Langgeng Setyono (115030213111001)
Risa Widia Ariesta (115030207121001)
International Trade in General and its Importance
Each state must relate to other countries. No country in the world that can meet their own needs. So that each country should cooperate with other countries. A state associated with other countries in various fields of social, political, cultural, and other activities included in the trading world. International trade is the exchange of goods or services from one country to another and exchange between a company with another company in another country or government and foreign companies.
Why does a country do international trade? A state of international trade because Because of differences in the costs of production between countries and Because It increases the economic welfare of each country by widening the range of goods and services available for consumption.
The materials will discussed in the chapter is Why does international trade take place and how does it affect the countries’ and businesses’ existence and viability? Does trade take place between countries or between companies? What is the importance of inter-national trade theories within the framework of a country’s competitiveness? Does international trade improve the welfare of a country’s citizens? Why do students of international business need to study international trade?
In this material is also covered various materials related to international trade. Students expected to be able to analyze whether the theory or not aplicable applied or not in international trade today.
International trade can be defined as trading done by the state or by state enterprises or other companies.
Mercantilism is an economic and cultural philosophy of the Sixteenth and seventeenth centuries, reflecting the Emergence of economies based on commerce. Mercantilism was a sight to look as much gold from international trade.
Measures taken by countries that subscribe to the theory of mercantilism is an aggressive nationalism to create the colony. This trade theory states that a country in building its economy. This trade theory stated that the government should establish economic policies that Promoted exports and discouraged imports, so that the trade surplus created should be paid for in gold and silver. Mercantilism, or “economic state building,” commonly involved governmental extensive intervention in economic life with the objective off offering the national growth of commerce and industry.
Mercantilist doctrine expressed by Jean Baptiste Colbert, known as colbertism understand the term synonym for mercantilism in France. The purpose of existence was to colbertism is the increase of the taxable wealth of the kingdom so that the monarch would have sufficient revenue to support his ambitious policies of territorial expansion and political consolidation. A second purpose of Colbert’s program was to expand industrial production with a view to Achieving self-sufficiency and a consequent reduction in necessary imports of goods and services from abroad. French exports, on the other hand, were to be Increased to the point where they exceeded imports, Thus bringing about the “favorable balance of trade” so much Desired by virtually all mercantilists. The result would be a net influx of bullion (Gold and silver).
Mercantilism resulted in the implementation of each country that adopts the competing this should lead the country to find the colonies. Countries Sought colonies as markets for their manufactures, as sources of food and raw materials, and as outlets for surplus population. The colony was to complement, rather than Compete with, the home economy. Each colonizing power was determined to reserve to itself the entire benefit of trade with its own over-seas possessions, and foreign interlopers were excluded as much as possible.
In the center of much of the expansion of European colonization has emerged mercantilism but with a different type called Cameralism. Cameralism been growing in the area of Austria and Prussia. Cameralism called for countries highly stressed people to fill the state coffers or called Camer. Encouragement was given to new industries. Immigrants particularly those having economic special capabilities were welcomed.
Critique of mercantilism that in the seventeenth century has been widespread criticism of the basic assumptions of mercantilism, there were attacks on the restrictive policies that stemmed from them. David Hume (1711-1776)-who proved that bullionism was self-defeating Because it was necessarily inflationary-and, above all, of Adam Smith (1723-1790), Whose Wealth of Nations was published in 1776. While admitting that the navigation acts had gone far to the make England mistress of the seas, Smith condemned most forms of government intervention in economic life on the ground that the free competitive market was, in the long run, a far more effective regulator.
Adam Smith and the Theory of Absolute Advantage
A state may not be able to meet goods and services to meet their own needs. Adam Smith wrote about the reasons above answers to the written word. An Inquiry into the Nature and Causes of the Wealth of Nations, roomates Appeared in 1776, Became the foundation upon which was constructed the whole subsequent tradition of English classical economics. Smith was primarily concerned with the factors that led to Increased wealth in a community and he rejected the physiocrat’s view of the preeminent position of Agriculture, recognizing the parallel contribution of the manufacturing industry. He Began his analysis by means of a sketch of a primitive society of hunters. If it costs twice the labor to kill a beaver as it does to kill a deer, one beaver would exchange for two deer. Adam Smith and the Theory of Absolute Advantage
A state may not be able to meet goods and services to meet their own needs. Adam Smith wrote about the reasons above answers to the written word. An Inquiry into the Nature and Causes of the Wealth of Nations, roomates Appeared in 1776, Became the foundation upon which was constructed the whole subsequent tradition of English classical economics. Smith was primarily concerned with the factors that led to Increased wealth in a community and he rejected the physiocrat’s view of the preeminent position of Agriculture, recognizing the parallel contribution of the manufacturing industry. He Began his analysis by means of a sketch of a primitive society of hunters. If it costs twice the labor to kill a beaver as it does to kill a deer, one beaver would exchange for two deer.
Absolute advantage is the ability of a country to produce a product cheaper than other countries. Absolute advantage (Absolute Advantage) occurs when a country can produce a good at a price which is much cheaper and / or the quality that higher when compared to any country To make it easier to understand the theory of profit-making absolute we can see in the picture below
Spain has an absolute advantage in the production of olive oil. It requires fewer man-hours (2 being less than 4) for Spain to produce 1 unit of olive oil. Italy, on the other hand, has an absolute advantage in the production of shoes. It requires fewer man hours (2 being less than 4) for Italy to produce 1 unit of shoes. Spain is obviously more efficient in the production of olive oil. It takes Italy 4 man-hours to produce 1 unit of olive oil whereas it takes Spain only 2man-hours to produce the same unit of olive oil. Italy takes twice as many man-hours to produce the same output. Italy needs 2 man-hours to produce 1 unit of shoes that takes Spain 4man-hours to produce. Spain there-fore requires 2 more man-hours than Italy to produce the same unit of shoes. The two countries are exactly opposite in relative efficiency of production.
David Ricardo and the Theory of Comparative Advantage
Comparative advantage is the ability of a country to produce a product cheaper or better than any other country. A country is said to have a comparative advantage for a product if it can produce efficiently or better than other items.
David Richardo take the logic one step further than in explaining how to exploit an advantage in the state and benefit from international trade. Ricardo had little formal education. At the early age of 14, however, he was already working in the money market. He succeeded in making a fortune on the stock exchange. In the theory of international trade Ricardo stated explicitly for the first
time the law of comparative costs. This theory of comparative advantage can best be illustrated by means of the example of two countries (Spain and Italy) producing two commodities, shoes and olive oil. If the relative cost of shoes to olive oil is the same in both countries, then no trade will take place Because there is no gain to be had by exchanging olive oil (or shoes) for shoes (or olive oil) produced abroad for that produced at home. Trade will take place where the cost differences exist.
From the figure above we can see that Italy exports 1 unit of olive oil to Spain, and imports in exchange 120/100 units of shoes. If Italy had dedicated the 80 man-hours employed in making Theories of International Trade and International Investment 75 Man hours per unit of olive oil olive oil for exports to making cloth, it would have produced only 80/90 units of shoes. Italy therefore gains from the trade by the difference ((120/100)– (80/90)) in the units of shoes. As long as Italy can exchange olive oil for shoes at a rate higher than 80/90, it will gain from the trade. If Spain exports 1 unit of shoes to Italy, it will obtain in exchange 90/80 units of olive oil. If the 100 man hours required by Spain to produce 1 unit of shoes had been devoted to the home production of olive oil, only 100/120 units of olive oil would be obtained. The gain from trade therefore is ((90/80)–(100/120)) units of olive oil. If Spain can exchange shoes for olive oil at a rate higher than 100/120, it will gain from the trade. Within the range of exchange of olive oil for shoes of 120/100 and 80/90, both countries therefore benefit.
The theory of comparative advantage survives as an important part of the theory of international trade today. Overall, comparative advantage according to Ricardo was based on what was given up or traded off in producing one product instead of the other.
The Heckscher-Ohlin (Factor Proportions) Model
The Heckscher Ohlin (H-O) model that expanded by Ricardian model that only one factor production – labor. H-O model developed by elin hecksher and bertil ohlin. H-O model incorporates a number of characteristics of production that left out the Ricardian model. Ricardian assume that only one production , labor is needed to produce goods and service. The productivity of labor is assumed to vary which implies difference in technologies between nations.
The standard H-O model expanding by number of factor from one into two, they are labor and capital that used in the production of two final goods. Capital refers to physical machine and equipment in production. Such as, machine tools, trucks, forklifts, computer, office building, office supplies, and etc. All productive capital must be owned by someone. In a capitalist country, physical capital owned by individuals or businesses. In a socialist economy, productive capital would be own by the government.
H-O model assumes that private ownership of capital. Using capital in production generates income for the owner. Thus, worker earn wages of their effort in production. The assumption of productive factor, consist of labor and capital that differing factor proportion both across and within industries. We consider that proportion of capital to labor used vary considerably. For example, steel production generate a number of expensive machines and relatively need few workers. In tomato industry, requires hundreds of workers to handpicks and collect each fruit and need few machine.
In H-O model we define the ratio of quantity of capital to quantity of labor called capital-labor ratio. we can imagine that different industry, producing different goods, have different capital – labor ratios. So that called the factor proportions model. Another characteristics of each country have different quantities or endowment of capital and labor available for use. For example in united states have well endowed with physical capital and have less its labor force. Contrast with such developed country have endowed with a large labor force and have a less physical capital.
H-O model assumes the different between countries is found in the relative endowments of factor of production. The results of the H-O model: H-O theorem predicts the pattern of trade between countries based on the character of the countries. The capital abundant country will export capital incentive goods while the labor abundant country will export labor incentive goods . the reason occur international trade caused the differences in resources endowments.
Raymond Vernon And The Product life cycle Theory Of Trade
Raymond Vernon published article ”international investment and international trade in the product life cycle” 1966 that contra about innovation need higher cost and high income consumer can pay. Now days the invention of new product, the maturing product, and standard product, each stage implying a different type of trade. According to the model in the initial stages of creation and introduction of new products to the market needs, the process is done by experts. Product cycle and product life cycle: the purpose of the following section make a distinction and clarify between product cycle and product life cycle concepts. And redefine the international product life cycle (IPLC). Raymond Vernon, try to explain the pattern of international trade between countries and the world market. The product life cycle expressed as an human biological cycle. Start from birth, development, growth, maturity, decline, demise. To be meaningful, The product life cycle concept have had conjunction with market evolution. Philip Kotler link both of product life cycle and market stages. There are four stages of the trade patterns:
1. United states exports strength
2. Foreign production starts
3. Foreign production become competitive in exports market
4. Import competition begins
Product cycle is the macro effort level to generalized trade pattern between countries based on empirical data that offers innovation and economist scale as dominant variable. Vernon’s product cycle model is production oriented and does not focus on consumer oriented-oriented on socio cultural and behavioral variables
The International product life cycle (IPLC): can be defined as market life span stages the product through in the international markets sequence, simultaneously, or as chronously. The stages are introduction, growth, maturity, decline, and extinction in international markets. When a product positioned in different international markets at the same time it will through similar life cycles stages. The life cycles stage in which a production be position is influenced by macro variables indigenous to country markets.
The differences between the product life cycle and IPLC. The first relates to rebirth in international markets of a product that is in decline in domestic market for reasons or close to extinction. The second difference is culture specific product designed for international market, offer new innovation of product life cycle that is not possible in the domestic market.
Contemporary Trade Theories
Globalization is a phenomenon that has remade the economy and trade balance of virtually every nation , reshaped almost every industry ,and touched billions of lives, often in surprising and ambiguous ways. Reminding about president bush getting the trade bill affecting economic crisis in Argentine, Uruguay and Brazil. We can imagine no nation has ever developed over the long term without trade. In the previous we have seen the factor abundance lead to comparative advantage. When the factor are abundant run inefficiently , there is little incentive to use this factor in an efficient way. For example, the logging industry in British Columbia, in Canada has experienced little innovational activity,(diversification into the recycling business) this industry is complecent and stagnant because its primary resource is available plentifully.by contrast, if factors are scarce, firms have a strong incentive to make efficient use of the available resources and be innovative.
Porter’s diamond of national advantage
Michael porter (1990) believes that standard classical theories on comparative advantage are edaquate. Based on porter theory, a nations attains a competitive advantage if its firm are competitive that can do innovation that include technical improvement to the product or production process. He proposed a model that provides conditions that had fulfilled by a firm to be competitive and succesfuly in international. These four element to entrerpreneural success :
• Factor condition : (the nation’s position in factors of production, such as infrastructure and skilled labor)
It refers to inputs used as factors production, such as labor, land, natural resources, capital, and infrastructure. Porter argues that factor of production or specialized factor are created not inherited. Porter states that lack of resources helps country become competitive. And abundant make a country waste and scarcity an innovative mindset and innovation.
• Demand conditions : sophisticated customers in home market
the sophisticated domestic market is important in producing competitiveness. It caused high quality of demand that can provide by the industry as a superior selling products. If the nation’s discriminated values spread to other country, te local firm would be competitive in global market.
• Related and supporting industries : importance of clustering
This statements mean stating that a set of strongly related and supporting industries is important for firm to be competitive includes suppliers and related industries. Usually it occurs at regional level compete with national level. Example, silicon shoes rival leather shoes in the same location. There are the advantage to locating close to rivals may be :
• Potential technology knowledge spillovers
• An association of region on the consumers with high quality product and therefore some market power.
• An association of a region on the part of applicable labor force
The disadvantages to locating close to rival are :
• Potential poaching of employees by rivals companies
• Obvious increase in competition possibly decreasing markups
Firm strategy, structure, and rivalry : conditions for organization domestic of companies, and the nature of rivalry
a. Capital markets: domestic capital markets affect the strategy of firms. Depend on, the ideology of the country choose long run outlook or short run outlook. For example, United states will tend to be more competitive in industries where investment in short term like the computer industry. In other hand switzerland prefer to long term investment like the pharmaceutical industry.
b. Individuals career choices: individuals careers base their decision in opportunity and prestige. A competitive firm have personnel hold positions that are prestigious.
Porter argues, there are vary management style among industries. Depend on the management would choose suitable style to the firm that tend to be competitive in industry.
Porter states that competition motivate to make innovation. International competition not only intense and motivate. With international competition, there are differences between companies and their environment to provide outperform by their competitors.
The diamond as a system: if the diamond element increase, so the trade increase. these element is the system and self in forcing. Domestic rival stimulate the firm provide specialized intermediate goods. Kind of self reinforcing are:
a) The presence of industry will increase the supply of specific factor (trained worker)
b) Upstream firms (supply intermediate inputs) will invest in the area. It will save transport cost, tariff, inter firm communication costs, inventories, etc
c) Downstream firm (use intermediate inputs) will also invest to this area. Because of additional saving of the type listed before.
d) Investment cycle that attracted by the good set of specific factor by upstream and downstream firm
Implications for government : government is important role in porter’s diamond model. He said that government’s proper role as a pusher and challenger. Government encourage firms to raise their aspirations and move to higher level of competitive. The action of government that influence porter’s diamond are: subsidies to the firm, tax codes , educational policies that affect to the skill level of workers. Establish method technical standard and product standard. Including environmental regulations, government’s purchase, antitrust regulation.