THE 6 MAIN THEORIES OF INTERNATIONAL TRADE - CULTURE VOCABULARY - 2024

The theories of international trade have been proposed from the 16th century to the present while they have been adapted to the realities of each era.

These theories have become increasingly complex over the years, as they seek to respond to all the scenarios and problems that have arisen in the field of international trade.

The theories of international trade are born as a consequence of the need to understand the commercial relations between different countries and favor their economic growth.

Through these theories, human beings have tried to understand the reasons for trade between nations, its effects, and its various implications.

What is international trade?

International trade refers to the exchange of goods and services between different national territories. In 2010, the value of international trade reached 19 trillion US dollars (19,000,000,000,000), about 30% of the world's Gross Domestic Product.

This means that a third of the world's goods and services are traded internationally. Although this movement has existed throughout history, it has grown in importance in recent centuries.

In the seventeenth and eighteenth centuries, so-called mercantilism asserted that countries should encourage exports and avoid imports.

However, at the end of the 18th century the classical theories of international trade began: Smith with his theory of absolute advantage and Ricardo with comparative advantage, to which the theories of Heckscher-Ohlin and that of the Product life cycle.

Finally, at the end of the 20th century, many renowned economists emerged who proposed what is known as the new theory of international trade.

Main theories of inter trade

The most important precepts of each will be explained below:

Theory of mercantilism

It emerged in England in the mid-16th century. One of its main precepts had to do with the need to generate more exports than imports, and the definition of gold and silver as the most important elements of a country's economic heritage.

The mercantilist theory indicated that greater exports would generate greater wealth and, therefore, greater power in a nation.

According to this theory, what is generated from exports would allow paying for imports and, in addition, generating profits.

According to the mercantilist theory, greater exports should be generated than imports; therefore, the State played a fundamental role in restricting imports.

This limitation was carried out through economic sanctions, the generation of import monopolies, among other actions.

Theory of absolute advantage

The theory of absolute advantage was proposed by the Scottish philosopher and economist Adam Smith, who was against the application of high taxes and state restrictions.

In 1776 he published the work "The Wealth of Nations", through which he stipulated that nations should identify the productive area in which they had an absolute advantage, and specialize in it.

The concept of absolute advantage applies to that production that can be more efficient and of better quality.

Smith considered that these were the products that should be exported, and imports could include products that could be obtained in the own nation, as long as the import of these products cost less than the obtaining of these in the own country.

Theory of Comparative Advantage

David Ricardo (1772-1823) was a British economist who in 1817 postulated the theory of comparative advantage as an alternative to Smith's absolute theory.

In it, Ricardo affirmed that if a country did not have an absolute advantage in the production of any good, it should also trade in those goods for which it had a greater comparative advantage. That is, Ricardo took into account relative costs, and not absolute ones.

The example given by Ricardo was the following: in a supposed world with only two countries, Portugal and England; and in which there are two products, cloth and wine, Portugal takes 90 hours to produce a unit of cloth, and 80 hours to produce a unit of wine. England, on the other hand, takes 100 hours to produce a unit of cloth, and 120 to produce one of wine.

As we can see, Portugal has an absolute advantage in the production of both goods. Therefore, according to Smith, these countries should not trade.

However, Ricardo proposes the following: since it is cheaper for England to produce cloth than wine, and for Portugal it is cheaper to produce wine than cloth, both countries should specialize in the good for which they are most efficient.

That is, in the good in which they have a comparative advantage. Thus, international trade would grow, since England would spend 220 hours in the production of cloth, and Portugal 170 hours in the production of wine.

Factor ratio theory

The main premise of this theory, proposed in the early 1900s by the Swedish economists Eli Heckscher and Bertil Ohlin, has to do with the notion that each country will be more efficient in the production of those products whose raw material is abundant in its territory.

The factor ratio theory establishes that a nation should export those products whose production factors are abundant, and import those that use scarce productive factors in the country.

The Heckscher-Ohlin theory implies that trade is defined by the availability of productive factors in each country.

Some arguments to the contrary indicate that the statement is clearly related to the natural resources of a country, but when it comes to industrial resources, the application of the theory is less direct.

Product life cycle theory

This theory was proposed by the American economist Raymond Vernon in 1966. Vernon determines that the export and import characteristics of a product can vary during the marketing process.

Vernon determines 3 phases in the product cycle: introduction, maturity and standardization.

Introduction

A developed country has the possibility of generating an invention and offers it to its domestic market. Being a new product, its introduction to the market is gradual.

Production is located close to the target market, in order to respond quickly to demand and to receive direct feedback from consumers. At this stage, international trade does not yet exist.

Maturity

At this point it is possible to start mass production work, since the characteristics of the product have already been tested and established according to the response given by consumers.

Production incorporates more sophisticated technical elements, allowing for larger-scale manufacturing. The demand for the product can begin to be generated outside the producing country, and it begins to be exported to other developed countries.

It is possible that in this phase the developed country that generated the innovative product will promote the production of said product abroad, as long as it is economically convenient.

Standardization

In this phase the product has been commercialized, so its characteristics and the notions of how it is produced are known by commercial factors.

According to Vernon, at this time it is possible that the product in question is manufactured in developing countries.

Since the cost of production in developing countries is lower than in developed countries, at this stage developed countries could import the product in question from developing countries.

Saturation

Sales stop growing and remain stable. The competitors are larger and have gained considerable market share. Changes are likely to be made to the product to make it more attractive.

Decline

At this stage, the characteristics and process of the product are well known, and it is familiar to consumers. Sales begin to decline to the point where it is no longer economically viable to continue producing the good.

New theory of international trade

Its main promoters were James Brander, Barbara Spencer, Avinash Dixit and Paul Krugman. This notion emerged in the 1970s and proposes solutions to the flaws found in previous theories.

Among its precepts stands out the need for state intervention to solve certain problems that are generated in commercial dynamics, such as imperfect competition that exists in the market.

They also indicate that the most widespread trade worldwide is intra-industry, which arises as a consequence of an economy of scale (a scenario in which more is produced at a lower cost).

References

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