© 2013 Cengage Learning. All rights reserved. CHAPTER 5 GLOBAL2  PENG © OLIVER LANG/AFP/Getty Images 1

© 2013 Cengage Learning. All rights reserved. CHAPTER 5 LEARNING OBJECTIVES After studying this chapter you should be able to: 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. 2

© 2013 Cengage Learning. All rights reserved. LO1: WHY DO NATIONS TRADE? Terms to know:  Exporting  Importing  Merchandise trade  Service trade  Trade deficit  Trade surplus  Balance of trade 3

TERMS Exporting Selling abroad Importing Buying from abroad Merchandise Tangible products being traded Service Intangible services being traded © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

TERMS Trade deficit When a nation imports more than it exports Trade surplus When a nation exports more than it imports Balance of trade Whether a country has a trade surplus or deficit © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

© 2013 Cengage Learning. All rights reserved. LO1: WORLD MERCHANDISE EXPORTS 6 © iStockphoto.com/luoman In 2010, merchandise exports increased by 22% in value.

© 2013 Cengage Learning. All rights reserved. THEORIES OF INTERNATIONAL TRADE 8

© 2013 Cengage Learning. All rights reserved. THEORIES OF INTERNATIONAL TRADE 9

© 2013 Cengage Learning. All rights reserved. LO2: MERCANTILISM  Views international trade as a zero-sum game. A nation that exported more than it imported would enjoy net inflow of money.  Intellectual ancestor of protectionism – idea that governments should actively protect domestic industries from imports and promote exports. 10

© 2013 Cengage Learning. All rights reserved. LO2: ABSOLUTE ADVANTAGE With free trade, a nation gains by specializing in economic activities in which it has an absolute advantage. 11 © iStockphoto.com/ Stephen Strathdee

ABSOLUTE ADVANTAGE Free trade Buying and selling of goods and services with little or no government intervention Absolute advantage To be more efficient than anyone else in the production of any good or service © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

© 2013 Cengage Learning. All rights reserved. LO2: COMPARATIVE ADVANTAGE The relative advantage in one economic activity that a nation enjoys over others. 13

COMPARATIVE ADVANTAGE Nation A has an absolute advantage in production of all goods compared to Nation B As long as Nation B is not equally less efficient in the production of both goods, Nation B can still choose to specialize in the production of one good in which it has comparative advantage © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

© 2013 Cengage Learning. All rights reserved. LO2: PRODUCT LIFE CYCLE THEORY Dynamic theory that accounts for changes in the patterns of trade over time. 15

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

© 2013 Cengage Learning. All rights reserved. LO2: STRATEGIC TRADE Suggests that strategic government intervention in certain industries can enhance their odds for international success. 17

© 2013 Cengage Learning. All rights reserved. NATIONAL COMPETITIVE ADVANTAGE OF INDUSTRIES (DIAMOND THEORY) Competitive advantage of certain industries in different nations depends on four factors: 18 Source: M. Porter, “The competitive advantage of nations,” Harvard Business Review (March-April 1990): 77. Reprinted with permission.

© 2013 Cengage Learning. All rights reserved. LO3: IMPORTANCE OF POLITICAL REALITIES Why do trade barriers remain?  Tariff Barriers – means of discouraging imports by placing a tariff (tax) on imported goods.  Costly to organize individuals and firms in scattered countries to make the case for free trade. 19

© 2013 Cengage Learning. All rights reserved. LO3: IMPORTANCE OF POLITICAL REALITIES Why do trade barriers remain?  Non-tariff barriers – discourages imports by means other than tariffs: Subsidies Import quotas Voluntary export restraints Local content requirements Administrative policies Antidumping duties 20

NONTARIFF BARRIERS (NTBs) Import quota Restriction on the quantity of a good that can be brought into a country Voluntary export restraint (VER) Exporting countries voluntarily agree to restrict their exports Local content requirement Rules stipulating that a certain proportion of the value of the goods made in one country must originate from that country © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

NONTARIFF BARRIERS (NTBs) Administrative policy Bureaucratic rules that make it harder to import foreign goods Antidumping duty Costs levied on imports that have been “dumped” (selling below costs to “unfairly” drive domestic firms out of business © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

© 2013 Cengage Learning. All rights reserved. LO3: ARGUMENTS AGAINST FREE TRADE Economic: 1.Protect domestic industries 2.Shield infant industries 23

ARGUMENTS AGAINST FREE TRADE Trade embargo Politically motivated trade sanctions against foreign countries to signal displeasure © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

ARGUMENTS AGAINST FREE TRADE Infant industry argument Young domestic firms need government protection because they stand no chance of surviving and will be crushed by mature foreign rivals © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

© 2013 Cengage Learning. All rights reserved. LO3: ARGUMENTS AGAINST FREE TRADE Political: 1.National security 2.Consumer protection 3.Foreign policy 4.Environmental responsibility 5.Social responsibility 26