Introduction
This chapter has two goals that are related to the story of Ghana and South Korea. The first is to review a number of theories that explain why it is beneficial for a country to engage in international trade. The second goal is to explain the pattern of international trade that we observe in the world economy.
An Overview of Trade Theory
The Benefits of Trade
The great strength of the theories of Smith, Ricardo, and Heckscher-Ohlin is that they identify with precision the specific benefits of international trade. Common sense suggests that some international trade is beneficial. The theories of Smith, Ricardo, and Heckscher-Ohlin go beyond this commonsense notion, however, to show why it is beneficial for a country to engage in international trade even for products it can produce for itself. This is a difficult concept for people to grasp.
The same kind of nationalistic sentiments can be observed in many other countries. The gains arise because international trade allows a country to specialize in the manufacture and export of products that can be produced most efficiently in that country, while importing products that can be produced more efficiently in other countries.
This economic argument is often difficult for segments of a country's population to accept. With their future threatened by imports, American textile companies and their employees have tried hard to persuade the US government to impose quotas and tariffs to restrict importation of textiles.
The Pattern of International Trade
The theories of Smith, Ricardo, and Heckscher-Ohlin also help to explain the pattern of international trade that we observe in the world economy. Some aspects of the pattern are easy to understand. Climate and natural resources explain why Ghana exports cocoa, Brazil exports coffee, Saudi Arabia exports oil, and China exports crawfish. But much of the observed pattern of international trade is more difficult to explain. One early response to the failure of the Heckscher-Ohlin theory to explain the observed pattern of international trade was the product life-cycle theory. Proposed by Raymond Vernon, this theory suggests that early in their life cycle, most new products are produced in and exported from the country in which they were developed. As a new product becomes widely accepted internationally, production starts in other countries. As a result, the theory suggests, the product may ultimately be exported back to the country of its innovation.
Trade Theory and Government Policy
Although all these theories agree that international trade is beneficial to a country, they lack agreement in their recommendations for government policy. Mercantilism makes a crude case for government involvement in promoting exports and limiting imports. The theories of Smith, Ricardo, and Heckscher-Ohlin form part of the case for unrestricted free trade. The argument for unrestricted free trade is that both import controls and export incentives (such as subsidies) are self-defeating and result in wasted resources. Both the new trade theory and Porter's theory of national competitive advantage can be interpreted as justifying some limited and selective government intervention to support the development of certain export-oriented industries. We will discuss the pros and cons of this argument, known as strategic trade policy, as well as the pros and cons of the argument for unrestricted free trade in Chapter 5.
Mercantilism
The first theory of international trade emerged in England in the mid-16th century. Referred to as mercantilism, its principle assertion was that gold and silver were the mainstays of national wealth and essential to vigorous commerce. At that time, gold and silver were the currency of trade between countries; a country could earn gold and silver by exporting goods. By the same token, importing goods from other countries would result in an outflow of gold and silver to those countries. The main tenent of mercantilism was that it was in a country's best interests to maintain a trade surplus, to export more than it imported. By doing so, a country would accumulate gold and silver and increase its national wealth and prestige.
The result would be a deterioration in the English balance of trade and an improvement in France's trade balance, until the English surplus was eliminated. Hence, according to Hume, in the long run, no country could sustain a surplus on the balance of trade and so accumulate gold and silver as the mercantilists had envisaged.
The flaw with mercantilism was that it viewed trade as a zero-sum game.
Absolute Advantage
Due to the combination of favorable climate, good soils, and accumulated expertise, the French had the world's most efficient wine industry. The English had an absolute advantage in the production of textiles, while the French had an absolute advantage in the production of wine. Thus, a country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it.
Consider the effects of trade between Ghana and South Korea. The production of any good (output) requires resources (inputs) such as land, labor, and capital. Now consider a situation in which neither country trades with any other. Each country devotes half of its resources to the production of rice and half to the production of cocoa. Each country must also consume what it produces.
Thus, as a result of specialization and trade, output of both cocoa and rice would be increased, and consumers in both nations would be able to consume more. Thus, we can see that trade is a positive-sum game; it produces net gains for all involved.
Comparative Advantage
Qualifications and Assumptions
Our simple model includes many unrealistic assumptions:
1. We have assumed a simple world in which there are only two countries and two goods. In the real world, there are many countries and many goods.
2. We have assumed away transportation costs between countries.
3. We have assumed away differences in the prices of resources in different countries. We have said nothing about exchange rates and simply assumed that cocoa and rice could be swapped on a one-to-one basis.
4. We have assumed that while resources can move freely from the production of one good to another within a country, they are not free to move internationally. In reality, some resources are somewhat internationally mobile. This is true of capital and, to a lesser extent, labor.
5. We have assumed constant returns to scale; that is, that specialization by Ghana or South Korea has no effect on the amount of resources required to produce one ton of cocoa or rice. In reality, both diminishing and increasing returns to specialization exist. The amount of resources required to produce a good might decrease or increase as a nation specializes in production of that good.
6. We have assumed that each country has a fixed stock of resources and that free trade does not change the efficiency with which a country uses its resources. This static assumption makes no allowances for the dynamic changes in a country's stock of resources and in the efficiency with which the country uses its resources that might result from free trade.
7. We have assumed away the effects of trade on income distribution within a country.
Simple Extensions of the Ricardian Model
Diminishing Returns
The simple comparative advantage model developed in the preceding subsection assumes constant returns to specialization. By constant returns to specialization, we mean that the units of resources required to produce a good (cocoa or rice) are assumed to remain constant no matter where one is on a country's production possibility frontier (PPF). Thus, we assumed that it always took Ghana 10 units of resources to produce one ton of cocoa. However, it is more realistic to assume diminishing returns to specialization. Diminishing returns to specialization occur when more units of resources are required to produce each additional unit. There are two reasons why it is more realistic to assume diminishing returns. First, not all resources are of the same quality. As a country tries to increase output of a certain good, it is increasingly likely to draw on more marginal resources whose productivity is not as great as those initially employed. The end result is that it requires more resources to produce an equal increase in output.
A second reason for diminishing returns is that different goods use resources in different proportions. For example, imagine that growing cocoa uses more land and less labor than growing rice, and that Ghana tries to transfer resources from rice production to cocoa production. The rice industry will release proportionately too much labor and too little land for efficient cocoa production. To absorb the additional resources of labor and land, the cocoa industry will have to shift toward more labor-intensive production methods. The effect is that the efficiency with which the cocoa industry uses labor will decline; and returns will diminish.
Dynamic Effects and Economic Growth
Our simple comparative advantage model assumed that trade does not change a country's stock of resources or the efficiency with which it utilizes those resources. This static assumption makes no allowances for the dynamic changes that might result from trade. If we relax this assumption, it becomes apparent that opening an economy to trade is likely to generate dynamic gains. These dynamic gains are of two sorts. First, free trade might increase a country's stock of resources as increased supplies of labor and capital from abroad become available for use within the country.
Second, free trade might also increase the efficiency with which a country uses its resources. For example, economies of large-scale production might become available as trade expands the size of the total market available to domestic firms. Trade might make better technology from abroad available to domestic firms. In turn, better technology can increase labor productivity or the productivity of land.
National Competitive Advantage: Porter's Diamond
In 1990, Michael Porter of Harvard Business School published the results of an intensive research effort that attempted to determine why some nations succeed and others fail in international competition.20 Porter and his team looked at 100 industries in 10 nations. The book that contains the results of this work, The Competitive Advantage of Nations, has made an important contribution to thinking about trade. Like the work of the new trade theorists, Porter's work was driven by a feeling that the existing theories of international trade told only part of the story. These attributes are
· Factor endowments--a nation's position in factors of production such as skilled labor or the infrastructure necessary to compete in a given industry.
· Demand conditions--the nature of home demand for the industry's product or service.
· Relating and supporting industries--the presence or absence in a nation of supplier industries and related industries that are internationally competitive.
· Firm strategy, structure, and rivalry--the conditions in the nation governing how companies are created, organized, and managed and the nature of domestic rivalry.
Factor Endowments
Factor endowments lie at the center of the Heckscher-Ohlin theory. While Porter does not propose anything radically new, he does analyze the characteristics of factors of production in some detail. He recognizes hierarchies among factors, distinguishing between basic factors and advanced factors .He argues that advanced factors are the most significant for competitive advantage.
The relationship between advanced and basic factors is complex. Basic factors can provide an initial advantage that is subsequently reinforced and extended by investment in advanced factors. Conversely, disadvantages in basic factors can create pressures to invest in advanced factors.
Demand Conditions
Porter emphasizes the role home demand plays in providing the impetus for upgrading competitive advantage. Firms are typically most sensitive to the needs of their closest customers. Thus, the characteristics of home demand are particularly important in shaping the attributes of domestically made products and in creating pressures for innovation and quality. Porter argues that a nation's firms gain competitive advantage if their domestic consumers are sophisticated and demanding. Sophisticated and demanding consumers pressure local firms to meet high standards of product quality and to produce innovative products.
Related and Supporting Industries
The third broad attribute of national advantage in an industry is the presence of internationally competitive suppliers or related industries. The benefits of investments in advanced factors of production by related and supporting industries can spill over into an industry, thereby helping it achieve a strong competitive position internationally. Swedish strength in fabricated steel products .One consequence of this is that successful industries within a country tend to be grouped into clusters of related industries. This was one of the most pervasive findings of Porter's study. One such cluster is the German textile and apparel sector, which includes high-quality cotton, wool, synthetic fibers, sewing machine needles, and a wide range of textile machinery.
Firm Strategy, Structure, and Rivalry
The fourth broad attribute of national competitive advantage in Porter's model is the strategy, structure, and rivalry of firms within a nation. Porter makes two important points here. His first is that nations are characterized by different "management ideologies," which either help them or do not help them to build national competitive advantage.
Porter's second point is that there is a strong association between vigorous domestic rivalry and the creation and persistence of competitive advantage in an industry. Vigorous domestic rivalry induces firms to look for ways to improve efficiency, which makes them better international competitors. Domestic rivalry creates pressures to innovate, to improve quality, to reduce costs, and to invest in upgrading advanced factors. All of this helps to create world-class competitors. Porter cites the case of Japan:
Evaluating Porter's Theory
In sum, Porter's argument is that the degree to which a nation is likely to achieve international success in a certain industry is a function of the combined impact of factor endowments, domestic demand conditions, related and supporting industries, and domestic rivalry. He argues that the presence of all four components is usually required for this diamond to positively impact competitive performance .Factor endowments can be affected by subsidies, policies toward capital markets, policies toward education, and the like. Government can shape domestic demand through local product standards or with regulations that mandate or influence buyer needs. Government policy can influence supporting and related industries through regulation and influence firm rivalry through such devices as capital market regulation, tax policy, and antitrust laws.
Implications for Business
Location Implications
Underlying most of the theories we have discussed is the notion that different countries have particular advantages in different productive activities. Thus, from a profit perspective, it makes sense for a firm to disperse its productive activities to those countries where, according to the theory of international trade, they can be performed most efficiently. If design can be performed most efficiently in France, that is where design facilities should be located; if the manufacture of basic components can be performed most efficiently in Singapore, that is where they should be manufactured; and if final assembly can be performed most efficiently in China, that is where final assembly should be performed. The result is a global web of productive activities, with different activities being performed in different locations around the globe depending on considerations of comparative advantage, factor endowments, and the like. If the firm does not do this, it may find itself at a competitive disadvantage relative to firms that do.
The manufacture of advanced components such as microprocessors and display screens is a capital-intensive process requiring skilled labor, and cost pressures are less intense. Since cost pressures are not so intense at this stage, these components are manufactured in countries with high labor costs that also have pools of highly skilled labor (primarily Japan and the United States).
Finally, assembly is a relatively labor-intensive process requiring only low-skilled labor, and cost pressures are intense. As a result, final assembly may be carried out in a country such as Mexico, which has an abundance of low-cost, low-skilled labor.
First-Mover Implications
The new trade theory suggests the importance of first-mover advantages. According to the new trade theory, firms that establish a first-mover advantage in the production of a new product may dominate global trade in that product. This is particularly true in those industries where the global market can profitably support only a limited number of firms, such as the aerospace market, but early commitments also seem to be important in less concentrated industries such as the market for cellular telephone equipment For the individual firm, the clear message is that it pays to invest substantial financial resources in building a first-mover, or early-mover, advantage, even if that means several years of substantial losses before a new venture becomes profitable
Finally, Porter's theory of national competitive advantage also contains policy implications. Porter's theory suggests that it is in a firm's best interests to upgrade advanced factors of production; for example, to invest in better training for its employees and to increase its commitment to research and development. It is also in the best interests of business to lobby the government to adopt policies that have a favorable impact on each component of the national "diamond."
Tidak ada komentar:
Posting Komentar