MAN 010 – International Business and Trade

Module 3

Trading Internationally

Compiled by: Prof. PAUL MARIA A. PESITO

Intended Learning Objectives

Determine the concepts of

International trade
Identify the concept of import,
export, trade deficit and trade
surplus
Recognize the types of classic and
modern theories of international
trade

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Opening Case: Why Are German Exports
So Competitive?

Until 2009, Germany had been the world’s

export champion for a long time. Although
China snatched the world’s export
champion title in 2009,
Germany’s export volume (approximately
$1.4 trillion a year) routinely outperforms
other powerhouses such as the United
States and Japan.

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Opening Case: Why Are German Exports
So Competitive?

On the road, BMW and Mercedes cars

In information technology (IT), SAP is king
of the hill for enterprise resource planning
(ERP).
In sportswear, many of us wear Adidas
shoes.
Nivea touches the skins of many female

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Opening Case: Why Are German Exports
So Competitive?

What is unique about German exports?

German products and firms are world
renowned for their excellent engineering,
superb craftsmanship, and obsession for
perfection.
German government has sought to avoid
large scale deindustrialization (otherwise
known as loss of manufacturing jobs) and
encouraged firms to produce at home.
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 WHY DO NATIONS TRADE?

International trade consists of:

 Exporting - selling abroad

 Importing - buying from abroad

Two main sectors: Merchandise and Services.

 In services, the United States

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 WTO Trade Report as of 2019

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 Pattern of Trade (Export)
 U.S. exports vehicles - new and used cars (12.1% as of
2019)
 Ghana exports cocoa
 Brazil exports coffee
 Saudi Arabia exports oil
 China exports electrical machinery, crawfish
 Japan export automobiles, consumer electronics, and
machine tools
 Switzerland export chemicals, pharmaceuticals,
watches, and jewelry
 Bangladesh export garments
 South Korea – consumer technology
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 Economy of the Philippines
Comprises of more than 7,100 islands, the
vast majority of the population lives on only
11 of them. At present, the country is the
38th largest export economy in the world.
Its annual exports total $97.8 billion and
imports are $35 billion, resulting in a
negative trade balance.

https://commodity.com/data/philippines/

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 Economy of the Philippines
(November, 2020)
Top 5 Commodity Exports
Gold – $2 billion
Bananas – $1.8 billion
Coconut Oil – $1.3 billion
Refined Copper – $1.1 billion
Copper Ore – $670 million

https://commodity.com/data/philippines/#Top_5_Commodity_Exports

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 WHY DO NATIONS TRADE?

Trade deficit occurs when a nation imports

more than it exports.
Trade surplus occurs when a nation
exports more than it imports.

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 WHY DO NATIONS TRADE?

The aggregation of such buying (importing) and

selling (exporting) by both sides leads to the
country-level balance of trade—namely, whether a
country has a trade surplus or deficit.

Overall, we need to be aware that when we ask

―Why do nations trade?‖ we are really asking ―Why
do firms from different nations trade?‖

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 WHY DO NATIONS TRADE
Overall, why are there economic gains from
international trade?
 According to the resource-based view, it is
because some firms in one nation generate
exports that are valuable, unique, and hard to
imitate that firms from other nations find it
beneficial to import.
 According to the institution-based view, different
rules governing trade are designed to determine
how such gains are shared.

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 THEORIES OF INTERNATIONAL TRADE

Theories of international trade

provide one of the oldest, richest, and
most influential bodies of economic
literature.

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 THEORIES OF INTERNATIONAL TRADE

Classical trade theories,

(1) Mercantilism
(2) Absolute Advantage,
(3) Comparative Advantage
Modern trade theories
(1) Product life cycle
(2) Strategic trade
(3) National competitive advantage of industries.

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 Theory of Mercantilism

Jean-Baptiste Colbert, French

statesman
Widely practiced during the 17th
and 18th centuries
Viewed international trade as a
zero-sum game
Suggested that the wealth of the
world measured in gold and
silver at that time
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 Theory of Mercantilism

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.
Although mercantilism is the oldest theory
in international trade, it is not an extinct
dinosaur. Very much alive, mercantilism is
the direct intellectual ancestor of modern-
day protectionism
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 Protectionism

The idea that governments should actively

protect domestic industries from imports
and vigorously promote exports.

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 Absolute Advantage

Adam Smith, British

He is considered the founder of
modern economics, theories of
international trade
He wrote The Wealth of Nations
1776 to challenge an earlier
theory: Mercantilism.
He believes on specialization
and division of labor.
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 Absolute Advantage

Smith argued that, in the aggregate, the

“invisible hand” of the free market, not
government, should determine the scale
and scope of economic activities. This is
known as laissez faire .

Smith argued free trade, the idea that

free market forces should determine
how much to trade with little or no
government intervention.

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 Theory of Absolute Advantage

 With free trade, a nation gains by specializing in

economic activities in which that nation has an
absolute advantage.

 Absolute Advantage A nation that is more efficient

than anyone else in the production of any good or
service

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 Absolute Advantage
For example, Smith argued that Portugal enjoyed an absolute advantage
over England in producing grapes and wines because Portugal had better
soil, water, and weather. Likewise, England had an absolute advantage in
raising sheep and producing wool compared to Portugal. It cost England
more to grow grapes: an acre of land that could raise sheep and produce
fine wool would only produce an inferior grape and a lower quality wine.
Has anyone heard of any world famous English wines? Smith
recommended that England specialize in sheep and wool, that Portugal
specialize in grapes and wines, and that they trade with each other.
Smith’s two greatest insights are:
1) By specializing in the production of goods for which each has an
absolute advantage, both can produce more.
(2) Both can benefit more by trading. By specializing, England produces
more wool than it can use and Portugal produces more wine than it can
drink.

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 Theory of Comparative Advantage

 British economist David Ricardo 1817.

 Comparative advantage is defined as the

relative (not absolute) advantage in one economic
activity that one nation enjoys in comparison with
other nations.

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 Comparative Advantage

 Bangladesh
 Export Textile industry
 Walmart
 Labor cost – 50%
 ¾ of inputs are locally produced
 West are cautious about not
becoming too dependent on
China.

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 Product Life Cycle

 Develop by Raymond Vernon

 the first theory to account for the change of trade
patterns overtime
 A theory suggesting that patterns of trade change
overtime as production shifts and as the product
moves from new to maturing then
to standardized stages (Peng,2012)68)

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 Strategic Trade

 Strategic intervention by governments may help

domestic firms reap first mover advantages in
certain industries.

 First mover firms, aided by governments, may

have better odds at winning internationally.

 Heavily resisted by scholars who advocate ―free

trade‖
(Peng,2012,p.71)
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 National Competitive Advantage of
Industries

 The competitive advantage of different industries

in a country was based on this four interacting
forces (Peng,2012,p.71).

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 National Competitive Advantage of
Industries

Factor endowments(Heckscher-Ohlin
Theory) - a nation’s position in factors of
production such as skilled labor or the
infrastructure necessary to compete in a
given industry
Demand conditions - the nature of home
demand for the industry’s product or
service.
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 National Competitive Advantage of
Industries

 Relating and supporting industries - the

presence or absence of supplier industries
and related industries that are
internationally competitive
Firm strategy, structure, and rivalry - the
conditions governing how companies are
created, organized, and managed and the
nature of domestic rivalry.

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