International Trade Theories

for UTSC students

please note:  International trade theories are discussed in more detail in the course ECM C62H taught by Prof.  Walid Hejazi see  http://www.utsc.utoronto.ca/~hejazi/

Below you'll see some screen captures of an old powerpoint presentation that was used to discuss "International Trade Theories".

Our Canadian government's "Dept. of Foreign Affairs" still seems to cling to the "Mercantilist Theory"

The senior trade commissioners working in the Canadian embassies and consulates are very helpful to Canadian exporters but when you ask them for advice importing from another country there is not the same level of assistance. The personal experience of some Canadian involved in international business has been that the Embassy will help them export, but not import. Embassy staff officials have said "we can't give you that information", or "our mandate is only on helping exporters". This "one-way" policy has been frustrating to some Canadians involved in international business because it means they are more "challenged" in trying to import from other countries. One of the avenues to address this is to seek hekp from the Embassy of the other country. For example, if the Canadian Embassy in South Korea will not help a Canadian find information on importing some product from South Korea, you can simply go to the office of the South Korean (ROK) Consulate in Toronto or the Korean Embassy in Ottawa and their staff will be pleased to provide assistance.

Adam Smith said - each nation should specialize in producing things it has an "absolute advantage" . The theory of "Absolute Advantage" seems to make sense in situations where the circumstances of the geographic and economic environment are relatively simple and straight forward - example: - Switzerland and watches, Canada and cereal grain.
 

A useful video explaining the difference between Comparitive Advantage and Absolute Advantage

Student Kenny K. in MGTC46 at UTSC in Feb 2011 wrote to say "I was reading about International Trade Theories on your webpage and while doing so, wanted to find a video that made more sense of the   information. I believe that the YouTube video (see left) is very effective in helping to explain absolute and comparative advantage in addition to the notes you provided" WTGR replies Thanks Kenny, I tried to find the name of this South African Professor, to "give him props", but the video has no "credits" at the end.

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In most cases, a straight-forward Absolute Advantage does not exist in the real world. Some countries may have an advantage in one commodity, and also a slight advantage in another commodity - however there is still an opportunity for them to trade.
 

Comparitive Advantage  re: red carrots?

UTSC student Shawn T. in MGTC44 in May 2010 emailed to suggest that a current situation involving farmers in the "Holland Marsh" north of Toronto may be an example of a decision that runs contrary to the "theory of Absolute Advantage" and shows how a situation can develop where the producing country has a slight Comparitive Advantage. Shawn explains In your discussion of Subsidies, there is mention about how nations should produce what they are naturally better at producing. Recently I was watching TV and an ad came on which discussed how some farmers are trying to grow foreign crops in Canada.

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Comparitive Advantage re: red carrots?

Shawn adds In the ad it mentioned Indian red carrots. I thought it was really interesting because on the one hand there is the idea that a country that grows it's own food is sustainable, but on the other hand there is trade theory that you discussed which states that countries should produce what they are naturally good at producing. Not only is Canada trying to compete where they don't have an advantage but they are investing in going against nature and create seeds that can thrive in an environment that isn't natural itself in the name of sustainability.

Shawn concludes I figured it was worth mentioning because it just seemed downright strange to me that there is such a promotion for it.

 

WTGR replies I think what you queried Shawn is a good example of how the infleunces of the Technological environment and the Social-cultural environment can result in a situation that does not fit accepted theory. Technology through advanced farming practices (chemicals to stimulate growth and technology for water irrigation)  together with new food demands created by immigrant communities, result in producers moving away from traditional products in order to satisfy the possibility of a new market.

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a YouTube video discussing the red carrots can be seen at  youtube.com/watch?v=X9AIRlEykAQ&feature=player_embedded

In 1817, David Ricardo looked at Adam Smith's theory and suggested that "there may still be global efficiency gains from trade if a country specializes in those products that it can produce more efficiently than other products - regardless of whether other countries can produce those same products even more efficiently"
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The Theory of Factor Endowments suggested you should trade in the products which you can make from the production factors and resources you naturally possess. So for Canada this means we should trade in lumber and minerals and grain since we naturally possess these resources in large quantities. Following this theory it would then make sense for Canada to import citrus fruits since our climate does not naturally give us weather to allow this food to grow without expensive greenhouses. This theory was espoused by Heckscher and Ohlin.
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The Product Life Cycle

The PLC, is taught to eveyone in first year business and marketing courses.
How is the PLC effected by International Business?
The introduction stage can be shortened due to other competitors from around the globe copying your product, the decline stage can be extended, by exporting beyond your existing markets.

The big challenges of the International Product Life Cycle these days are
 

1. dealing with a very short Introduction Stage, due to technological competitiveness
2. extending the length of the PLC through

• Market Modification
• Product Modification