Different Parts Of International Trade Theory Business Essay

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This paper is about different parts of international trade theory. I am going to analyze five different articles in relation with the mentioned topic.

First of all there is a separate review of each of them; I decided to make each article at a time because even though they are all about international trade theory the topics they all cover are pretty different.

I start the review with an article covering purely international trade theory since the beginning of the theories with Adam Smith to the New Trade Theory. The second article is about the contribution to the theory of one of the most important models: the Heckscher-Ohlin Theory. The third one analyzes the globalization of international trade in the actual times. The fourth one deal with the rise of innovation in low-wage countries and what is the international trade effect on it. And the last one I chose is an actual analysis of the international trade and credit conditions during the financial crisis in the world economy.

Even though not every article deals with international trade theory which is the topic of this paper, I chose the ones that I found more interesting to analyze because the ones that are not purely theory cover the effect of trade or the actual trade conditions.


International Trade Theory and Policy: What is Left of the Free Trade Paradigm?

This article provides an overview of all the trade theories developed during history and its impact on policy.

It starts from the beginning of free trade theory with Adam Smith’s invisible hand and David Ricardo’s comparative advantage theory, going through the neoclassical trade theories with the implementation of the opportunity cost among other things to develop the New Trade Theory (NTT) from the 80s.

The NTT gives away the restricted assumptions from the traditional theories by the introduction of the concepts of economies of scale in production, imperfect competition and product differentiation. As the NTT affected the main assumptions of the previous models it also affected its major conclusions. Therefore, the main contribution of the new model was that it worked on product differentiation and intra-industry trade.

The NTT also introduces new theories of foreign direct investment (FDI) and technology, which are important factors that affect trade flows and trade patterns.

Even though the NTT has changed many things from the traditional theories it still is in consonant with them.

Therefore, the changes on trade theory over history have three main impacts on the policy. First of all, the fact that in developing areas the policy is being determined by free trade, it can be observed by all the regional agreements between developing countries such as Mercosur in Latin America and SAPTA in South Asia. Secondly, the advanced nations believe in the NTT doctrine and therefore go on with interventionist policies to trade negotiations. And the third impact is that there is a general concern with trade liberalization for developing countries.

What Does the Heckscher-Ohlin Model Contribute to International Trade Theory? A Critical Assessment.

Eli Heckscher and Bertil Ohlin developed the factors endowment theory as an alternative to the Ricardian Model. It is considered one of the greatest contributions to international trade theory because it explains comparative advantage and the Ricardian Model just assumed it, but did not explain it. During the article the authors cast doubt on the empirical validity of the Heckscher-Ohlin model and expose its weaknesses. One of the main problems of the factors endowments theory is that it avoided serious development issues by not using them in the model. Nowadays, according to the article, it is considered that the Heckscher-Ohlin Theory has lack of theoretical and empirical validity.

Measuring Globalization of Trade: Theory and Evidence

It is not easy to measure globalization; it is a complex process because it takes into account all cultural, political, social and economic integrations. Furthermore, globalization is not only measuring the openness of countries but also direct and indirect relations between individuals who are far away from each other. Until now there is no consensus about the level of globalization that has been achieved all around the world and how far are away are we to reach its peak.

One of the main conclusions from the article is that domestic bias affecting trade represents the highest limit of integration, also that the effect of bias on trade is more limited than the effect of the degree of openness.

Wake Up and Smell the Ginseng: International Trade and the Rise of Incremental Innovation in Low-Wage Countries

Even though the incremental innovation in low-wage countries is not considered as part of the international trade theory I choose this article because it has a significant impact on international trade and I thought it was interesting to analyze it.

This paper is the first one to analyze the implications of the rise of incremental innovation in some low-wage countries in international trade. The incremental innovation is permitting the countries to export more sophisticated new goods and it is leading to a change in the trade patterns all around the world. There are some countries that are involved in the incremental innovation such as India and China.

According to the article, there is a change from the product-cycle trade to trade involving innovation in low-wage countries; the model explains the difference of how much innovation is being achieved in different low-wage countries and in different firms within the same country.

Off the Cliff and Back? Credit Conditions and International Trade during the Global Financial Crisis

Due to the global financial crisis, there was a collapse on the international trade by around 12% in 2009. This paper explains and quantifies the effect that credit conditions had on the drop of international trade flows, mentioned before, during the financial crisis in 2008-2009.

There are two main issues of the financial crisis that are believed to be behind this large drop on international trade: on the one hand, the credit crisis the availability of external finance was drastically reduced and therefore the company’s production and therefore their availability to export products to other countries. On the other hand, the economic crunch led to the decrease on the global demand for products in general.

Taking into account the previous statements, one of the main conclusions of the article is that the unfavorable credit conditions had an important role on the sharp reduction of the international trade flows. It also provides further evidence on the statement of the effect of credit conditions on trade, above all in adverse situations on the credit market.