INTERNATIONAL TRADE

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INTERNATIONAL TRADE
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Case Sri Lankan Trade

• Since independence Sri Lanka has looked to
  international trade policy as a means of helping
  to solve such problems as
• a) shortage of foreign exchange
• b) overdependence on one product and one market
• c) insufficient growth of output and employment
• Import Substitution Strategic Trade Policy
• Development of exports of nontraditional Products
• Identifying the most likely competitive
  Industries
• Manufacturing has grown as a portion of total
  Exports

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• I - INTRODUCTION

• Trade theory focuses on three basic questions
• a) What products to import and export?
• b) How much to trade?, and
• c) With whom to trade?
• Some theories explain trade patterns that exist
  in the absence of governmental interference, and
  some theories explain what governmental actions
  should strive for in trade.

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• II - TRADE THEORY AND GOVERNMENT POLICY

A - Mercantilism mid-16th century, principal
assertion was that gold and silver were the
mainstays of national wealth and essential to
vigorous commerce. Main tenant it was
in a countrys best interest to maintain a trade
surplus, a country would increase its national
wealth and prestige Autarky
Trade was viewed as a zero-sum-game
David-Hume Neo-Mercantilism
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B Absolute Advantage a country has an absolute
advantage in the production of a product when it
is more efficient than any other country in
producing it. Countries should
specialize in the production of goods for which
they have an absolute advantage and then trade
these goods for goods produced by other
countries. Basic Argument you should
never produce goods at home that you can buy at
lower cost form other countries.
Absolute advantage exists potential for gains
in trade Adam Smiths 1776 An
Inquiry Into the Wealth of Nations. Introduced
the concept of specialization Trade
is not a zero-sum game situation
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1. Natural Advantage a country may have a
natural advantage in producing a product because
of climatic conditions, access to a certain
natural resources, or availability of an abundant
labour force 2. Acquired Advantage industrial
policy
C Comparative Advantage In his 1817 book
Principles of Political Economy, David Ricardo
says that it makes sense for a country to
specialize in the production of those goods that
it produces most efficiently and to buy the goods
that it produces less efficiently from other
countries, even if it could produce them more
efficiently itself. In other words, nations
should produce those goods for which they have
the greatest relative advantage
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• According to David Ricardo potential world
  production is greater with unrestricted free
  trade than it is with restricted trade.
• Consumers in all countries can consume more if
  there are no restrictions to trade.
• Differences in labour productivity between
  nations underlie the notion of comparative
  advantage
• C.1. Simple Extensions of the Ricardian Model
• Diminishing Returns to Specialization not all
  resources are of the same quality, draw upon
  marginal resources whose productivity is not as
  great as those initially employed

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• Dynamic Effect and Economic Growth Free trade
  might increase a countrys stock of resources,
  free trade might also increase the efficiency
  with which a country utilizes its resources
• Dynamic gains in both the stock of a countrys
  resources and the efficiency with which resources
  are utilized will cause a countrys Production
  Possibility Frontiers (PPF) to shift outwards
• C.2. Theory of Country Size larger countries are
  more self-sufficient
• C.3. Transportation Costs make it more likely
  that small countries will trade internationally
• C.4. Scale Economies countries with large
  economies and high per capita income are more
  likely to produce goods that use technologies
  requiring long production runs.

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• C.4. Scale Economies countries with large
  economies and high per capita income are more
  likely to produce goods that use technologies
  requiring long production runs.
• D Heckscher-Ohlin Theory
• Two swedish economists put forward a different
  explanation of comparative advantage they argued
  that comparative advantage arises from
  differences in national factor endowments.
• Different nations have different factor
  endowments and different factor endowments
  explain differences in factor costs. The more
  abundant a factor, the lower its cost.

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This H-Ohlin theory predicts that countries will
export those goods that make intensive use of
those factors that are locally abundant, while
importing goods that make intensive use of
factors that are locally scarce The Leontief
Paradox U.S. produces and exports technology
intensive products that require highly educated
labor. D Product Life Cycle Raymond Vernon
proposed the PLC in the early 1960s. Raymond
argued that the size and the wealthy market gave
American companies a strong motivation to develop
innovative consumer goods. As the market in the
US and other more developed countries matures,
the products becomes more standardized, and price
becomes the main competitive factor.
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• Further along, the U.S. switches from being an
  exporter of the product to an importer of the
  product as production becomes concentrated in
  lower cost foreign locations.
• Ex cellular phones
• PLC weakness
• E The New Trade Theory
• First Mover Advantages the theory suggests that
  a country may predominate in the export of a good
  simply because it was lucky enough to have one or
  more firms among the first to produce that good.
• This theory generates an argument for government
  intervention, industrial policy, and strategic
  trade policy

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• F National Competitive Advantage Porters
  Diamond Model
• Why a nation achieves international success in a
  particular industry?
• Porters thesis is that four broad attributes of
  a nation shape the environment in which local
  firms compete, and these attributes promote or
  impede the creation of competitive advantage.
• a) Factor Endowments skilled labour,
  infrastructure, technology, etc. Advanced factors
  are the most significant for competitive
  advantage.
• b) Demand Conditions home demand provides the
  impetus for upgrading competitive advantage. A
  nations firm gain competitive advantage if their
  domestic consumers are sophisticated and
  demanding.

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c) Related and Supporting Industries Presence of
suppliers or related industries that are
internationally supportive. Successful industries
within a country ten to be grouped into clusters
of related industries. d) Firm Strategy,
Structure, and Rivalry Different nations are
characterized by different management ideologies
there is a strong association between vigorous
domestic rivalry and the creation and
persistence of competitive advantage in an
industry. e) Government Business should urge
government to increase its investment in
education, infrastructure, and basic research and
to adopt policies that promote strong competition
within domestic markets.
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• G - Country Similarity Theory observations of
  actual trade patterns reveal that most of worlds
  trade occurs among countries that have similar
  characteristics. Thus, overall trade patterns
  seem to be at variance with the traditional
  theories that emphasize country-by-country
  differences.
• H - Pairs of Trading Relationships How do you
  explain specific pairs of trade relationships?
• transport costs (natural traders)
• Cultural Similarity
• Historic Ties
• Political Relationships and Economic Agreements

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• I - Independence, Interdependence, and
  Dependence
• J Trade Strategies Among Emerging
• Countries
• - Outward-Led-Growth Strategies
• - Import Substitution Industrialization
• K Why Companies Trade Internationally?