 5.11 Implications for Action

31. 31 GLOBAL3 | CH5 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Debate: Trade Deficit For Trading partners mutually benefit by developing a deeper division of labor based on comparative advantage Against Trade deficits are attributed to countries with which the United States holds large deficits

32. KEY TERMS 32 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GLOBAL3 | CH5 Export Import Merchandise trade Service trade Trade deficit Trade surplus Balance of trade Mercantilism Protectionism Free trade Theory of absolute advantage Absolute advantage Theory of comparative advantage Comparative advantage

33. KEY TERMS 33 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GLOBAL3 | CH5 Opportunity cost Factor endowment Factor endowment theory Product life cycle theory Strategic trade theory First-mover advantage Strategic trade policy Theory of national competitive advantage of industries Resource mobility Tariff barrier Import tariff Deadweight cost

34. KEY TERMS 34 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GLOBAL3 | CH5 Non-tariff barrier (NTB) Subsidy Import quota Voluntary export restraint (VER) Local content requirement Administrative policy Antidumping duty Trade embargo

35. SUMMARY 35 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GLOBAL3 | CH5 International trade provides economic gains Gains are shared by both exporters and importers Theories of international trade Classical theories - Mercantilism, absolute advantage, and comparative advantage Modern theories - Product life cycle, strategic trade, and national competitive advantage of industries

36. SUMMARY 36 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GLOBAL3 | CH5 Trade barriers include tariff and non-tariff barriers Managers must leverage the comparative advantage of world-class locations

37. 37 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GLOBAL3 | CH5