International Trade Chapter 1 PDF

279780170407014 Chapter 1 \| International trade Porter developed four broad criteria for a nation to achieve competitive advantage of its industries. These are illustrated in Porter's Diamond of National Advantage, shown in Figure 1.17. Factor conditions: the nation must have an advantage in...

279780170407014 Chapter 1 \| International trade Porter developed four broad criteria for a nation to achieve competitive advantage of its industries. These are illustrated in Porter's Diamond of National Advantage, shown in Figure 1.17. Factor conditions: the nation must have an advantage in factors of production; for example, skilled labour or infrastructure. Porter argues that nations need not be well endowed with the factors; they can be created through investment for infrastructure and highly specialised training of the workforce. Demand conditions: the nation can benefit from having a clear view of consumer demand by first developing a domestic market to help anticipate international market needs. Related and supporting industries: a nation can gain an advantage by having efficient and internationally competitive supplier industries. Firm strategy, structure and rivalry: conditions governing company creation, organisation and management, and domestic rivalry need to be disciplined, flexible and supportive of innovation. FIGURE 1.17 Porter's Diamond -- determinants of national competitive advantage Circumstances in one country may be different from, yet just as effective as, those of another country seeking competitive advantage, as long as the four conditions in the diamond complement each other. Trade offers nations the opportunity to share the world's resources and provides access to resources that might otherwise not be available. International trade theory is concerned not only with the efficient use of resources within nations, but also with efficient resource allocation in the world as a whole. If nations try to be completely self-sufficient, the potential gains from production are not maximised. There are always opportunity costs associated with attempts to maintain self-sufficiency. If all nations in the world were to specialise, overall global output would increase as a result of a more efficient use of resources. In the real world, nations tend, for varying reasons, to cling to self-sufficiency. Specialisation requires that nations become dependent upon each other for the provision of essential goods and services. It is this fear of dependence that often generates criticism of international trade theory. Firm strategy, structure and rivalry Related and supporting industries Demand conditions Factor conditions 28Economics for the Real World \| Units 3 & 4 9780170407014 1.6.4 Intra-industry and intra-company trade Intra-industr y trade: trade that occurs when a nation imports and exports the same good simultaneously Transfer price: the price charged for goods by one subsidiary of a multinational corporation to another subsidiary of the same company in another country CONCEPTS Other economists have suggested that the theories already described do not allow for intra- industry and intra-company trade. Intra-industry trade occurs when a nation imports and exports the same good simultaneously. This may be explained by such factors as seasonal variations in climate ( for example, Australia imports strawberries from New Zealand during the Australian summer) and differentiated products ( for example, Australia imports wine from France and Germany, while exporting wine to New Zealand at the same time). While intra-industry trade allows consumers to have a wider choice of products available, it results in the loss of economies of scale associated with specialisation. Nearly all intra-industry trade occurs between economically advanced countries, which are able to afford the additional costs associated with variety of product. Some 35 per cent of world trade in manufacturing is carried out within companies. Intra- company trade occurs between the affiliates of the one organisation; for example, between a home-based subsidiary and a foreign-based subsidiary of the same company. In this situation, the importer and the exporter are essentially the same company. This often happens when there is vertical integration within the company. For example, a company may mine coal in one country and use it in steel mills in another country, or manufacture sports shoes in one country and retail them in another. The difficulty with this is the use of transfer pricing. The transfer price is the price charged by one subsidiary of a multinational corporation on the sales to another subsidiary of the same company in another country. Such prices are often calculated to reduce company tax, by making paper profits as high as possible in countries with low taxation, and small profits in countries with higher taxation. When this happens, a country loses taxation revenue, shareholders (if any) lose profits in that country, and terms of trade and balance of payments are affected How would the principle of competitive advantage apply to Australia? 2 Why does most intra-industry trade occur between nations that are economically advanced? 3 How does intra-company trade interfere with other theories of trade?