Professional Documents
Culture Documents
International
Business: Theory and
Practice
Week 3 (Ch 3)
Dr Linda Piusa
So far
We will:
look at some theories of
international trade; and
consider some of the discussion
around free trade versus
protectionism in the global
economy (Chapter 3 of the key
text).
Clarifying terms
Copyright 2010
Pearson Education, Inc.
publishing as Prentice Hall
Why Do Countries Trade
Mercantilism
Absolute advantage
Comparative advantage
Hecksher Ohlin
Leontief paradox
Vernon
Linder
Mercantilism
17th-18th century
Countries should maximize exports and
try to limit imports as much as possible
Aim: trade surplus / inflow of gold and
silver
Large colonies supplied raw materials
Finished goods exported back at much
higher prices
Neo-mercantilism / economic
nationalism
Drawbacks to
Mercantilism
Confuses treasure and wealth
A weakness of Heckscher-Ohlin
theory is that it treats all factors as
homogenous, when in fact they are
not.
Modern Trade Theories
(Firm-based)
Because :
1. Failure of Leontief and others to
empirically validate country-based
Heckscher-Ohlin
2. Inability of the country-based
theories to explain and predict the
existence and growth of intra-
industry trade
3. Growing importance of MNCs
Firm-based Trade Theories
National defence
Infant industries
Declining industry protection
To spread risk
Political reasons
Strategic trade policy- first in the market
Protection from dumping
Retaliation
To protect against undesirable products
To resist cultural imperialism
Case against
protectionism
Retaliation
Misallocation of resources
Regional trading
arrangements
The European Union(EU) from
common market to economic
union
NAFTA free trade area
MERCOSUR partial customs
union
ASEAN Free Trade Area (AFTA)
etc
RTAs (Regional Trading
Agreements)
Free Trade Areas
Where member countries reduce or
abolish restrictions on trade with each
other while maintaining their individual
protectionist measures against non-
members.
Customs Unions
Where, as well as freeing trade
among members, a common external
tariff is established to protect the
group from imports from any non-
member.
RTAs (Regional Trading
Agreements)
Common Market
Where the customs union is extended to
include the free movement of factors of
production as well as products within
the designated area.
Economic Union
Where national economic policies are
also harmonised among member
states within the common market.
Control of Trade
Exchange Rates:
Effects on business:
international competitiveness
value of foreign sales, profits and
assets
Exchange Rate Regimes
Choice of regimes:
E-mail: linda.piusa@anglia.ac.uk