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Instructions

Recently, there has been much criticism about the Trans-Pacific Partnership free trade agreement. Discuss three issues that may seem questionable in relation to the agreement. Given that eight other nations have already signed their participation, would you recommend to the U.S. Senate that it should be ratified?

Your journal entry must be at least 200 words. No references or citations are necessary.

MBA 6601, International Business 1

Course Learning Outcomes for Unit III

Upon completion of this unit, students should be able to:

3. Evaluate policies and factors affecting international trade patterns.

4. Distinguish between absolute advantage and comparative advantage trade theories.

5. Explore the influence of regional trading groups on an organization.

Reading Assignment

In order to access the following resource(s), click the link(s) below:

Burnson, P. (2016). Shape up or ship not. Logistics Management, 55(1), 40–43. Retrieved from

https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direct
=true&db=bth&AN=112308215&site=ehost-live&scope=site

Dwyer, R. (2015). TPP to the rescue. Euromoney, 46(559), 73–76. Retrieved from

https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direct
=true&db=bth&AN=110602247&site=ehost-live&scope=site

Knowler, G. (2015). The good, bad and ugly of the TPP. The Journal of Commerce, 16(22), 36.Retrieved from

https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direct
=true&db=bth&AN=110580564&site=ehost-live&scope=site

Lim, W. L. and Xavier, S. R., (2015). Opportunity recognition framework: Exploring the technology

entrepreneurs. American Journal of Economics. 52(2), 105-111.

Click here to view the Unit III Presentation. Click here to access a PDF slide view and transcript of the
presentation.

Unit Lesson

Searching for a Trade Theory

We all know that some international trade is beneficial. For example, Greenland does not grow bananas, and
should it want any, it would have to purchase them from a country that does grow them for export such as
Costa Rica or Honduras. The benefits of trade are not limited to tangible goods. International migration and
international borrowing and lending are also forms of trade. While nations may gain from international trade,
some groups within these nations may be economically hurt. For example, the money spent for bananas in
Greenland would not be spent to buy fish from the country’s fishermen. The Greenland fishing industry would
have less income unless they found an export market, say, to Costa Rica or Honduras.

Since we know that international trade can be beneficial to some constituents and harmful to others, politicians
are looking to implement trade policies that benefit their country. Consequently, international economists study
the patterns of trade to help explain how trade policies can manipulate the different variables to achieve
maximum economic advantage. Multiple theories have emerged to help explain who sells what to whom.
Some aspects of trade are easy to understand, such as Greenland buying bananas from Costa Rica. Climate
and resource availability clearly explain why certain countries can or cannot produce certain products. Brazil
exports coffee, and Saudi Arabia exports oil. Trade theories also take into account other variables like capital,
labor, land, and technical expertise into understanding and predicting trade policies.

UNIT III STUDY GUIDE

Trade Theories and Trading Institutions

https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=112308215&site=ehost-live&scope=site

https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=110602247&site=ehost-live&scope=site

https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=110580564&site=ehost-live&scope=site

http://article.sapub.org/10.5923.c.economics.201501.10.html#:~:text=Opportunity%20Recognition%20Framework%3A%20Exploring%20the%20Technology%20Entrepreneurs%201,of%20Framework%20to%20Entrepreneurship.%20…%20More%20items…%20

https://online.columbiasouthern.edu/bbcswebdav/xid-78536288_1

https://online.columbiasouthern.edu/bbcswebdav/xid-78536295_1

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Classical Theories That Help Explain Why Countries Trade

The gravity model: This is a very simple theory with some credibility. Countries with large economies trade
with other countries with large economies. For example, the top four U.S. trade partners are Canada, Mexico,
China, and Japan. One reason is that other large economies seek out countries that have trading infrastructure
in place and that produce a large variety of products not found in the other

countries.

Country similarity: This is a theory that compliments the gravity model. Companies create new products in
response to market conditions in their home countries. They then turn to markets they see as most similar to
what they are accustomed. That may explain why Canada is the largest trading partner of the United States.

Absolute advantage: In this theory, some countries produce some goods more efficiently than other countries
because of climate and resource availability. Advantages separate into two categories: natural (climate and
location) and acquired advantages. We are familiar with natural advantage. Acquired advantage infers that a
country has incentivized firms to develop sophisticated technologies that yield valuable products and services.
An example would be a country rich in computer technology, such as the United States or India. In either
natural or acquired advantage, the bottom line is that a country has achieved the lowest cost to produce a
product. Earlier, we mentioned that Saudi Arabia produces oil. Because the Saudis have so much oil, and their
oil is easy to get to, their breakeven cost is, at this time, less than $30 per barrel—lower than almost any other
country in the world. The United States is also rich in oil if you include the shale oil formations in the Northwest.
However, the U.S. breakeven costs run from around $50 to $75 (Tverberg, 2016). Saudi Arabia has the
absolute advantage in oil production.

The Ricardian model (aka the comparative advantage): This theory works if a country has a lower
opportunity cost of producing a product than other countries (Holden, 2008). Each country has limited
resources, so if they devote their resources to producing one product, they are foregoing the production of
other products. The opportunity cost is what the country gives up when it produces a product. If it is less than
what another country gives up to make a product, the first country has a comparative advantage. (Please see
the Unit III Presentation for more examples.)

The Heckscher-Ohlin model (aka the factor proportions theory): This theory builds on the Ricardian theory
by predicting that countries will export products that use their abundant and cheap factors of production and
import products that use the countries’ scarce factors. The theory emphasizes the interplay between the
proportions in which different factors of production are available in different countries and the proportions in
which they produce different goods.

The standard trade model: While very complex because of supply and demand factors in other countries as
well as the host country, a basic explanation is that a country maximizes its well-being if it can sell exports for
more money than they cost to produce or buy imports for less than it would cost to produce them. The key
process is supply and demand for the products, as well as the factors of production as the price of goods on
the world stage is a determinate in the marginal cost (Krugman & Obstfeld, 2008).

A Contemporary Theory That Helps Explain How Nations Enhance Competitive Advantage

Porter’s diamond of national competitive advantage: While economists look for reasons to explain how
international trade works, politicians look for ways to improve economic performance. The diamond theory
works on four features as being relevant in determining how to structure your country’s trade policy.

 Demand conditions: Demand usually starts in the host country and continues to grow into other similar

countries.

 Factor conditions: The factors of production have to be readily available at affordable prices.

 Related and supportive industries: Logistics, transportation, and educational/training facilities must be
available and assessable.

 Firm strategy, structure, and rivalry: In the beginning, barriers to entry must be low, but as production
becomes stable, barriers to entry become high. Usually, there is a high capital requirement followed by
a high skill set that is difficult to copy.

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Given the plan, a nation can create new advanced factor endowments such as skilled labor, a strong
technology and knowledge base, government support, and culture to develop a strong international trading
base (Porter, 1990).

The Impact of Mobile Production Factors

The mobility of capital and people affect trade and relative competitive positions. Politicians look for ways to
maximize the economic impact of trade. Since production factors also affect trade, politicians also try to control
the economic forces that govern the movement of production factors.

People: At present rates, 24 countries estimate that they have smaller populations now than they had five
years ago. The trend seems to be getting worse with the developed countries. Compare world population
growth at 1.18% to the population growth for the United States at .75% or Germany at .06% (United Nations,
Department of Economic and Social Affairs, 2015). Lower fertility rates and an aging demographic leave fewer
people in the workforce.

GDP relates to a country’s output and standard of living. If the output is smaller, the standard of living declines.
Many of the world’s leaders recognize this problem and are proactive in their positions. U.S. President Obama
and German Chancellor Merkel are taking stands to allow large numbers of migrants into their countries.
However, while small numbers of migrants easily assimilate into standing populations, large numbers create
problems in meeting national values and acceptable levels of education.

Heads of state are quickly learning that migration is good if it is controlled, and assimilation is necessary for a
trained and educated labor force to emerge out of the chaos. Given that it takes almost a decade to change a
migrant into a productive citizen, it is obvious that the European Union, by accepting millions of migrants from
the Middle East, is planning long-term action to replenish their aging and declining workforce.

Capital: Long-term capital in the form of foreign direct investment (FDI) and short-term capital in the form of
financial transactions and bank loans are the most fluid types of mobile production factors. Investors of both
long-term and short-term capital are primarily seeking greater financial returns on their investment than they
can get domestically.

Companies invest abroad for the long term to tap markets, improve quality, and achieve lower operating costs.
Governments give foreign aid to achieve political and economic goals. Individuals send money to their families
still living in foreign countries.

Technology: To some extent, capital can replace people with the use of technology. Going further, capital can
make people more effective and productive, again with the aid of technology. Technology is the use of
specialized knowledge to manipulate production output gains.

In some cases, vendors take their technology to countries to make their factories more productive. In other
cases, technology is stolen or copied. For example, China has a colorful history of securing technology by
forcing vendors to build their factories in China, by hacking foreign governments, and by buying products for
reverse engineering (Carey, 2014). In any case, technology can offset reliance on other production factors by
substituting productivity for people and by providing expertise in materials and processes.

Government Influence on Trade

Governments can and often do alter and change trade policies to fit their political goals. Usually, the best trade
policies follow the concept of free trade. Free trade is trade without government intervention of imports or
exports. However, when the microscope is applied to see how trade is governed, free trade is difficult to
achieve. Here are some examples:

Keeping people employed: The government of China maintains a full employment policy—despite the cost.
The idea is to keep people employed and off the street, thus, keeping them from demonstrating against the
government.

Protecting selective industries: Some industries like the defense and aeronautics industries have special
needs that the government protects. In the United States, defense industry companies have heavy restrictions

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against trading on the international markets without approval from the government. Consequently, the
industries receive lucrative grants and contracts to make up for those limitations.

Protecting the environment and national culture: The recent disapproval of the Keystone XL pipeline was
mainly in response to environmental concerns. The prohibition of the sale of ivory is a direct effort to prevent
poachers from killing elephants in Africa.

Responding to other countries: Many countries may employ a tariff or a quota to restrict outside products
from interfering with domestic production. Trade theories recommend that if a country produces a product, they
should be the low-cost producer. If the low-cost producer brings that low-cost product into another country, that
country’s industry cannot compete effectively. The government will sometimes attach a tariff or a quota to that
low-cost product making the cost somewhat higher or making it unavailable. In either case, one government
takes action, and the reciprocal government takes action—one in response to the other.

Extending spheres of influence: Governments in developed countries use trade as part of their foreign aid
policy. It is common for the United States to give aid and preferential trade relations to countries that join a
political alliance or that vote a preferred way within political bodies. NATO is a direct offshoot of Western Bloc
countries forming a trading alliance at the end of World War II.

Embargoes: Embargoes and sanctions fall under Article 41 of the United Nations Charter, allowing the
Security Council a broad range of enforcement options that do not involve the use of armed force. Since 1966,
the Security Council has established 26 sanctions.

Global and Regional Trading Organizations

Governments often cooperate with each other to remove trade barriers. The two ways to look at trading groups
are by location (global or regional) or type (such as FTA or OPEC). There are numerous trading groups, and it
would be difficult to cover every group in every region, so we will cover just a few of the major groups.

The World Trade Organization (WTO) is the only international organization dealing with the global rules of
trade between nations. Its main function is to ensure that trade flows as smoothly, predictably, and freely as
possible. The World Trade Organization came into being in 1995 and has about 160 members, accounting for
about 95% of world trade. Around 25 others are negotiating membership (World Trade Organization, 2016).

The North American Free Trade Agreement (NAFTA) is a comprehensive trade agreement that sets the rules
of trade and investment between Canada, the United States, and Mexico. Created in 1994, NAFTA has
systematically eliminated most tariff and non-tariff barriers to free trade and investment between the three
countries (NAFTA, 2012).

The European Union (EU) represents not only economic and trade relations but political ties between 28
European countries. Created in 1958, the EU operates on the rule of law: Everything that it does is founded on
treaties, voluntarily and democratically agreed by all member countries (European Union, n.d.).

The Organization of the Petroleum Exporting Countries (OPEC) is a permanent, intergovernmental
organization, created in 1960, by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Nine other members later
joined the five founding members. OPEC’s objective is to coordinate and unify petroleum policies among
member countries in order to secure fair and stable prices for petroleum producers. It is worth noting that two
of the largest oil producers, the Russian Federation and the United States are not members. (Organization of
the Petroleum Exporting Countries, n.d.).

Free Trade Agreements

Free trade agreements (FTAs) have proven to be one of the best ways to open up foreign markets. In the
United States, trade agreements reduce export barriers, protect U.S. interests, and enhance the rule of law in
participating countries. The reduction of trade barriers and the creation of a more stable and transparent
trading and investment environment make it easier and cheaper for U.S. companies to export their products
and services to trading partner markets. As of January 1, 2015, the United States has 14 FTAs in force with 20
countries (International Trade Administration, n.d.).

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 Pacific FTA Partners (the TPP): The United States is negotiating a regional FTA, the Trans-Pacific
Partnership (TPP), with Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New
Zealand, Peru, Singapore, and Vietnam.

 Atlantic FTA Partners (the T-TIP): The United States and the European Union launched negotiations
on the Transatlantic Trade and Investment Partnership (T-TIP) in June 2013. (International Trade
Administration, n.d.).

References

Carey, B. (2014). Study: Foreign partners wary of technology theft in China. Retrieved from

http://www.ainonline.com/aviation-news/aerospace/2014-04-04/study-foreign-partners-wary-
technology-theft-china

European Union. (n.d.). The EU in brief. Retrieved from http://europa.eu/about-eu/basic-

information/about/index_en.htm

Holden, P. [pajholden]. (2008, August 22). Absolute and comparative advantage [Video file]. Retrieved from

https://www.youtube.com/watch?v=Pd_qs8ueIWw

International Trade Administration. (n.d.). Free trade agreements. Retrieved from http://trade.gov/fta/

Krugman, P.R., & Obstfeld, M. (2008). International economics: Theory & policy (8th ed.). Boston, MA:

Pearson.

North American Free Trade Agreement. (2012). Frequently asked questions: What Is NAFTA. Retrieved from

http://www.naftanow.org/faq_en.asp#faq-1

Organization of the Petroleum Exporting Countries. (n.d.). Brief history. Retrieved from

http://www.opec.org/opec_web/en/about_us/24.htm

Porter, M. E. (1990). The competitive advantage of nations. New York, NY: Free Press.

Tverberg, G. (2016). Why oil under $30 per barrel is a major problem. Retrieved from

https://ourfiniteworld.com/2016/01/19/why-oil-under-30-per-barrel-is-a-major-problem/

United Nations, Department of Economic and Social Affairs. (2015). World population prospects, the 2015

revision. Retrieved from http://esa.un.org/unpd/wpp/Download/Standard/Population/

United Nations Security Council. (2015). Sanctions. Retrieved from

https://www.un.org/sc/suborg/en/sanctions/information

World Trade Organization. (2016). The WTO in brief: Part 1. Retrieved from

https://www.wto.org/english/thewto_e/whatis_e/inbrief_e/inbr01_e.htm

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