International trade theory
Introduction The scholars have reviewed the various trade theories in the light of the modern economic developments. The seventeenth century scholars gave importance to the theory of mercantilism which emphasized surplus exports in order to improve the economic position of the country. However, the limitations of mercantilism has been highlighted by the later economists such as Adam Smith who presented free trade theory which argued that free trade benefits all the countries which participated in such trade.
In spite of the threat of competition from the underdeveloped countries, it is argued by the theorists that free trade does not affect the American economy. (Hill, 144) Recent studies have showed that America has been able to increase its exports to the countries such as Japan and China. (Zhang; Hitt) Summary These trade theories were put forward by the scholars such as Adam Smith, David Ricardo, and Eli Heckscher and Bertil Ohlin. Adam Smith argued that the trade should be devoid of government interference and regulations.
Smith propounded the theory of absolute advantage which suggested that the countries should specialize in the production of the goods based on their advantages. (Hill, 147) Other goods should be imported from the other countries. David Ricardo propounded the comparative advantage theory which suggested that a country can prosper by producing the goods which are being produced in other countries. However, the countries can compete with each other and exhibit the superiority of their products.
(Hill, 151) According to Heckscher and Ohlin advantage of a particular country depends on the factors of production. (Hill, 157-158) This theory resulted in the response in the form of product life-cycle theory which argued that during the course of time an item could be exported to the original place of its production. (Hill, 159) According to new trade theory some countries specialize in the production of particular goods because only a few firms can compete in such industries. For example, the USA has dominated the aircraft industry.
(Hill, 162) The new trade theory also argues that when the countries specialize in the production of the some goods, economies of scale will increase the returns. This theory contradicted the earlier assumption that specialization in production would lead to result in diminishing returns. The economies of scale can be improved when a country specializes in the production of a particular commodity and thereby reduces the unit cost. It imports those commodities which are produced in other countries.
This benefits both the countries that import and export goods. (Hill, 162) This theory is particularly useful in the era of globalization in order to suggest that specialization of production leads to increased returns. These theories show that although some groups of people may lose their jobs, American economy would benefit from free trade. Recently American agriculturists have been able to export large quantity of potatoes to Japan. Attempts are being made to remove the barriers to export the American commodities to China. (Zhang; Hitt) Analysis.
Among these different theories, new trade theory can be considered as more relevant in the case of the USA In spite of globalization and the fear of the domestic industries regarding competition from the other countries, the US industries have been able to maintain domination in the production of commercial aerospace industry. New trade theory argues that when there is less demand for some products in the domestic market, their production can be reduced leading to the increased price of such products. However, economies of scale results in the reducing the unt costs and this makes the nation more competitive in the international market.
(Hill, 162) The American industries such as Boeing and Air Bus have been able to obtain substantial revenue by following this strategy. (Hill, 163) The economies of scale have resulted in the increased returns for the American aerospace industries. This theory and the example shows that free trade does not affect the American economy as the American industrialists can increase the profits by specializing the production of a particular commodity and constantly improving the quality and price of such commodity. This increases the revenue of the industries.
The contention that American industries would not be affected by free trade can be proved by the fact that recently American businessmen have been able to increase their exports to Japan and China. Japan had banned the import of the American potatoes due to their bacteria content. However, after 1990s the American producers eradicated the bacteria in the potatoes. When there was shortage of potato in Japan, the American businessmen pressured the American government to facilitate them to export potato to Japan.
The Americans were allowed to export potato to Japan because of the free trade agreement between the two countries. This shows that although America imported a few goods from Japan, America has been able to export commodities which are in great demand in Japan. Americans specialize in the potato production and due to increased demand for potato the American agriculturists and businessmen have been able to increase their revenues. This fact has supported the new trade theory which argues that specialization of production leads to increased returns.
(Zhang, A 6) Recently, American government has decided to send strong signals to the Chinese authorities to reduce the Chinese imports. This shows that the government has taken interest to protect the domestic industry from the Chinese competition. On the other hand, the American officials have showed intent to increase American exports to China. (Hitt, A 4) This shows that in spite of free trade the nations can protect their domestic economy. It is also possible to work within the limitations of the free trade.
Both the Chinese and American economies have been benefited by the free trade. Conclusion The above details show that free trade theory has been beneficial to the different countries. The main reason for this conclusion is the fact that each country possesses particular advantage in the production of particular goods. For example, although American textile workers lost their jobs, the consumers have been able to obtain cheap clothes. The American aircraft industry has remained one industry which is not challenged by other countries.
This shows that specialization in the production of a particular commodity has given edge to the American industrialists. The developing countries such as India have provided knowledge based services to the American industries. However, this has increased the demand for American goods in these developing economies due to increase in the purchasing power. Based on the advantages of free trade, different countries have entered into free trade agreements. The American capitalists have outsourced their production process due to the availability of cheap labor and other advantages in the other countries.
This shows that outsourcing has benefited the American nation. Based on these details one can suggest that free trade benefits all the countries.
Works Cited Hill, Charles W. L. International business: competing in the global market place. New York: McGraw-Hill/Irvin, 2005. Hitt, Greg. “U. S. to Press China On Trade Laws”. The Wall Street Journal Online. 14 Feb 2006: A4. <http://wsj. com> Dow Jones Reprints. Zhang, Jane. “Japan Revives Imports Of Fresh U. S. Potatoes”. The Wall Street Journal Online. 22 Feb. 2006: A6. <http://wsj. com> Dow Jones Reprints.