Chapter 5 International Trade

Learning Objectives
Describe the relationship between international trade volume and world output List and discuss overall international trade patterns

Define mercantilism and explain its historical impact on the world powers and their colonies.
Identify the differences between absolute advantage and comparative advantage. Compare and contrast the factor proportions and international product life cycle theories. Explain the new trade and national competitive advantage theories Discuss the implications of trade theories for global IT management
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Coke in Africa Example

US trade with Africa: >$10 billion annually Only countries where Coke does NOT have operations: Libya, Sudan (why not?) Sales in Africa: 2% of Cokes profits Coke salesperson in Africa: street corner, kiosk, spaza shop, bottling business
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International Trade
Purchase, sale, or exchange of goods and services across national borders
Benefits of International Trade:
Greater choice of goods and services

Job creation

International Trade
Increase in Volume Of International Trade Persistence of International Trade Patterns Trade Dependence And Independence

Volume Of International Trade

Merchandise: $5.5 trillion Services: $1.4 trillion (20%) Trade and World Output
Level of world output in any given year influences the level of international trade in that year: Slower world economic output slows the volume of international trade, and higher output spurs greater trade

International Trade Patterns

Who Trades with Whom?
Customs agencies record sources, destinations, quantities, values of goods
May be distorted or misleading (why?)

Trade between the worlds high-income economies: 60 % of total trade Between high-income countries and low- and middle-income: 34 % of total trade Between middle and low-income: 6%

70% Europes trade is within Europe

Volume Of International Trade
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Trade Dependence And Independence

All countries fall on a continuum of trade interdependencies, from total dependence to total independence
Effect on Developing and Transition Nations
Dependence has both pros and cons: Eastern Europe

Dangers of Trade Dependency

Conditions change: Mexico is losing jobs to Asia

Goal: Balance between dependence and independence

Volume Of International Trade
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Global Manager: Pacific Rim

Count on Third-Party Contacts Build personal rapport Carry a bilingual business Building card Good Relations in the Pacific Rim Leave the hard Sell at home
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Go easy With legalese

Theories of International Trade

Mercantilism
Absolute Comparative

Advantage

Advantage

Factor Proportions Theory

International Product Life Cycle

New Trade Theory

National Competitive Advantage

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Mercantilism
Nations should accumulate financial wealth by encouraging exports and discouraging imports Other measures, such as living standards and human development, are irrelevant

Trade Surplus: Value of exports are greater than value of imports

Trade Deficit: Value of imports are greater than value of exports

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Absolute Advantage
Ability of a nation to produce a good more efficiently than any other nation Specialization leads to trade Refutes mercantile idea of restricting imports

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Comparative Advantage
If one country held absolute advantages in the production of both products, specialization and trade could still benefit both countries. A country has a comparative advantage when it is unable to produce a good more efficiently than other nations, but produces the good more efficiently than it does any other good
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Limitations of Comparative Advantage

Unrealistic Assumptions:
Countries are driven only by maximization of production and consumption Only two countries are engaged in the production and consumption of just two goods There are no costs of transporting traded goods. Labor is the only resource for the production process Specialization in the production of one particular good does not result in gains in efficiency
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Factor Proportions Theory

Countries produce and export goods that require resources (factors) that are abundant and import goods that require resources in short supply Includes capital and equipment as well as labor as resources

Capital Equipment

Categories

Labor

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Leontief Paradox
Proposes that U.S. exports require more labor-intensive production than its imports
Factor Proportions Theory considers a countrys production factors to be homogeneous, when in most cases they are not When expenditures on training are included, the theory is supported
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International Product Life Cycle

United States
Exports

Consumption
Imports

Production Other Advanced Countries

Imports

Time Production
Exports

Consumption

Less Developed Countries Exports Production Imports Consumption

New Product Maturing Product Standardized Product

Product Life Cycle Theory

Validated when US was main innovator and producer Now many countries must introduce products in multiple markets at once Rise in small, global entrepreneurs
Internet allows reach to global audience

Comparative advantage more descriptive of todays global economy

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New Trade Theory

Government may have a role to play in assisting its Home-based Companies Gains to be had from Specialization and Economies of Scale Companies that first to enter a market can create Barriers to Entry
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First Mover Advantage

The economic and strategic advantage gained by being the first company to enter an industry Can create a formidable barrier to entry for potential rivals Spurs government support
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National Competitive Advantage

A nations competitiveness in an industry depends on the capacity of the industry to innovate and upgrade.

Firm Strategy, Structure, & Rivalry Factor Conditions Demand Conditions

Related & Supporting Industries

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Firm Strategy, Structure, & Rivalry

Strategic decisions affect future competitiveness Managers must be committed to producing quality products that are valued by buyers, while maximizing the firms market share and/or financial returns Government and chance are also important
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Factor Conditions
Factor Proportions Theory considers a nations resources, such as a large labor force, natural resources, climate, or surface features, as paramount factors in what products a country will produce and export.
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Demand Conditions
Sophisticated buyers in the home market drive companies to modify existing products to include new design features and develop entirely new products and technologies

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Related and Supporting Industries

Companies that belong to a nations internationally competitive industries do not exist in isolation Supporting industries spring up to provide the inputs required by the industry

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What are the implications for Global IT Management?

IT should support domestic and international competitiveness
Strategic goals Quality of products Efficiency of production Reduction in transportation costs New product and service innovations Mass customization for diverse markets

Take advantage of Internet

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