International Trade Theories and Policies: A Comprehensive Guide
International Trade and Globalization
Outsourcing and Offshoring
Outsourcing: The contracting out of a business function, commonly one previously performed in-house, to an external provider.
Offshoring: The relocation by a company of a business process from one country to another, typically an operational process, such as manufacturing or supporting processes.
Multilateralism and Regionalism
Multilateralism: Exemplified by the World Trade Organization (WTO), multilateralism involves a group of countries deciding on common trade rules to facilitate cooperation.
Regionalism: Involves a group of countries reducing trade barriers amongst themselves while potentially maintaining barriers against others (e.g., the European Union).
Trade Theories
Heckscher-Ohlin Theory
This theory posits that a country exports the product that uses its relatively abundant factor intensively and imports the product using its relatively scarce factor intensively.
- A country is considered relatively labor-abundant if it has a higher ratio of labor to other factors than the rest of the world.
- A product is relatively labor-intensive if labor costs constitute a greater share of its value than they do for other products.
For example, if country A is abundant in labor relative to country B, and both countries produce goods requiring different labor-to-capital ratios, the theory suggests specific trade patterns.
Theorems Derived from Heckscher-Ohlin
- Stolper-Samuelson Theorem: Opening to trade divides a country into specific gainers and losers in the long run.
- Specialized-Factor Theorem: The more a factor is specialized or concentrated in producing a product whose relative price is rising (falling), the more this factor stands to gain (lose) from the change in 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. Factors are implicitly shipped between countries in commodity form.
Economies of Scale
Economies of scale occur when output quantity increases by a larger proportion than total cost, as output increases. International trade facilitates economies of scale by:
- Reaching larger markets.
- Offering a greater variety of products to consumers in each market.
- Providing a wider choice of more efficient, specialized inputs for producers.
Dumping
Dumping refers to selling exports at a price lower than their normal value. Types of dumping include:
- Predatory Dumping: Temporarily lowering prices to drive foreign competitors out of business.
- Cyclical Dumping: Selling at prices lower than production costs during periods of recession.
- Seasonal Dumping: Selling off excess inventory at reduced prices.
Persistent Dumping: A firm with market power uses price discrimination between markets to increase its total profit. This occurs if the firm has less monopoly power in the foreign market than domestically, and buyers in the home country cannot avoid the higher price by importing cheaply.
Immiserizing Growth
This phenomenon occurs when growth expands a country’s willingness to trade, but results in such a steep decline in its terms of trade that the country becomes worse off. This typically happens when:
- Growth is strongly biased towards increasing the country’s exports.
- Foreign demand for the country’s exports is price inelastic.
Biased Growth
Biased growth refers to growth in only one factor of production. If a country experiences biased growth, its overall welfare is expected to increase.
Economic Thought
Leon Walras
Walras’s general equilibrium theory considers the interdependence of multiple variables or the economy as a whole. It assumes that:
- Sectors are independent, but one sector’s output affects others.
- Prices of goods are determined simultaneously and mutually.
- All product and factor markets are in equilibrium.
Alfred Marshall
Marshall’s partial equilibrium analysis focuses on a single variable, assuming”ceteris paribu” (other things remaining constant). Key features include:
- One sector’s changes do not significantly affect others.
- Prices are determined in isolation.
Trade Policies
Tariffs
Small Country Case
A small country is a price taker in the world market for its imported goods. Tariff effects include:
- Production Effect: Welfare loss due to consumer demand shifting from imports to more expensive domestic production, leading to inefficient use of production factors.
- Consumption Effect: Consumers reduce consumption of the good due to higher prices.
- Deadweight Losses: Gains from international trade lost because of the tariff.
Welfare Measurement
- One-Dollar, One-Metric Approach: Each dollar of gain or loss is valued equally, regardless of the recipient.
- One-Dollar, One-Vote Yardstick: Considers the sum of monetary values, including consumer and producer surplus.
Big Country Case
A big country has market power as a consumer in the world market. The portion of the tariff passed onto the domestic price depends on the country’s size:
- Big Country: Only a part of the tariff is passed on.
- Small Country: The entire tariff is reflected in the domestic price.
Non-Tariff Barriers
These barriers restrict trade through means other than tariffs. Examples include:
- Product standards
- Domestic content requirements
- Mixing requirements
- Rules of origin
- Government procurement policies
- Custom valuation procedures
Arguments for Protectionism
- Optimal Tariff Argument (Big Country)
- Infant Industry Argument
- Anti-dumping Measures
- Positive Externalities
- Promoting Exports
- Retaliation Against Foreign Government Actions
- Currency Shortage
- Non-Economic Factors (e.g., national pride, defense)
- Income Redistribution
Specificity Rule
In a second-best world, a barrier against imports might be better than doing nothing. However, the specificity rule suggests that other policy instruments, such as government policies directly addressing the source of distortion, are usually more efficient.
Rent Seeking
IMPLIES AN UNPRODUCTIVE USE OF THE COUNTRY RESOURCES.