Running Head: TRADE THEORY PAPER

Trade Theory Paper

Vu Hue

ID: 830132204

City University of Seattle

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International trade theories have changed over the past forty years, from comparative

advantage to differentiation of products. Besides, new trade theories have emphasized the role of

homogeneity, leading to renewed interest in research into how credit disagreements can hinder

the import and export activities of enterprises[ CITATION Ahn11 \l 1033 ]. This paper, which

will provide and analyze trade theories, is one of the fields examined and analyzed in economic

literature, from both theoretical and experimental perspectives.

The reasons of nations trade

Trading is when countries exchange and buy or sell things for which they do not have the

resources to satisfy their needs and wants by developing and exploiting the scarce resources in

their own countries, countries can create surpluses and exchange the resources they

need[ CITATION Rub18 \l 1033 ].Trade offers some valuable benefits for a country by

exploiting a country's comparative advantage, trade is encouraging a country to specialize only in

the production of goods and services that it can produce more efficiently at the lowest

opportunity cost[ CITATION Tuc143 \l 1033 ]. Trade increases competitiveness and lowers

world prices, which benefits consumers by increasing the purchasing power of their income and

leading to an increase in consumer surplus [ CITATION Tuc143 \l 1033 ]. Besides, trade also

has the potential to increase job opportunities, since jobs are closely related to production

meaning that more workers will be employed in exporting so more jobs will be created across the

entire economy[ CITATION Rub18 \l 1033 ].

Concepts of free trade versus protectionism

With the current economic situations are questioning whether to pursue free trade policy or

protectionism, it means that the government should promote imports from abroad at the lowest

possible tax rates and give to allow domestic enterprises to export to international markets. Free
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trade spans the entire economy as it allows the production of goods and services in areas where

more natural capital, technology, and technical expertise are needed[ CITATION Gri19 \l 1033 ].

However, the protectorate has the character of a country or group of countries acting together as

a trade block, building up trade barriers to protect the economy from the elements of foreign

trade risk (Rubio & Berke, 2018).

Examples of free trade and protectionism are the international economic war of Former

President Donal J. Trump with China and its allies[ CITATION Ahn11 \l 1033 ]. By encouraging

consumers to import more, higher quality goods and cheaper prices, free trade has increased

opportunities for Americans and residents of all participating countries. In its rules-based

structure, it promoted economic prosperity, improved productivity, increased creativity, and

greater justice[ CITATION Ahn11 \l 1033 ]. As for protectionism, it controls what Americans

can buy and raises the cost of essential goods, from clothing to groceries to products used in

everyday manufacturing (Dunn, 2017).

However, the dollar deficit in trade, often due to free trade, is a dollar taken from American

workers and paid to workers in another country (Rubio & Berke, 2018). This leads to job loss in

the United States, while other countries have better job opportunities with lower rates of

employment and thanks to the part of government subsidies for businesses. It can be said that

protectionism is a dangerous path. In the past, the United States had previously attempted to

embrace protectionism by imposing high tariffs on its European trading partners[ CITATION

Dun17 \l 1033 ]. Besides, there are thousands of policies that countries can change and adjust.

Military intervention is perhaps the most serious problem, but subsidies for fields such as taxes,

spending, and the use of the legal system are more common [ CITATION Seg20 \l 1033 ].
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Although both ideologies encourage countries to strive to focus on the production and export of

goods that give them an advantage over their competitors, to benefit from free trade.

The history of strategies

Trade has been around since prehistoric times. It was the main basis of the prehistoric people,

who exchanged goods and services with each other when pre-modern was not yet present and the

history of long-distance trade dates back about 150000 years ago[ CITATION Dun17 \l 1033 ].

Besides, the integration of the national economies with the global economic system is called the

"globalization" process, which is one of the important developments in the last century and

measures the significant growth in inter-country trade[ CITATION Dun17 \l 1033 ]. Trade has

grown significantly over the centuries. Reducing trade barriers can bring good prices and good to

consumers. Besides, international trade helps countries to focus all resources of strength and

forces companies to continually innovate, innovate and evaluate more

competitively[ CITATION Ahn11 \l 1033 ]. Companies entering international markets can

exhibit higher growth rates and competitive products and higher wages and benefits for their

employees. An economy has a high productivity growth can support faster GDP growth without

generating inflation[ CITATION Ahn11 \l 1033 ]. High energy growth means that higher and

more sustainable living standards (Rubio & Berke, 2018).

Theories of absolute and competitive trade

The absolute advantage will look at the efficiency of producing a single product. This helps

countries avoid the production of products that may bring little or no demand, leading to losses

[ CITATION Seg20 \l 1033 ]. The absolute advantage or disadvantage of a country in a

particular industry can play an important role in the goods that country chooses to produce

[ CITATION Seg20 \l 1033 ]. For example, if Germany and Japan can both produce cars, but
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Germany can produce sports cars of a higher quality and at a faster speed with greater profit,

then Germany is said to have an absolute advantage in that particular industry. In this example,

Japan might be better served to devote the limited resources to another industry or other types of

vehicles, such as electric cars, steam cars, in which it may enjoy an absolute advantage, rather

than trying to compete with German’s efficiency.

The factors' competitive advantage arises not from the availability of low-cost or per-site

inputs, but the superior productivity in the use of inputs[ CITATION Dun17 \l 1033 ]. In

productivity competition, organizations expand global activities to source inputs and access

markets, but the competitive advantage arising from a process of innovation and productivity

growth is highly localized at the organizations "home base" for a particular line of products:

strategic development location, core product, and process R&D and a critical mass of an

organization’s sophisticated manufacturing (or service provision)[ CITATION Dun17 \l 1033 ].

Conclusion

Trade theory provides clarity about how and why countries profit from the trade and

therefore have an incentive to enter into commercial relationships. This shows why countries

tend to export certain goods while importing others. Furthermore, while modern trade theory

provides a strong argument that a country generally benefits from trade, it also provides a stream

of analysis that suggests that some groups within a country have could not be achieved but

instead lose from the country’s participation in trade, giving those specific groups a reasonable

reason to prefer and demand protection from international competition through political channels

(Grieco & Ikenberry, 2019).

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References

Ahn, J. (2011). A Theory of Domestic and International Trade Finamce.

Dunn, P. R. (2017). Comparative Advantage vs. Competitive Advantage. Retrieved from

Linkedin: https://www.linkedin.com/pulse/comparative-advantage-vs-competitive-prof-

rory-dunn#:~:text=A%20person%20has%20a%20comparative,lower%20cost%20than

%20anyone%20else.&text=Compare%20their%20opportunity%20costs.,you%20better

%20than%20anyone%20else.

Grieco, J. M., & Ikenberry, J. G. (2019). The Economics of International Trade and Finance .

Rubio, O. B., & Berke, B. (2018). International Trade and Finance: A Review.

Segal, T. (2020). Absolute vs. Comparative Advantage: What's the Difference? Retrieved from

Invetstopedia: https://www.investopedia.com/ask/answers/033115/what-difference-

between-comparative-advantage-and-absolute-advantage.asp

Tucker, I. B. (2014). Economics for Today.