Learn: International Trade Theories, Policy, and Protectionism

Benefits of international trade

Lower prices, greater variety, specialization, economies of scale, competition, innovation, and economic growth.

Mercantilism

Theory that national wealth and power increase by exporting more than importing and accumulating precious metals; supports trade restrictions.

Trade surplus

When the value of a country's exports exceeds the value of its imports.

Trade deficit

When the value of a country's imports exceeds the value of its exports.

Absolute advantage

Ability to produce a good using fewer resources or more output than another country.

Adam Smith

Economist associated with the theory of absolute advantage and specialization.

Comparative advantage

Ability to produce a good at a lower opportunity cost than another country.

David Ricardo

Economist associated with the theory of comparative advantage.

Opportunity cost

Value of the next-best alternative given up when making a choice.

Absolute vs. comparative advantage

Absolute advantage compares productivity; comparative advantage compares opportunity costs.

Diminishing returns

When adding more of one input while other inputs remain fixed eventually produces smaller additional output.

Dynamic effects of trade

Long-term benefits of trade, including innovation, investment, productivity growth, and economies of scale.

Paul Samuelson's critique

Free trade can increase overall welfare but may harm certain groups, and technological changes can shift economic gains between countries.

Heckscher-Ohlin theory

Countries tend to export goods that intensively use their relatively abundant factors of production.

Factors of production

Resources used to produce goods and services, including labor, land, capital, and natural resources.

Factor endowments

The amount and types of productive resources a country possesses.

Product-life cycle theory

Theory that production and trade patterns change as a product moves from new to mature to standardized.

Raymond Vernon

Economist associated with the international product-life cycle theory.

New trade theory

Theory that economies of scale and first-mover advantages help explain international trade, even between similar countries.

Paul Krugman

Economist associated with new trade theory and economies of scale in international trade.

Economies of scale

Lower average cost per unit as production volume increases.

First-mover advantage

Benefits gained by entering a market early, such as brand recognition, customer loyalty, and scale.

Porter's diamond model

Framework explaining national competitive advantage through factor conditions, demand conditions, related industries, and firm strategy and rivalry.

Michael Porter

Scholar who developed the diamond of national competitive advantage.

Factor conditions

A country's resources, skills, infrastructure, capital, and specialized capabilities.

Demand conditions

Characteristics and sophistication of domestic customer demand.

Related and supporting industries

Competitive suppliers and related businesses that support innovation and efficiency.

Firm strategy, structure, and rivalry

How companies are organized and managed and how domestic competition pushes them to improve.

Managerial implication: location

Businesses should locate operations where resources, skills, suppliers, customers, and costs support competitiveness.

Managerial implication: first mover

Early entry may build loyalty, scale, distribution access, and competitive advantages.

Managerial implication: government policy

Education, infrastructure, regulations, research funding, and trade policy can affect national competitiveness.

Trade policy

Government actions that influence imports, exports, and international competition.

Tariff

A tax imposed on imported goods.

Specific tariff

A fixed tax charged per unit of an imported product.

Ad valorem tariff

A tariff calculated as a percentage of the product's value.

Subsidy

Government financial assistance to businesses, such as grants, tax breaks, or low-interest loans.

Import quota

A government-imposed limit on the quantity of a product that can be imported.

Voluntary export restraint (VER)

An agreement in which an exporting country limits exports, often under pressure from an importing country.

Export tariff

A tax on goods leaving a country.

Export ban

A prohibition on exporting certain goods to specified destinations or under specified conditions.

Local content requirement

A rule requiring a minimum amount or percentage of domestic materials, components, or labor.

Administrative trade policy

Bureaucratic procedures that make importing foreign goods more difficult.

Dumping

Selling a product abroad at an unfairly low price under applicable trade rules, often assessed against its normal value.

Antidumping policy

Investigations and possible duties used to address qualifying dumping that injures a domestic industry.

Political arguments for intervention

Government intervention to protect jobs, national security, foreign policy, consumers, human rights, or to retaliate.

Jobs argument

Restricting imports may protect domestic jobs, but can raise prices and threaten export jobs through retaliation.

National security argument

Protecting industries and supplies considered essential to national defense or security.

Retaliation argument

Using trade restrictions to pressure another country to change its policies or remove trade barriers.

Foreign policy argument

Using trade restrictions or preferences to advance diplomatic goals or pressure other governments.

Consumer protection argument

Restricting products that fail health, safety, or quality standards.

Human rights argument

Restricting trade in response to abuses such as forced labor or severe labor violations.

Infant industry argument

Temporary protection may help a new domestic industry develop until it can compete internationally.

Strategic trade policy

Government support for domestic firms in industries where scale and limited global competition may create international advantages.

Trade war

Escalating trade restrictions and retaliation between countries.

Special interests

Groups that lobby government for policies that benefit their industry or members.

Smoot-Hawley Act (1930)

U.S. law that raised tariffs during the Great Depression and contributed to a protectionist environment and trade retaliation.

GATT

General Agreement on Tariffs and Trade, established in 1947 to reduce trade barriers through international negotiations.

Trade liberalization

Reducing tariffs and other barriers to international trade.

WTO

World Trade Organization, established in 1995 to administer trade agreements, support negotiations, and help resolve disputes.

WTO intellectual property rules

The TRIPS Agreement establishes international standards for intellectual property protection.

Agricultural protectionism

Tariffs, subsidies, and quotas that protect domestic agricultural producers from foreign competition.

Antiglobalism and populism

Political movements that criticize aspects of globalization over concerns such as jobs, inequality, sovereignty, and foreign dependence.

Foreign direct investment (FDI)

Investment in foreign business operations that establishes a lasting interest and significant influence.

Multinational enterprise (MNE)

A company that owns or controls business operations in more than one country.

Portfolio investment

Investment in financial assets without seeking significant managerial influence over the business.

FDI trends

Investment increasingly connects multinational production, services, technology, resources, and global supply chains.

FDI vs. exporting

Exporting produces at home and ships abroad; FDI establishes or acquires foreign operations.

When exporting is preferable

When trade barriers and shipping costs are manageable and centralized production is efficient.

When FDI is preferable

When local presence, control, market access, or avoiding certain import costs justifies the investment.

Licensing

Permission for another company to use intellectual property, technology, or a brand in exchange for payment.

FDI vs. licensing

FDI offers more direct control but requires more investment; licensing requires less capital but provides less control.

Oligopoly

A market dominated by a small number of large firms.

Follow-the-leader FDI

When a company invests abroad and competitors follow to protect their market positions.

Radical view of FDI

View that foreign investment can exploit host countries and create economic dependence.

Free market view of FDI

View that FDI generally improves efficiency and benefits economies through market forces.

Pragmatic nationalism

View that governments should encourage FDI when benefits exceed costs and restrict it when costs outweigh benefits.

Host country

The country receiving foreign investment.

Home country

The country where the investing company originates.

Host-country benefit: resource transfer

FDI brings capital, technology, management skills, and training into the host country.

Host-country benefit: employment

FDI can create direct jobs and indirect jobs through suppliers and supporting businesses.

Balance of payments

Record of a country's economic transactions with the rest of the world.

Host-country benefit: competition

Foreign businesses can push domestic firms to lower costs, improve quality, and innovate.

Host-country cost: competition

A powerful multinational may push out local competitors or increase market concentration.

Host-country cost: balance of payments

Profits sent abroad and imported inputs can create financial outflows.

Host-country cost: national sovereignty

Foreign ownership may raise concerns about control of strategic industries and domestic policy.

Home-country benefit: balance of payments

Foreign investment can generate later profits, dividends, and exports of equipment to overseas operations.

Home-country benefit: employment

Overseas expansion can create home-country jobs in management, design, engineering, and supporting industries.

Reverse resource transfer

Knowledge, skills, and technology gained abroad that benefit the investing company's home country.

Home-country cost: balance of payments

Outward investment initially sends funds abroad and may create other outflows.

Home-country cost: employment

Moving production abroad may reduce some domestic manufacturing jobs.

Home-country policies for outward FDI

Policies that encourage, finance, insure, or restrict investments made by domestic firms abroad.

Host-country policies for inward FDI

Incentives and restrictions used to attract, screen, regulate, or limit foreign investment.

Regional economic integration

Cooperation among countries to reduce trade barriers and coordinate economic activity.

Free trade area

Members remove most internal trade barriers but retain separate trade policies toward nonmembers.

Customs union

A free trade area with a common external trade policy and tariff structure.

Common market

A customs union that also allows freer movement of labor and capital among members.

Economic union

Integration that includes coordination of important economic policies.

Political union

Deep integration involving shared political institutions and decision-making authority.

Economic case for integration

Integration can increase trade, competition, economies of scale, investment, and efficiency.

Political case for integration

Integration can strengthen cooperation, regional stability, peace, and collective influence.