MODULE 3:

INTERNATIONAL TRADE
AND FOREIGN DIRECT
INVESTMENT
Members:
Gortayo, Katrina Joy Tuberlleha, Gerome
Quijano, Shermaine Sangcajo, Mark Lester
Escano, Mildred Acosta, Ernel
INTERNATIONAL TRADE
 International trade is the concept of exchanging goods and services between
people or entities in two different countries.
 Consumer goods, raw materials, food, and machinery all are bought and sold
in the international marketplace.
CLASSICAL COUNTRY-BASED
THEORIES
 MERCANTILISM – a classical, country-based international trade theory that states that a
country’s wealth is determined by its holdings of gold and silver.
The objective of each country was to have a trade surplus and to avoid a trade deficit.
 Trade Surplus – when the value of exports is greater than the value of imports.
 Trade Deficit – when the value of imports is greater than the value of exports.
 Protectionism – the practice of imposing restrictions on imports protecting domestic industry.
FORMS OF PROTECTIONISM
 Tariffs Taxes or duties typically levied on imports as they enter the country.
 Imports Qoutas
 Embargoes
 Export Subsidies.
 Foreign Exchange Controls
 Non-Tariff Barrier

Protectionist policies are typically focused on imports but may also involve other aspects of
international trade such as product standards and government subsidies.
GENERAL AGREEMENT ON
TARIFFS AND TRADE(GATT)
 Formed in 1947 by 23 countries to abolish qoutas and reduce tariffs.
 One of the achievements of the GATT was that of trade without discrimination.
 WTO – World Trade Organization(1st January 1995), 153 members countries(2010)

WORLD TRADE ORGANIZATION

 Created in 1995, it is an international institution that oversees the rules for global trade among
nations.
 As of 2021, the WTO has 164 members countries.
 The WTO attempts to mediate between nations in order to benefit the global economy.
KEY TRADING PRINCIPLES
UNDER GATT AND WTO
 Restrictions on the use of qoutas.
 Allowing retaliation.
 A requirement to grant’ most favored nation
 Members not allowed to treat imported good.

WORLD BANK WASHINGTON D.C

 IBRD (International Bank for Reconstruction and Development)

 IDA (International Development Association)

 MIGA (Multilateral Investment Guarantee Agency)

 IFC (International Financial Corporation)

 ICSID (International Centre for the Settlement of Investment Dispute

 IMF (International Monetary Fund)

GATT AND THE WORLD
TRADE ORGANIZATION(WTO)
 Then extend to include 100 centuries.
 GATT’s aim was to promote trade and reduce/eliminate tariffs.
 GATT three major round:

1. The Kennedy Round in the mid-1960s

2. The Tokyo Round in the mid-1970s
3. The Uruguay Round in 1993: which concluded seven years of difficult negotiation.
ABSOLUTE ADVANTAGE
 Adam 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. He reasoned that trade
between countries shouldn’t be regulated or restricted by government policy or intervention.
He also stated that trade should flow naturally according to market forces.

COMPARATIVE ADVANTAGE
 The situation in which a country cannot produce a product more efficiently than another
country. However, it does produce that product better and more efficiently than it does another
good.
HECKSCHER-OHLIN THEORY
 Also called Factor Proportions Theory. It was created by Eli Heckscher and Bertil Ohlin.
 The classical, country-based international theory states that countries would gain comparative
advantage they produced and exported goods that required resources of factors that they had
in great supply and therefore were cheaper production factors.
 MODERN OR FIRM-BASED
TRADE THEORY
 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.
COUNTRY SIMILARITY:
(SWEDISH ECONOMIST
STEFFAN LINDER THEORY)
 A Modern, Firm-Based International Trade Theory states that explains industry trade by
stating that countries with the most similarities in factors such as incomes, consumer, habits,
market preferences, stage of technology, communications, degree of industrialization, and
others will be more likely to engage in trade between countries and industry trade will be
common.
PRODUCT LIFE CYCLE THEORY: (RAYMOND
VERNON, A HARVARD BUSINESS SCHOOL
PROFESSOR)
 The optimal location for the production of certain types of goods and services shift over time
as they pass through the stages of market introduction, growth, maturity, and decline.
 Introduction – innovation, production, and sales occur in the domestic country. Innovative
customer tend to accept relatively high introductory prices.
 Growth – as demand grows, competitors enter the market. Foreign demand, competition,
exports, and investment activities also begin to accelerate.
 Maturity – global demand begins to speak, production process are relatively standardized, and
global price competition forces production site relocation to lower-cost developing countries.
 Decline – market factors and cost pressures dictate that almost all production occur in
developing countries.
GLOBAL STRATEGIC RIVALRY
THEORY
 By economist Paul Krugman and Kelvin Lancaster.
 Refers to the competition or conflict between countries or other actors on a global scale,
typically involving economic, political, military, or technological dimensions.

POTER’S THEORY
 Refers to the ability of a country to produce and export goods and services more efficiently
and effectively than other countries. This competitive advantage is determined by several
factors, including:
 Factor condition
 Related and supporting industries
 Firm strategy
 Demand condition
FOUR DETERMINANTS OF
POTER’S THEORY
 Local Market Resources & Capabilities – resources, human resources, natural resources etc.
 Local Market Demand Conditions – poter believed that a sophisticated home market is critical
to ensuring ongoing innovation, thereby creating a sustainable competitive advantage.
 Local Supplier & Complimentary Industries – is a business or individual that provides goods
or services to customers within a specific geographic area, typically within a city or region.
 Local Firm Characteristics – local firm characteristics include firm strategy, industry structure,
and industry rivalry.
WHICH TRADE THEORY IS
DOMINANT TODAY ?
 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 its 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.