International Trade Overview

International Trade

• Importance: International trade allows countries to specialize in producing goods where they have a competitive advantage, boosting efficiency and productivity, driving economic growth, and providing consumers with a wider variety of products. It also generates revenue for governments.
• Exports vs. Imports: Exports are goods produced domestically and sold abroad, while imports are foreign-made goods sold domestically. The difference (exports – imports) determines a country’s trade balance (surplus or deficit).
• USMCA (United States-Mexico-Canada Agreement): Replaced NAFTA, signed in 2018 and came into effect in 2020. It gives the US access to the Canadian dairy market without dismantling supply management and provides tariff-free access to 4% of the market. Also includes provisions for car and truck manufacturing & protection of Mexican workers.
• US-China Trade War: The US and China are engaged in a trade war, originating from China's alleged violation of WTO rules (forcing US companies to relinquish intellectual property) and imposition of high tariffs.

USMCA Provisions

• Dairy Market Access: USMCA allows greater US access to the Canadian dairy market, but maintains the current supply management system.
• Tariffs (Autos): Zero tariffs apply to cars and trucks with at least 75% of parts from the US, Canada, or Mexico, with 30% of the work performed by workers earning at least $16 USD/hour.
• Mexican Workers' Rights: The agreement protects Mexican workers' rights, including the right to unionize.
• Non-Market Economy Clause: Rules exist for the negotiation of trade deals with countries that are considered non-market economies. This allows for review of proposed deals.

China and the US

• Intellectual Property Theft: The US accuses China of intellectual property theft, forcing some US companies to have Chinese partners.
• Market Access: US companies face restrictions in accessing the Chinese market.
• US Protectionist Measures: Despite claiming an emphasis on US manufacturing and technology, the US hasn't removed tariffs or significantly softened its stance on bringing manufacturing back.
• Chips Act (2022): The Chips Act aims to boost US semiconductor manufacturing and restrict investments in certain countries, including China.

Thucydides Trap

• Relationship between Rising and Established Powers: Analysis by Graham Allison demonstrates a historical correlation between rising and established powers frequently leading to military conflict.

Governance of International Trade

• National Governments: Responsible for domestic trade policies, monitoring imports/exports, and implementing protectionist measures.
• Transnational Institutions: Involved in international trade, like the WTO, World Bank, and IMF.
• Protectionism: Measures taken to restrict trade, often justified by national interests – such as national security, protecting domestic industries, and consumer safety. Examples include tariffs, quotas, voluntary export restraints, product standards, investment restrictions, and intellectual property laws.

Protectionist measures

• Tariffs: Taxes on imported products (ad valorem, specific, or compounded)
• Quotas: Quantitative limits on imports.
• VERs (Voluntary Export Restraints): Self-imposed export limits by one country.
• Quality Standards: Imposed on foreign goods to protect health and safety of citizens
• IP Protection: Disincentivizing imports by lack of IP protections.
• Investment Restrictions: Restricting foreign ownership in some sectors.

Exchange Controls and Distribution

• Exchange Controls: Limiting foreign currency purchases by importers to impede transactions with exporters.
• Restricted Access: Governments might prevent foreign firms from accessing normal distribution channels. An example is Japan's Keiretsu distribution system.

Product Standards

• Product Standards: Governments enforce quality and testing standards on foreign goods.

Arguments for Protectionism

• Infant Industry Argument: Protecting new domestic industries to allow them to develop and compete against established foreign competitors.
• Employment Argument: Protecting domestic industries to maintain employment levels.
• National Security Argument: Restricting trade based on national security concerns.

Arguments for Free Trade

• Comparative Advantage: Specialization in products with a comparative advantage benefits all trading countries.
• Positive-Sum Game: Trade benefits all participating countries.

Trade Theories - Heckscher-Ohlin

• Factor Endowment: Countries export products using abundant factors of production and import those using scarce factors.
• Factor Intensities: Products require different factor intensitiies.

Product Life Cycle (Vernon)

• Stages: Products transition from being produced solely in developed countries to being produced in developing countries.

Trade Organizations

• WTO: Successor to GATT, promotes international trade by setting rules and settling disputes.
• World Bank: Aids countries recovering from war or natural disasters by improving economic and trade infrastructure.
• IMF: Maintains global monetary stability through policy advice and financing for countries experiencing financial / economic hardship

Economic Environment

• Uncontrollable Variables: Factors like interest rates, exchange rates, and inflation impact a country's market and attractiveness to investors.
• Market Selection, Strategy, and Resource Allocation: Firms must consider these economic factors when choosing target markets, formulating local marketing plans and allocating resources.

Factors to Examine

• Market Size: Population size influences demand for imported products.
• Income Levels: Purchasing power (GNI) is key to evaluating market potential for various goods/services. Income distribution is important.
• Exchange Rates: Stronger/weaker currencies affect import demand and export prices.
• Inflation: High inflation reduces purchasing power and impacts market attractiveness.

BOP Marketing

• Bottom of the Pyramid (BOP) Markets: Marketing to low-income consumers, recognizing their combined purchasing power.
• Counterarguments: Concerns about the accuracy of market size estimates and the challenges in reaching and satisfying these market segments' needs.

Economic Crises

• Great Recession and COVID-19: Both highlighted the impacts of international economic interdependence and challenged firms' strategies worldwide.

Economic Integration

• Forms: Examples include free trade areas, customs unions, common markets, and economic unions.
• Benefits: Trade creation, greater consensus, and political cooperation.
• Disadvantages: Trade diversion, loss of national sovereignty, and potential relocation of production to lower-cost regions within the integrated bloc.