Chapter 6 - Chapter 6: International Trade and Investment...

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Chapter 6: International Trade and Investment Caterpillar (CAT) Case -heavy earthmoving and construction equipment, manufactures engines and material handling equipments with 30% share global market -48% of 85,000 employees work outside USA -two comparative advantage that enables it to dominate international market: 1. Quality: CAT as tough, reliable products. 2. Network: 182 dealers worldwide that sell CAT products. -CAT in IB: 1. Exporter of equipment 2. Importer: purchases parts from all over the world suppliers 3. Borrows short and long term capital from investors and banks internationally 4. International licensing of technology: purchase of right to use innovative technology developed by foreigners and selling its use of own technology to foreigners. 5. Franchise: right to sell equipments to 59 US dealers and 123 foreigners. -CAT’s rival Komatsu undercut CAT in terms of prices and took market share by 11%. International Trade and World Economy -Trade: voluntary exchange of goods, services, assets, or money between one person or organization and another. Both parties must feel that they gain or transaction will not be complete. -International trade: between residents of two countries. Why does International trade occur? –both parties to transaction are residents in two different countries believe that they benefit from voluntary exchange. World Trade: exports increase economic activity in domestic economy and imports pressure domestic suppliers to cut prices and improve competitiveness. Failure to respond to foreign competition leads to closed factories and unemployment. World trade has increased since end of WWII. Classical Country Based – Trade Theories Mercantilism – country’s wealth is measured by its holdings of gold and silver (commodities). 1. Country’s goal should be to increase holdings by promoting exports and discouraging imports. 2. Foreigners buy more goods from you than you buy from them, you amass more treasure. 3. “Unfavourable” balance of trade = Exports – Imports < 1. 4. Mercantilism trade policies: imposing tariffs and quotas in order to protect domestic producers from foreign competition. 5. Government subsidies of exports in different industries are paid by taxpayers in form of higher taxes. 6. Mercantilism does not benefit all members of society, sometimes called noemercantilists or protectionists. Absolute Advantage – Adam Smith; mercantilism confuses acquisition of treasure with wealth.
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1. Mercantilism weakens a country by robbing people from trading freely and to benefit from voluntary exchange. 2. Mercantilism avoids imports at all costs, so a country must produce goods it is not suited to produce. Inefficiency reduces a country’s wealth although benefit certain groups. 3.
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Chapter 6 - Chapter 6: International Trade and Investment...

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