What Is International Trade?

International trade theories are simply different theories to explain international trade.
Trade is the concept of exchanging goods and services between two people or
entities. International trade is then the concept of this exchange between people or
entities in two different countries.

People or entities trade because they believe that they benefit from the exchange. They
may need or want the goods or services. While at the surface, this many sound very
simple, there is a great deal of theory, policy, and business strategy that constitutes
international trade.

In this section, you’ll learn about the different trade theories that have evolved over the
past century and which are most relevant today. Additionally, you’ll explore the factors
that impact international trade and how businesses and governments use these factors
to their respective benefits to promote their interests.

What Are the Different International Trade Theories?

“Around 5,200 years ago, Uruk, in southern Mesopotamia, was probably the first city
the world had ever seen, housing more than 50,000 people within its six miles of wall.
Uruk, its agriculture made prosperous by sophisticated irrigation canals, was home to
the first class of middlemen, trade intermediaries…A cooperative trade network…set the
pattern that would endure for the next 6,000 years.”Matt Ridley, “Humans: Why They
Triumphed,” Wall Street Journal, May 22, 2010, accessed December 20,
2010, http://online.wsj.com/article/SB100014240527487036918045752545333869331
38.html.

In more recent centuries, economists have focused on trying to understand and explain
these trade patterns. Chapter 1 "Introduction", Section 1.4 "The Globalization
Debate" discussed how Thomas Friedman’s flat-world approach segments history into
three stages: Globalization 1.0 from 1492 to 1800, 2.0 from 1800 to 2000, and 3.0 from
2000 to the present. In Globalization 1.0, nations dominated global expansion. In
Globalization 2.0, multinational companies ascended and pushed global development.
Today, technology drives Globalization 3.0.

To better understand how modern global trade has evolved, it’s important to understand
how countries traded with one another historically. Over time, economists have
developed theories to explain the mechanisms of global trade. The main historical
theories are called classical and are from the perspective of a country, or country-based.
By the mid-twentieth century, the theories began to shift to explain trade from a firm,
rather than a country, perspective. These theories are referred to as modern and are
firm-based or company-based. Both of these categories, classical and modern, consist of
several international theories.
Classical or Country-Based Trade Theories
Mercantilism

Developed in the sixteenth century, mercantilism was one of the earliest efforts to
develop an economic theory. This theory stated that a country’s wealth was determined
by the amount of its gold and silver holdings. In it’s simplest sense, mercantilists
believed that a country should increase its holdings of gold and silver by promoting
exports and discouraging imports. In other words, if people in other countries buy more
from you (exports) than they sell to you (imports), then they have to pay you the
difference in gold and silver. The objective of each country was to have a trade surplus,
or a situation where the value of exports are greater than the value of imports, and to
avoid a trade deficit, or a situation where the value of imports is greater than the value
of exports.

A closer look at world history from the 1500s to the late 1800s helps explain why
mercantilism flourished. The 1500s marked the rise of new nation-states, whose rulers
wanted to strengthen their nations by building larger armies and national institutions.
By increasing exports and trade, these rulers were able to amass more gold and wealth
for their countries. One way that many of these new nations promoted exports was to
impose restrictions on imports. This strategy is called protectionism and is still used
today.

Nations expanded their wealth by using their colonies around the world in an effort to
control more trade and amass more riches. The British colonial empire was one of the
more successful examples; it sought to increase its wealth by using raw materials from
places ranging from what are now the Americas and India. France, the Netherlands,
Portugal, and Spain were also successful in building large colonial empires that
generated extensive wealth for their governing nations.

Although mercantilism is one of the oldest trade theories, it remains part of modern
thinking. Countries such as Japan, China, Singapore, Taiwan, and even Germany still
favor exports and discourage imports through a form of neo-mercantilism in which the
countries promote a combination of protectionist policies and restrictions and domestic-
industry subsidies. Nearly every country, at one point or another, has implemented
some form of protectionist policy to guard key industries in its economy. While export-
oriented companies usually support protectionist policies that favor their industries or
firms, other companies and consumers are hurt by protectionism. Taxpayers pay for
government subsidies of select exports in the form of higher taxes. Import restrictions
lead to higher prices for consumers, who pay more for foreign-made goods or services.
Free-trade advocates highlight how free trade benefits all members of the global
community, while mercantilism’s protectionist policies only benefit select industries, at
the expense of both consumers and other companies, within and outside of the industry.

Absolute Advantage

In 1776, Adam Smith questioned the leading mercantile theory of the time in The
Wealth of Nations.Adam Smith, An Inquiry into the Nature and Causes of the Wealth
of Nations (London: W. Strahan and T. Cadell, 1776). Recent versions have been edited
by scholars and economists. Smith offered a new trade theory called absolute advantage,
which focused on the ability of a country to produce a good more efficiently than
another nation. Smith reasoned that trade between countries shouldn’t be regulated or
restricted by government policy or intervention. He stated that trade should flow
naturally according to market forces. In a hypothetical two-country world, if Country A
could produce a good cheaper or faster (or both) than Country B, then Country A had
the advantage and could focus on specializing on producing that good. Similarly, if
Country B was better at producing another good, it could focus on specialization as well.
By specialization, countries would generate efficiencies, because their labor force would
become more skilled by doing the same tasks. Production would also become more
efficient, because there would be an incentive to create faster and better production
methods to increase the specialization.

Smith’s theory reasoned that with increased efficiencies, people in both countries would
benefit and trade should be encouraged. His theory stated that a nation’s wealth
shouldn’t be judged by how much gold and silver it had but rather by the living
standards of its people.

Comparative Advantage

The challenge to the absolute advantage theory was that some countries may be better at
producing both goods and, therefore, have an advantage in many areas. In contrast,
another country may not have any useful absolute advantages. To answer this challenge,
David Ricardo, an English economist, introduced the theory of comparative advantage
in 1817. Ricardo reasoned that even if Country A had the absolute advantage in the
production of both products, specialization and trade could still occur between two
countries.

Comparative advantage occurs when a country cannot produce a product more

efficiently than the other country; however, it can produce that product better and more
efficiently than it does other goods. The difference between these two theories is subtle.
Comparative advantage focuses on the relative productivity differences, whereas
absolute advantage looks at the absolute productivity.

Let’s look at a simplified hypothetical example to illustrate the subtle difference between
these principles. Miranda is a Wall Street lawyer who charges $500 per hour for her
legal services. It turns out that Miranda can also type faster than the administrative
assistants in her office, who are paid $40 per hour. Even though Miranda clearly has the
absolute advantage in both skill sets, should she do both jobs? No. For every hour
Miranda decides to type instead of do legal work, she would be giving up $460 in
income. Her productivity and income will be highest if she specializes in the higher-paid
legal services and hires the most qualified administrative assistant, who can type fast,
although a little slower than Miranda. By having both Miranda and her assistant
concentrate on their respective tasks, their overall productivity as a team is higher. This
is comparative advantage. A person or a country will specialize in doing what they
do relatively better. In reality, the world economy is more complex and consists of more
than two countries and products. Barriers to trade may exist, and goods must be
transported, stored, and distributed. However, this simplistic example demonstrates the
basis of the comparative advantage theory.

Heckscher-Ohlin Theory (Factor Proportions Theory)

The theories of Smith and Ricardo didn’t help countries determine which products
would give a country an advantage. Both theories assumed that free and open markets
would lead countries and producers to determine which goods they could produce more
efficiently. In the early 1900s, two Swedish economists, Eli Heckscher and Bertil Ohlin,
focused their attention on how a country could gain comparative advantage by
producing products that utilized factors that were in abundance in the country. Their
theory is based on a country’s production factors—land, labor, and capital, which
provide the funds for investment in plants and equipment. They determined that the
cost of any factor or resource was a function of supply and demand. Factors that were in
great supply relative to demand would be cheaper; factors in great demand relative to
supply would be more expensive. Their theory, also called the factor proportions theory,
stated that countries would produce and export goods that required resources or factors
that were in great supply and, therefore, cheaper production factors. In contrast,
countries would import goods that required resources that were in short supply, but
higher demand.

For example, China and India are home to cheap, large pools of labor. Hence these
countries have become the optimal locations for labor-intensive industries like textiles
and garments.

Leontief Paradox

In the early 1950s, Russian-born American economist Wassily W. Leontief studied the
US economy closely and noted that the United States was abundant in capital and,
therefore, should export more capital-intensive goods. However, his research using
actual data showed the opposite: the United States was importing more capital-intensive
goods. According to the factor proportions theory, the United States should have been
importing labor-intensive goods, but instead it was actually exporting them. His analysis
became known as the Leontief Paradox because it was the reverse of what was expected
by the factor proportions theory. In subsequent years, economists have noted
historically at that point in time, labor in the United States was both available in steady
supply and more productive than in many other countries; hence it made sense to
export labor-intensive goods. Over the decades, many economists have used theories
and data to explain and minimize the impact of the paradox. However, what remains
clear is that international trade is complex and is impacted by numerous and often-
changing factors. Trade cannot be explained neatly by one single theory, and more
importantly, our understanding of international trade theories continues to evolve.

Modern or Firm-Based Trade Theories

In contrast to classical, country-based trade theories, the category of modern, firm-

based theories emerged after World War II and was developed in large part by business
school professors, not economists. The firm-based theories evolved with the growth of
the multinational company (MNC). The country-based theories couldn’t adequately
address the expansion of either MNCs or intraindustry trade, which refers to trade
between two countries of goods produced in the same industry. For example, Japan
exports Toyota vehicles to Germany and imports Mercedes-Benz automobiles from
Germany.

Unlike the country-based theories, firm-based theories incorporate other product and
service factors, including brand and customer loyalty, technology, and quality, into the
understanding of trade flows.

Country Similarity Theory

Swedish economist Steffan Linder developed the country similarity theory in 1961, as he
tried to explain the concept of intraindustry trade. Linder’s theory proposed that
consumers in countries that are in the same or similar stage of development would have
similar preferences. In this firm-based theory, Linder suggested that companies first
produce for domestic consumption. When they explore exporting, the companies often
find that markets that look similar to their domestic one, in terms of customer
preferences, offer the most potential for success. Linder’s country similarity theory then
states that most trade in manufactured goods will be between countries with similar per
capita incomes, and intraindustry trade will be common. This theory is often most
useful in understanding trade in goods where brand names and product reputations are
important factors in the buyers’ decision-making and purchasing processes.

Product Life Cycle Theory

Raymond Vernon, a Harvard Business School professor, developed the product life cycle
theory in the 1960s. The theory, originating in the field of marketing, stated that a
product life cycle has three distinct stages: (1) new product, (2) maturing product, and
(3) standardized product. The theory assumed that production of the new product will
occur completely in the home country of its innovation. In the 1960s this was a useful
theory to explain the manufacturing success of the United States. US manufacturing was
the globally dominant producer in many industries after World War II.

It has also been used to describe how the personal computer (PC) went through its
product cycle. The PC was a new product in the 1970s and developed into a mature
product during the 1980s and 1990s. Today, the PC is in the standardized product stage,
and the majority of manufacturing and production process is done in low-cost countries
in Asia and Mexico.

The product life cycle theory has been less able to explain current trade patterns where
innovation and manufacturing occur around the world. For example, global companies
even conduct research and development in developing markets where highly skilled
labor and facilities are usually cheaper. Even though research and development is
typically associated with the first or new product stage and therefore completed in the
home country, these developing or emerging-market countries, such as India and China,
offer both highly skilled labor and new research facilities at a substantial cost advantage
for global firms.
Global Strategic Rivalry Theory

Global strategic rivalry theory emerged in the 1980s and was based on the work of
economists Paul Krugman and Kelvin Lancaster. Their theory focused on MNCs and
their efforts to gain a competitive advantage against other global firms in their industry.
Firms will encounter global competition in their industries and in order to prosper, they
must develop competitive advantages. The critical ways that firms can obtain a
sustainable competitive advantage are called the barriers to entry for that industry.
The barriers to entry refer to the obstacles a new firm may face when trying to enter into
an industry or new market. The barriers to entry that corporations may seek to optimize
include:

 research and development,

 the ownership of intellectual property rights,
 economies of scale,
 unique business processes or methods as well as extensive experience in the
industry, and
 the control of resources or favorable access to raw materials.

Porter’s National Competitive Advantage Theory

In the continuing evolution of international trade theories, Michael Porter of Harvard

Business School developed a new model to explain national competitive advantage in
1990. Porter’s theorystated that a nation’s competitiveness in an industry depends on
the capacity of the industry to innovate and upgrade. His theory focused on explaining
why some nations are more competitive in certain industries. To explain his theory,
Porter identified four determinants that he linked together. The four determinants are
(1) local market resources and capabilities, (2) local market demand conditions, (3) local
suppliers and complementary industries, and (4) local firm characteristics.
 1. Local market resources and capabilities (factor conditions). Porter
recognized the value of the factor proportions theory, which considers a nation’s
resources (e.g., natural resources and available labor) as key factors in
determining what products a country will import or export. Porter added to these
basic factors a new list of advanced factors, which he defined as skilled labor,
investments in education, technology, and infrastructure. He perceived these
advanced factors as providing a country with a sustainable competitive
advantage.
2. Local market demand conditions. Porter believed that a sophisticated home
market is critical to ensuring ongoing innovation, thereby creating a sustainable
competitive advantage. Companies whose domestic markets are sophisticated,
trendsetting, and demanding forces continuous innovation and the development
of new products and technologies. Many sources credit the demanding US
consumer with forcing US software companies to continuously innovate, thus
creating a sustainable competitive advantage in software products and services.
3. Local suppliers and complementary industries. To remain competitive,
large global firms benefit from having strong, efficient supporting and related
industries to provide the inputs required by the industry. Certain industries
cluster geographically, which provides efficiencies and productivity.
4. Local firm characteristics. Local firm characteristics include firm strategy,
industry structure, and industry rivalry. Local strategy affects a firm’s
competitiveness. A healthy level of rivalry between local firms will spur
innovation and competitiveness.

In addition to the four determinants of the diamond, Porter also noted that government
and chance play a part in the national competitiveness of industries. Governments can,
by their actions and policies, increase the competitiveness of firms and occasionally
entire industries.
Porter’s theory, along with the other modern, firm-based theories, offers an interesting
interpretation of international trade trends. Nevertheless, they remain relatively new
and minimally tested theories.

Which Trade Theory Is Dominant Today?

The theories covered in this chapter are simply that—theories. While they have helped
economists, governments, and businesses better understand international trade and
how to promote, regulate, and manage it, these theories are occasionally contradicted by
real-world events. Countries don’t have absolute advantages in many areas of
production or services and, in fact, the factors of production aren’t neatly distributed
between countries. Some countries have a disproportionate benefit of some factors. The
United States has ample arable land that can be used for a wide range of agricultural
products. It also has extensive access to capital. While it’s labor pool may not be the
cheapest, it is among the best educated in the world. These advantages in the factors of
production have helped the United States become the largest and richest economy in the
world. Nevertheless, the United States also imports a vast amount of goods and services,
as US consumers use their wealth to purchase what they need and want—much of which
is now manufactured in other countries that have sought to create their own
comparative advantages through cheap labor, land, or production costs.

As a result, it’s not clear that any one theory is dominant around the world. This section
has sought to highlight the basics of international trade theory to enable you to
understand the realities that face global businesses. In practice, governments and
companies use a combination of these theories to both interpret trends and develop
strategy. Just as these theories have evolved over the past five hundred years, they will
continue to change and adapt as new factors impact international trade.
CHAPTER II
THEORIES OF INTERNATIONAL TRADE : AN OVERVIEW
2.1 Mercantilism
2.2 Classical Theories of International Trade
2.3 Modern Theory of International Trade
2.4 New Theories of International Trade
2.5 Summary
As pointed out in the introduction, Balance of payments (BOP) is a systematic
record of all economic transactions between the residents of the reporting country
and the residents of the rest of the world for a given period of time. It is pertinent to
note that international trade theories and policies represent microeconomic aspect of
international economics, while balance of payments represents macroeconomic
aspect of international economics. Before analyzing the study of balance of
payments in detail it is important to know how the concept has evolved in the field
of international trade. An insight into various theories of international trade
provides a basis for the evolution of the concept of balance of payments.
The theories of international trade
a
can be broadly classified into - (I) Mercantilist
view (II ) Classical theories of trade (III) Modern theory of trade (IV) New Theories
of trade.
2.1 MERCANTILISM
It was only after the publication of The Wealth of Nations by Adam Smith in 1776,
the subject of economics emerged in an organized scientific form. Prior to that

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during the 17
th
& 18
th
centuries in Europe a group of men – like merchants,
bankers, traders, government officials and philosophers, wrote essays and pamphlets
on international trade that advocated an economic philosophy known as
mercantilism. The term mercantilism first acquired significance at the hands of
Adam Smith. Mercantilism, as the term implies is closely associated with trade and
commercial activities of an economy. Mercantilist theory was highly nationalistic in
its outlook and favoured state regulation and centralization of economic activities
including foreign trade. The mercantilists believed that a nation’s wealth and
prosperity is reflected in its stock of precious metals (also known as specie), namely,
gold and silver. At that time, as gold and silver were the currency of trade between
nations, a country could accumulate gold and silver by exporting more and
importing less. The more gold and silver a nation had, the richer and more powerful
it was. They argued that government should do everything possible to maximize
exports and minimize imports. However, since all nations could not simultaneously
have an export surplus and the amount of gold and silver was limited at any
particular point of time, one nation could gain only at the expense of other nations.
In other words, mercantilists believed that trade was a zero sum game (i.e. one’s gain
is the loss of another). For mercantilists, the objective of foreign trade was
considered to be achievement of surplus in the balance of payments. Hence, they
advocated achieving as high trade surplus as possible. In this context, Blaug (1978)
points out that – “The core of mercantilism, of course, is the doctrine that a
favourable balance of trade is desirable because it is somehow productive of national
prosperity…. When mercantilist authors speak of the surplus in the balance of trade,
they mean an excess of exports, both visible and invisible, over imports, calling
either for an inflow of gold or for granting of credit to foreign countries, that is

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capital exports. In other words, they were roughly thinking of what we would now
call ‘the current account’ as distinct from ‘ the capital account’ in the balance of
payments.”
1
The mercantilist ideas were strongly criticized in the 18
th
century by economists like
David Hume, Adam Smith and David Ricardo. For instance, Adam Smith criticized
mercantilists on the ground that the mercantilists falsely equated money with capital,
and the favourable balance of trade with the annual balance of income over
consumption. Thus, Blaug (1978) critically points out that - “The idea that an export
surplus is the index of economic welfare may be described as the basic fallacy that
runs through the whole of the mercantilist literature.”
2
Another flaw of mercantilism is that it they viewed trade as a zero sum game. This
view was challenged by Adam Smith and David Ricardo who demonstrated that
trade was a positive sum game in which all trading nations can gain even if some
benefit more than others.
From the above analysis it is seen that the concept of balance of payments or
balance of trade was evolved for the first time in the writings of mercantilists. As
pointed out earlier, at that time economics was not yet developed in an organized
form, so the concept of balance of payments / balance of trade was evolved in a
vague form. In spite of various flaws in the ideology, due credit may be given to the
mercantilist writers in the development of the concept of balance of payments /
balance of trade.
2.1.1 Three Basic Issues of International Trade
It is to be noted that mercantilists failed to address three relevant issues of
international trade which are –

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1) Gains from trade – The first important issue is about the gains from trade?
Do countries gain from international trade? Where do the gains come from ,
and how are they divided among the trading countries?
2) Structure of trade – The second relevant issue is the structure or direction
or pattern of international trade. In other words, which goods are exported
and which are imported by each trading country? What are the fundamental
laws that govern the international allocation of resources and the flow of
trade?
3) Terms of trade – The third relevant issue is the terms of trade. In other
words, at what prices are the exported and imported goods exchanged?
2.2 CLASSICAL THEORIES OF INTERNATIONAL TRADE
It was the classical economists like Adam Smith, David Ricardo, Robert Torrens
and John Stuart Mill, who explained these three issues through their theories which
can be grouped under classical theories of international trade.
2.2.1 Absolute Cost Advantage Theory
It was Adam Smith who emphasized the importance of free trade in increasing
wealth of all trading nations. According to Adam Smith, mutually beneficial trade is
based on the principle of absolute advantage. His theory is based on the assumptions
that there are two countries, two commodities and one factor (labour) of production.
Adam Smith’s theory is based on labour theory of value, which asserts that labour is
the only factor of production and that in a closed economy goods exchange for one
another according to the relative amounts of labour they embody. The principle of
absolute cost advantage points that a country will specialize and export a commodity
in which it has an absolute cost advantage.

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2.2.2 Comparative Cost Advantage Theory
According to Ricardo, it is not the absolute but the comparative differences in costs
that determine trade relations between two countries. The comparative cost theory
was first systematically formulated by the English economist David Ricardo in his
Principles of Political Economy and Taxation published in 1817. It was later refined
by J. S. Mill, Marshall, Taussig and others. According to Ricardo, differences in
comparative costs form the basis of international trade. The law of comparative
advantage indicates that each country will specialize in the production of those
commodities in which it has the greatest comparative advantage or the least
comparative disadvantage. Thus, a country will export those commodities in which
its comparative advantage is the greatest and import those commodities in which its
comparative disadvantage is the least.
2.2.2.1 Evaluation of the Comparative Cost Theory
The comparative cost doctrine is not complete in itself. It has been severely
criticized by economists due to its unrealistic assumptions. Prof. Bertil Ohlin
critically pointed out that the principle of comparative advantage is not applicable to
international trade alone, rather it is applicable to all trade. Furthermore, the theory
does not explain why there are differences in costs.
Ricardo’s theory of comparative advantage did not explain the ratios at which the
two commodities would be exchanged for one another. In other words, it does not
indicate what the terms of trade are. It was J. S. Mill who discussed this issue in
detail his theory of reciprocal demand. The term ‘reciprocal demand’ indicates a
country’s demand for one commodity in terms of the quantities of the other
commodity which it is prepared to give up in exchange. Thus, it is the reciprocal
demand that determines the terms of trade which, in turn, determines the relative

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share of each country. Equilibrium would be established at that ratio of exchange
between the two commodities at which quantities demanded by each country of the
commodity which it imports from the other, should be exactly sufficient to pay for
one another. Mill’s theory of reciprocal demand relates to the possible terms of
trade at which the two commodities will exchange for each other between the two
countries. The terms of trade here refer to ‘the barter terms of trade’ between the two
countries i.e. the ratio of the quantity of imports for a given quantity of exports of a
country.
The Ricardian theory, though based on a number of wrong assumptions, is regarded
as an important landmark in the development of the theory of international trade.
2.3 MODERN THEORY OF INTERNATIONAL TRADE
One of the main drawbacks of Ricardian theory of comparative cost was that it did
not explain why differences in comparative costs exist.
In 1919, Eli Heckscher propounded the idea that trade results from differences in
factor endowments in different countries The idea was further carried forward and
developed by Bertil Ohlin in 1933 in his famous book Inter-regional and
International Trade. This book forms the basis for what is known as Heckscher –
Ohlin theory or modern theory of international trade.
2.3.1 Heckscher – Ohlin Theory
The Heckscher – Ohlin theory is based on most of the assumptions of the classical
theories of international trade and leads to the development of two important
theorems – (a) Heckscher – Ohlin theorem and (b) Factor price equalization
theorem.

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Heckscher & Ohlin have explained the basis of international trade in terms of factor
endowments. According to Heckscher & Ohlin, regions or countries have different
factor endowments. It means that some countries are rich in capital while some are
rich in labour. In their theory, the concept of factor endowments or factor abundance
is used in relative terms and not in absolute terms. Moreover, they have defined the
concept of factor endowment or factor abundance in terms of two criteria (a) Price
criterion and (b) Physical criterion .
(a) Price criterion - As per price criterion, a country is said to be capital abundant if
the ratio of price of capital to the price of labour ( PK / PL) is lower as compared to
the other country. This criterion considers both demand for and supply of factors.
(b) Physical criterion – As per physical criterion, a country is said to be capital
abundant if the ratio of the total amount of capital to the total amount of labour
(K/L) is greater as compared to other country. This criterion considers only supply
of factors.
On the basis of above criterion the Heckscher – Ohlin theorem states that – “ A
nation will export the commodity whose production requires the intensive use of the
nation’s relatively abundant and cheap factor and import the commodity whose
production requires the intensive use of the nation’s relatively scarce and expensive
factor .” In other words, the countries in which capital is cheap & abundant will
export capital - intensive goods and import labour – intensive goods. On the
contrary, the countries in which labour is cheap & abundant will export labour –
intensive goods and import capital-intensive goods.
Thus, for them it is the differences in factor intensities in the production of goods
along with actual differences in factor endowments of the countries which explain
international differences in comparative costs of production.

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The Heckscher –Ohlin theory further leads to the development of factor price
equalization theorem. The factor price equalization theorem indicates that free
international trade will ultimately lead to equalization of commodity prices and
factor prices.
Economists Paul Samuelson & Wolfgang Stolper have further contributed to this
theory and have formed Stolper – Samuelson theorem.
3
Stolper –Samuelson theorem
explains the effect of change in relative product prices on factor allocation and
income distribution. It postulates that an increase in the relative price of a
commodity raises the return or earnings of the factor used intensively in the
production of that commodity. In other words, an increase in the relative price of
labour intensive commodity will increase wages. Similarly, an increase in the
relative price of capital intensive commodity will increase the price of capital. This
implies that free trade would raise the returns to the abundant factor and reduce the
returns to the scarce factor.
2.3.2 Evaluation of Heckscher – Ohlin Theory
It is clear from the above that the Heckscher – Ohlin ( hence forth, H-O) theory is
superior to Ricardian theory. It accepts comparative advantage as the cause of
international trade and explains the reasons behind the differences in comparative
cost. Thus, it supplements the Ricardian theory of comparative cost.
However, one of the limitations of H-O theory is that it is based on static model of
given factor endowments and given technology.
2.4 NEW THEORIES OF INTERNATIONAL TRADE
It is observed that the Ricardian theory and H-O theory provided good explanations
of trade theory till the first half of the 20
th
century. However, in due course many

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researchers observed that comparative advantage seemed to be less relevant in the
modern world. Economists now believe that the traditional trade theories (i.e.
Ricardian theory and H-O theory) fail to provide a complete explanation of the
structure of the world trade. The world trade data now contains several empirical
regularities or stylized facts that appear to be inconsistent with the traditional
theories. Thus, the assumptions of H- O theory like – perfect competition, constant
returns to scale, and same technology are invalid in today’s context of world trade.
Hence, economists have modified H-O theory by relaxing most of its assumptions
and have developed new trade theories or complementary trade theories. These new
theories are based on economies of scale, imperfect competition, and differences in
technology among nations
2.4.1 Salient Features of New Theories of Trade
The new theories which are developed after 1970s have the following salient
features –
(a) They have liberated the trade theory from the assumption of perfect
competition made in the classical and neo-classical theories of trade.
(b) They are developed in an imperfect competitive framework and have
incorporated developments in industrial organization theory within the trade
theory.
(c) They have incorporated scale economies and product differentiation in the
imperfect competitive framework within the H-O general equilibrium theory
of comparative advantage.
(d) These theories have taken into account the important determinants of the
pattern of international trade such as increasing returns to scale,
technological innovation, product differentiation and international oligopoly

Page 10
36
rivalry, etc. The strategic trade policy models have provided theoretical
justification for policy intervention in the form of import protection, export
subsidies, etc. in increasing national relative advantage in exports.
(e) These theories show the possible interaction between the inter-industry
pattern of trade based on relative factor endowment of factors of production
and intra-industry trade based on scale economies and product
differentiation.
(f) These theories are quite powerful in explaining the patterns of trade between
developed countries as well as trade between developed and developing
countries at any given point of time in static terms.
(g) Trade between developed countries in terms of this theory is explained by
differences in the economies of scale existing among the different oligopoly
firms as well as by the levels of technological progress among them. Trade
between developed and developing countries also arises because of the
developed countries have the advantage of economies of scale and highly
developed technology while the developing countries lag behind in the
economies of scale and technological progress.
2.4.2 Broad Categories of New Theories
The new theories can be broadly categorized into three types – (1) Neo –
technological trade theories (2) Intra-industry trade models (3) Strategic trade policy
models .
2.4.2.1 Neo – Technological Trade Theories
The neo-technological trade theories emphasize the importance of technological
innovation and the technological gap across firms and countries as a major source of
international trade. The main theories are as follows:

Page 11
37
(a) Kravis’ Theory of Availability – In the Kravis’(1956)
4
model, technological
innovation as a basis of trade operates through his product availability hypothesis.
The availability approach seeks to explain the pattern of trade in terms of domestic
availability and non-availability of goods. Availability influences trade through
demand and supply forces.
According to him, a country produces and exports those goods which are ‘
available’, that is, goods developed by its entrepreneurs and innovators. By
availability he means an elastic supply. In short, as per Kravis’ theory of availability,
international trade takes place because of differences in the availability of certain
products among countries.
(b) Linder’s Theory of Volume of Trade and Demand Pattern – Linder (1961)
5
in
his theory gave importance to demand side factors like similarity in income levels
across nations and income distribution characteristics in determining pattern of
trade. As per this theory, international trade takes place between those countries
which have similar income levels and demand patterns.
Thus, Linder’s theory explains the reasons for large volume of trade in
manufacturers among developed countries. The theory highlights the fact that the
lion’s share of world trade is among the developed countries with broadly similar
per-capita incomes rather than between the developed and underdeveloped
countries.
(c) Posner’s Imitation Gap or Technological Gap Theory – M.V.Posner (1961)
6
analysed the effect of technology on trade. He regards technological changes as a
continuous process which influences the pattern of international trade. The model is
based on the assumption that trading countries have similar factor endowments and
identical production functions for established products. But, the technology is

Page 12
38
different between the trading countries. This difference in the technology leads to
introduction of new products and new production processes by a firm in a country.
As a result, an innovating firm which creates a new product might acquire a
temporary comparative advantage in the exports of its products to other countries.
This comparative advantage could be called as ‘technology gap’. To conclude, the
technological gap theory is more realistic than the traditional theories because it
analyses the effect of technical changes on the pattern of international trade.
(d) Vernon’s Product Cycle Theory – Vernon (1966)
7
has put forth the product
cycle hypothesis. Vernon’s model is a generalization and extension of the
technological gap model. It states that the development of a new product moves
through a cycle or a series of stages in the course of its development, and its
comparative advantage changes as it moves through the cycle.
As a new product passes through different stages in a domestic market, in the
similar way it passes through different stages in the international market. Generally,
a product passes through the three stages during its life time. These stages are - (a)
New product stage, (b) Maturing product stage and (c) Standardized product stage.
To conclude, we can say that the Posner’s technological model stresses the time lag
in the imitation process, while Vernon’s product cycle model stresses the
standardization process. Both the models, try to explain dynamic comparative
advantage for new products and new production processes, as opposed to the basic
H-O model which explains static comparative advantage.
2.4.2.2 Intra – Industry Trade Models
Intra – industry trade refers to trade between identical countries which are exporting
& importing similar but differentiated products. The intra- industry trade models
developed after 1970s take into account firm level internal economies of scale and

Page 13
39
product differentiation in explaining trade between identical economies. In the late
1970s, several researchers like - Krugman, Dixit & Norman, Lancaster etc.
independently formalized the idea that economies of scale and imperfect
competition can give rise to trade even in the absence of comparative advantage. It
was the Grubel & Lloyd’s (1975)
8
study which formed the basis for the development
of intra-industry trade models. They found that international trade was maximum
between identical (capital abundant) developed countries, and these countries,
exported and imported similar but differentiated products. It was Krugman (1979)
who formalized it into a systematic general equilibrium model by taking Dixit &
Stiglitz’s (1977)
9
general equilibrium theory of monopolistic competition for the
first time. The main intra –industry models are as follows:
(1) Krugman’s Model (1979)
10
– Paul Krugman’s model marks a distinctive and
realistic departure from the traditional models because it recognizes the role of
economies of scale and monopolistic competition in international trade.
Krugman in his model points out that trade is possible between the two countries
having identical tastes, technology, factor endowments & income levels, because of
product differentiation and internal economies of scale in production. Thus, the
sources of trade between identical economies lies in product differentiation and
internal economies of scale in production of manufactured goods under a
monopolistic competitive framework.
The implications of his model are – (a) Trade increases the choice of goods available
to consumers and thereby improves consumer welfare. (b) Trade can cause an
increase in demand, production and real income, facilitated by economies of scale.
(2) Brander – Krugman Model (1983)
11
– The Brander- Krugman model of intra-
industry trade is based on oligopolistic competition. This model considers the

Page 14
40
application of the concept of dumping in international trade. The Brander- Krugman
model considers a situation in which two firms of two countries resort to dumping in
each other’s domestic market. Hence, their model is also known as reciprocal
dumping model.
Dumping in the context of international trade means a practice in which a firm sells
its products in foreign market at a price much lower than its domestic price. The
situation in which dumping leads to a two way trade in the same product is known as
reciprocal dumping. The possibility of dumping in international trade was first
noted by Brander (1981)
12
and then extended by Brander & Krugman (1983).
The Brander- Krugman model suggests that with the opening up of trade the
monopoly situation turns into a duopolistic market structure, which is a form of
oligopolistic competition. Thus, their reciprocal dumping model explains the intra-
industry trade in homogenous products under oligopolistic competition. However,
the model fails to explain the net effect of such peculiar trade on a nation’s
economic welfare.
2.4.2.3 Strategic Trade Policy Models
The strategic trade policy models provide certain theoretical justification for policy
intervention such as home market protection and export subsidies towards increasing
exports and national welfare.
In the broader sense, the strategic trade policy models are an extension of intra-
industry trade models. These models are developed in a partial equilibrium
framework by assuming oligopolistic competition. The basis of these models lies in
the trade war between industrialized countries such as United States, Japan, and the
European Community. Two strategic trade theory models are as follows:

Page 15
41
(a) Krugman’s Model (1984)
13
– Krugman’s strategic trade policy model shows that
import protection of domestic producers could lead to export promotion. In this
model three forms of economies of scale are taken into account - (a) Static internal
(to a firm) economies, (b) Economies in Research & Development and investment,
(c) Dynamic economies of learning by doing.
(b) Brander & Spencer’s Model (1985)
14
– Brander & Spencer’s model shows that
export subsidies could help domestic producers to capture third country markets at
the cost of foreign rivals. This is a two stage (game theory) model in which
governments (simultaneously) choose subsidy levels in the first stage and firms
(simultaneously) choose output levels in the second stage. There is no domestic
consumption in either country. i.e. firms produce only for the third country market.
The model assumes foreign firm does not receive export subsidy.
An export subsidy to a domestic firm is considered as a reduction in its cost of
production. Hence, it becomes profitable for the domestic firm to expand its sale in
the third country market, and capture a large market share at the cost of the foreign
rival.
Briefly, it can be said that the new theories are quite capable of explaining the
pattern of world trade today.
On the significance of intra-industry trade Krugman & Obstfeld (2000) have pointed
out that: –
➢About one –fourth of world trade consists of intra-industry trade that is two
way exchange of goods within standard industrial classification. Intra-
industry trade plays a particularly large role in the trade in manufactured
goods among advanced industrial nations, which accounts for most of the
world trade.

Page 16
42
➢Intra-industry trade produces extra gains from international trade, over and
above those from comparative advantage, because intra-industry trade allows
countries to benefit from larger markets.
➢By engaging in intra-industry trade a country can simultaneously reduce the
number of products it produces and increase the variety of goods available to
domestic consumers.
➢By producing fewer varieties a country can produce each at a larger scale,
with higher productivity and lower costs. At the same time, consumers
benefit from increased choice.
➢Intra-industry trade tends to be prevalent between countries that are similar
in their capital labour ratios, skill levels, and so on. Thus, intra –industry
trade will be dominant between countries at a similar level of economic
development .Gains from this trade will be large when economies of scale
are strong and products are differentiated.
15
2.5 SUMMARY
The main issues with respect to theories of international trade can be summarized as
follows –
To begin with “mercantilists” view dominated the economic philosophy during 17 &
18
th
centuries. The mercantilist theory was highly nationalistic in its outlook which
favoured state regulation and centralization of economic activities. Mercantilists
believed that trade is a zero sum game and the objective of foreign trade was to
achieve surplus in balance of payments. Hence, the concept of balance of payments
or balance of trade was evolved for the first time in the writings of mercantilists.

Page 17
43
However, they failed to address the issues such as – gains from trade, structure of
trade and terms of trade.
Adam Smith emphasized the importance of free trade in increasing wealth of all
trading nations. His theory of international trade was based on the principle of
absolute cost advantage. He advocated a policy of laizzez faire. Adam Smith’s
theory was strongly criticized by David Ricardo and others. David Ricardo argued
that it is the differences in comparative costs which forms the basis of international
trade. His theory was based on the principle of comparative cost advantage.
According to him, each country will specialize in the production of those
commodities in which it has the greatest comparative advantage or the least
comparative disadvantage.
The credit of developing modern theories of international trade (in early 20
th
century) goes to the two economists viz. Eli Heckscher and Bertil Ohlin. Heckscher
– Ohlin have explained the basis of international trade in terms of factor
endowments. According to them, international trade results from differences in
factor endowments in different countries. Thus, according to them, capital rich
countries will export capital intensive goods and import labour intensive goods. On
the other hand, labour rich countries will export labour intensive goods and import
capital intensive goods.
The Ricardian theory and Heckscher – Ohlin theory were relevant till the first half of
the twentieth century because till that they could satisfactorily explain the pattern of
world trade. Later on several economists modified the Heckscher – Ohlin theory by
introducing the role of economies of scale, imperfect competition, differences in
technology etc.

Page 18
44
The international trade theories which are developed after 1970s have explained the
international trade by considering increasing returns to scale, technological
innovation, product differentiation, oligopoly, etc. For instance, Posner’s
technological gap theory and Vernon’s product cycle theory have analysed the effect
of technical changes on the pattern of international trade.
Another important development in the theories of international trade in the late
1970s is the development of intra – industry trade models. The intra – industry trade
models emphasize that economies of scale and imperfect competition can give rise
to trade even in the absence of comparative advantage. Some of the important intra-
industry models are developed by Krugman (1979), Brander & Krugman(1983),
etc.
The strategic trade policy models developed in the second half of 1980s are
extension of intra-industry trade models. These models are developed by assuming
oligopolistic competition and the basis of these models lies in the trade war between
industrialized countries such as United States, Japan & the European Community.
Krugman(1984), and Brander & Spencer (1985) have made notable contributions to
the strategic trade models.
To conclude, over a period of time the development in theories of international trade
have gone significant change. The earlier theories (prior to1970s) assumed only two
products, two commodities, two factors, two countries, perfect competition, constant
returns to scale, constant technology, etc. While the new theories which are
developed after 1970s are based on more realistic assumptions like – change in
technology, imperfect competition, changing returns to scale, etc. Hence, the new
theories which are developed after 1970s and 1980s are quite capable of explaining
the pattern of world trade today. Economists like Krugman & Obstfeld have

Page 19
45
observed that about one – fourth of world trade consists of intra – industry trade.
The gains from intra – industry trade are considered to be over and above that from
comparative advantage. It is also believed that in future, intra – industry trade will
be dominant between countries which have similar level of economic development.
NOTES & REFERENCES
NOTES
a. The pure theories of international trade assume that the equilibrium in balance of
payments is maintained and they consider the issues such as distribution of gains
and terms of trade.
REFERENCES
1. Blaug Mark (1978) – Economic Theory In Retrospect – New Delhi, Vikas
Publishing House Pvt. Ltd., pp. 11 & 12.
2.Ibid, p.12.
3. Stolper W. F. & Samuelson P. A. (1941) – “Protection & Real Wages” – Review
of Economic Studies, Vol. 9, No. 1, pp. 58 -73.
4. Kravis I. B. (1956) – “Availability & Other Influences on the Commodities
Composition of Trade ”– Journal of Political Economy, Vol. LXIV, April, pp. 143 –
155.
5. Linder S. B. (1961) – An Essay on Trade & Transformation - New York, John
Wiley .
6. Posner M. V. (1961) – “International trade & Technical change” – Oxford
Economic Papers, Vol. 13, No. 3, pp. 323 - 341.
7. Vernon R. (1966) – “International Investment & International Trade in the
Product Cycle” - Quarterly Journal of Economics, Vol. 80, No. 2, pp. 190 – 207.
8. Grubel H. & Lloyd P. (1975) – Intra – Industry Trade: The Theory and
Measurement of International Trade in Differentiated Products- London,
Macmillan.

Page 20
46
9. Dixit A. K. & Stiglitz J. (1977) – “Monopolistic competition & Optimum Product
Variety” – American Economic Review, Vol. 67, No. 3, pp. 297 -308.
10. Krugman Paul R. (1979) – “Increasing Returns, Monopolistic Competition and
International Trade ”– Journal of International Economics, Vol. 9, No. 4, pp. 469 -
479.
11. Brander James & Krugman Paul (1983)- “A Reciprocal Dumping Model of
International Trade ”– Journal Of International Economics, Vol. 16, Nos. 3 – 4, pp.
313 – 321.
12. Brander James (1981) –“ Intra-Industry Trade in Identical Commodities” –
Journal of International Economics, Vol. 11, No. 1, pp. 1 – 14.
13. Krugman Paul R. (1984) – “Import Promotion as Export Promotion” in - Henry
Kierzkowski (Ed) - Monopolistic Competition and International Trade – Oxford,
Oxford University Press.
14. Brander James & Spencer Barbara (1985) – “Export subsidy and International
Market share rivalry”– Journal of International Economics, Vol. 18, Nos. 1 – 2, pp.
83 – 100.
15. Krugman Paul R. & Obstfeld Maurice (2000) – International Economics –
Theory & Policy - New Delhi, Addison –Wesley Longman, pp. 138 – 140
New Zealand too has joined the rhetoric. Traditionally we have been a
reasonably positive nation around foreign trade and our connectedness to the
rest of the world, but in this new political climate we need to be careful.

We need to make sure we don't ignore that which creates prosperity and
inclusion – that is, economic competition, business growth, diversity, foreign
trade, immigration – in favour of protectionism.

Governments have the most important role here. Any government that wants to
promote an inclusive society must first recognise the part that business and a
competitive economy play in creating prosperity and inclusion.

Otherwise we will all be less well off.

With strong evidence suggesting that open and competitive economies are the
best drivers of inclusion, governments need to create the right environment for
businesses to start-up, grow easily and become flexible in how they go about
doing business.

This includes being able to attract investment and include talent from the most
appropriate source (be it domestic or international), and being able to select a
workforce from a diverse population.

Without the right economic conditions, society cannot benefit from trade and
investment.

Fortunately, in New Zealand some good work has already gone in towards
achieving this. A good example is the very large investment in high speed
broadband infrastructure undertaken by government and the private sector over
the last few years.

This vital infrastructure allows large and small businesses to benefit from global
connectedness and competition almost no matter where they operate from in
New Zealand.

Governments also need to ensure that the way they interact with business and
society is as efficient, effective and fair as possible. This means business needs
good corporate governance, including fair and equitable tax systems.

There has been criticism over the last few years of some businesses appearing
not to pay their fair share of tax.
While the OECD has been working on possible solutions to the issue, it is still
important for governments to ensure that domestic tax systems are conducive to
businesses paying their fair share of tax.

Any government keen for diversity must also implement domestic policies that
prepare people for change and disruption by equipping them with better skills
and providing them with better opportunities for inclusion.

Business needs increased participation. This implies that the social welfare
system must play an important role in enabling people who lose their jobs or go
through difficult circumstances to have a real opportunity to participate in the
workforce again – and the sooner the better.

It also suggests that the way in which skills are acquired should be as relevant
and focused as it can be.

For example, we increasingly need to make sure that digital skills are of a high
standard. Not just amongst our young people in our schools but also amongst
those currently in the workforce.

In any plausible scenario about the future of work it is not the loss of jobs that will
matter so much as the change in existing jobs.

Much of that change will involve digital and this suggests we need to do a much
better job of ensuring that today's workers, including those who are older, have
the skills and resilience to move forward in a new digital world.

We need to ensure that we are not struck with the digital divide that is so
prevalent in other countries.

For example, women, older Kiwis and those living in rural and regional areas
need to be given the same digital literacy opportunities as everyone else, so that
they can play their part in our digital future.

Finally we know that young, small businesses are the key engines of job growth
in any economy. This suggests that we really need to turn our minds to the
possibilities of entrepreneurship.

New Zealand is doing a good job in many areas here, including through a large
range of tech incubators and good work coming out of our business schools, but
more can be done – particularly with our young Maori and Pacifica population.

Those who argue that inclusion can only be improved through making it harder to
do business – such as restricting access to capital, making it harder to employ
people, or increasing taxes on whoever in society someone feels like blaming for
the negative impacts of globalisation – need to think again about the real role of
business, not just as a driver of economic growth, but also of inclusion in our
country.

Globalization in New Zealand

11/2/2015

Globalization is a interactive process between people, governments and companies of

different nations around the world. It is primarily driven by trade and investing
internationally. Globalization is primarily possible because of technology. Because of
globalization, nations are interdependent on each other and thus interconnected.

Globalization is continuously occurring in the country of New Zealand. The country is

showing the affects of globalization in a variety of ways and is rapidly increasing. One of the
ways that New Zealand is showing globalization is through imports and exports in the
country. Products and goods are constantly being brought in and taken out of the country to
be used and sold. For example, just in September alone, New Zealand exported 2.0 percent
more than they did in September of 2014. This trend was led by the export of beef.
Additionally, in the September quarter, the imports rose by 9.2 percent and this trend was
led by aircrafts (Statistics New Zealand, 2015). This shows globalization because New
Zealand is partaking in trade with other countries in the means of both selling and buying
goods and products. Another example of globalization in New Zealand is the integration of
diverse cultures. The is a very great attribute of New Zealand because not only Kiwis,
people from New Zealand, live in New Zealand. In any given day, a person in New Zealand
could come in contact with someone from Europe, Asia, and even the United States. This
shows that globalization is prominent in New Zealand because people from all over the
world are coming to New Zealand to live, study and work. Lastly, another example of
globalization in New Zealand is multi-national companies based in New Zealand. For
instance, the company Xero was created and is solely based in New Zealand. However,
since then, it has become a world-wide company with offices in the United States, Australia,
and the United Kingdom (Xero, 2015). This multinational company is a prime example of
globalization because it is operating on a global scale in various places across the world,
showing its growth from just being a small company in New Zealand when it first started.

Overall, I feel that globalization is a positive process that will hopefully, one day, make the
entire world a better place. I personally think that this is the intention of globalization, even
though it may not seem like it at times. In New Zealand, there are many pros and cons to
globalization, although I feel that there are more pros than there are cons. The most
obvious pro is that globalization creates jobs, not just in New Zealand, but around the world.
Having the opportunity to export and import goods, and have multi-national corporations
creates more jobs that are needed to make these things a possibility. However, at times this
could also be a con. Depending on what the export is, the product or good could be make
more efficiently and cheaper if it was produced in another country and then shipped to New
Zealand. This still creates jobs but not for the people living in New Zealand. I do not feel like
this is an intention of globalization, but it is up to people involved in this process to make a
change and do what was intended of globalization: to make the world a better place.

Citations:
Overseas Merchandise Trade: September 2015. (2015, October 27). Retrieved November
3, 2015, from
http://www.stats.govt.nz/browse_for_stats/industry_sectors/imports_and_exports/Overseas
MerchandiseTrade_HOTPSep15.aspx
From Auckland to Oslo, Havana to Berlin, millions of people flocked to capitals
and major cities to decry capitalism. The worldwide nature of the demonstrations
left the undeniable impression that protest has become the most high-profile
product of globalisation.

The protests marking the traditional workers' day took on new meaning this year,
linked as they were with movements that have grown since the so-called Battle of
Seattle in December 1999.

The example of Seattle, when thousands of people disrupted a World Trade

Organisation meeting, has spawned similar demonstrations and inspired millions
to take to the streets.

Their common enemy is globalisation, but their backgrounds are as varied as the
languages they speak.

The scene on the streets, however, is only the most visible end of an insurrection
that has made business and world leaders sit back and take stock, if only of their
own tactics.

Even the term globalisation is being reconsidered, with politicians admitting that it
now conjures up negative images.
"We're going to have to find a new term because that word globalisation has
become too sullified right across the world," said Australia's Trade Minister Mark
Vaile at last year's World Economic Forum - another trigger for violent protests.

What is globalisation?

The most basic definition is the international integration of markets for goods,
services and capital.

Related articles:

But globalisation is a process that cannot be undertaken without parallel social

and cultural changes - and that is where the battle is being fought.

Globalisation is a product of trade and international business, a function of

organisations like the World Trade Organisation and multinational corporations.

Yet it is nothing new. Niall Ferguson, a professor of political and financial history
at Oxford University, wrote in Britain's Daily Telegraph yesterday that world trade
figures now are comparable to those just before the First World War. In 1913,
merchandise exports accounted for about 9 per cent of the world's gross
domestic product. In the 1990s, it was 13 per cent.

Professor Ferguson said the globalisation pattern of the early 1900s was brought
about by the technological advances of the day - railroads, steamships and the
telegraph. Wars and economic retraction put a halt to it.

The recent rapid advances in computer technology, telecommunications and

travel have helped this latest round, stirred along by political will to break down
national trade barriers.

What do the believers in globalisation say the benefits are?

The WTO, watchdog and champion of a global world market, says trade
liberalisation has come a long way thanks to the 1986-94 Uruguay Round of
negotiations between countries.

Tariff cuts resulting from those talks have reduced customs duty collected on
imports between 1994 and 1999 by 10 per cent for the United States, the
European Union and Japan. These account for nearly half of the world's imports.
The organisation's director, former New Zealand Prime Minister Mike Moore,
says the only way people and countries can achieve their full potential is by
tackling the remaining trade barriers.

Supporters such as the Business Roundtable see the free and open markets of
globalisation as a prerequisite for economic growth.

Minister for Trade Negotiations Jim Sutton says New Zealand's economic well-
being relies upon further international trade liberalisation. In a recent speech, he
said a 50 per cent reduction in global tariffs would add about 4 per cent to the
country's GDP.

With the progress towards future worldwide trade deals only a wish at the
moment, the Government has taken up the approach of securing further regional
deals such as the proposed closer economic partnership with Hong Kong.

During a visit to Hong Kong last week, Prime Minister Helen Clark told a
business audience that New Zealand was seeking "new, open trade
relationships."

"At the regional level, New Zealand supports linkages between our CER
agreement with Australia and the Asean free trade area."
So what are the protesters campaigning against?

A study published by the non-government organisation Arena last month damned

the Hong Kong deal as "globalisation by stealth."

The paper, by researcher Bill Rosenberg, said the agreement contained hidden
dangers for New Zealand, including the destruction of the remaining textiles,
clothing and footwear industries.

Mr Rosenberg said the agreement would facilitate further pressure to

commercialise social services and diminish control over foreign investment,
reducing New Zealand ownership of land and fishing quotas.

In short, the Hong Kong agreement would lead to the results feared from all
advances in globalisation.

Those on the streets say the inevitable results of globalisation are a reduction in
basic worker's rights, the advancement of the economy at the expense of the
environment, a growing gap between the First World and the Third, and the
transfer of power from governments to multinational corporations.

Auckland University's Professor Jane Kelsey says globalisation attacks our

democratic system. She has argued that the WTO fundamentally affects the
capacity of New Zealand Governments to determine and implement domestic
economic and social policy.

Giving fuel to the anti-free trade campaigners are figures showing globalisation
has taken place in parallel with widening income disparity around the world.

Professor Ferguson said the gaps had increased dramatically in the past 40
years.

"In 1963, the richest fifth of the [world's] population earned 71 per cent of the
world GDP; the poorest fifth, 2.3 per cent. Today the top fifth get 89 per cent of
the total output; the poorest, 1.2 per cent."

Who are the protesters?

There is no simple way of describing those who took to the streets this week.
They come from non-Government organisations, unions, political parties,
churches and universities.

They come from across the political spectrum. In Germany, far-left marchers
were unnerved when skinheads of the far right joined in.

Around the world, greenies and farmers are marching for the cause.

Before the World Economic Forum in Melbourne, unions, churches and non-
Government organisations formed beneath the umbrella of an organisation
calling itself S11, a coalition of largely left-wing activists.

Within the New Zealand Parliament, members of the Green Party campaign for
fair trade, not free trade. MPs Sue Bradford and Nandor Tanczos marched on the
Melbourne streets outside the forum.

But the protesters are not all what might be called radical.

In February, the leaders of the Pacific's small nations condemned the effects of
globalisation. Niue's Prime Minister, Sani Lakatani, told the Pacific Leaders
Conference: "The uneven distribution of wealth and power points to the potential
loss of sovereignty by Governments as the control of their respective economies
becomes more subject to global forces such as multinational companies and the
pressures of the select global brotherhood."

Cook Islands Prime Minister Terepai Maoata said: "I don't know where this
globalisation came from and from who - it's time to get together and fight."

What methods are used to halt globalisation?

The protests that have unfolded since December 1999 have been described as
the re-emergence of civil unrest on a scale not seen since the 1960s. Certainly,
the numbers who have taken to the streets around the world are staggering.

But the violence that has captured the attention of the television networks is not
the aim of most who have joined the protest lines. Many, in fact, believe the
shattering of glass and the sound of pitched battles have drowned out the
message.

Organisers favour civil disobedience, but not violence. Cyclists in London on May
Day, for instance, went on a slow ride to make their point.
Multinational companies such as McDonald's and Nike are targeted for protest,
and slogans are painted on their buildings.

Internet communications are used to inform and debate about the issues.

An activist newsletter posted on the internet yesterday called for more calm in
future protests.

"We need to train and prepare as many people as possible," said the newsletter,
Organising in the Face of Increased Repression.

"We also need ever-more flexible and creative tactics ... We need to clarify our
vision of the world we want to create so we can mobilise people's hopes and
desires as well as their outrage. And we need to be creative, visionary, wild,
sexy, colourful, humorous, and fun in the face of the violence directed against
us."

Will the forces for or against globalisation win the fight?

It depends whom you ask.

It is not too late to stop globalisation, but there are powerful forces behind it. In
New Zealand, the Labour-Alliance Coalition has put a five-year freeze on tariff
reduction and introduced labour issues into discussions about its trade
agreements.

Internationally, there are fears among pro-trade campaigners that countries have
lost their nerve.
International trade agreements and conventions help you to do
more and better business in a range of markets. The New
Zealand Government works continually to negotiate and upgrade
trade agreements and help New Zealand companies overcome
trade barriers.
What trade agreements do

Free trade agreements (FTAs) and other agreements improve market access and
remove barriers for goods and services travelling between the signatory countries. This
can include tariff cuts as well as removing barriers to trade and investment.

When you’re doing business in a signatory country, trade agreements can give you a
head start over competitors from non-signatory countries, or level the playing field in
markets where your competitors already have their own trade agreement advantages.
New Zealand’s free trade agreements

New Zealand is a signatory to the following trade agreements:

 ASEAN-Australia New Zealand Free Trade Area (AANZFTA)
 New Zealand-China Free Trade Agreement
 Trans-Pacific Strategic Economic Partnership (P4)
 New Zealand and Thailand Closer Economic Partnership
 New Zealand and Singapore Closer Economic Partnership
 Australia and New Zealand Closer Economic Relations (CER)
 New Zealand-Korea Free Trade Agreement
 Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)
 New Zealand and Malaysia Free Trade Agreement - signed but not yet in force.

Find out more about trade agreements currently in force on the Ministry of Foreign
Affairs and Trade (MFAT) website.
Conventions, treaties and controlled exports

New Zealand has signed up to a number of conventions and treaties that affect
international trade. These include conventions that protect and assist companies doing
business internationally such as the Anti-Counterfeiting Trade Agreement.
Conventions and treaties can place requirements on your business as well as
protections. For instance, if you’re exporting hazardous waste for disposal, you will need
a permit from the Ministry of Business, Innovation and Employment (MBIE). See the full
list of conventions and treaties at New Zealand Treaties Online.

Controlled exports are also called strategic goods. These include:

 Military equipment, including weapons, explosives and ammunition
 Substances designed for use in chemical weapons
 Nuclear materials
 ‘Dual-use’ technology – this can include commercial products, components, software or
intellectual property with a potential military use.

You must have permits or consents from the Ministry of Foreign Affairs and Trade
(MFAT) to export strategic goods.

MFAT also applies ‘catch-all’ controls to exports connected to weapons of mass

destruction, or destined for military use by countries under UN arms embargoes.

If you’re planning to export strategic or controlled goods, read more about the required
permits and the application process on MFAT's website.
Non-tariff barriers

Trade barriers such as government policies and regulations are called non-tariff
barriers. Find out how government agencies can help reduce or prevent some of these
barriers

Red tape can push up costs

Non-tariff barriers are rules that make it costly or difficult to export to a particular market.
You might experience these as ‘red tape, ‘roadblocks’ or ‘costs of doing business’.

The barriers can arise with any type of export from food to digital goods and services.

Examples include:
 administrative procedures
 quantity restrictions (such as quotas)
  price controls
 subsidies
 product labelling requirements
 private standards
 phytosanitary or technical regulations and standards.

Help available to break the barriers

Government agencies can help with trade barriers. We may be able to reduce, resolve
or even prevent them from happening. That might be by holding government to
government discussions – where officials talk through the issues with overseas
agencies. Or it might be through longer-term free trade agreement negotiations.

Some barriers can be cleared up quickly, but others can take years to resolve. It
depends on their nature and the willingness of the foreign partner to sort them out.
Some may never be resolved for reasons beyond New Zealand’s control.

Sometimes non-tariff barriers exist for good reasons – for example, regulations to
protect public health or the environment. In those cases, foreign governments may
agree that New Zealand’s regulations provide equivalent protection. Or they may
improve their regulations so they meet their purpose without impeding free trade.

What is New Zealand's trade policy?

New Zealand's prosperity depends on trade. We work hard to expand opportunities and
improve conditions for New Zealand in overseas markets and we support international trade
rules which, alongside other government policies, support sustainable and inclusive
economic development. We are currently consulting with New Zealanders on the
development of a Trade for All policy with the aim of ensuring trade delivers for all New
Zealanders wherever or whoever they are.
Read more about Trade for All.
Why does New Zealand advocate free trade?

Trade is critical to New Zealand's economy

New Zealand is a strong advocate for free trade and the regional and international
institutions that support it. This is the case for a number of key reasons:
 Trade is critical to New Zealand’s economy. We can only pay for the goods and services we
import from overseas by selling exports to other countries. At the moment, international
trade (exports and imports) make up around 60% of New Zealand’s total economic
activity.
 Supporting open markets is a logical response to the nature of our economy. With a population
of only 4.8 million people we lack the scale to produce at affordable prices the diverse
 high quality goods we import, and we are too small to provide a market that would
sustain many of our export sectors. The jobs of more than 600,000 New Zealanders are
in direct export sectors or in sectors supporting exports. Many of these jobs are in the
regions. Overseas markets provide the opportunity for New Zealand businesses to grow
to a scale that simply could not happen in New Zealand alone.
 Free trade doesn’t just benefit our exporters. Our open economy has meant New Zealand
importers and consumers now enjoy access to a much wider and more competitively
priced range of goods and services. Without imports New Zealanders would not have
access to anything containing a computer chip – such as mobile phones, computers,
and modern televisions. The competition provided by imports ensures that consumers
can access a wider range of quality products at internationally competitive prices than
would be possible if we could buy only from ourselves.
 Other countries are seeking to trade more as well. Since 2000, regional and bilateral free
trade agreements (FTAs) have flourished worldwide. As our global competitors develop
new networks of trade agreements with each other, New Zealand also needs new FTA
partners or it risks our exporters being disadvantaged.
Goods trade

New Zealand is the #2 dairy exporter in the world

Goods made up 70% of New Zealand goods and services exports and were valued at $53.6
billion in the year ending December 2017. For our major primary sectors – meat, dairy,
fisheries, wine, forestry and some horticulture products – between about 70 percent and 95
percent of the output they produce is exported. Without trade, between 70 and 95 percent
of those industries in New Zealand would simply not exist. The impact on Māori and the
regions would be especially acute.

Agricultural goods – New Zealand is the world’s 12th largest agricultural exporter by value
and the #2 dairy exporter in the world. We’re the number one sheep meat exporter, the
number one dairy product exporter and the second biggest wool exporter. Improving
productivity, value-add and export earnings in this sector are critical to New Zealand's
sustainable economic growth. FTAs are one way the government can support such growth.
Non-agricultural goods – 38% of our merchandise exports are non-agricultural goods. Our
top earners include forestry products, crude and refined petroleum, and fish products; and
exports of manufactured products such as clothing and electronics are growing. However,
as a whole, our non-agricultural exports have only been expanding by 1% per year in the
last decade. It’s critical we work to secure the FTAs we have under negotiation, and make
sure we help businesses to take full advantage of our current agreements. Other key New
Zealand industries such as specialised high-tech manufacturing are equally dependent on
international trade.

Services and investment

Services made up around 30% of New Zealand goods and services exports, valued at
$22.7 billion (December 2017). These exports include tourism (our largest service export),
transport, education and commercial services such as IT, telecommunications, accounting
and film production. Services exports (and imports) allow New Zealand firms to grow their
businesses by taking advantage of offshore opportunities, and new technologies are making
it easier to do this digitally. Inwards and outwards foreign investment can help New
Zealand businesses better integrate into supply chains, improve market access, reduce
costs and increase productivity. It is important that we continue to negotiate high-quality
comprehensive FTAs that cover trade in services and investment, as well as trade in goods.