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INTERNATIONAL BUSINESS
CHAPTER 5: INTERNATIONAL TRADE THEORY
Smith proposed in 1776 why unrestricted free trade is beneficial to a country. Free trade
is the absence of govt barriers to the free flow of goods and services between countries.
Smith claimed that the invisible hand of the market mechanism (instead of a govt
control) should determine what a country imports and exports; laissez-faire is the best for
a country. Two more theories that build upon Smiths were theories of Ricardos
comparative advantage (intellectual basis of the modern argument for unrestricted free
trade) and Hecksher-Ohlin theory (improvement of Ricardos theory). All of these theories
make strong cases for unrestricted free trade.
BENEFITS OF TRADE
The 3 theories tell us that a countrys economy may gain if its citizens buy certain
products from other nations that could be produced at home. The gains rise because
international trade allows a country to specialize in the manufacture and export of
products that can be produced most efficiently in their
REI can be seen as an attempt to achieve additional gains from the free flow of trade and
investment between countries beyond those attainable under international agreements
like WTO. It is easier to establish a free trade and investment regime among a limited
number of adjacent countries than among the world community. The greater the number
of countries involved, the more perspectives that must be reconciled, and the harder it
will be to reach agreement. Thus, attempts at regional economic integration are
motivated by a desire to exploit the gains from free trade and investment.
THE POLITICAL CASE FOR INTEGRATION
Linking neighboring economies and making them increasingly dependent on each other
creates incentives for political cooperation between the neighboring states and reduces
the potential for violent conflict. In addition, by grouping their economies, the nations
can enhance their political weight in the world.
IMPEDIMENTS TO INTEGRATION
Integration has never been easy to achieve or sustain because 1. Economic integration
aids the majority, it has its costs. While a nation as a whole may benefit significantly from
a regional free trade agreement, certain groups may lose. Moving to a free trade regime
involves painful adjustments. 2. Integration arises from concerns over national
sovereignty. Ex. Mexicos concerns about maintaining control of its oil interests results in
an agreement with Canada and US to exempt the Mexican oil industry from any
liberalization of foreign investment regulations achieved under NAFTA.