International Trade Theory, Essay Example

International Trade in the Modern World

Understanding international trade is an important component of business transactions today. The economies of major world powers are based on their ability to provide services to their citizens, which increases their quality of life. Engaging in international trade supports the ability of these nations to accomplish this in addition to strengthening foreign relations with other countries due to a mutual support of these common goals. Many different international trade theories are used to help economists and businesses gain an understanding of the information that is necessary for them to conduct business successfully. It is important to understand the evolution of these theories throughout history because this dictates modern international business practices. In the modern era, companies around the world rely on multinational trade in order to be successful due to a necessary exchange of resources, skills, and labor necessary to make many of the products and services that are currently in demand. It is therefore essential to determine how international trade theory could be applied to the establishment of a modern business and to determine how trade practices will help the business become successful.

A literature review was conducted to complete this analysis. This information was collected internet journal databases such as Google Scholar. All journals utilized were from peer-reviewed sources. Search terms will included aspects of international trade theory and specific trade theories, such as neo-mercantilism, were included in the search query. Some of the peer-reviewed journals utilized for this research include: the Journal of Economic Perspective, the Economic Journal, the Journal of Political Economy, and the Handbook of International Economics.

Development of the International Trade Theory

Researchers have demonstrated the need for conducting original research studies in order to better understand the international market. While free trade generally guides international trade principles, it is also necessary to consider that many other factors influence the market, such as political relationships between trading nations. As a consequence, it could be said that international trade is not simply a static principle. Rather, it is consistently changing over time due to the changing needs of trade partners in addition to alterations in competition, quality of products, and other factors. In their publication, Theory of International Trade, authors Dixit and Norman demonstrate that it is necessary to generate both a quantitative and qualitative understanding of international trade data in order to gain a fully understanding of the variables that describe trends in the field (Dixit & Norman, 1980). It is important to use the standard theory as a component of this analysis because it helps researchers gain a greater understanding of comparative advantages. In addition, it allows them to compare and contrast other trade theories that are useful to the overall understanding of this concept.

In order to better appreciate the relationship between trading partners in the modern world, it is essential to gain an understanding of their nations standing with regards to international politics and economy (Ethier, 1982). Ultimately, individuals that conduct business in developed nations are more likely to have a greater degree of purchasing power, which allows them to compete more effectively with other countries. In most situations, it is the developed nations who will benefit from trade relationships with developing nations. While many developing nations have a sufficient amount of resources for trade, they are unable to profit from their finished products because they do not have the means by which to process these goods into a finished item. Therefore, developed nations are able to engage in trade negotiations with these individuals knowing that these agreements will be mutually beneficial for either nation, but in a manner that proportionally benefits the developed nation to a greater extent.

It is also important to note that trade has grown among newly industrialized nations, such as China and Brazil (Ethier, 1982). These countries are attempting to compete with already established industrial nations in a manner that will allow them to become world leaders of trade. In order to enhance their ability to do so, they are investing large amounts of money to boost these economic efforts. These countries have also increased their ability to trade by increasing the number of investments they have provided in their trade partners’ economies in order to bolster their own ability to exchange goods and receive profit. The nations that have taken part in these lending activities are therefore in a better financial situation than many other nations because they have a surplus of funds rather than a deficit. While many countries, like the United States, operate under the assumption that it is necessary to spend money to make money, it is important to understand that this phenomenon is only true to a certain extent. After an initial investment, it is essential to begin to pay this money off to ensure that there is some sort of return in profit to compensate for the money invested. If this is not done, the nation will end up owing too much money due to the rate of interest and corresponding funds that will be accrued over time. Therefore, these nations are able to be more competitive in the modern market.

Another component of business that has allowed the industry to develop is that intelligent businesses search for new products or new variations of already existing products that have the potential to be higher quality than what is already commercially available. When these is accomplished, these organization have a better ability to compete because there is less competition overall (Helpman, 1984). Companies can differentiate their product from the competition by modifying their offerings in a variety of ways. This could include making the product the cheapest on the market, making it the most affordable. In addition, this could involve making it the highest quality in order to be the best product of its type. The last way that a product could be differentiated is to either sell it in locations in which the product is not currently highly accessible or to modify the product in a manner that gives it an additional use. It is therefore necessary for companies that want to be internationally competitive to offer a range of products to their customers in addition to conducting research that will allow them to identify how their products should be differentiated in order to make the most profit (Grubel & Lloyd, 1985).

In order for companies to make their maximal profit, it is important for them to consider whether engaging in international trade is the correct decision for their decision for their business. Many businesses would be better served by engaging in trade only at the national level to ensure that their operations will be more focused. In addition, the ability for different companies to succeed as international businesses depends upon the particular product that they are selling. For example, many products and services can be considered locally relevant instead of internationally relevant. McDonald’s is suffering this impact because while its products are in high demand in the United States, many other countries are opposed to the unhealthy products that the food chain sells and the company is therefore not as successful in these economic climates. It would have therefore been a better move for the company to remain focuses on business in the United States because it is not as successful internationally. However, when international trade is done properly, it could be advantageous for an organization because this allows them to reach a larger customer base which could drive a greater degree of profits (Jones & Neary, 1982).

When organizations wish to support their international businesses, it becomes necessary for them to study different international trade theories. Two such theories include the Ricardian and the Ricardo–Viner models of international trade theory (Lerner, 1995). The Ricardian model is based on the law of diminishing returns. This indicates that it is important for companies to carefully consider their input and output with regards to business production at the international level. While many companies have an excellent understanding of the law of diminishing returns with regards to their practices on a national level, they often have difficulty in adapting this understanding to their practices on an international scale. The Ricardo-Viner model is an extension of this model that considers a greater degree of variables. It should therefore be used by companies over the Ricardian model because it provides organizations with a more comprehensive understanding of the business models that are needed for them to achieve international success.

It is also important to consider the pure theory and monetary theory of international trade with regards to developing international business (Meier, 1964). The pure theory of international trade deals with the notion that the determination of relative prices and real incomes in international trade is abstracted from the intervention of money. Meanwhile, the monetary theory of international trade attempts to explain the ability of a system to obtain monetary equilibrium under the gold standard despite adjustment to this system due to fixed and floating exchange rates. The classical theory states that trade patterns are determined by factors that are found due to differences between the technologies, the specific type of good or service that is being sold, and the tastes of different countries. These trade theory principles can be utilized to gain a greater understanding of trade theory in developing nations with regards to trade practices across the world. Ultimately, these theories are related to one another and this understanding can be used to generate the appropriate trade technique for a particular organization.

In order for companies to take maximum advantage of international trade, they also must consider how their products are being produced. More successful companies attempt to obtain raw materials from areas in which these goods are the cheapest, and then elect to ship these materials to a central location where the production costs would be the least expensive. Ultimately, these considerations require a vast amount of data collection with regards to where raw materials are available and how cheaply they can be purchased. In addition, they must consider the price that it costs to ship products to different locations in order to determine which combination of shipping techniques will lend to the final product being assembled for the cheapest possible price. Overall, manufacturers in different countries are responsible for manufacturing different parts of a product. Ultimately, this leads to items being available for lower costs due to the lower cost for manufacturing, which increases the opportunity for organizations that take advantage of this process to make a greater extent of profit (Vernon, 1996).

As a whole, for companies to be successful in modern international trade, they need to be competitive in a manner that is consistent with the way that business is done in current times. A primary issue that many of the international organizations around the world are facing is that their business operations are outdated because they are largely manual processes. It is important for companies to realize that a majority of their operations can be automated so that business happens more quickly. When companies are able to produce products that have a higher quality with a greater degree of efficiency, it’s easier for them to remain competitive because they are able to keep delivery promises and are therefore likely to experience return business. Furthermore, enabling products to be shipped quickly is beneficial for the organization, because it means that their warehouses will empty more quickly which will afford them more room for newly produced products. Optimizing this process allows the company to save more money which contributes to a greater profit. Ultimately, the companies that have enhanced technology capabilities are able to compete more significantly (Wakelin, 1997). This is highly connected to the ability of companies to communicate more efficiently with partners across the world, which enhances profitability as well as efficiency of practice.

Application of International Trade Theory to Modern Business Practice

It is necessary for businesses to consider how they should apply international trade theory to their business practices because doing so will help them understand how to be more competitive and drive more profit. Organizations that wish to conduct international trade do so based on the understanding that this will help them access a larger market and increase the amount of goods or products sold overall. While international trade is largely directed by the free market, it is essential for businesses to thoroughly research their particular product in order to ensure that it is being sold in the right niche. Before developing a marketing strategy for the product, the organization must understand the competition in different parts of the world, the quality and availability of these other products, in addition to the amount of money they could be sold for in order to make the most profit. While some of this information is unknown, these business professionals can use complex analytical tools to gain a greater understanding of their sector of the market. By completing mathematical models with these various factors to determine profit and expenditures, many of the unknowns of this process can be predicted in a manner that promotes good business practices.

International trade can therefore be said to be an experimental process. Even when a business plan is formed, it is important for the organization to constantly assess whether the business practices being implemented are effective and whether the plan needs to be modified. In order to enhance business practices, it is important to use the data created from these mathematical models to predict a reasonable intervention that could change business practices. It will then be necessary for the company to determine the success of this project by comparing profit and product development before the intervention and after the intervention to see if a real change was made. Even if this change is effective, this process is never complete because the process must be optimized in order to ensure that the organization can be maximally competitive. Some reasonable interventions would be implementing new technology into the shipping process, adding a new manufacturing plant, or altering shipping routes. Different changes are applicable for different types of businesses and it is necessary to consider all potential interventions and alternatives before a decision is made.

In conclusion, it is important for businesses to implement a knowledge of international trade theory in their practices. This will help them understand who their customers are, how their product could be optimized, how much the product could be sold for, and more. This information will allow these organizations to ultimately become more competitive, which confers an advantage in terms of profit. Therefore, it is important to create the marketing plan and business practices with regards to international trade theory because this will allow to achieve success in their industry. Considering this knowledge before beginning practice will lead to smaller number of mistakes which will decrease the risk of conducting business.

References

Dixit A, Norman V. (1980). Theory of International Trade. Cambridge, U.K.: The Cambridge University Press.

Ethier W. (1982). National and International Returns to Scale in the Modern Theory of International Trade. The American Economic Review, 72(3).

Grubel HG, Lloyd PJ. (1975). Intra-Industry Trade: The Theory and Measurement of International Trade in Differentiated Products. The Economic Journal, DOI: 10.2307/2230917

Helpman E. (1984). A Simple Theory of International Trade with Multinational Corporations. Journal of Political Economy, 92(3).

Hettne B. (1993). Neo-Mercantilism: The Pursuit of Regionness. Cooperation and Conflict, 28(3): 211-232.

Jones RW, Neary PJ. (1982). Positive theory of international trade. Ireland: University College Dublin.

Learner EE. (1995). Chapter 26 International trade theory: The evidence. Handbook of International Economics, 3: 1339-1394.

Meier GM. (1964). International trade and development. Retrieved from http://oep.oxfordjournals.org/content/10/3/277.full.pdf

Markusen JR. (1995). The Boundaries of Multinational Enterprises and the Theory of International Trade. Journal of Economic Perspectives, 9(2): 169-189.

Vernon R. (1996). International Investment and International Trade in the Product Cycle. The Quarterly Journal of Economics, 80(2).

Wakelin K. (1997). Trade and Innovation: Theory and evidence. Department of Economics. Retrieved from http://hdl.handle.net/1814/26257