PERSPECTIVES ON INTERNATIONAL TRADE

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PERSPECTIVES ON INTERNATIONAL TRADE

• BA 447
• Day 4

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Plan

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

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Related Concepts/Theories

• Theory of comparative advantage
• Tariff and non-tariff barriers

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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

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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

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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

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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

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Assume we all consume burgers and shakes
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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

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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.

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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

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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

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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)
• http//www.technewsworld.com/story/45394.html
• Emergence of new players, new transactions
• Tata of India doing business in Indiana
• CNOOCs attempt to acquire UNOCAL

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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

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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

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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

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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

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Economic perspective on offshoring

• Does it really help?
• http//www.businessweek.com/magazine/content/07_25
  /b4039010.htm

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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

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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?

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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)

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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?

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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