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The International Trading Environment

Explaining world trade Trade Policy

Comparative Advantage

Comparative Advantage: Ricardo Role of resources in determining trade patterns: trade will be greatest between countries with differing factor endowmentsdeveloped and developing economies Real World? This explanation of trade does not explain the principle patterns of trade over the past 50 years as trade has been greatest between countries that are similar in terms of resources - EU

Explaining real world trade

Much trade takes the form of intraindustrial trade ie exporting & importing goods belonging to the same industry? Economies of Scale => concentration of production in the hands of a small number of oligopolistic producers Product Differentiation brand loyalty

New Trade Theories 1980s

Vernon 1960s Product Life Cycle Theory early attempt to link together the international growth of the firm and the changing patterns of trade in the world economy Imperfect Competition monopolistic competition; oligopoly and strategic behaviour One of the most important results of such a model is the prediction that local producers will sell at a higher price on the home market than they will charge on exports - dumping

Implications of new trade theories for trade policy

Intervention by governments in international trade is generally considered harmful New theories => intervention can be welfare enhancing example Competitive Advantage of firms

Porter The Competitive

Advantage of Nations

The key to industrial success lies in the question of productivity To achieve competitive success, firms must possess a competitive advantage lower costs or differentiated products that command premium prices To sustain an advantage, firms have to achieve more sophisticated advantages over time higher quality products and services or producing more efficiently This translates directly into productivity



Link between industrial efficiency and national welfare; a rising national standard of living depends upon the capacity of a nations firms to achieve high levels of productivity and to increase productivity over time Diamond : determinants of success of a nation rely on four interrelated conditions Firm strategy, factor conditions, demand conditions and related and supporting industries Trade : enables nations to enhance levels of productivity through specialisation

Productivity is the key

Porters approach differs to earlier approaches of CA in that the key areas of specialisation are those which a nations firms have created rather than inherited. Firms seeking competitive advantage will combine trade with FDI to continually seek to upgrade activities

Trade Barriers

Trade brings benefits to countries involved Look around the world=>countries erect trade barriers. Why? Trade involves costs as well as benefits Methods of restricting trade: Tariffs; Quotas; Exchange controls; Import licensing; embargoes, subsidies, administrative barriers, procurement policies

Arguments for restricting trade

Valid and non valid arguments Non- economic arguments The Infant Industry Argument Changing Comparative Advantage and the inflexibility of markets Prevent Unfair Trading Practices To prevent the establishment of a foreign based monopoly To reduce reliance on goods with little dynamic potential Income redistribution

Arguments for Trade Restrictions -continued

Exploitation of monopoly power Protection of declining industries Balance of Payments Strategic Trade Policy - Brander Spencer Non-economic arguments: self-sufficiency political preserve traditional ways of life