Forerunner of the free trade movement defeats

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Forerunner of the free trade movement. Defeats mercantilism, at least intellectually. When one nation is absolutely inferior than another, the theory is unable to provide any advice. When there are many nations, it may be difficult to find an absolute advantage. Comparative advantage (Ricardo, 1817; Heckscher, 1919; Ohlin, 1933) Nations should specialize in economic activities in which they have a comparative advantage and trade with others. Even if one nation is absolutely inferior to another, the two nations can still gainfully trade. Factor endowments underpin comparative advantage. More realistic guidance to nations (and their firms) interested in trade but having no absolute advantage. Explains patterns of trade based on factor endowments. Relatively static, assuming that comparative advantage and factor endowments do not change over time. Modern theories Product life cycle (Vernon, 1966) Comparative advantage first resides in the lead innovation nation, which exports to other nations. Production migrates to other advanced nations and then developing nations in different product life cycle stages. First theory to incorporate dynamic changes in patterns of trade. More realistic with trade in industrial products in the 20th century. The United States may not always be the lead innovation nation. Many new products are now launched simultaneously around the world. Strategic trade (Brander, Spencer, Strategic intervention by governments may More realistic and positively Ideological resistance from
Krugman, 1980s) help domestic firms reap first-mover advantages in certain industries. First-mover firms, aided by governments, may have better odds at winning internationally. incorporates the role of governments in trade. Provides direct policy advice. many “free trade” scholars and policy makers. Invites all kinds of industries to claim they are strategic. National competitive advantage of industries (Porter, 1990) Competitive advantage of different industries in different nations depends on the four interacting aspects of a “diamond.” The “diamond” consists of (1) factor endowmen ts, (2) domestic demand, (3) firm strategy, structure, and rivalry, and (4) related and supporting industries. Most recent, most complex, and most realistic among various theories. As a multilevel theory, it directly connects firms, industries, and nations. Has not been comprehensively tested. Overseas (not only domestic) demand may stimulate the competitiveness of certain industries. TARIFF BARRIERS tariff barrier – trade barrier that relies on tariffs to discourage imports Who has to pay the tax? The consumer!!! The only penalty of import tariffs is that the consumers have to pay higher prices import tariff – a tax imposed on imports deadweight cost – net losses that occur in an economy as a result of tariffs Tarriffs cause net losses by making the market inefficient NONTARIFF BARRIERS (NTBs) nontariff barrier (NTB) – trade barriers that rely on nontariff means to discourage imports TYPES OF NONTARIFF BARRIERS

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