🌍Intro to International Business Unit 3 – International Trade Theories & Policies

Key Concepts

• International trade involves the exchange of goods and services across national borders
• Absolute advantage refers to a country's ability to produce a good or service more efficiently than another country
• Comparative advantage occurs when a country can produce a good or service at a lower opportunity cost than another country
• Factor endowments include a country's resources such as land, labor, and capital that influence its comparative advantage
• Tariffs are taxes imposed on imported goods to protect domestic industries and generate revenue for the government
• Quotas limit the quantity or value of goods that can be imported or exported during a specific period
• Subsidies are government payments to domestic producers to help them compete with foreign competitors
• Trade agreements are treaties between two or more countries to reduce trade barriers and promote trade

Historical Context

• International trade has existed for centuries, with early examples including the Silk Road and trans-Saharan trade routes
• The Industrial Revolution in the 18th and 19th centuries led to increased production and trade of manufactured goods
• The Great Depression of the 1930s led to a rise in protectionist policies and a decline in international trade
• The Bretton Woods Conference in 1944 established the International Monetary Fund (IMF) and the World Bank to promote international economic cooperation
• The General Agreement on Tariffs and Trade (GATT) was established in 1947 to reduce trade barriers and promote free trade
• The World Trade Organization (WTO) was established in 1995 to oversee global trade rules and resolve trade disputes
• Globalization has accelerated in recent decades due to advances in transportation, communication, and technology

Major Trade Theories

• Mercantilism, popular in the 16th to 18th centuries, emphasized the importance of a positive balance of trade and the accumulation of gold and silver
• Adam Smith's theory of absolute advantage suggests that countries should specialize in producing goods they can produce more efficiently than others
• David Ricardo's theory of comparative advantage argues that countries should specialize in producing goods they can produce at a lower opportunity cost than others
• The Heckscher-Ohlin model emphasizes the role of factor endowments in determining a country's comparative advantage
• The product life-cycle theory suggests that the location of production shifts as a product moves through its life cycle
• The new trade theory emphasizes the role of economies of scale, product differentiation, and imperfect competition in international trade
• Michael Porter's diamond model identifies four key determinants of national competitive advantage: factor conditions, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry

Trade Policy Instruments

• Tariffs are taxes imposed on imported goods to protect domestic industries and generate revenue for the government
  • Types of tariffs include specific tariffs (fixed amount per unit) and ad valorem tariffs (percentage of value)
• Quotas limit the quantity or value of goods that can be imported or exported during a specific period
  • Types of quotas include absolute quotas (fixed quantity) and tariff-rate quotas (allow a certain quantity to be imported at a lower tariff rate)
• Subsidies are government payments to domestic producers to help them compete with foreign competitors
  • Types of subsidies include direct subsidies (cash payments) and indirect subsidies (tax breaks or low-interest loans)
• Voluntary export restraints (VERs) are agreements between countries to limit the quantity of exports to avoid trade disputes
• Local content requirements mandate that a certain percentage of a product's components must be produced domestically
• Administrative barriers include complex customs procedures, import licensing requirements, and technical standards that can hinder trade

Global Trade Organizations

• The World Trade Organization (WTO) is an international organization that oversees global trade rules and resolves trade disputes
  • The WTO operates on the principles of non-discrimination, reciprocity, and transparency
  • The WTO's dispute settlement mechanism allows countries to resolve trade conflicts through consultation, mediation, and arbitration
• The United Nations Conference on Trade and Development (UNCTAD) promotes the integration of developing countries into the global economy
• The Organization for Economic Cooperation and Development (OECD) provides a forum for countries to discuss and coordinate economic policies
• The International Trade Centre (ITC) is a joint agency of the WTO and the United Nations that provides technical assistance to developing countries to promote exports
• Regional development banks, such as the African Development Bank and the Asian Development Bank, provide financing for trade-related projects in their respective regions

Trade Agreements and Blocs

• Bilateral trade agreements are treaties between two countries to reduce trade barriers and promote trade
  • Examples include the US-Korea Free Trade Agreement (KORUS) and the Japan-EU Economic Partnership Agreement
• Regional trade agreements (RTAs) are treaties between countries in a specific geographic region to reduce trade barriers and promote economic integration
  • Examples include the European Union (EU), the North American Free Trade Agreement (NAFTA), and the Association of Southeast Asian Nations (ASEAN)
• Preferential trade agreements (PTAs) provide preferential access to certain products from participating countries
  • Examples include the Generalized System of Preferences (GSP) and the African Growth and Opportunity Act (AGOA)
• Customs unions eliminate trade barriers between member countries and adopt a common external tariff on imports from non-members
  • Examples include the Gulf Cooperation Council (GCC) and the Southern African Customs Union (SACU)
• Common markets allow for the free movement of goods, services, capital, and labor among member countries
  • The European Union (EU) is the most prominent example of a common market

Impact on Businesses

• International trade allows businesses to access new markets, source inputs more efficiently, and achieve economies of scale
• Trade barriers such as tariffs and quotas can increase the cost of importing goods and reduce the competitiveness of businesses in foreign markets
• Trade agreements can create opportunities for businesses to expand into new markets and reduce the costs of exporting goods
• Exchange rate fluctuations can affect the profitability of businesses engaged in international trade
  • A strong domestic currency can make exports more expensive and less competitive in foreign markets
  • A weak domestic currency can make imports more expensive and increase the cost of production for businesses that rely on imported inputs
• Cultural differences can pose challenges for businesses operating in foreign markets
  • Businesses need to adapt their products, marketing strategies, and business practices to meet the preferences and expectations of local consumers
• Political risks, such as changes in government policies or social unrest, can disrupt international trade and affect the operations of businesses in foreign markets

Current Trends and Challenges

• The rise of digital trade, including e-commerce and digital services, is creating new opportunities and challenges for international trade
  • Digital trade raises issues related to data privacy, cybersecurity, and the taxation of digital goods and services
• The increasing importance of services trade, such as financial services and telecommunications, is changing the nature of international trade
• The growing role of emerging markets, particularly China and India, is shifting the balance of power in the global trading system
• The COVID-19 pandemic has disrupted global supply chains and highlighted the need for greater resilience and diversification in international trade
• The increasing focus on sustainability and environmental protection is leading to the development of new trade rules and standards
  • Examples include the WTO's negotiations on fisheries subsidies and the EU's proposed carbon border adjustment mechanism
• The rise of protectionist sentiments and trade tensions, particularly between the US and China, is creating uncertainty and challenges for businesses engaged in international trade
• The need for greater inclusion and equity in international trade, particularly for small and medium-sized enterprises (SMEs) and developing countries, is driving efforts to reform the global trading system