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/

When teaching international business courses 1999 - 2002, "International Trade Theories" was not necessarily an important section but it was something that a little bit of time was spent on - but by 2003 this topic has become less and less important since other issues in International Business have become more important (like risk and threat situations). In the time taken to teach a course - normally 3 1/2 months - there has to be some decisions about what things to focus on, and what things to skim over. In the classes of Prof. Richardson, information on "International Trade Theories" is provided for reference purposes only in 2004 and 2005.

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.

.
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.

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"
.

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.
.
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