International Trade and Globalization: An Overview
International Trade and Globalization
Stages of Economic Integration
Stage 1 (Integrated Economy): No national boundaries, free mobility of factors and goods.
Stage 2 (Autarky): No factor mobility, no goods mobility.
Stage 3 (International Trade): No factor mobility, goods mobility.
Stage 4 (Globalization): Partial factor mobility (high for capital, low for labor), multinationalization, goods mobility.
Foreign Direct Investment (FDI)
FDI involves “jumping over” borders and producing outside the home country.
Outsourcing and Offshoring
Outsourcing: Contracting out a business function, typically previously performed in-house, to an external provider.
Offshoring: Relocating a business process from one country to another, typically an operational process like manufacturing or supporting processes (e.g., accounting).
Forms of Market Entry
- Licensing: Ownership advantages: Yes, Internalization advantages: No, Locational advantages: No.
- Export: Ownership advantages: Yes, Internalization advantages: Yes, Locational advantages: No.
- FDI: Ownership advantages: Yes, Internalization advantages: Yes, Locational advantages: Yes.
Trade Effects (Static Effects)
Direct: Customs costs (tariffs, paperwork), common technical regulations.
Indirect: Adapting to a larger and more competitive market. Trade blocs create a larger market.
Heckscher-Ohlin Model
A country exports the product that uses its relatively abundant factor intensively and imports the product using its relatively scarce factor intensively.
Abundant Factor: A country is relatively labor-abundant if it has a higher ratio of labor to other factors than the rest of the world.
Intensive Factor: A product is relatively labor-intensive if labor costs are a greater share of its value than they are of the value of other products.
Stolper-Samuelson Theorem
Opening to trade splits a country into specific gainers and losers in the long run.
Price(A) = MgC(A) = ar + bw
Price(B) = MgC(B) = cr + dw
(a, c represent how much land and capital are required to produce 1 unit of each good)
(b, d represent how much labor is required to produce 1 unit of each good)
Specialized-Factor Pattern
The more a factor is specialized (or concentrated) in the production of a product whose relative price is rising/falling, the more this factor stands to gain/lose from the change in the product price.
Factor-Price Equalization Theorem
Given certain conditions and assumptions, free trade equalizes not only product prices but also the prices of individual factors between two countries.
- Laborers of the same skill will earn the same wage in both countries.
- Units of land earn the same rental return in both countries.
- Factors are implicitly shipped between countries.
Scale Economies
Output quantity goes up by a larger proportion than does total cost, as output increases. Doesn’t allow infinite differentiation.
Dumping
Selling exports at a price less than its normal value or fair market value.
A firm establishes a price for the exported good lower than the production costs of firms in the importing country, making it difficult for those firms to compete.
Types of Dumping:
- Predatory: Temporarily setting a very low price to drive foreign competitors out of business.
- Cyclical: During periods of recession, selling at a lower price than the production cost.
- Seasonal: Selling excess inventory at a lower price than normal.
- Persistent: A firm with market power uses price discrimination between markets to increase total profit. It occurs when the firm has less monopoly power in the foreign market than at home, and buyers in the home country cannot avoid the higher price by importing cheaply.
- Reciprocal: Each firm dumps in the other’s country, lowering prices in both. This can have a pro-competitive effect.
Immiserizing Growth
Growth that expands a country’s willingness to trade can result in such a large decline in its terms of trade that the country is worse off.
Tariffs
A tax on importing a good or service into a country, collected by customs officials at the place of entry.
- Specific: Per unit of item.
- Ad valorem: Percentage of the good’s value.
- Mixed: Ad valorem + specific amount.
Quotas
A limit on the total quantity of imports allowed into a country each year.
Effective Rate of Protection (ERP)
A measure of the percentage effect of the entire tariff structure on the value added per unit of output in each industry.
Depends on the entire set of a nation’s trade barriers.
ERP = (VAfinal – VAinitial) / VAinitial x 100
Tariff Effects in a Small Country
Production Effect: Welfare loss tied to the fact that some customer demand shifts from imports to more expensive domestic production. The tariff creates inefficiency in the use of production factors.
Consumption Effect: Due to consumers being forced to reduce their consumption of the good and paying more for each unit.
Free Trade Area
An agreement to eliminate tariffs, quotas, and preferences on most goods and services traded between member countries.
Customs Union
A free trade area plus a common external tariff and common external trade policy.
Common Market
A customs union plus relatively free movement of capital and services.
Trade Creation
The net volume of new trade resulting from forming or joining a trade bloc.
Trade Diversion
The volume of trade shifted from low-cost outside exporters to higher-cost bloc-partner exporters.
Multilateralism
International governance of the “many,” with a central principle of opposing bilateral discriminatory arrangements believed to enhance the leverage of the powerful over the weak and increase international conflict.
Regionalism
The development of a political or social system based on one or more regions.
Tobin Tax
(small tax0.5% 1% on international financial transactions will dissuade many speculativw transactions(their profit margin will disppear)