PERSPECTIVES ON INTERNATIONAL TRADE

1. PERSPECTIVES ON INTERNATIONAL TRADE BA 447 Day 4

2. Plan • Theory of comparative advantage • Ch 4: The Great Sorting Out • Ch 5: America and Free Trade

3. Related Concepts/Theories • Theory of comparative advantage • Tariff and non-tariff barriers

4. Theory of comparative advantage • Simply stated: two countries are ahead in terms of providing for the common good, if • Each country produces a product where it has comparative advantage, i.e. land, skills, etc. • Uses the revenues to purchase other products • Factors of production have changed • Labor costs and skill • Transportation costs • Communication and reduction of lead times

5. Tariff and non-tariff barriers • Tariff duties are levied on incoming products, has the effect of increasing cost • Non-tariff barriers come in different forms; the intent is to protect local production • Related issues • WTO • Relative influence of industry groups in each country • Political stability: impact on cost of doing business

6. Chapter 4 • The dynamics between national boundaries and international trade • National identity of a corporation • Changing roles of the individual • Buyer • Employee • Powell and his aide

7. Chapter 4 • National boundaries are less important • Reduction in tariffs (WTO) • Production or processing cost advantage make-up for transportation cost • Reductions in transport cost • Open boundaries and greater education • Difference in living standards, aspirations • In countries where skills can be developed and in industries where labor cost are important, there can be an advantage

8. Assume we all consume burgers and shakes

9. Comparative Advantage • Total Price = • production cost + • transportation cost + • processing cost + • producer and processor profit + • tariffs where applicable • Exchange rates – • parity and predictability • potential source of profits if managed properly

10. Comparative Advantage - continued • Everyone has access to cheap burgers and milk • Barriers may exist to protect local industries: • Tariffs • Non-tariff barriers • Jobs are secured for the time being • Prices known mostly to those in trade • Equilibrium occurs when supply = demand, i.e. given employment levels in each country, salaries translate to propensity to buy, supply and demand relationships, etc.

11. Return to Ch 4 • With “flatteners”, comparative advantage of low labor cost is accentuated because knowledge is easily transferable. • Assumes • Adequate labor pool • Infrastructure • Cooperative government • Active participation of private sector. • Multi-nationals • Entrepreneurs

12. Chapter 4 • The world as one “market” • Search for ideal locations to produce goods and services for different national markets • NIKE produces shoes in China for southeast asian markets • Movement of factories a combination of numerous factors already mentioned, e.g. labor costs, taxes and tariffs, etc. Also consider • Proximity to markets • Aging of physical plants

13. Chapter 4 • Nationalities of multinationals blur: • Rolls Royce • IBM/Lenovo • Daimler Chrysler • Competition becomes global • Adidas has Europe, NIKE has US in types of shoes • GM and Holden • Yahoo and Alibaba (China) • http://www.technewsworld.com/story/45394.html • Emergence of new players, new transactions • Tata of India doing business in Indiana • CNOOC’s attempt to acquire UNOCAL

14. Ch 4 • Implies loss of jobs • Who is exploiting whom? • Company with Indian workers looking for opportunities in Indiana, or Indiana exploiting cheap labor??? • Issues surrounding ownership • Property rights • Loss or reduction of services or functions • Tellers started to go much earlier • Sales persons • Help desk personnel

15. Additional Perspectives on International Trade • To pursue “global strategy” managing components and assemblies provide ability to take advantage of location economies • Trade in tasks, not final products (see Economist article) • First unbundling was when one country did not have to produce wine for its citizens to consume wine • Second unbundling, production is broken up (the article uses the term “spliced”) into tasks that can be spread around the world • This is what makes it hard to define “safe jobs:” it is now difficult to predict what class of tasks can not be offshored

16. Chapter 5 • Benefits of offshoring to a US company? • Retain competitiveness in US and foreign markets • Flexibility • Differentiation • Long-term survival • Benefits/harm to society? • Cheaper goods • Lost jobs • Foreign exchange

17. Offshoring: general comments • Does it result in net loss of jobs? • Claim: 3.3m jobs lost to outsourcing, over several years • Jobs may also be created in the sense of company remaining competitive, other jobs becoming more practical • Jobs may also be lost because of productivity improvements, e.g. reengineering, rightsizing • Scale: there are 150 million jobs in US economy and it creates a couple million jobs a month

18. Economic perspective on offshoring • Does it really help? • http://www.businessweek.com/magazine/content/07_25/b4039010.htm

19. International Trade before the 1900s • Trade in ancient times – spice, silk • The History of the World in Six Glasses • Trade in beer and wine • Trade in coffee and tea • The galleon trade

20. Industries on the move • Since the 1960s, industries have searched for ideal production sites. Considerations: • Production or processing cost • Transportation and proximity to markets • Tariff or tax advantages • Political regime, including “friendly” laws, for example pollution controls, and their impact on costs • Examples: steel and iron, automobiles, appliances, semi-conductors, software, etc. • What has been the contribution of the “web-enabled playing field” to this process?

21. Offshoring: China perspective • Think of this as part of a process of understanding how trade emerges and additional insights on the trade relationship between the US and China • Film on Wal-Mart (PBS, Frontline)

22. Comments on film • Premise behind opening of US-China relationship – market for US goods. • Reality is a bit more complex: • Disparity in incomes between the two countries • Profit opportunities for industries with few players – the retail industry is not an example of perfect competition • Chinese markets could be served by production from within China and neighboring countries, with participation of US companies • Foreign exchange regimes in both countries • Comparative advantage evolves over time • Other comments?

23. In-class • Friedman: countries like China will (eventually) consume US products if they have not already doing so. • Wal-Mart film: the Clinton administration assumed that China would provide a market for US produced goods. However because the disparity of income, the US ended up to be a net importer of Chinese-made goods. • Resolve