International Trade MGMT 1035

What is mercantilism?

An early trade theory that views wealth as fixed, equating national strength with gold/silver reserves, and prescribing export promotion with import restrictions

Why did mercantilist states establish colonies?

To secure cheap raw materials, exclusive markets, and ensure a favorable trade balance

What is a “favorable balance of trade” in mercantilism?

Exporting more than importing to amass national wealth and power

How did Adam Smith redefine wealth?

As the total goods and services available to people, not government gold reserves

What is absolute advantage?

When a country can produce a good more efficiently than another, it should specialize and trade

How is comparative advantage different from absolute advantage?

Even if a country is more efficient in all goods, it benefits by specializing in what it produces at lower opportunity cost

What is opportunity cost in comparative advantage?

The value of what is given up to produce one good over another

How does specialization improve trade benefits?

It increases productivity, efficiency, and the range of goods available for consumption

What is the factor proportions (Heckscher-Ohlin) theory?

Countries export goods that use their abundant factors (labor, capital, land) and import those using scarce factors

Give an example of factor endowments shaping trade.

Labor-abundant China exporting textiles to capital-abundant Western nations

What is new trade theory?

A theory emphasizing economies of scale and network effects as reasons for trade between similar countries

Why do similar countries often trade with each other?

Because industries achieve efficiency at scale and specialize differently (e.g., autos in US vs. semiconductors in Taiwan)

What is intra-industry trade?

When countries trade similar products (like cars or electronics) due to specialization within industries

How does industrial policy challenge free trade theory?

Governments pick “winners” by supporting key industries for jobs, security, or innovation

What are some tools of industrial policy?

Subsidies, tariffs, regulations, and state support for strategic industries

How does Paul Krugman link trade theory to sweatshops?

He argues low-wage manufacturing jobs can be a development step for poorer nations

What was the purpose of the CHIPS Act in the U.S.?

To subsidize semiconductor production and reduce reliance on vulnerable supply chains

How does globalization affect the Global South historically?

It reinforced patterns of resource extraction and dependency established under colonialism

What is South-South trade?

Trade between developing countries aiming to reduce reliance on the Global North

How are Chinese firms reshaping trade in the Global South?

By expanding manufacturing, selling affordable goods, and investing through the Belt and Road Initiative

What advantage do Chinese firms have in emerging markets?

They produce low-cost, innovative goods tailored to local consumers (e.g., $100 smartphones in Africa)

How does Canadian trade depend on the U.S.?

Three-quarters of exports and two-thirds of imports are with the U.S., making Canada highly integrated with its neighbor

Why are imports as important as exports in Canada?

Imports lower prices, increase consumer choice, and provide inputs for production

How much of Canadian employment is tied to exports?

About 16–17% of jobs depend directly or indirectly on exports

What is a value-added export?

Exports adjusted for imported inputs, reflecting the true domestic contribution to GDP

How do imports raise Canadian productivity?

By providing cheaper, higher-quality intermediate goods that firms use in production

What role do trade agreements play for Canada?

They give certainty, reduce barriers, and prevent larger states from dominating bilateral disputes

What is the difference between comparative and competitive advantage?

Comparative is between countries based on opportunity costs; competitive is between firms based on efficiency/costs

How does protectionism contradict trade theory?

It prioritizes short-term job protection but reduces long-term productivity and living standards

Why is specialization essential in modern trade?

It allows countries to focus on what they do best while benefiting from imports of other goods

What role do economies of scale play in trade?

Larger production reduces per-unit costs, making some industries viable only with global markets

What is a major criticism of free trade?

It creates winners and losers, with some workers and industries harmed despite overall gains

How do tariffs affect consumers?

They raise prices, limit variety, and reduce efficiency in the economy

Why are autarky (closed economy) policies seen as failures?

Historically, countries with autarky (e.g., Cuba, North Korea) remained poor compared to open economies

What is meant by “trade liberalization”?

Lowering trade barriers such as tariffs and quotas to increase cross-border flows of goods and services

How does trade policy link to national security?

Governments protect industries like semiconductors or energy to avoid dependence on rivals

Why are trade surpluses not always beneficial?

They may coincide with recessions, since reduced imports can signal weak domestic demand

What is the role of foreign direct investment (FDI) in trade?

Firms build production abroad to access markets, reduce costs, and integrate into global supply chains

How do multinational corporations (MNCs) fit into trade theory?

They operationalize comparative advantage and economies of scale by spreading production globally

What is the political risk of relying on global trade?

Shocks like pandemics, wars, or sanctions can disrupt supply chains and harm economies

How does trade impact inequality?

It raises productivity and incomes overall but often widens wage gaps between skilled and unskilled workers

What are special economic zones (SEZs)?

Areas with relaxed regulations and taxes to attract foreign capital and trade

Why are SEZs controversial?

They boost growth but reinforce inequality and weaken government oversight

What lesson do Western firms face from Chinese expansion?

Protecting incumbents can backfire as Chinese competitors innovate for low-income markets

How do governments use tariffs strategically?

To protect domestic industries or retaliate in trade disputes

What is the main benefit of trade according to economists?

Productivity-enhancing specialization and access to larger markets, not just trade surpluses

How does trade contribute to Canadian prosperity?

It accounts for roughly one-third of GDP and millions of jobs

Why do economists argue imports can be as beneficial as exports?

Because they lower costs, expand consumer choice, and improve productivity