Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
CHAPTER 5
TRADING INTERNATIONALLY
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. use the resource-based and institution-based views to answer why nations trade.
2. understand classical and modern theories of international trade.
3. realize the importance of political realities governing international trade.
4. participate in two leading debates concerning international trade.
5. draw implications for action.
GENERAL TEACHING SUGGESTIONS
Many people view trade in a way similar to the mercantilists centuries ago: it is a zero sum game
in which one nation must lose if another wins. Smith and Ricardo indicated that it can be a
win/win game. However, with all the news about loss of jobs due to outsourcing and the trade
deficit, there are those who feel that theory and reality do not match.
One way to help students reconcile theory and reality is to help them understand that the real
problem (if it is a problem) is change and that all kinds of change can create threats for some and
opportunities for others regardless of whether it involves a change in technology, markets, laws
or changes in nature such as a shift in the direction of a river or changes in weather patterns.
Nevertheless, in spite of all the variety of changes that affect our economy, many tend to blame
most of U.S. economic ills on the change caused by trade and they see only the glass half
empty–only those who suffer from trade and not those who benefit. Furthermore, given the level
of passion underlying the misunderstandings, you should have no problem generating discussion
and you may wish to use the formal debate technique as a way to explore trade issues in a way
that the students can bring out both sides.
OPENING CASE DISCUSSION GUIDE
Opening Case: Emerging Markets: Is China the Largest Trading Nation of the World?
Both merchandise and services are exported and imported. China is now the world’s largest
merchandise exporter. Manufacturing is 33% of China’s GDP. Chinese exports have become
popular because they deliver value, are rare, and possess hard-to-imitate attributes. China joined
the World Trade Organization in 2001 and established free trade agreements with countries and
groups of countries where it can sell its merchandise. China has also grown as an importer—it is
now the second-largest merchandise importer. The majority of its imports are raw materials.
Although China continues to grow as a trader, it is currently behind the United States. In the
future, it could pass the United States to become the largest economy in the world.
CHAPTER OUTLINE: KEY CONCEPTS AND TERMS
Sections I through V of Chapter 5
I. WHY DO NATIONS TRADE?
1. Key Concept
The resource-based view suggests that nations trade because some firms in one nation
generate valuable, unique, and hard-to-imitate exports that firms in other nations find it
beneficial to import. The institution-based view argues that as “rules of the game,”
different laws and regulations governing international trade aim to share gains from
trade.
2. Key Terms
Balance of trade is the aggregation of importing and exporting that leads to the
country-level trade surplus or deficit.
Export is selling abroad.
Import is buying from abroad.
Merchandise (goods) are tangible goods being traded.
Services are intangible services being traded.
Trade deficit is an economic condition in which a nation imports more than it
exports.
Trade surplus is an economic condition in which a nation exports more than it
imports.
II. THEORIES OF INTERNATIONAL TRADE
1. Key Concepts
Classical theories include (1) mercantilism, (2) absolute advantage, and (3) comparative
advantage. Modern theories include (1) product life cycle, (2) strategic trade, and (3)
national competitive advantage.
2. Key Terms
Absolute advantage is the economic advantage one nation enjoys that is absolutely
superior to other nations.
Classical trade theories are the major theories of international trade that were
advanced before the 20th century, which consist of (1) mercantilism, (2) absolute
advantage, and (3) comparative advantage.
Comparative advantage is the relative (not absolute) advantage in one economic
activity that one nation enjoys in comparison with other nations.
Diamond theory is a theory that suggests that the competitive advantage of certain
industries in different nations depends on four aspects that form a “diamond.” Also
known as the theory of national competitive advantage of industries.
Factor endowment is the extent to which different countries possess various factors
of production such as labor, land, and technology.
Factor endowment theory (or Heckscher-Ohlin theory) is a theory that suggests
that nations will develop comparative advantages based on their locally abundant
factors.
First-mover advantage is a benefit that accrues to firms that enter the market first
and that late entrants do not enjoy.
Free trade is the idea that free market forces should determine how much to trade
with little or no government intervention.
Modern trade theories are the major theories of international trade that were
advanced in the 20th century, which consist of (1) product life cycle, (2) strategic
trade, and (3) national competitive advantage of industries.
Opportunity cost is the cost of pursuing one activity at the expense of another
activity, given the alternatives (other opportunities).
Product life cycle theory is a theory that accounts for changes in the patterns of
trade over time by focusing on product life cycles.
Protectionism is the idea that governments should actively protect domestic
industries from imports and vigorously promote exports.
Resource mobility is an assumption that a resource used in producing a product for
one industry can be shifted and put to use in another industry.
Strategic trade policy is a government policy that provides companies a strategic
advantage in international trade through subsidies and other supports.
Strategic trade theory is a theory that suggests that strategic intervention by
governments in certain industries can enhance their odds for international success.
Theory of absolute advantage is a theory that suggests that under free trade, a
nation gains by specializing in economic activities in which it has an absolute
advantage.
Theory of comparative advantage is a theory that focuses on the relative (not
absolute) advantage in one economic activity that one nation enjoys in comparison
with other nations.
Theory of mercantilism is a theory that suggests that the wealth of the world is
fixed and that a nation that exports more and imports less will be richer.
Theory of national competitive advantage of industries is a theory that suggests
that the competitive advantage of certain industries in different nations depends on
four aspects that form a “diamond.” Also known as the diamond theory.
III. REALITIES OF INTERNATIONAL TRADE
1. Key Concepts
The net impact of various tariffs and nontariff barriers (NTBs) is that the whole nation is
worse off while certain special interest groups (such as certain industries, firms, and
regions) benefit. Economic arguments against free trade center on (1) protectionism and
(2) infant industries. Political arguments against free trade focus on (1) national security,
(2) consumer protection, (3) foreign policy, and (4) environmental and social
responsibility.
Key Terms
Administrative policy is bureaucratic rules that make it harder to import foreign
goods.
Antidumping duty is a tariff levied on imports that have been “dumped” (selling
below costs to “unfairly” drive domestic firms out of business).
Deadweight cost is net losses that occur in an economy as a result of tariffs.
Import quota is restrictions on the quantity of imports.
Import tariff is a tax imposed on imports.
Infant industry argument is the argument that if domestic firms are as young as
“infants,” in the absence of government intervention, they stand no chance of
surviving and will be crushed by mature foreign rivals.
Local content requirement is a requirement stipulating that a certain proportion of
the value of the goods made in one country must originate from that country.
Nontariff barrier (NTB) is a trade barrier that relies on nontariff means to
discourage imports.
Subsidy is government payments to domestic firms.
Tariff barrier is a trade barrier that relies on tariffs to discourage imports.
Trade embargo is politically motivated trade sanction against foreign countries to
signal displeasure.
Voluntary export restraint (VER) is an international agreement that shows that
exporting countries voluntarily agree to restrict their exports.
IV. DEBATES AND EXTENSIONS
1. Key Concepts
The first debate deals with whether persistent trade deficit is of grave concern or not. The
second deals with whether service trade will benefit or hurt rich countries.
2. Key Terms
None
V. MANAGEMENT SAVVY
1. Key Concepts
Managers should discover and leverage the comparative advantage of world-class
locations. Monitor and nurture current comparative advantage of certain locations and
take advantage of new locations. Be politically active to demonstrate, safeguard, and
advance the gains from international trade.
2. Key Terms
None
