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Global trading system (International trade theory (3 Impact of trade…
Global trading system
International trade theory
govt role in trade:
MERCANTILIST philosophy
mercantilism: suggest its better to maintain TRADE SURPLUS (PROMOTE export & LIMIT import)
view trade as ZERO-SUM game: 1 country gain while another lose
UNRESTRICTED FREE trade
promote UNRESTRICTED FREE trade
Ricardo's theory of COMPARATIVE ad.: suggests that country should specialise in production of goods that they produce MOST efficiently & buy those they produce LESS efficiently even when they can produce it MORE efficiently at home
Heckscher-Ohlin theory: comparative ad rises from diff in national factor ENDOWMENTS, extent country is endowed with resources
predict countries will EXPORT goods that make use of factors that are LOCALLY abundant & IMPORT those that have to use factors that are SCARCE
Smith's theory of ABSOLUTE ad.: suggests that country should specialise in production of where they have ABSOLUTE ad. & trade for goods produced by other countries
Ad:
↑ country stock of resources cause supplies avail. from overseas
↑ efficiency of resource utilization & free up other resources
↑ economic growth
rich country may be worse off w free trade but PROTECTIONIST measures is more harmful
Paul: dynamic gains from trade may not be beneficial (lower wage)
Disad:
immobile resource
lower return
dynamic effects & economic growth
2 theory of national competitive ad.: justify limited & selective govt intervention to support development of certain export-oriented industries
New trade theory
suggest that because of economies of scale & ↑ returns to specialisation, some industries might only have a FEW profitable firms
firm w 1st mover ad: economic & strategic ad & can develop economies of scale & create barriers to entry for others
Impact:
country can benefit even when dont differ in resource endowments/tech (country can dominate export just because they have 1/more firms among 1st to produce)
govt should consider strategic trade policies that NURTURE & PROTECT firms & industries where 1st mover ad & economies of scale are impt
Porter's diamond of competitive ad.:
4 attributes that PROMOTE/IMPEDE creation of competitive ad.
factor endowments
country POSITION in factors of production needed to compete in industry: can lead to competitive ad
can be either BASIC(natural resources, climate, location) or ADVANCED(skilled labor, infrastructure, technological know how)
demand conditions
NATURE of home demand for industry's pdt/service
affect development capabilities
EXPERIENCED & DEMANDING customers pressure firms to be competitive
relating & supporting industries
PRESENCE/ABSENCE of supplier & related industries that are internationally competitive
can SPILL OVER & contribute to other industries
norm successful industries grouped in clusters in countries
firm strategy, structure & rivalry
conditions that govern how companies are CREATED, ORGANISED & MANAGED & NATURE of domestic rivalry
diff mgmt ideologies affect development of national competitive ad.
VIGOROUS domestic rivalry: creates pressures to INNOVATE, ↑ quality, ↓ costs & invest in upgrading advanced features
3 Impact of trade theory for managers
Location
firm should SPREAD out productive activities to countries that they can perform most efficiently
if not: may be at competitive disad
1st mover: ad can help firm DOMINATE global trade inpdt
Policy
firm should try to encourage govt policies that support FREE trade
firm should LOBBY govt to adopt policies that have favourable impact on components of PORTER
Pdt life cycle theory(Raymond)
as pdt mature, both LOCATION of sales & OPTIMAL production location will change which affect FLOW & DIRECTION of trade [eg. US]
size & wealth = strong incentive to develop new pdts
at 1st: produced & sold in US then ↑ demand = begin export
US firms might set up production faci. in advanced countries
as demand ↑ & other advanced mature = pdt become more standardised & price is MAIN competitive weapon
if cost pressure intense: developing countries have production ad. over advanced countries
production become centered in LOWER cost foreign locations & US become imposter of pdt
Political economy of international trade
although many are committed to free trade but tend to intervene to protect interests of politically impt groups
2 arguments
Political: concern w protecting interests of certain groups in country(producer) at expense of other groups(consumer)
6 arguments
protecting jobs
most common reason for trade restriction
result from political pressure by industries that are 'threatened' by more efficient foreign producer
protecting industries that are impt to national security
eg. aerospace & electronics: impt
fight against UNFAIR foreign competition
when govt take/threaten to take specific action, other countries might REMOVE trade barriers
if threatenED govt dont = tension ↑ & have new barrier
protect consumer from 'dangerous' pdt
limit 'unsafe' pdt
furthering goals of foreign policy
trade policy can use to punish ROGUE states
PREFERENTIAL trade terms can be granted to countries of interest(want to build strong r/s)
protect human rights of indi in EXPORTING countries
through trade policy actions
grant China MFN(most favoured nation) status based on this
Economic: concern w boosting overall wealth of country(benefit both producer & consumer)
2 arguments
infant industry argument
industry should be protected until can develop & be VIABLE & COMPETE internationally
accepted as justification for TEMP trade restriction under WTO(world trade org)
qns: when industry grown up ?
critics say if country have potential to develop VIABLE competitive position then firm should be can w.o additional govt support
strategic policy
if have impt 1st mover ad, govt can help get ad
govt can help overcome barriers to enter industries where foreign firms have INITIAL ad
7 ways that govt intervene [TSIVLAA]
Tariffs: tax imposed that ↑ cost of IMPORTED pdts vs domestic pdt
Specific: imposed as FIXED charge for each unit of imported good
Ad valorem: imposed as PROPORTION of imported goods
↑ govt rev
force consumers to pay more for certain imports
PRO-producer & ANTI consumer
↓ efficiency of world economy
Subsidies: govt pay DOMESTIC producer
help compete against LOW cost foreign IMPORTS & gain export markets
consumer norm absorb cost of subsidies
Import quotas
restrict qty of IMPORTED goods
tariff rate quotas:
HYBRID of quota & tariff where LOWER tariff is applied on IMPORTS within quota then those over quota
quota rent: extra profits that producers make when SUPPLY is ARTIFICIALLY limited by import quota
Voluntary export restraints(VER): trade quotas imposed by EXPORTING country
Import quotas & VER
benefit domestic producers
↑ prices of imported goods
Local content requirements
demand some amount of good to be produced DOMESTICALLY
benefit domestic producers
consumer face HIGHER prices
Admin policies
designed to make it difficult for IMPORTS to enter country
hurt consumer by LIMITING choices
Anti dumping policies: countervailing duties
designed to PUNISH foreign firms that are involved in DUMPING & protect domestic producers from 'UNFAIR' foreign competition
Dumping: sell goods in foreign market at BELOW 'fair' market value
firm can sell EXCESS production
can be PREDATORY behaviour: producer use profits from home market to SUBSIDIZE prices in foreign market to DRIVE competitors out then ↑ prices
Future of WTO
attract group that protest free trade
current agenda
↑ anti dumping policies
High level protectionism in agriculture
lack of strong protection for IP rights in countries
continues HIGH tariffs no non-agricultural goods & services in countries
Trade barriers impact on managers
need see how it affect firm strategy & impact of govt policy
need to lobby for free trade & keep protectionist pressures from changing strategies
3 impacts:
↑ cost of EXPORTING pdts
VER may limit firm ability to serve country from locations outside
firm need locate more production activities in market to follow local content rewuierments