International Trade and Investment

Firms Invest Overseas and Export

  • Foreign Direct Investment (FDI):

    • U.S. FDI from 2013 to 2017 was approximately $1.5 trillion.

    • Major factors influencing FDI growth:

    • Global competition.

    • Liberalized trade policies in host countries.

    • Technological advancements.

    • Annual average investment surpassed the U.S. average from 1995 to 2005.

    • Increased FDI generally correlates with a decrease in U.S. exports.

U.S. Exports of Goods and Services

  • Export Trends (1990–2022):

    • Graphical representation shows U.S. exports in billions of dollars anticipated before decline due to COVID-19.

Volume of International Trade

  • Historical Data:

    • International trade volume in 1990: $4 trillion.

    • By 2022, had increased nearly eightfold.

    • Over 60% of global output is attributed to international trade.

Growth Distribution of Trade

  • Geographic Trends:

    • Post-2003, the trade proportion from North America and Europe has decreased.

    • China emerged as the leading global exporter, lifting 800 million people out of poverty.

    • Developing countries now account for a greater share of exports; developed countries export less.

    • Growth in service exports as a significant part of international business.

Leading Exporters and Importers (2022)

Merchandise Exports:

  • Top 10 Exporters:

    • China: $3,594 billion

    • United States: $2,064 billion

    • Germany: $1,658 billion

    • Netherlands: $967 billion

    • Japan: $747 billion

    • South Korea: $684 billion

    • Italy: $657 billion

    • Belgium: $635 billion

    • France: $618 billion

    • Hong Kong (China): $610 billion

Merchandise Imports:

  • Top 10 Importers:

    • United States: $3,376 billion

    • China: $2,716 billion

    • Germany: $1,571 billion

    • Netherlands: $898 billion

    • Japan: $897 billion

    • United Kingdom: $824 billion

    • France: $818 billion

    • South Korea: $731 billion

    • India: $720 billion

    • Italy: $689 billion

Service Exports:

  • Top 10 Service Exporters:

    • United States: $900 billion

    • United Kingdom: $492 billion

    • China: $422 billion

    • Germany: $406 billion

    • Ireland: $355 billion

    • France: $336 billion

    • India: $309 billion

    • Singapore: $291 billion

    • Netherlands: $270 billion

    • Spain: $167 billion

Service Imports:

  • Top 10 Service Importers:

    • United States: $671 billion

    • China: $461 billion

    • Germany: $458 billion

    • Ireland: $373 billion

    • United Kingdom: $313 billion

    • France: $286 billion

    • Netherlands: $264 billion

    • Singapore: $258 billion

    • India: $249 billion

    • Japan: $207 billion

Increasing Regionalization of Trade

  • Characteristics:

    • Trade predominantly occurs within geographic regions.

    • Driven by regional trade agreements such as ASEAN, Mercosur, EU, and USMCA.

    • Trends: nearshoring (relocating production closer to the home market) and friendshoring (working with countries that are politically allied).

Major Trading Partners of the U.S. (2022)

  • Trade Statistics:

    • The top 10 trading partners represented 63% of total U.S. exports and 69% of total U.S. imports.

    • Developed nations and members of trade agreements primarily trade amongst themselves.

    • Notable partners: Mexico and Canada through USMCA.

Trade Deficits and Surpluses:

  • Definitions:

    • Trade Deficit: Imbalance occurs when imports exceed exports (IM > EX).

    • Trade Surplus: Condition where exports exceed imports (EX > IM).

Major Trading Partners: Implications for Managers

  • Importance of trading with developed countries:

    • Favorable business climates.

    • Manageable export/import regulations.

    • Minimal cultural objections.

    • Established transportation infrastructure.

    • Experienced import channels.

    • Availability of currency for transactions.

    • Government influence promoting imports from nations like the U.S.

Discussing Changes and Future Trends in International Trade

  • Class discussion focusing on the evolution of international trade over the last two decades:

    • Identify major trends and speculate on future trends.

    • Emphasis on the implications for managerial strategies.

Theories Explaining Trade: International Trade Theories

Mercantilism:

  • Views wealth in terms of precious metals.

  • Strategies:

    • Promote exports.

    • Discourage imports.

  • Example: China as a modern representation.

Absolute Advantage (Adam Smith):

  • A nation has an absolute advantage if it can produce more efficiently than another for the same cost.

  • Concept of specialization leads to optimized resource allocation.

Comparative Advantage (David Ricardo):

  • A less efficient nation can have a comparative advantage by producing goods for which it has a lesser absolute disadvantage.

  • Example:

    • Pre-specialization commodity outputs:

    • United States:

      • Soybeans: 4 tons

      • Cloth bolts: 2 tons

    • China:

      • Soybeans: 5 tons

      • Cloth bolts: 5 tons

Other Assumptions and Empirical Evidence:

  • The Ricardian model assumptions have been analyzed, indicating countries export those they produce most efficiently.

  • Newer trade theories suggest diminished free trade benefits compared to earlier beliefs.

Absolute Advantage Example:

  • Commodity Outputs:

    • United States: Soybeans 3, Cloth 2

    • China: Soybeans 6, Cloth 8

Case Study: Ethiopia and Kenya

  • Scenario for coffee and tea production specialization:

    • Specialization: Ethiopia focuses on coffee, Kenya on tea.

    • Determine terms of trade, best outcomes post-specialization, and discuss model limitations.

Contemporary Trade Theories:

  1. Resource Endowment Theory: Based on the factors of production a country possesses.

  2. Overlapping Demand Theory (Steven Linder): Similar income levels lead to shared product preferences, prevalent in manufacturing.

  3. Intra-industry Trade: Arises from overlapping demand due to differentiation.

  4. International Product Life Cycle (IPLC): Stages of a product evolving from export to becoming an import as competition rises.

  5. Economies of Scale: Larger facilities reduce average costs as output scales up.

  6. Experience Curve: Efficiency improves with operational experience over time.

  7. National Competitive Advantage: Nations that cluster certain industries benefit from collective efficiencies.

Summary of International Trade Theory

  • By specializing in products with comparative advantage, nations enhance living standards.

  • Trade barriers are detrimental to national welfare.

Foreign Investment and FDI

Evolution of FDI

  1. Portfolio Investment: Buying stocks/bonds for financial returns.

  2. Direct Investment: Acquiring significant control in foreign firms.

Foreign Portfolio Investment:

  • Constitutes a significant and expected growing segment with value reflecting $26.8 trillion for non-resident U.S. holdings (Q2 2023).

Foreign Direct Investment Stock:

  • Total global FDI was valued at $39.9 trillion by end of 2022.

Trends Influencing FDI:

  • Developed nations account for two-thirds of FDI outflows; developing countries are seeing notable inflows.

  • Outflows are often linked to mergers and acquisitions.

Historical Context of FDI:

  • Traditional trends showed FDI following trade, but modern factors allow for the reverse.

FDI Strategies:

  • Different forms of FDI:

    • Greenfield Investment: Establishing new facilities.

    • Cross-Border Acquisitions: Purchasing existing businesses abroad.

Monopolistic Advantage Theory:

  • FDI by firms in non-competitive industries will leverage proprietary advantages.

  • Examples: Technology-intensive industries like smartphones and aircraft manufacturing.

Strategic Behavior Theory:

  • Firms in oligopolistic sectors imitate each other's investments to mitigate competitive disparities.

Internalization Theory:

  • Firms seek higher returns by controlling proprietary information rather than licensing it out.

Dynamic Capabilities Theory:

  • Success in international investments relies on continuous capability development and adaptation.

Eclectic Theory of International Production:

  • Widely recognized theory indicating three necessary advantages: Ownership, Location, and Internalization.

Welfare Effects of Tariffs

  • Welfare Effects Analysis:

    • Various graphs illustrating the market dynamics with and without tariffs on products like pens.

    • Consumer surplus and producer surplus affected by tariff imposition.

Tariff Effects on Trade Dynamics:

  • Tariffs can generate significant revenue while simultaneously causing deadweight loss, impacting consumer surplus negatively.

Discussion Activity:

  • Exploration of whether higher tariffs are a prudent strategy to address federal debt and alternative methods.

Arguments for Trade Restrictions

  1. Job Protection: Trade restrictions are controversial as they can protect certain industries but lead to wider job losses across sectors.

  2. Protection Against Cheap Labor: Competing against lower-wage foreign labor requires understanding the correlation between efficiency and production costs.

  3. Level Playing Field: Advocates for import restrictions often argue for fairness against foreign competitors benefiting from different regulations.

  4. Domestic Standard of Living Maintenance: Tariffs aimed at preserving income may inadvertently lower overall global welfare.

  5. Infant Industry Argument: Temporary protection for emerging industries poses challenges for long-term sustainability without continued support.

Impact of Tariffs on Employment

  • Trade policies can have immediate benefits for specific sectors but broader economic complications ensue.