Day 5 6 Students International Trade Theories and Regional Economic Integration

Prévia do material em texto

The Fundamentals of Internatıonal Trade
Imports
Exports
Trade barriers
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Source: McGraw-Hill
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Learnıng by doıng exercıse1
Please work on the nation you selected in this exercise on a power point file!
Find its three most important products and/or industry in its export and find where (which nation/s) it exports these products
Make sure that the sector of the fırm you selected to work on durıng the class ıs taken ınto consideratıon (ıts share ın the total ımport and export)
 Find its three most important products and/or industry in its imports and find where (which nation/s) it imports these products
Prepare a figure, send it to IB KEBS4 page to present it at class
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MERCANTıLıSM
The first theory of international trade emerged in England in the mid-16th century.
Economic Theory and practice common in Europe from the 16th to the 18th century!
Its 17th-century publicists—most notably Thomas Mun  in England, Jean-baptise Colbert in France, and Antonio Serra in Italy
Referred to as mercantilism, it’s principle assertion was that gold and silver were the mainstays of international wealth and essential to vigorous commerce.
Precious metals, such as gold and silver, were deemed to a nation’s wealth. If a nation did not possess mines or have access to them, precious metals should be obtained by trade. 
Colonıal possessions should serve as markets for exports and as suppliers of raw materials to the mother country. 
Manufacturing was forbidden in colonies, and all commerce between colony and mother country was held to be a monopoly of the mother country.
The flaw with mercantilism was that it viewed trade as a zero-sum game.
A zero-sum game is one in which a gain by one country results in a loss by another.
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Selected CountrIes and Theır Colonıal Herıtage (late perıod of mercantilism)
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Source: McGraw-Hill
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ABSOLUTE ADVANTAGE
In his 1776 landmark book ‘the Wealth of Nations’, Adam Smith attacked the mercantilist assumption that trade is a zero-sum game. 
In his time, the English, by virtue of their superior manufacturing processes, were the world’s most efficient textile manufacturers.
Due to the combination of favourable climate, good soils and accumulated expertise, the French had the world’s most efficient wine industry.
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ABSOLUTE ADVANTAGE(coNT)
The English had an ‘absolute advantage’ in the production of textiles, while the French had an ‘absolute advantage’ in the production of wine.
Thus, a country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it.
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COMPARATIVE ADVANTAGE
David Ricardo took Adam Smith’s Theory one step further by exploring what might happen when one country has an absolute advantage in the production of all goods.
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Comparatıve advantage & davıd rıcardo
He considered an example with two goods (wine and cloth) and two countries (England and Portugal). 
He showed that both countries can gain by opening up trade and specializing based on comparative advantage. 
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In his 1817 book Principles of Political Economy and Taxation, Ricardo developed the principle of comparative advantage. 
CA CONT.
According to Ricardo’s Theory of ‘Comparative Advantage’;
It makes sense for a country to specialize in the production of those goods that it produce most efficiently 
And to buy the goods that it produces less efficiently from other countries, 
Even if this means buying goods from other countries that it could produce more efficiently itself.
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Absolute & Comparative Advantage
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Tom & Mary can as countries!
ABSOLUTE ADVANTAGE
One nation can produce more output with the same resources as the other.
🙁Having an absolute advantage is not the same thing as having a comparative advantage.
COMPARATIVE ADVANTAGE
One nation can produce a good at a lower opportunity cost than the other.
🤔Specialization is economically desirable because it results in more efficient production.
🤔 Specialization should take place if there are relative cost differences in production of different items.
Learnıng by doıng exercıse2
Please work on the nation selected and its products exports the most 
Create a figure for its absolute advantage (show clearly what products and what nation/s)
Create a figure for its comparative advantage (show clearly what products and what nation/s)
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HECKSCHER-OHLIN THEORY
Swedish economists Eli Heckscher and Bertil Ohlin put forward a different explanation of comparative advantages. They argued that comparative advantage arises from differences in national factor endowments.
By factor endowments, they meant the extent to which a country is endowed with such resources as land, labour and capital. 
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HECKSCHER-OHLIN THEORY cont.
Different nations have different factor endowments, and different factor endowments explain differences in factor costs. The more abundant a factor, the lower its cost.
The theory predicts that countries will export those goods that make intensive use of factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce.
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COMPARATIVE ADVANTAGE& HECKSCHER-OHLIN THEORY
Similarity:
Both theories argue free trade is beneficial.
Differences:
Unlike Ricardo’s Theory, the Heckscher- Ohlin Theory argues that the pattern of international trade is determined by differences in factor endowments, rather than differences in productivity.
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Learnıng by doıng exercıse3
Please work on the nation and its most exporting good/industries you worked on earlier
Explain what factor endowments lead to this good/industry to become the most important sector for international trade for the nation.
Figure out what factors are abundant
Figure out what factors are scarce (if you have time enough!)
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THE LEONTIEF PARADOX
According to the Heckscher-Ohlin Theory, it is expected that the US would be an exporter of capital-intensive goods and importer of labour- intensive goods.
Wassily Leontief found (1953) that us exports were less capital intensive than us imports. 
WHY DO WE OBSERVE LEONTIEF PARADOX?
No one is quite sure!
One possible explanation is that the US has a special advantage in producing new products or goods made with innovative technologies. Such products may be less capital intensive than products whose technology has had time to mature and become suitable for mass production.
😊May be Ricardo’s Theory actually predicts trade patterns better.
Trade patterns are largely driven by international differences in productivity!
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Learnıng by doıng exercıse4
Please figure out whether Leontief Paradox is valid in your case (considering nation you selected and its imports and exports) 
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THE PRODUCT LIFE-CYCLE THEORY
Raymond Vernon initially proposed the Product Life-cycle Theory in the mid-1960s.
Vernon’s Theory was based on the observation that for most of the 20th century, a very large proportion of the world’s new products had been developed by U.S. 
Firms sold first in the U.S. to explain these, Vernon argued that the wealth and size of the U.S. Market gave U.S. Firms a strong incentive to develop new consumer products. In edition, the high cost of U.S. labour gave firms an incentive to develop cost-saving process innovations.
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THE PRODUCT LIFE-CYCLE THEORY cont.
In the early in the life cycle of A typical new product, while demand is starting to grow rapidly in the US, demand in other advanced countries is limited to high-income groups. 
Over time, demand for the new product starts to grow in other advanced countries (e.g. The GB, France, Germany, and Japan). Than it becomes worthwhile for foreign producers to begin producing for their home markets. In addition, the US firms might set up production facilities in those advanced counties where demand is growing.
As the market in the US and other advanced nations matures, the product becomes more standardized, and price becomes main competitiveweapon. 
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THE PRODUCT LIFE-CYCLE THEORY cont.
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In the early in the life cycle of a typical new product, while demand is starting to grow rapidly in the US, demand in other advanced countries is limited to high-income groups. 
Over time, demand for the new product starts to grow in other advanced countries (e.g. the GB, France, Germany, and Japan). Than it becomes wothwhile for foreign producers to begin producing for their home markets. In addition, the US firms might set up production facilities in those advanced counties where demand is growing.
As the market in the US and other advanced nations matures, the product becomes more standardized, and price becomes main competitive weapon. Than producers in advanced countries where labour cost is lower might now able to export to the US. 
If cost pressure becomes intense, the process might not stop there. The cycle might be repeated once more, as developing countries begin to aquaire a production advantage over advanced countries.
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Focus of global production initially switches from the US to other advanced nations, and than from those nations to developing countries.
Over the time the US switches from being an exporter of the product to an importer of the product as production becomes concentrated in lower-cost foreign locations.
Learnıng by doıng exercıse 5
Please work on the firms and its industry that you selected for our course;
Figure out life cycle of the industry/good
Take into consideration your previous work on the firm’s expansion history (geographically)
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THE NEW TRADE THEORY
The New Trade Theory began to emerge in the 1970s. 
They argued that: many industries experience increasing returns to specialization because of the presence of substantial economies of scale and countries may export certain products simply because they have a firm that was an early entrant into an industry that will support only a few firms because of substantial economies of scale.
Underpinning this arguement is the nation of ‘first-mover advantages’,which are the economic and strategic advantages that accrue to early entrants into an industry.
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NATIONAL COMPETITIVE ADVANTAGE:
PORTER’S DıAMOND
These questions cannot be answered easily by the heckscher-ohlin theory, and the theory of comparative advantage offers only partial explanation. 
Comparative advantage theory would say that Switzerland excels in the production and expert of pharmaceuticals because it uses its resources very productively in this indutries. This might be correct but does not explain WHY switzerland is more productive in this industry than GB, Germany or Spain. 
Why do Germany and United States do so well in the chemical industry?
Why does Switzerland excel in the production and export of precision instruments and pharmaceuticals?
MICHAEL PORTER
“National prosperity is created, not inherited. It does not grow out of a country’s natural endowments, its labour pool, its interest rates, or its currency’s value, as classical economics insists”.
“A nation’s competitiveness depends on the capacity of its industry to innovate and upgrade.”
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The DıAMOND model cont.
In 1990, Michael Porter of Harvard Business School published the results of an intensive research effort that attempted to determine “why some nations succeed and others fail in international competition”.
Book: Competitive Advantage of Nations
Porter and his team looked at 100 industries in 10 nations (each involving between 5 to 19 industry cases). 
For porter, the essential task was to explain why a nation achieves international success in particular industry.
Why does Japan do so well in the automobile industry? 
Why does Switzerland excel in the production and export of precision instruments and pharmaceuticals?
Porter thesis is that four board attributes of a nation shape the environment in which local firms compete, and these attributes promote or impede the creation of competitive advantage.
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NATıONAL COMPETıTıVE ADVANTAGE:PORTER’S DıAMOND model
Factor endowments-a nation’s position in factors of production/ ADVANCED FACTORS (communication infrastructure, sophisticated skills and research facilities etc.), And BASIC FACTORS (natural resources, climate, location, demographics etc.).
A close interaction between industry success and the creation of the specialized factors of production necessary to that success. 
Demand conditions-the nature of home demand for the industry’s product of service. The role of sophisticated and demanding domestic customers 
The role of home demand in providing the impetus for 'upgrading' competitive advantage. 
Relating and supporting industries-the presence or absence in a nation of supplier industries and related industries that are internationally competitive.
One of the most pervasive findings of the study was the tendency for the successful industries within each country to be grouped into 'clusters' of related and supporting industries. 
Firm strategy, structure,and rivalry-the condition in the nation governing how companies are created, organized, and managed and the nature of domestic rivalry.
The most interesting relationship which porter identifies is between domestic rivalry and the creation and persistence of competitive advantage. 
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Maın poıntS!
A nation’s competitiveness depends on the capacity of its industry to innovate and upgrade. 
Ultimately, nations succeed in particular industries because their home environment is the most forward-looking, dynamic, and challenging.
Companies gain advantage against the world’s best competitors because of pressure and challenge. 
They benefit from having strong domestic rivals, aggressive home-based suppliers, and demanding local customers.
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Dynamics of the national diamond 
These four sets of national influences on competitive advantage operate interdependently rather than individually. 
For the 'diamond' to positively impact competitive performance usually requires that all four sets of influences are present. 
The intensity of interaction between the four corners of the diamond determines the extent to which the national environment is conducive to international success. 
The strength of interaction depends upon two primary factors:
Industry Clustering
Tight clustering of successful industries was observed to be a characteristic of all the successful smaller nations, including Switzerland, Sweden, Denmark, and Singapore, as well as Japan and Italy.
Geographical Concentration of the Industry 
 Such proximity accelerates diffusion of innovation, facilitates investment in skills, and encourages the development of supporting industries 
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porter
“Once a company achieves competitive advantage through an innovation, it can sustain it only through relentless improvement. Almost any advantage can be imitated”
Competitors will eventually and inevitably overtake any company that stops improving and innovating. 
Sometimes early-mover advantages are enough to permit a stagnant company to retain its entrenched position for years or even decades. But sooner or later, more dynamic rivals will find a way to innovate around these advantages or create a better or cheaper way of doing things.
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Pros
Porter’s Diamond model explains why corporations domiciled in certain countries are successful in penetrating foreign markets. This model can be used to assess competitive advantage of the national environment in which individual business units, organisations, or industries operate.
The model helps to understand the dynamic interplay between a firm’s corporate strategy and the competitive advantages of a country – the ‘habitat’ in which organisations operate. This model is an addition to Porter’s five forces model dealing with industry structure. The diamond model emphasises that a firm should only internationalise when it has a strong position in its home market.
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Pros
The model provides an explanation of why industry clusters are relevantGovernments can play an active role in supporting the development of clusters countering the notion of public laissez-fair.
The model shows that apart from inter-firm rivalry, cooperation is a vital component of corporate strategy. Companies should form strategic alliances, especially with organisations in related and supporting industries.
The model explains in part the “resource curse” -- why a large natural resources base is not sufficient to develop industrial might.
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cons:
The situation in which all four attributes are correctly lined up to boost the development of a given industry provides only a higher probability that an industry will develop. Its development depends on personal action for the favourable conditions to be fully commercially exploited.
The absence of any of the four conditions from the diamond domestically, may not inhibit companies and industries from becoming globally competitive. For example if related and supporting industries are not available locally, materials and components can be easily brought in from abroad because of advancements in transportation and the relaxation of import restrictions. 
Capacity gets created by better allocation of resources due to the pressure of competition. The model pays no direct attention to competence building. 
The level of importance of chance as a nucleus for change is not clear. How much ‘change’ is needed to make the transition to a globally competitive economic cluster?
Cooperation directly between rivals is considered non advantageous due to the reason that it decreases the strength of rivalry. This view does not always hold, e.g. When - based on cooperation - industry standards get developed that grow the overall market.
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CONs cont.
The importance of exchange rates and wage rates in the determination of competitiveness is overlooked. No comparative data for wages, price levels or cost levels in manufacturing were listed in the country fact files in porter’s 1990 volume.
The impact of virtual clusters where participants located across countries collaborate via internet on porter’s model has not been determined
The model assumes that national free markets exist where firms compete head-to-head. This is not the case in many countries on this globe.
Porter placed perhaps a too great an emphasis on the role of home based companies when the driving force is the multinational company
Moon, Rugman & Verbeke argued that the porter diamond framework is useful in a single country context but, as so much of a nation’s activity takes place in a regional, international or global context, it is important to consider the trade relationships between countries to gain a full understanding at the nation level. A double diamond framework was proposed to consider the trade space between two countries.
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The double dIamond model
In Porter's single home-based diamond approach, a firm's capabilities to tap into the location advantages of other nations are viewed as very limited. Rugman has demonstrated that a much more relevant concept prevails in small, open economies, namely the 'double diamond' model. 
For example, in the case of canada, an integrated north american diamond (including both canada and the united states), not just a canadian one, is more relevant.
The double diamond model, developed by Rrugman and D'cruz, suggests that managers build upon both domestic and foreign diamonds to become globally competitive in terms of survival, profitability, and growth. 
While the Rugman and D'cruz North American Diamond framework fits well for Canada and New Zeland, it does not carry over to all other small nations,including Korea and Singapore.
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DISCUSSION QUESTIONS AT CLASS! 
Using the new trade theory and Porter’s theory of national competitive advantage, outline the case for government (for the country you are working on) policies that would build national competitive advantage in a particular industry? 
Please concentrate on:
What kind of policies would you recommend to the government to adopt?
Are these policies at variance with the basic free trade philosophy?
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Learnıng by doıng exercıse 6 (homework)
Please work on the national competitive advantage of your nations by:
Indicating why does your nation advance and prosper according to the diamond model in a figure.
How are the four determinants in particular ındustry you are working on?
What is the dynamics of the national diamond?
Whether the double diamond model valid for your nation?
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Regıonal Economıc Integratıon
Agreements among countries in a geographic region to reduce, and ultimately remove, tariff and nontariff barriers to the free flow of goods, services and factors of production among each other.
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Source:Sonia Gupta, International Business, Chapter 11.
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What Are The Levels Of 
Regıonal Economıc Integratıon?
A free trade area eliminates all barriers to the trade of goods and services among member countries
European Free Trade Association (EFTA) - Norway, Iceland, Liechtenstein, and Switzerland
North American Free Trade Agreement (NAFTA) - U.S., Canada, and Mexico
A customs union eliminates trade barriers between member countries and adopts a common external trade policy
Andean Community (Bolivia, Columbia, Ecuador, and Peru) 
A common market has no barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production 
MERCOSUR (Brazil, Argentina, Paraguay, and Uruguay)
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Source: William D. Coleman,Geoffrey D. Underhill, Regionalism and Global Economic Integration: Europe, Asia and the Americas.
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What Are The Levels Of 
Regıonal Economıc Integratıon?
An economic union has the free flow of products and factors of production between members, a common external trade policy, a common currency, a harmonized tax rate, and a common monetary and fiscal policy.
European Union (EU)
A political union involves a central political apparatus that coordinates the economic, social, and foreign policy of member states 
the EU is headed toward at least partial political union, and the U.S. is an example of even closer political union
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Source: William D. Coleman,Geoffrey D. Underhill, Regionalism and Global Economic Integration: Europe, Asia and the Americas.
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What Are The Levels Of 
Regıonal Economıc Integratıon?
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https://www.studyblue.com/notes/note/n/chapter-3-regional-economic-differences/deck/13247629
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Economıc Case for 
Regıonal Integratıon
Stimulates economic growth in countries.
Countries specialize in those goods and services efficiently produced.
Additional gains from free trade beyond international agreements such as GATT and WTO.
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Source:Sonia Gupta, International Business, Chapter 11.
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Regıonal Economıc Integratıon 
 Question: Is regional economic integration a good thing?
While regional trade agreements are designed to promote free trade, there is some concern that the world is moving toward a situation in which a number of regional trade blocks compete against each other.
If this scenario materializes, the gains from free trade within blocs could be offset by a decline in trade between blocs.
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Source: Global Business Today 6e, by Charles W.L. Hill
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Classroom Performance System
In a _______, all barriers to the free flow of goods and services between member countries are removed, and a common policy toward nonmembers is established.
 Free trade area
 Customs union
 Common market
 Economic union
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Source: Global Business Today 6e, by Charles W.L. Hill
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Answer
In a _______, all barriers to the free flow of goods and services between member countries are removed, and a common policy toward nonmembers is established.
b)Customs union
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Source: Global Business Today 6e, by Charles W.L. Hill
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Classroom Performance System
The European Union is an example of a(n)
 Free trade area
 Customs union
 Common market
 Economic union
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Source: Global BusinessToday 6e, by Charles W.L. Hill
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Answer
The European Union is an example of a(n)
d) Economic union
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Source: Global Business Today 6e, by Charles W.L. Hill
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 The EconomIc Case for IntegratIon
Regional economic integration is an attempt to achieve additional gains from the free flow of trade and investment between countries beyond those attainable under international agreements such as the WTO
Since it is easier to form an agreement with a few countries than across all nations, there has been a push toward regional economic integration 
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Source: Global Business Today 6e, by Charles W.L. Hill
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RegIonal EconomIc IntegratIon 
In the AmerIcas
Regional economic integration is on the rise in the Americas
The most significant attempt is the North American Free Trade Agreement
Other agreements include 
the Andean Community 
MERCOSUR
There are also attempts to form a Free Trade Area of the Americas 
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Source: Global Business Today 6e, by Charles W.L. Hill
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Dılema! Decıde!
“Latin America’s need to conquer new markets comes as globalisation is in retreat elsewhere. After years of procrastination, the Mercosur trade group (based on Brazil and Argentina) in April began formal negotiations for a trade pact with the European Union. Because of the farm protectionism of France and others, the Europeans are unlikely to offer anything useful. Earlier this year, Chile, Mexico and Peru signed the proposed 12-country Trans-Pacific Partnership. This now looks stillborn, since both candidates in the American presidential election oppose it. Donald Trump threatens to throw up barriers around what is still, despite the rise of China, by far Latin America’s single largest export market”. 
Source:http://www.economist.com/news/americas/21707588-latin-america-wants-rejoin-world-will-world-reciprocate-growth-and-globalisation, reached at: 27.09.2016.
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Group work: Why the natıon succeed ın thıs PARTICULAR ındustry whıle others faıled ın ınternatıonal competıtıon? 
NATIONS IN THE DIAMOND MODEL;
THE US
FRANCE 
GERMANY
ITALY
THE UK
SWITZERLAND
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JAPAN
BELGIUM
SINGAPORE
CHINA
BRASIL
INDIA