Global4 Peng Ch05

Chapter 5, Trading Internationally
5
Trading
Internationally
Copyright ©2018 Cengage Learning. All Rights Reserved. May not be

scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
Learning Outcomes
LEARNING OUTCOMES
1. Use the resource-based and institution-based views

to explain why nations trade
2. Identify and define the classical and modern
theories of international trade
3. Explain the importance of political realities
governing international trade
4. Identify factors that should be considered when
your firm participates in international trade
Copyright ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part. GLOBAL4 | CH5 2
LO 1
Important Terms Related to Trade
• International trade - Exports and imports

• Consists of:
➖Merchandise (goods) trade: Tangible
products being bought and sold
➖Service trade: Intangible services being
bought and sold
LO 1
Important Terms Related to Trade (continued)
• Balance of trade: Country-level trade

surplus or deficit
• Trade deficit: Occurs when a nation imports
more than it exports
• Trade surplus: Occurs when a nation exports
more than it imports
LO 1
Need for International Trade
• Resource-based view
• Firms in one nation generate exports that are
valuable, unique, and hard to imitate
➖Beneficial for foreign firms to import
• Institution-based view
• Different rules governing trade are designed to
determine how gains are shared or not shared
• Both sides must have economic gains
LO 2
Theories of International Trade -

Mercantilism
• Holds that wealth of the world is fixed

• Nation that exports more than it imports will
enjoy the net inflows of gold and silver and
become richer
• Intellectual ancestor of modern-day
protectionism
• Protectionism: Idea that governments should
actively protect domestic industries from imports
and promote exports
LO 2
Theories of International Trade - Absolute Advantage
• Advocated by Adam Smith

• Under free trade, each nation gains by
specializing in economic activities in which
it is the most efficient producer
• Free trade: Free market forces should determine
the buying and selling of goods and services
➖There is little or no government intervention
LO 2
Exhibit 5.3 - Absolute Advantage
LO 2
Exhibit 5.4 - Absolute Advantage
LO 2

Comparative Advantage
• A nation gains by specializing in production

of one good in which it has comparative
advantage
• Comparative advantage: Relative advantage in
one economic activity that one nation enjoys in
comparison with other nations
• Developed by David Ricardo
LO 2

Comparative Advantage (continued 1)
• Net gains are availed through trade

• Opportunity cost: Cost of pursuing one activity
at the expense of another activity
• Counterintuitive
• Realistic and useful during application
• Absolute and comparative advantages arise
from:
• Productivity
➖Absolute advantage deals with productivity
differences
LO 2

Comparative Advantage (continued 2)
➖Comparative advantage emphasizes relative

productivity differences
• Factor endowment: Extent to which different
countries possess various factors of production
(labor, land, and technology)
➖Factor endowment theory: Nations will
develop comparative advantages based on
locally abundant factors
LO 2
Exhibit 5.5 - Comparative Advantage
LO 2
Exhibit 5.6 - Comparative Advantage
LO 2

Product Life Cycle
• Patterns of trade change over time as

production shifts and product moves from
new to maturing to standardized stages
• Developed by Raymond Vernon
• Dynamic theory
• Divided the world into three categories
• Lead innovation nation, developed nations, and
developing nations
LO 2

Product Life Cycle (continued)
• Criticism of product life cycle theory

• Assumes:
➖United States’ permanent position as lead
innovation nation for new products
➖Stage-by-stage migration of production that
takes a longer duration
LO 2

Strategic Trade
• Strategic government intervention in certain

industries enhance their odds for
international success
• Strategic trade policy: Provides companies
a strategic advantage through government
subsidies
LO 2

Strategic Trade (continued)
• Criticism
• Scholars and policy makers are uncomfortable
with government intervention
• Industries claim they are strategically important
LO 2
Exhibit 5.8 - Entering the Very Large, Super-Jumbo

Market?
LO 2
Exhibit 5.8 - Entering the Very Large, Super-Jumbo

Market? (continued)
LO 2
Theories of International Trade - National Competitive

Advantage of Industries
• Competitive advantage of certain industries

in different nations depends on four aspects
• Form a diamond shape when diagrammed
• Proposed by Michael Porter
• Also known as diamond theory
LO 2
Exhibit 5.9 - National Competitive Advantage of

Industries: The Porter Diamond
LO 2
Evaluation of Classical Theories of

International Trade
• Considered as revolutionary theories when

the world was dominated by mercantilistic
thinking
• Rely on simplistic assumptions of a model
consisting of only two nations and two
goods
• Assume perfect resource mobility
• Assume that there are no foreign exchange
issues and zero transportation costs
LO 3
Realities of International Trade -

Tariff Barriers
• Discourage imports by placing a tariff or tax

on imported goods
• Import tariff: Tax imposed on imports
• Deadweight costs: Net losses that occur in an
economy as the result of tariffs
LO 3
Realities of International Trade - Nontariff

Barriers
Voluntary
Subsidy Import quota export
restraint (VER)
Local content Administrative Antidumping

requirement policy duty
LO 3
Economic Arguments against Free Trade
To protect domestic industries
To shield infant industries
LO 3
Political Arguments against Free Trade
Consumer
National security
protection
Environmental and
Trade intervention social
responsibility
LO 4
Factors That Determine the Success and

Failure of Firms’ Exports
• Resource-based view
• Successful exports are valuable, unique, and
hard-to-imitate products
• Institution-based view
• Laws and regulations promoted by special
interest groups can:
➖Protect certain domestic industries, firms, and
individuals
➖Erect trade boundaries
➖Make the nation as a whole worse off
LO 4
Exhibit 5.12 - Implications for Action
Key Terms
KEY TERMS
• Export • Protectionism
• Import • Free trade
• Merchandise (goods) • Theory of absolute
trade advantage
• Service trade • Absolute advantage
• Trade deficit • Theory of
• Trade surplus comparative
advantage
• Balance of trade
• Mercantilism
website, in whole or Copyright
in part. ©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GLOBAL4 | CH5 30
Key Terms (continued
KEY TERMS (continued)
1)
• Comparative • Strategic trade
advantage theory
• Opportunity cost • First-mover
• Factor endowment advantage
• Factor endowment • Strategic trade
theory (Heckscher– policy
Ohlin theory)
• Product life cycle
theory
2)
• Theory of national • Nontariff barrier
competitive (NTB)
advantage of • Subsidy
industries (diamond • Import quota
theory) • Voluntary export
• Resource mobility restraint (VER)
• Tariff barrier • Local content
• Import tariff requirement
• Deadweight cost
3)
• Administrative policy
• Antidumping duty
• Trade embargo
Summary
SUMMARY
• International trade provides economic

gains
• Gains are shared by both exporters and
importers
• Theories of international trade are divided
into classical and modern trade theories
• Trade barriers include tariff and non-tariff
barriers
• Managers must leverage the comparative
advantage of world-class locations

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Global4 Peng Ch05

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Chapter 5, Trading Internationally

Copyright ©2018 Cengage Learning. All Rights Reserved. May not be

1. Use the resource-based and institution-based views

Important Terms Related to Trade

• International trade - Exports and imports

Important Terms Related to Trade (continued)

• Balance of trade: Country-level trade

Need for International Trade

Theories of International Trade -

• Holds that wealth of the world is fixed

Theories of International Trade - Absolute Advantage

• Advocated by Adam Smith

Exhibit 5.3 - Absolute Advantage

Exhibit 5.4 - Absolute Advantage

Theories of International Trade -

• A nation gains by specializing in production

Theories of International Trade -

• Net gains are availed through trade

Theories of International Trade -

➖Comparative advantage emphasizes relative

Exhibit 5.5 - Comparative Advantage

Exhibit 5.6 - Comparative Advantage

Theories of International Trade -

• Patterns of trade change over time as

Theories of International Trade -

• Criticism of product life cycle theory

Theories of International Trade -

• Strategic government intervention in certain

Theories of International Trade -

Exhibit 5.8 - Entering the Very Large, Super-Jumbo

Exhibit 5.8 - Entering the Very Large, Super-Jumbo

Theories of International Trade - National Competitive

• Competitive advantage of certain industries

Exhibit 5.9 - National Competitive Advantage of

Evaluation of Classical Theories of

• Considered as revolutionary theories when

Realities of International Trade -

• Discourage imports by placing a tariff or tax

Realities of International Trade - Nontariff

Local content Administrative Antidumping

Economic Arguments against Free Trade

To protect domestic industries

To shield infant industries

Political Arguments against Free Trade

Factors That Determine the Success and

Exhibit 5.12 - Implications for Action

• International trade provides economic

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