Comprehensive Guide to International Trade Theories and Policies

Trade policy

Government actions that affect international trade and investment.

Free trade

Absence of barriers to the free flow of goods and services between countries.

Mercantilism

The view that a country should encourage exports and discourage imports to maintain a trade surplus.

Neo-mercantilism

The modern belief that political and economic power are linked to a balance-of-trade surplus.

Trade surplus

When a country exports more than it imports.

Zero-sum game

A situation in which one country's gain is viewed as another country's loss.

Absolute advantage

When a country is more efficient than another country at producing a good.

Theory of absolute advantage

Adam Smith's idea that countries should specialize in goods they produce most efficiently and trade for the rest.

Theory of comparative advantage

David Ricardo's idea that countries should specialize in goods they produce at the lowest opportunity cost.

Positive-sum game

A situation in which all countries can gain from trade.

Gains from trade

The increase in total output and welfare that comes from specialization and exchange.

Factor endowments

A country's supply of land, labor, capital, and other resources.

Heckscher-Ohlin theory

The theory that countries export goods that intensively use their abundant factors and import goods that use scarce factors.

Leontief Paradox

The finding that contradicted Heckscher-Ohlin predictions in real-world trade data.

New trade theory

The theory that trade can arise from economies of scale and first-mover advantages, even without major resource differences.

Economies of scale

Reductions in unit cost that come from producing on a large scale.

First-mover advantage

The economic and strategic advantage gained by entering an industry early.

National competitive advantage

Michael Porter's theory that national success in an industry depends on domestic conditions such as demand, rivalry, and suppliers.

Demand conditions

The nature and sophistication of home-market demand for an industry's product.

Related and supporting industries

The presence of internationally competitive supplier and related industries in a country.

Firm strategy, structure, and rivalry

The way firms are organized and managed, and the intensity of domestic competition.

Basic factors

Natural resources, climate, location, and demographics.

Advanced factors

Skilled labor, research facilities, communication infrastructure, and technological know-how.

Immobile resources

Resources that do not move easily between industries or activities.

Diminishing returns

The idea that additional units of a resource do not always produce proportional increases in output.

Dynamic gains from trade

Long-run gains from trade such as better resource use, more growth, and outward shifts in a country's PPF.

Samuelson critique

The argument that lower prices from trade may not fully offset lower real wages in some countries.

PPF

Production possibility frontier; a curve showing the maximum possible output combinations of two goods.

Tariff

A tax levied on imports.

Import tariff

A tariff placed on imported goods.

Specific tariff

A tariff charged as a fixed amount per unit imported.

Ad valorem tariff

A tariff charged as a percentage of the value of the imported good.

Export tariff

A tax placed on the export of a good.

Export ban

A policy that partially or completely restricts exports of a good.

Subsidy

A government payment to a domestic producer.

Import quota

A direct restriction on the quantity of a good that may be imported.

Tariff-rate quota

A hybrid policy where imports above a set quota face a much higher tariff.

Voluntary export restraint

A quota on exports imposed by the exporting country, usually at the importing country's request.

Quota rent

The extra profit producers make when supply is artificially limited by a quota.

Local content requirement

A rule requiring that some specific fraction of a product be produced domestically.

Administrative trade policy

Bureaucratic rules designed to make it difficult for imports to enter a country.

Dumping

Selling goods in a foreign market below production cost or below fair market value.

Antidumping policy

A policy used to punish foreign firms that dump goods and protect domestic producers.

Antidumping duty

A tariff imposed on dumped imports to offset unfair pricing.

Countervailing duty

A duty imposed to counter dumping or foreign subsidies.

Protectionism

Government actions that shield domestic industries from foreign competition.

Managed trade

Trade that is guided more by government rules and intervention than by free markets.

Infant industry argument

The claim that new domestic industries need temporary protection until they become efficient.

Strategic trade policy

Government intervention designed to help domestic firms gain first-mover advantages in industries with scale economies.

GATT

General Agreement on Tariffs and Trade; the post-WWII framework that governed world trade before the WTO.

WTO

World Trade Organization; the global institution that oversees trade rules and trade disputes.

GATS

General Agreement on Trade in Services.

TRIPS

Agreement on Trade-Related Aspects of Intellectual Property Rights.

Uruguay Round

A major round of trade talks that led to the creation of the WTO.

Doha Round

A trade negotiation round focused on cutting tariffs, reducing subsidies, and lowering barriers to trade and investment.

Smoot-Hawley Act

The 1930 US law that sharply raised tariffs and worsened the global trade collapse during the Great Depression.

Retaliation

A response in which one country imposes trade barriers after another country does.

Trade war

A cycle of retaliatory trade barriers that leaves countries worse off.

Bargaining tool

The use of trade intervention to pressure other countries to change their policies.

Foreign direct investment (FDI)

Investment by a firm in new facilities or assets to produce or market in a foreign country.

Multinational enterprise (MNE)

A firm that engages in FDI and operates in more than one country.

Flow of FDI

The amount of FDI undertaken over a given period of time.

Stock of FDI

The total accumulated value of foreign-owned assets at a given time.

FDI inflow

FDI entering a country.

FDI outflow

FDI leaving a country to be invested abroad.

Greenfield investment

FDI in which a firm builds a new operation in a foreign country from scratch.

Acquisition

FDI in which a firm buys an existing company or operation in a foreign country.

Exporting

Producing goods at home and shipping them abroad for sale.

Licensing

Granting a foreign entity the right to produce and sell a firm's product in return for royalties.

Internalization theory

The theory that firms prefer FDI over licensing when keeping activities inside the firm is more efficient.

Market imperfections approach

Another name for internalization theory.

Low value-to-weight ratio

A characteristic of products where transportation costs are high relative to the product's value.

Oligopoly

An industry made up of a small number of large firms.

Strategic rivalry

Competitive behavior in which firms match each other's moves, including foreign investments.

Multipoint competition

Competition in which the same firms encounter each other in several different markets.

Eclectic paradigm

John Dunning's theory that FDI depends on ownership, location, and internalization advantages.

Location-specific advantages

Benefits tied to a particular place, such as natural resources, labor, or local markets.

Externalities

Knowledge spillovers that occur when firms in the same industry cluster in one location.

Radical view

The belief that MNEs exploit host countries and serve the interests of capitalist home countries.

Free market view

The belief that FDI should flow according to comparative advantage and increases world efficiency.

Pragmatic nationalism

The view that FDI should be allowed only when its benefits to the host country outweigh its costs.

Resource-transfer effects

The transfer of capital, technology, and management skills to a host country through FDI.

Employment effects

The impact of FDI on jobs in the host or home country.

Balance of payments

A country's record of payments to and receipts from other countries.

Current account

The part of the balance of payments that records trade in goods and services.

Repatriation of earnings

The sending of profits from a foreign subsidiary back to the parent company's home country.

National sovereignty and autonomy

A country's control over its own economy and policy decisions.

Ownership restraints

Rules limiting foreign ownership in certain sectors.

Performance requirements

Conditions placed on foreign investors to increase benefits to the host country.

Inward FDI

Foreign investment coming into a country.

Outward FDI

Domestic firms investing in foreign countries.

Host-country benefits

Advantages to the host nation from FDI, such as jobs, capital, and technology.

Host-country costs

Disadvantages to the host nation from FDI, such as profit outflows, competition issues, and reduced autonomy.

Home-country benefits

Potential gains to the home country from FDI, such as better specialization and lower prices.

Home-country costs

Potential losses to the home country from FDI, such as job export or capital outflow.

Greenfield investment advantage

A benefit of greenfield FDI is full control and creation of new operations.

Acquisition advantage

A benefit of acquisition is speed and access to brands, customers, and distribution systems.

Regional economic integration

Agreements among countries in a region to reduce or remove trade and investment barriers.

Free trade area

A group of countries that remove barriers among themselves but keep separate trade policies toward nonmembers.

Customs union

A group of countries that remove barriers among themselves and adopt a common external trade policy.