Free Essay. International Trade Theories

Trading is facilitated by exchanging products between two parties. Therefore, international trade involves exchanging products between entities in different countries. Trade promotes the growth of a nation's economy through imports and exports. Over the years, economists have come up with theories for explaining international trade. Historical theories are referred to as classical theories. The classical theory is country-based. By the mid-twentieth century, theories were developed to explain international trade from a firm-based perspective rather than the country's perspective. The theories that explain international trade from the perspective of firms are referred to as modern theories. The paper provides an analysis of international trade theories literature.

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Classical Theories

The Mercantilism

This theory formulated in the 1600s become one of the first efforts of developing and economic-based theory. Mercantilism theory state that a country's wealth is dependent on the number of silver and gold it has. According to the theory, nations are required to increase their silver and gold holdings through discouraging imports and encouraging exports (Sen, 2010). Every country ensured that their trade was in surplus or exports were more than the imports to avoid trade deficit. The trade deficit was paid in terms of silver or gold. The mercantilism theory flourished between the 1500s and 1800s. During the period, the rulers had an objective building national institutions and larger armies through an increase in trade and export. During the period, rulers amassed more wealth and gold for their nations.

Absolute Advantage

Adam Smith, in 1776 questioned the mercantile theory. Smith came up with a new theory that focused on a nation's ability to produce a product quickly than another country. Smith argued that government interventions should not regulate trade between nations. According to Smith, trade should be driven by market forces. If nation A can produce specific goods more efficiently and cheaper than nation B, nation A should major in producing such goods (Sen, 2010). Specialization allows the labor force to become skilled, leading to efficiency in production. Production becomes efficient due to the availability of incentives for creating better and faster production methods. Smith argued that the wealth of a country should not be quoted in terms of the amount of silver and gold they have but the peoples’ living standards.

Comparative Advantage

David Ricardo came up with a comparative advantage to address the issue of absolute advantage. With the absolute advantage, some nations can be good in the production of both goods. This condition makes the nation have an advantage in several areas, making the other nation not benefit (Murphy, 2013). Ricardo introduced the theory in 1817. David stated that even where a nation has absolute advantage of manufacturing and production of both production, trade, and specialization can still exist between the two nations. The comparative advantage comes about if a country is incapable of producing specific products better than the trading partner; however, the nation can produce those goods and services than any other product.

Heckscher-Ohlin Theory

Ricardo and Adam Smith's theories failed to explain which products can give a nation an advantage. Ricardo and Smiths' theory assumed that open and free markets would lead producers and countries to establish which product they can produce better. Bertil Ohlin and Eli Hechschter focused on how nations can gain a competitive advantage through products that use factors that are abundant in their country (Sen, 2010). The theory was based on capital, land, and labor that provides funds for equipment and plant investments. The duo established that the resources are a function of demand and supply.

Modern Trade Theories

Country Similarity

In 1961, Steffan Linder, a Swedish economist, developed the similarity theory. The theory aimed to elaborate on intra-industry trade concepts. Steffan argues that nations are in the same development stage have the same preferences. Steffan further argued that companies first produce for domestic consumption. When companies explore the international market, they realize that the markets are similar to the domestic market in consumer preference (Murphy, 2013). The condition makes it possible for them to succeed in those markets. Therefore, Steffan argued that countries that trade on manufactured goods have the same per capita income. This, thus, results in common intra-industry trade.

Product Lifecycle

Raymond developed this theory in the 1960s. The theory originates from marketing, where it states that a product has three stages in its lifecycle. The stages include; new product, maturing, and standardized stage (Murphy, 2013). The theory of product lifecycle argues that the production of a new product occurs in its home country. The theory explained the success of the US in manufacturing during the 1960s. The US-dominated manufacturing after the end of World war. The approach has ineffectively explained the current world trade patterns. The current trade patterns have manufacturing and innovation occurring across the world. The theory was further used to explain the PC product lifecycle.

Global Strategic Rivalry

The theory was created in the 1980s by Kelvin and Krugman Paul. The theory focused on MNCs' intentions of gaining competitiveness in the global market. The MNCs faced rivalry from global firms. The duo stated that the firm would face competition from global competitors (Lam, 2015). The firms should develop a competitive advantage to ensure they gain a larger customer base. Firms create market conditions that act as barriers to entry in a market. There are various barriers to entry that most companies aim at optimizing. They include; R&D, IP, control to access to raw materials, and unique business methods.

National Competitive Advantage

In 1990, Porter developed the national competitive theory. Michael argued that a country's competitive ability depends on the industry's capacity to upgrade and innovate. The objective of Michael developing the theory was to explain the reason why some nations are competitive in some industries. Porter had four determinants that he linked to explain his theory (Lam, 2015). The determinants included the local market's demand condition, local market capabilities, resources, characteristics of a local firm, and local complementary industries and suppliers. Porter further noted that the government has an impact on the industry's national competitiveness. The policies of the government can improve competitiveness in the market.

In conclusion, the trade theories have evolved from old doctrines to NTT. Evolution has seen various economists trying to explain what facilitates international trade. The theories help firms, economists, and governments to understand international trade. Management, promotion, and regulatory measures have been implemented through the understanding of international trade theories. Trade theories are likely to continue evolving due to the changing international market conditions. There are various factors that affect the international market, therefore, demanding a better explanation. The theories that are to be developed should address the limitations of the current theories.

References

Lam, T. D. (2015). A Review of Modern International Trade Theories. American Journal of Economics, Finance and Management, 1(6), 604-614.

Murphy, E. (2013). The evolution of trade theory: an exercise in the construction of surrogate or substitute worlds? (Doctoral dissertation, SOAS, University of London).

Sen, S. (2010). International trade theory and policy: a review of the literature.