Chapter 3..

Theories of International Trade

Contents
3.1 Introducion
3.2 Inlernational Trode Theories
3.3 Trade Barriers
3.3.1 Introduclion to Trade Borriers
3.3.2 Tarift Borriers (Monelary Based)
3.3.3 Non-Tariff Barriers
3.4 Naional tax
Points to Remember
Questions for Discussion
Learning Objectives.
T o dovelop an understanding about trade theories and its role in determining trade
among countries.
various commercial policies adopted by the nations to facilitote trade
obetween
understand
them.
To study various measures and types of barriers faced by nations and its challenges.

3.1 INTRODUCTION

radeInrefers to buying and selling of goods and services for money or equivalent of an
other transfer exchange of goods and services takes place in lieu of
money.
money.
words, or

International trade is that field of economics that determines the pattern of international
trade. International trade came into force With regard to differences in opportunity cost. No
country is selt sufficient in the production of all the commodities at an economic price. The
nterdependence of nations on one other gave rise to the development of internationa
trade theories. In order to foster international trade there was requirement for certain
to
mechanism for trade be established. Various economics from various parts of the nations
developed various theories that paveda way towards the direction of international trade.
Development of trade theories at different polnt of time are further divided into classical
and modern theories. This chapter will bring into light various international theories, their
direction and mechanism. lt will aiso elaborate the commercial policy or trade barriers that is
tariff and non tariff barnier.
Ongin &Developmemt of Global Buiness Theorles ef lntenations.Tnde
Intemetional trade occurs due to-
1. Differences in factor endowment.
2. Varity and quality of goods.
3. Gains from specialization.
4. Political reasons,
3.2 INTERNATIONAL TRADE THEORIES
The international trade theories
are further divided into
classical and modern which is
shown as below
Classical Country Based Theories Modern Frm Based Theorles
Mercantilism Theory Haberler's Opportunity Cost Theoy
Absolute Cost Advantage Theory
Porters National Competitive Advantage
Theory.
Comparative cost Advantage TheoryKrugman s New
Trade Theory
Heckscher-Ohlin Theory Product Life Cycle Theory
Classical Country Based Theories
1. Mercantilism Ttheory
Mercantilism is one of the oldest trade theory. This
1500 to 1800. This theory revolves around the
theory emerged In England around
viewpoint to encourage export and
discourage import. The value so received will be in the form of precious metals such as god,
silver etc. These
precious metals in respect of foreign exchange will increase the wealth and
have long lasting effect

According to this theory the country should concentrate more and more
on its
export
than its import. imiting the imports will restrict the outfiow of wealth in the form of
and silver gold
Mercantilism theory rests on zero sum
game, in other words we can say win
strategy where one country lose and another country wins. lose
Mercantilism was more prominent with countries having colonies llke Britain use to
with their colonies like India, Srilanka etc by trade
importing raw materials at a very low cost and
finished goods at a very high cost.
exporting
2. Absolute Cost Advantage Theory
Propounded By: Adam Smith (Scottish Economist)
Year-21776
Absolute cost advantage theory is propounded by Adam Smith a Scottlsh economist
He brought into light that the should concentrate in the
country production of only those
commodities in which they have absolute cost advantage and export them and import those
commodities in whlch they do not have absolute
advantage.
This theory is based on win-win strategy.
 Theorles of InternatlonalTrede
orgin &Deveopment of Global Busines
Assumptlons of the theory: Following are the assumptions of the theory
(a) Two Coutries Two Commoditles: The trade will be executed only when the trad
will take place between two countries and will involve two commodities. That is th

reason it aiso known as2 x2 Model.

1e.
Full that there exist free trade
(b) Free
Trade and
Employment: The theory assumes
no trade bamiers even there is full employment in the economy.
labour is taken
(0
Labour asa
costot production: While producing the goods only
into account as a factor of production.
(d) No transportation Cost: Transportation cost is omitted by the theory.
(e) Internal Mobliy and External Inmmobility: According to this theory tactor o
and immobe
that is labour is perfectly mobile within the country
production
outside the country.
Adam Smith has further divided the absolute cost advantage into two parts:
(a) Natural Advantage,
(2) Acquired Advantage.
a) Natural Advantage: Acountry can possess natural advantage through
(a) Cimatic conditions5.

(6) Access to certain naturai resources.

c) Availabity of certain labour force.

For instance: The climatic condition of Sri Lanka is optimum for the production of tea,
rubber and coconuts. Sri Lanka is not accustomed to the production of wheat and dairy
products so it imports these products. Thus Sri Lanka should produce more of tea, rubber
and coconut as having natural cost advantage in it.

(2) Acquired Advantage:

A country specialzes in acquired advantage when they have certain technological and
skill development in their countries. They are in contrast to natural advantage.
For instance: Japan by acquiring labour and technoogy s3ving mechanism, came up
with the acquired advantage. t exported steel products rather than importing them by

enhancing their technology

To understand it better let's take an example-

Table 3.1: Output per day of labour

Country Japan ndia

0 20
Tea
Electronic Producs 20
Ordgin & Development of Globel Busines
Theorles of International Trade
From the above table it can be seen that it is a model.
2 x2 Japan has an absolute cost
advantage in producing electronic products and India has an absolute advantage in
producing tea. Soit will be
beneficial for Japan to produce electronic
products and export
them to India and import tea
from India. India on the other hand has
an absolute cost
advantage of producing tea so it should produce tea and export it and
products from Japan.
import electronic
In the example if Japan puts its full efort in the production of electronlc
produce 20 units by using less labour as compared to India. On the other hand products it can
absolute cost
India has
advantage
in
producing tea that is 20 units of tea by employing less labour as
compared to Japan.
Merits:

(Boost international Trade: Absolute cost advantage theory promotes internationa

trade. It
specialize a country in producing goods and services at a
lower cost, which
in return reduces the cost of production. Thus promotes international trade.
(6) Save
Cost Attaining specialization in the production of certain
county obtain absolute cost advantage. This mastery over a product saves cost.
makes a
commodity
(c) Base Win-Win Strategy: This theory is based on win-win strategy as both the
on
country gets in return something after the execution of the trade.
Limitations:
No absolute cost advantage: This theory says that there should be absolute cost
in at-
advantage least one product. But there are various developing countries which
do not have any absolute cost advantage in any commodity. Thus this theory does
not apply.
6) Factors of production: This theory assumes only one factor of production that is
labour. It ignores other factors of production which is irrelevant
() Transportation cost: Applicability of transportation cost is must when it comes to
trade. This theory on the contrary specifies that transportation cost is not present
which is not true.

(d) Absolute cost advantage of many products: This theory fails to explain the
mechanism of international trade when it comes to absolute cost advantage in two
or more commodities. This theory is only prevalent when 2 x 2 model exists.

5. Full employment: This theory is based

on full employment. Full
employmentisan
and does not exist in real wortd. Thus acts as one of the
imaginary assumption
limitation.
3. Comparative Cost Advantage Theory
Propounded By- David Ricardo (British Economist)
Also known as - Ricardian Theory

Year- 1817
 oooal business Theorles of International Trade
ongin & Developmn Or in

Absolute Advantage theory

Cost fails whena country has absolute cost advantage
Ricardo through his comparative cost advantage the
oroducing many prooucts David
and developed a theony in his book "Principle
of Political Economy
the
esolves limitation
and T a x a t i o n .

a naton should concentrate and specialize in the production and

The Theory
states that which it has comparative and relative advantage.
It should impot
export that product in relative and comparative less advantage than other
of countnes.

those goods in whicn it has in the production of those goop0s

a country should engage
s
based on
the prnciple that nations.
in which it has lower opportunity cost than other
and services
the assumptions of the theory:
Assumptions of the theory: Following are

Commodities:
Two between two countries and will The trade will be executed only when there the
(a) Two countries
take place
involve two commodities.
Thatis

rade will 2 Model.

the reason it also known as 2 x
1e.
that there exist free trade
(6) Free Trade and Full Employment The theory assumes

even there is full employment in the economy.

no trade barriers,
labour is taken
of production: While producing the goods only
(c) Labour cost
as a

nto account as a factor of production.

cost is omitted by the theory.
(d) No transportation Cost: Transportation
this theory factor of
(e) Internal Mobility and External Immobility: According
to
and immobile
perfectly mobile within the country
production that is labour is
Outside the country.
can be understood with the example below
The theory
Table 3.2: Output per day of labour
India
Japan
Tea

Electronic ProducES
has the absolute cost in both
From the above table it can be seen that Japan advantage
igure out which
the products. But Japan has to underg0 a comparative analysis andis done it would be
product's production will
be advantageous. fa comparative analysis
more beneficial for Japan produce electronic products and export them and import tea
to
from India. For India t will be beneficial to export tea to Japan and import electronic
products from Japan.
In the above example it can be seen that Japan has absolute cOst advantage in both the
goods that is tea 60 units and 6 units of electronic products as compared to India that

produces 55 units of tea and 2 units of electronic proaucs,

But
as per comparative
cost
Ovantage theory a country should undertake the comparanve analysis. After undertaking
that product in which it
comparative cost advantage theory countty siould produce
a

has comparative analysis and import that good in which it has relatively less comparative
 Origin &Development of Global Business Theorles of lnterational Tred
analysis. So Japan has comparative advantage in electronic products so should export th
and import tea. On the other hand India has a comparative advantage In tea so shoul
eport tea and import electronic products.
Merits of the Theory:
(0)Gave solution when countries had absolute cost advantage in more than ohs
product Comparative cost advantage brought into light how the county can
nternationally trade either having or not having any absolute cost advantage
(b) It provides a solution for underdeveloped countries. nis tneory
hem which were never discussed before.
paved a way fo
CThis theory gave a new dimension were it stated that rather than looking at absolute
cost advantage start focussing on comparative cost 3dvantage wnich is more
realistic.
(d) This theory is also based on win-win approach.
imitations of the Theory:
) Two countres and two commodities: It
has also the
same limitationas itsalo
based on2x2 model absolute
as cost
advantage treoy. Tne ecOy 15 only
applicable when the trade is done between 2 nations. It fails to explain the trade
mechanism when it comes to more than two countries and
commodities
(b) Factors of Production: This
theory assumes only one factor of production that ia
labour. It ignores other factors of production which is irrelevant.
( Transportation Cost: Applicability of transportation cost is must when it comesto
trade. This theory on the contray specifies that transportation cost is not present
which is not true.
(d) is based Full
Full employment: This theory on full employment. employment is
imaginary assumption and does not exist in real world. Thus acts as one of the
limitation.
(e) No mention of services: This theory only focuses on goods and excludes the
mention of services from its ambit.
Difference between Absolute Cost Advantage Theory and Comparative Cost
Advantage theor
Basis Absolute Cost Advantage Comparatve Cost
heory Advantageneos
1. Definition: Absolute Cost Advantage is Comparative Cost
an inborn ability of a country Advantage refers to a
to produce a specific good. situation where a county
Goods are produced has a
capablity of
effectively and efficiently at a producing the specific oc
lower marginal cost than dra iower marginal cost an
other country. OPportunity cost than the
10tper COunigy,_
. (C
 Global Busin
ogln &DevEIOPment ol Theorles of Intermatlonal Trede
Basls Absolute Cost Advantage Comparative Cost

Uheory dvantage ITheory

tis based on based on lower
sic ConcepE lower marginal t is
cost of production ofa marginal and opportunity
cost of production or a
particular good in
comparison of other country particular good in
comparison to other

3. Trade Benefits:
couny
This theory is not mutually Both the countries are
mutually benefited because
beneficial for both the
countries involved in trade of comparative advantage

transaction of both the countries.

t refers to lowering the t refers to lowering the
4. Costof Productlon: cOst a
PPOnunity cost of
oroduction of
particular good in production of a particular

comparison of other good in comparison o

cOunnE other counthes.

Countries which have
5. Production of Goods:Countries which have
absolute cost advantage ofcomparative cost advantag9e
in
produces multiple goods
producing good produces the
the good in higher volume country which deciding
with the available resources. Pproduction of a particular

6. Resource Allocation
gooo
The absolute cost advantage The comparative cost
does not effectively decide advantage effectively
theresource allocation by a decides the resource
country for cost of allocation by a countryit for
production. As it does not cOst of production as

deal with opportunity cost of takes into accaount

production Opportuniy cost
It is not mutually beneficíalt is mutually beneficial as it
Benefit t
Economles as it deals tn the context r deals in the co
absolute advantage ompardtuve dovaintdge
Effectveness for Absolute cost advantage is
Comparative cost advantage
is more effectlve for the
not that effective for the
ECOnomy
economy. t focuses on
economy. It focuses on
maximizin9 productiopn
opportunity cost of
without taking into account production which help
opportunity cost of them in decislons like
resource allocation, import
production
and export of goods etc
Orlgin t Dewelopment of Globel Buslnes Thecresof lintenetlonel Trd Orgin
5. Heckscher-Ohlin Theory Limlta
Propounded by - Heckscher-Ohlin a)

Also known as - Factor Endowment Theory

Heckscher and Ohlin theory of International trade explains that trade tokes between two
countries because of differences in cost of factor of production. Trade
different countries as they have different factor endowments.
occurs between
The theory explains that the countries which ich in should eport labour
are
labour
extensive go0ds and counties which are rich in capnel sroui export capitai intensive
products.
Factor endowment theory ls based on two factors of production that is labour and
()
capital.

Assumptions: Difteren
(@ Two wo and
countries,
on two
products
countries, two products
two factors of production: This theory is based
and two tactor of No.
production that is the reason it is
called 2 x2x2 model.

(6) Identical Technologies: Identical technologles are being used in both the countries
he production method or ways used in both the countries are similar. Only one way
produce products at low cost f the are available at
5lowthere to
cost.
factors of production
(C) output perfectly competitve: The market for input and output is
Input and
pertecty competitive in nature.
Merits:

(o) Based on general theory of value Not like absolute and comparative cost
advantage theory which was based on labour value this theory is based on the
general theony of value of demand and supply.
(6) Two factors of production: This theory unlike absolute and comparative cost
8Cvantage theory for the first time stated the existence of two factor of producuon

(C) Production function The H-o theory gives prominence to

diferences in thelt
production functions.

(d) Eficient trade due to advantage in factor of production: According to Ho

theory trade occurs due to advantage in factor of production. This point was for the
hrst time implemented in the intermational trade and provided an all
together
different edge.
 dgin Develo pment oLabal Busine Theorles gf Internasionalr d e
Limitations:

(a) 2 x 2 * 2 ModelE This theory is criticised for implementing oversimplited

assumptions.

b) Unrealistie Assumptions: Assumptions used In the theory are unrealistic as fu

is totaly an
and perfect competition does not exist in the real world. n
empioyment
imaginary phenomenon.
(Homogeneous production techniques: This theory assumes that production
Tecnniques dre identical in nature. t cannot be true as technology wil vay n o

country to country.

(d) Static Theory: Like other classical theories this theory is also static in nature t wnereds
certain period of time,
etaboretes on certain features of the economy ata
the economy and the international trade is dynamic in nature
Difference between Comparative Cost Advantage and Factor Endowment 1theory
Factor Endowment Theory
Sr.ComparativeCost Advantage Theor
No.

1 Ricardo explained comparative cost Heckscher-Ohlin explained factor

advantage theory on the basis of endowment theory on the D8513 O
labour theory of value
PCe tneoy.
t is based on 2 x 2 model ie. two t is based on 2 * 2 x 2 model Le. two
countries and 2 commodities. countries, two commodities and two

factors of production.
is one of are two of
Labour only factor production Labour and capital
in comparative cost advantage theonyproduction in tactor
factors
endowment
theoy
4. i s based on one market theory as itttis based on multi-market theory as it
eliminates space eremen takes no considereuon he space

5. t signifies the gains from trade. e o n s t a t e s the basis of trade.

6. Comparative Cost Advantage TheoryFactor Endowment Theory takes into

only takes into consideration consideration differences in factor
differences in labour efficiency Suply
In Comparative Cost Advantage n Factor Endowment Theory,
Theory. international trade sinternational trade Is an extension of
altogether separate theory of inter-regional trade.
explanation.
 Orgn&Devalepmentof Global Busines .10 Theorle of Internatlensl Tra
Modern Fim Based Theorles:
5. Haberiers Opportunity Cost Theory
Propounded By- Professor Gottfried Haberler
Year 1983

The
opportunity
cost is theory given by Professor Gotfred Haberer n 1983.Ih h
tneory he states that opportunity cost of anything is the value that has been foregon

Opportunity cost is best explained with production possibility curve, As resources are limited
one
the country has to choose from the alternative which Is Suftice ana nas to
one.
Torego the other
For example: In a given amount of resources can produce eitner 0 units of wheat or
20 units of maize then the opportunity cost of 1 unit of wheat is 2 units of maize.
This theory is the advanced version of comparative cost advantage theory.
Merits:

(a) t emphasised on simplifed general equilibrium model of international trade.

Substitution in production was taken into account by the theory.
0)
(Trade under this theory is considered under all the three categories such as constant
diminishing and increasing cost. On the contrary comparative cost advantage works
on constant cost of production.
(a) tincludes various types of factors of production.
Limitations
(@) This theory is also based on number of imaginary and unrealistic
assumptions.
(b) Viner argues that this theory is inferior to classical theories as it
measures of real cost such as sacrifice, irksomeness etc.
fails to explan
(c) It did not take into account the changes in
factor supplies.
(d) It even ignores the preferences for leisure that is income.
Porter's National Competitive Advantage
Propounded By - Michael Porter

Also known as - Porters Diamond Model

Year - 1990

Ater the Intensive research Michael Porter in 1990 in

published
Havard
the reason behind the success and failfure of
Business Sch
He propounded four
a
international level.
country at

components which the

5ustain at international level. The four components
companies should adopt to compete
areas
follows
1 Factor Condition
2. Demand Condition
ondgln Developnen oLGiOb Suslness Teorles of Intematlonal Trade
3. Related and Supporting Industries
4. Firm Strategy, Structure, and Rivalry
Factor Conditlon

Demend Condition Related and

Supporting Industries

Firm Stralegy
Structure and Rivalry

Fig. 3.1: Porter's basic four factor Diamond Model

1. Factor Condition: Porter states that condition of factor of production plays a very

Pnent roe when it comes to international trade. As

even stated in classical
neornes a nation having
in order edvantage in a certain factor conditions should use them
to reap optimum advantage from them, Factor condition
Judiciousiy
stated as
be can

(a) Natural resources

(6) Manpower.
( Capital.
(d) Internal infrastructure.
(e) Level of knowledge content.
Demand Conditlon: A firm's demand at the domestic market determines its success
at international level. According to Porter, a fim that attains a
competitive edge at
the domestic market can survive the competition at global level too.

Related and Supporting Industries:A fim

working with related and supporting
industries attains close proximity and dloseness to suppliers, timeliness of product
and information flow. This related ness drives a hrm to sustain
competitiveness at
International level.
Firms Strategy, Structure and Rivalry: Fim's strategy, structure and ivalry at the
domestic market provide a boost to formulation its modus operandi at the global
scenario. Thus the atmosphere of a country plays a very important role in the
Success and failure ofa firm.
 Origin & Development
o f Global Business Theorles Oaternational Trd
Apart from the above mentioned components there are 2 other varables namely:

R a l e of Chance: Taking proper decision or chance tactor provides a great shift ar

upthrust. These chance factors can be as-
(a) Innovativeness and Inventions.
(6) Various political decisions undertaken by foreign government.
( Technological upgradations
d) Wars.
(e) Impact due to shift in foreign exchange rate
R o l e of Government: Government of a particular nation also piays a very importane
roie to infuence the four components constituted by Porters Mode.
Some of the affecting factors are:
@Tax provision and law.
(6) Subsidies granted by the
government
C) Regulations and deregulation implemented in capital market.
(d) Product standard set at the domestic level.
Merits:
(@) Porter's Diamond model explains the factors that can drive competithve advantage
or one national market or economy over another.

()
Ttpatn used bothsuchto describe the sources of
cantobeobtaining a nation's
competitive advantage and
also be
advantage
The model can businesses to help guide and
used by shape strategy
regarding how to approach investing and operating in different national markets.
Limitations
The limitations of the theory are as follows:

(a) in mind the 10 developed

Tne theory was developed keeping
more suitabe for developed countries.
countries. Thus R
() The major focus af the theory is at domestic level rather than foreign
market,
() relevant for service
tis more industry
Danks and management consultancies.
argued by many. As its analysis was based
(G) does not at all address the role of MNCs.
Krugman's New Trade Theory
Propounded By - Paul Krugman

Year - 1980's

During 1980s the new trade theory was given by Paul Krugman of Massac
of theary that the organizations that enter martet
Institute Technology. This states
or who are the first movers enjoy certain advantages as
the
 GlobalSusiness
gin &Deviopment of Theorles of lnternatlonslTrade
1 They are able to carve their niche in the international level.
2. Adopts benefit of economies of scale.

The theony states that due to heavy initial capíital Investment it becomes
extremey
dificult for ndustnes to match up with their break even. To compete and challenge the well
established playersinthe marketis also extremely dificult For exomple of such industries
Aerospoce which dominates the airline industry.

Having dominance in airline industry by few companies their large output which helps
them to spread their fixed cost which will decrease the fixed cost per unit. On the other hand
if the output is less its fixed cost will be high.
New trade theory is based on monopolistic competition, it explains that Dranosco
on brand and quality and not only price. All flourishing Industries in
are dominant
intensive countries. Developed countries are the one who own these industnes thus ove
copita
very strong competitive advantage
8. Vernon's Product Life
Cycle Theory
Propounded by Raymond Vermon
Year- 1966
Raymond Vernon's theory of product life cycle states that during the shift of product
life from introduction to decline shifts the location of production. The four stages trom
which the product goes through as-

1 Introduction
2 Growth
3. Maturity
4. Decline,

Assumptions of the Theory: The assumptions of the study are as follows:

(a) The stimulus to produce a new innovative product arises in the domestic
market.
(b) There is no awareness to the innovating firm about the information
regarding the
Condition of toreign market.
() Development of new innovative product initiates in the
economies
developed and capital rich

(d) There is a
significant level of difference in the environment of innovating firm.
Stages of Cycle: The product goes through the following stages namely
(a) Introductory Stage
b) Growth Stage.
() Maturity Stage

(d) Decline Stage.

Origin &Development ol Globai Eualneta- Theornies o na Tnds
he detailed explanations of the stages are as
follows
(Introductory Stage: When a product is successfuly produced t will be introduced
in the national outlets. The new innovative products are
generally conceptualized
the developed nations. During this stage there are no competitors In the market T

noergoes tremendous improvement during

this stage with the helo
feed back. The profit earned during this stage is veny low. ihe customers are unaware
about the products.

() As sales of a firm
Growth Stage:
market. The demand
new
increases new conpentonsstarns entering the
the
of product starts
increasing. The productstarts becoming
popular in the neighbouring countries. The product slowly moves towards the-step
of standardization.

(Maturity Stage: In the maturity stage the product becomes popular worndwide thus
the demand begins to level of. The product aunng s stage Oecomes highy
standardised. This is the level that the product is at itS peak so the producer reduces
price to a fimit.
Decline As the product reaches the dectine its
Stage: stage demand in the domestic
country starts declining as new technologically advanced products starts entering th
market. h e tirm during this stage shifts the industry trom its home country
developing countries. In return rather than exporting the product they start Import the
product from the developing country. This stuation arises because the demand of the
product almost declines in the home country
Thus from the above it can be seen that during the stages of a product cycle the
location of a product shifts from the country where the concept for the same wa
developed.
Introduction Growth Maturity Dacline

Sales

Tme on a i n

Fig. 3.2
Merits: The merits of the theary are as follows:
(a) This model helps organizations to develop new innovative projects. It helps
understand how compeuuve piaygrouno changes over time.
(b) This theory is an explanatory model how industries migrate across borders over
ogn Development of Globrsiness Theories of lnternational Trade
tim itation: The limitations of the theory are as follows

(a) The assumpuon that technology can capture in capital equipment and standard
operation procedures does not stand true.
(b) This theory negiects emergence of global consumer segment. There are multupie
segments available in the foreign market but this theory only includes averag9e
income consumers

Dirference DewEen classikal Trade Theory and Modem Trade Theory

Besis Classical Trade Theory Modern Trade Theory
1. Separate rade Classical theories state that Moderm theories state that
theory there s a requirement for there is no such requirement
for
Separate trade theory tor
for separate trade theory
international trade. international trade,
2. Phenomenon: Classical economist explained Modern economists

the theory as labour theoy ofexplained the theory as

value. general equllbrium of value.

Basis of Comparative advantage due Comparative advantage due
comparative in production difference in factor
to difference to
advantage: eficiency. endowment.
4. Factor model: Cassical theory states one Modern theory States

tactor nodel. ipie tneory mode.

5. Factor price Classical theory never looks Modern theory looks factor
differences into account differences in price difference as one of

factorprice. ne ve lmpointant eienent.

6. Cause of difference Classical Theory does not Moderm heory provides
in comparative provide cause of difference In causes of differencein
comparative advantage comparatve advantage in
advantage
terms ot tactor endowment.
Classical Theory is based on Modern theory is based on
7.Value of market
single value ot market theory.muit value of market theory.
theory
wwelfare Is based
Classical theoy is Modem theory on
Nature of theory
oriented. positve theory appro8cn.
Orgin &Deelopment ef Globel Busines
3.3 TRADE BARRIERS

S.3.1 tntroduction to Trade Barriers

rade barners refer to the government polices and measures which obstructs the flow of
9oods and services national borders.
across

rade barriers are various types of restrictions imposed on the goods and services
e national boundaries. The flow of goods and services during the internationa
trade takes place in the following two forms
Export
Import
) Exportt Export refers to the international trade
One
where goods and services
county are brought by some other country (Foreign Country).
produced
()
Import into
mport refers to the international trade where goods and
services ane
Drought a country from another
country
rade
barrers are imposed by country to adopt protective measures for domestic
a
industry and to safeguard domestic industry from the competition ot developed countrie
rade polices provides a niche or an edge to the domestic industries in order to enhance
their competencies by providing various polices as subsidies.
overnment announces their trade policies from time to time. hese policies are
nciusive o taritt and tanit
Dotn non barriers. he trade policies are
also known s
Commercial Policies which set rules and
regulations
which are imposed to
restrict import
Tts aim is to boost international trade amongst nations.

Trede barriers are divided into two parts :

Tanif Barriers
Non-Tariff Barriers.
3.3.2 Tariff Barrlers (Monetary Based)
The term tariff refers to the tax or duty Imposed: Tariff
barriers are monetary
barriers which are levied
or t
on
internationaly trade commodities that cross the
natio
boundaries
Tariff barriers are those barriers that Increase the rate of import duty. It does not
the trade. It onily increases the price of the product.
1. Non-tarif (Quality and Quantity Specific):
Non-Taiff barners are those barrilers that restrict or limit thee quantity and quali
product during intermationa trace Non tant barmiers have no influence on e
a product. It is a mecnanism natrestncs the trade from a different perspective oth
tariff
2E>D DI
e e
 &DevelopinO O sn
orgin Theorles of Intemetdonel Trede
Now after understanding dumping its now very easy to understand anti-dumping it Is
ust opposite or aumping. n Ant-Dumping practice the government of a country adopts

gtrict measures to curo this practice. Thus we can say it is a measure used to nullify the act of

dumpin
) Counter Vailing Duty Counter vailing duty ls also similar to anti-dumplng duty but
snot so severe. These are used to curb or nullily the impact of subsidies or cash assistant

provided by the foreign country to lts manufacturer, The rate of this duty is proportionsi to
the extent of cash assistant or subsidies granted.
(4) On the basis of trade Relatlon: On the basis of trade relation the duty is diideo
nto two par

(a) Single Column Tariff (Similar duty levied),

(6) Double Column Tariff (Two different duties Levied to different nations).
a) Is
Single Column Tariff: In
single column tarif the
same rate made applicable o
imports from all the countries. No biasness or favouritism is given to any country, A
the countries are treated at par i t h one another.
(b) Double Column Tarlft: In double column tarlff two rates are fixed elther on one or
all the commodities. Lower rate of import duty is imposed on countries with which
one has various types of trade agreements. On the contrary the higher tarif rates are
evied on countnes witn wnidh no trading agreements are entered.

3.3.3 Non-Tariff Barriers

Non-tariff barriers are those barriers which restricts trade apart from tariff barriers. These
on the of the product. It
arethe barmiers which are imposed quantity rather than the price
limits the quantity to be imported or exported without imposing heavy charges.

Oiola sysem

Product Standards

u eontant Repuremant
Produa Labeling
arm

Fackaging ecuiremen

Dulmer
Consular Formalibes

Fig. 34
 Ongin &Dvelopment of Globel Susiness Theeres oflaernadonel Trnde
uot System: In quota system a country fixes a
limit or
estcts the Impot of
quantity of a commodity. It does not have any mpact onepnces of the
Commodity as the rate are similar on the restrictions are mposeo on ne nUmber of
products to be imported. So here it can be seen that beyond à certain imit products
cannot be imported thus stops trade to a certain leve.
2. Standards: In product standards the country
Product the
sets standard of the
d u c s thnat are to be imported in the country. All the products that fal below th
t ot the specified standard are restricted. Thus here the government of
cOuntry lays down certain predetermined standards that the imporung county has
to ddnere with in order to get access to the
market
3. Domestic Content Requlrement: In domestic content
requirement tne government
t alout the organization from an adverse condition. In return the
government demands from the organization to purchase goods from domestic
country rather than importing from the foreign country. For Example- US bailout
package for General Motors where US helped General Motors in time of crisis and in
return demanded that they should purchase
domestically manufactured products for
their organization.

Product Labelling: The government restrict the

can even
quantity of a product
wnout nampenng its price in case of product labeling. Here the government
deines vanous prerequisites that a country has to follow. If a country falls to fallow

the
For
regurement the product becomesproduct
incapable ofentering the country'
periphery
should be stated in various
s
example-the description of the
countiy which sticks to the entire stated requirement will be welcomed to import
languagesa
their goods in the country.
5. Packaging Requirement The
importing country
packaging tor the exporting country. For example-
imposes various
restrictions on
(a) Packaging of product should have minimal requirement for hygiene,
safety etc.
(b) Packaging should be reusable such as recyclable material, biodegradable etc.
(Eco-friendly material used in packaging.
6. Consular Formalities: Anumber of
importing countries demand that
documents should inciude consular documents such
the shipping
as
(e) Certificate of Onigin (6) Certificated Invoices (c) Import
Other Non-Tariff barriers:
Certificates
L Embargo: t isa situation where a country or countries officially bans the spedifed
goods for trade between them. it is a complete or partial prohibition of comme
with & countty.

2. Blockade: Biockage refers to 8 total ban on all goods and services

betvie
countries due to war situation. It is complete restriction on import of all goods and
services from.a war cOuntry.
ogin &Deveiopmeni of Global Buslness 3.21
Theories of lntemationel Trede
. Health and Safety Standard: The importing
country sets certain standards when it
comes to health
and safety. The exporting country which abides with all the
standards stated will De pemissible to
exports These standards are set in order to
safeguard the heaith and
satety of
residents.the
4. Sanctions: Sanctions are imposed on
exporting countries to limit the trade activity. It
includes stingent administrative action, trade
trade mechanism.
procedures etc that siows down une
5. Environmental Regulations: Certaln restrictions
Imposed on the importing country. They
pertaining
have
to environment
to produce goods thatare also
are
environment mendly that has no
6.
or
negligible hazard towards
environment the
Technical
are
and Administrative Regulations: Various types of
technical regulations
on
imposed the exporting countries Imposing technical specifications, tecnce
roduction elc. These types of restriction are basicaly imposeo
nafmaceutical products. Even administrative restrictions are also imposed e
ocumentary procedures to be followed. Thus limits the inflow of goods it the
exparung Counthes does not adhere with pre-determined standards.

Difference between tariff and non-tarif bariers:

Basis Tariff Barier Non Tarifi Barrier
1. Meaning Tarlff barriers are those barriers Non tantf barriers are
wnicn are
tnose
monetany Specinc Darriers that are quality and
Hinders Trade: Tanff barriers do not stoP
quantity 5pecinic
Non tariff barriers to a certain
trade. extend stop trade.

. Kestrction on Tariff barrier are related with Non tantf bariers are not at all
Price: Impect on price related to
4. Restrictlon on A tanff barrier does hot
naveNon tari arners nave
Quantity: any restrictioh on quantisy. estnCuoin onCueni.
5. Flexibiliy Tariff barriers are less flexible, Non larit Darners are more
rtexible.
Simpllcity There
1 Simplicity in
the n case of non tarit
operation. A rate once tixed by authorities are
barners
there to

legislation requires no monitor,

individual allocation.
Discrimination: There is no discrimination in nere 1S
respect Of international trade Detween the new comers and
discrimination
when it comes to the entry of the existing players in the
new comers in the market market. The policies are
different for the both
hence
GIscrimination occurs.
 9gn& Dnlopment of Globel Buslnes 2 heories C Td
3.4 NATIONAL TAX
nose revenue taxes that are levied and collected by the national govemment vie Burea
na Revenue (6lR) are known as National Taxes. On the other hand local taxes an
those taxes which are imposed
by the local authonty.
e o Natonal Tax: National taves which are imposed on nationals of a nation
specihcally pertaining to trade are as

(a) Value Added Tax (VAT).

rollows
(2) Goods and Service Tax (GST).
() Value Added Tax: Value added type of
s
tax is a a
tax is a type or Cconsumption tax t
imposed on the product whenever value is
ddoed to P cn and
every stage of suppy chain. It means from the production to the sales.

alue Added Tax is regressive in nature. It s an indirect tax which is levied by the
e govermment it is intra state sales tax. It is charged on the value addition of the
product. Germany and France were the first countries to implement VAT. Inda
implemented Value Added Tax on 1" April 20os.
(2) Goods and Service Tax (GST): Goods and Service Tax is an
indirect of tax nature
oods and Serice Tax came into force from 1" July 2017. It is a comprehensive,
and destination based tax.
muit-stage
(a) Comprehensive: Goods and Service Tax is known as
almost all indirect taxes under its ambit
comprehensive as it
includes
(6) Multi-stage: Goods and Service Tax is known as multi-stage tax
because it s
imposed at each and every stage of production process
(C) Destination Based: Goods
and Service lax is
it is collected from the
known as
destination based tax as
point from consumption and not from the
There are
point of origin,
5 different slabs for the collection of Goods and Service
12%, 18%, 28%.
Tax-0% 5
Petroleum products, alcoholic drinks and
electricity falls outSoe
the ambit or arena of Goods and Service Tax. France was the first country to
impose GST in 1954.
Goods and Service Tax
is implemented
provides a common nationwide tax.
to emove the cascading effect and thus
Types of Goods and Sernvice Tax:
The types of Goods and Service Tax is divided into 3 types:
1. As the name itself
State Goods and ServiceTax(ESTE singifies it is a tax that s
collected Dy the state government
2. Central Goods and Service Tax (CGST); It is a tax that is collected by the centra
9overnment

3. Integrated Goods and Service Tax (IGST: IN is a tax that is collected by the centra
9overnment.
 in &Dewelopiment e aiobel Dusiness Theorles nl Intenatiensl Trade
polnts to Remember
1 International Trade Theories are broadly classified into:
(a) Classical country based theories, and
(b) Modern firm based theories
2 Classical Country Based Theories:
(a) Mercantilism theory,
(b) Absolute cost advantage theory,
(c) Comparative cost advantage theory.
(d) H.O. theory.
3 Modem Firm Based Theories
(a)Haberle's OpportunityCost theon
() Porters National Competitive Advantage Theory.
Krugman's New Trade Theory.
(d) Product Life Cycle Theory.
4rade barriers reter to the government policies and measures which obstruct tne
low of goods and services across national
borders
5. Tarif barriers are those barriers that increases the
pice of import commodues
Non-tariff barriers are those barriers that restricts or limit the quarntity or quality of a
product during international trade.

uestions for Discussion

. What do absolute cost
you mean by
5sociated to the
advantage theoy? State the various limitations
theory.
2 Write a detailed nate on Product Life Cycle Theory.
3. What is theory of National Competitive Advantage? State ts components.
4. Explain factor Endowment theory ot intemational trade.
5. Elaborate the term
tradebamers
6. Explain various tarif and non tariff barrierss
7. Distingulsh between tariff and non tarnff bariers.
8. State the companson between tariff and non tenf barriers.

9. Dlstinguish between Absolute cost

advantage and comparative cost
advantage
theory.
10. Elaborate international trade theorles in
Write short notes onc
detail.

Mercantlism Theoy.
2

Critlcism of Absolute Cost Advantage Theory

3.Components of National Competitive THEORY
4Embarg90.
 Theories oneTrd
9 A Dopment af Glebal Tuuine
5. Tariff Barmiers
6. Non Tarf 8arriers.

Dumping
& Single Column Tariff.
9. National Tax
Multiple Cholce Questions:
Dy
Absolute Cost Advantage theory is propounded
(b) Adam Smith
o) David Ricardo
(d) Michael Porter
(c) Heckscher-Ohin
in respect
L No-Taif Barriers
restncts trade o
a) Quantity
(d) None o these
a) Both (a) and
(o
B l o c k a d e i s a situation where international trade is restricted due to .

(a) Terrorism 0) War

Peace d) Trade dispute
4. ATarit.
(b) Reduces the volume of trade
(a) Increases the volume of trade

(a) and (C) both

Has no effect on volume of trade d)
5. Dumping reters to
a) Buying goods at low prices abroad and selling at higher prices locally.

(b) Expensive goods selling for low prices

(C) Reducing tarifs.
(d) Sale of goods abroad at low a price. below their cost and price In hame market
6.
Factor proportions theory is aiso knovwn as the.
(a) Comparative acvantage Theary (6) Laissez faire Theory
(C) Heckscher-Ohlin Theory () Product Life Cycle Thieor
7. Goods and Service Tax came into effect on
(a) 1" July 2017 (6) 1 June 2017
July 2017
( 15 (G)september20177
Answer to MCos
()-(6). (2)-(a, 3) (),4)-(0), (S)- (d). (6) - (c, ()-(a)