The International Trading Environment

1
The International Trading Environment

• Explaining world trade
• Trade Policy

2
Comparative Advantage

• Comparative Advantage Ricardo
• Role of resources in determining trade patterns
  trade will be greatest between countries with
  differing factor endowments-developed and
  developing economies
• Real World? This explanation of trade does not
  explain the principle patterns of trade over the
  past 50 years as trade has been greatest
  between countries that are similar in terms of
  resources - EU

3
Explaining real world trade

• Much trade takes the form of intra-industrial
  trade ie exporting importing goods belonging
  to the same industry?
• Economies of Scale gt concentration of production
  in the hands of a small number of oligopolistic
  producers
• Product Differentiation brand loyalty

4
New Trade Theories 1980s

• Vernon 1960s Product Life Cycle Theory
• early attempt to link together the
  international growth of the firm and the
  changing patterns of trade in the world economy
• Imperfect Competition monopolistic competition
  oligopoly and strategic behaviour
• One of the most important results of such a model
  is the prediction that local producers will sell
  at a higher price on the home market than they
  will charge on exports - dumping

5
Implications of new trade theories for trade
policy

• Intervention by governments in international
  trade is generally considered harmful
• New theories gt intervention can be welfare
  enhancing example
• Competitive Advantage of firms

6
Porter The Competitive Advantage of Nations

• The key to industrial success lies in the
  question of productivity
• To achieve competitive success, firms must
  possess a competitive advantage lower costs or
  differentiated products that command premium
  prices
• To sustain an advantage, firms have to achieve
  more sophisticated advantages over time higher
  quality products and services or producing more
  efficiently
• This translates directly into productivity growth

7
Porter

• Link between industrial efficiency and national
  welfare a rising national standard of living
  depends upon the capacity of a nations firms to
  achieve high levels of productivity and to
  increase productivity over time
• Diamond determinants of success of a nation
  rely on four interrelated conditions
• Firm strategy, factor conditions, demand
  conditions and related and supporting industries
• Trade enables nations to enhance levels of
  productivity through specialisation

8
Productivity is the key

• Porters approach differs to earlier approaches
  of CA in that the key areas of specialisation are
  those which a nations firms have created rather
  than inherited.
• Firms seeking competitive advantage will combine
  trade with FDI to continually seek to upgrade
  activities

9
Trade Barriers

• Trade brings benefits to countries involved
• Look around the worldgtcountries erect trade
  barriers. Why?
• Trade involves costs as well as benefits
• Methods of restricting trade Tariffs Quotas
  Exchange controls Import licensing embargoes,
  subsidies, administrative barriers, procurement
  policies

10
Arguments for restricting trade

• Valid and non valid arguments
• Non- economic arguments
• The Infant Industry Argument
• Changing Comparative Advantage and the
  inflexibility of markets
• Prevent Unfair Trading Practices
• To prevent the establishment of a foreign based
  monopoly
• To reduce reliance on goods with little dynamic
  potential
• Income redistribution

11
Arguments for Trade Restrictions -continued

• Exploitation of monopoly power
• Protection of declining industries
• Balance of Payments
• Strategic Trade Policy - Brander Spencer
• Non-economic arguments
• self-sufficiency
• political
• preserve traditional ways of life