International Trade Structure

This chapter of the book explores the topic of international trade structure. After the introduction, section 2 considers the arguments for trade and the arguments for restricting trade. We learn the following advantages of trade: increased competition, decreasing costs, and export led growth. The following section delineates the development of international trade theory over the last 240 years. We begin by looking at the classical trade theories starting with the mercantilism theory which states that a country’s wealth is determined by the amount of gold and silver it holds. This is then followed by Adam Smith’s theory of absolute advantage.  It highlighted the ability of one country to produce a good more efficiently than another. This theory gave way to the theory of comparative advantage developed by Ricardo. Comparative advantage stipulates that where some countries may be better than others at producing more than one good and, therefore, have a comparative advantage in many industries. In contrast, some countries may not have any useful absolute advantages. The final of the classical theories is the Heckscher-Ohlin theory of international trade. Their theory stated that countries would produce and export goods that required resources or factors that were in great supply and, therefore, had cheaper production factors.

Following this is an examination of firm-based trade theories. This covers: country similarity theory, product life cycle theory, global strategic rivalry theory and national competitive advantage theory. Section 4.0 studies Foreign Direct Investment (FDI) theories. We found out that the earliest models suggested that available interest rates on capital were the prime determining factors, where firms invested in foreign countries simply to obtain higher returns than were possible at home. It is in this section that we learn about the gravity model which is a model used to explain bilateral flows of FDI between tow countries mainly based. Other notable theories include the internalization theory where subsidiary outputs are used as inputs in another arm of the multinational corporation, or where technologies are shared, and the OLI/Eclectic paradigm which can be used to anticipate the production undertaken by MNE's and financed by FDI.  Section 5 delves into the international trade restrictions. Free trade agreements are also explored in this section. The following section looks at preferential trading. The last section focuses on the European Union by examining the political and economic project and Its troubles (fiscal, monetary and trade), and the European Economic and Monetary Union (EMU).


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