Patterns of International Trade
Pattern of International Trade, Trade Theories, Export-ImportWelcome friends to the class of International Business. In a time when the Indian stockmarket is going downhill and the companies most of the companies are in the red right!Still there is a good news that, Amazon is trying to double its stores in the next coming 4years in India right! So, this is a case of an international example of an internationalbusiness how companies are trying to invest more in India.And similarly, we are trying to also go overseas. In this lecture today we are going todiscuss about we will be carrying on from the last class; where we talked about youknow the new economic policy, the challenges of internationalization and globalizationand its impact, privatization and how it all started in the year 1991, under the leadershipof then prime minister Narasimha Rao and the finance minister Dr. Manmohan Singhright!So, India has been going through some interesting time right! So, there has been in thepast we saw lot of difficulties, but then there has been substantial growth in an Indianeconomy and India has become one of the most powerful economies in the world. So, intoday’s lecture we will be discussing about the theoretical foundations of internationaltrade right!(Refer Slide Time: 01:40)Let us see this if you can connect with these photos that is visible to you, the patterns ofinternational trade. Now, if you can see some patterns of trade are very fairly easy tounderstand right! Now let us look at this.It is obvious why Saudi Arabia exports oil right! Because its it has lot of oil reserves, nodoubt about it. Ghana exports cocoa, Brazil exports coffee, Sri Lanka exports spicesright! So, these are the countries which are blessed with certain kind of resources; andthey are thus exporting them. But the question is why does Switzerland export chemicals,pharmaceuticals, watches and jewellery?Why does japan export at automobiles, consumer electronics, and machine tools? Andwhy does the U.S. buy a lot of textiles from places like Honduras and Guatemala and ofcourse, textiles from Bangladesh? So, how these things are happening? So, today’slecture we will be discussing about the patterns of international trade, the theories behindthe international trade, how do these decisions happen? And how these decisions aretaken? Right!. So, what are trade theories basically? Trade theories are basically, thosetheories that help managers and policymakers to focus on a few questions.(Refer Slide Time: 03:01)What are these questions? The questions are from this cue if you can see, what, withwhom and how much? What products should you we import and export? Should we onlyexport? Should we only import? Should we both export and import? If yes then, howmuch should we export? And how much should we import? How much should we tradewith which country? What is the proportion of trade we should have? Right! With whomshould we trade?So, which countries are more favorable, right!? So, we should have a good relationship,economic relationship, trade relationship with them. So, these are some of the things thattrade theories help us to understand.(Refer Slide Time: 03:35)The question is why? What are the reasons for the international trade? So, first let usunderstand these reasons right! So, to start with we will go to the first point which is thedifferences in technology.Now, if you can see there are various technologies coming up; every day the in fact, thelargest change is happening, because of the change in technology or rapid expansion intechnology, as a time was there when the number of semiconductors would double every18 months was said by Robert Moore right! So, this time has changed and expansion oftechnology is everywhere.So, you can see the world has become a machinized world. And because of rapidexpansion in technology things have become much much faster, in comparison to the olddays when we were doing most of the things in a manual manner. Apple is highlydependent on key Japanese manufacturers and even Chinese right! More than half of thecomponents of an iPhone are from Japan and China which I have missed here.So, Japan and China and other countries also are suppliers, but most of the productscomes from Japan and China, I think I have shown you in the last to last class about theconfiguration of the different parts of Apple and who are the suppliers from whichcountries. So, first point is because technology is differing and somebody is having anadvantage in that. So, he would build more products, generate more products and canexport it to others right!So, this is the first difference first reason. The second is the difference in the resourceendowments now what are endowments? Resource endowments are basically the factorsof endowment which are basically land, labor, capital and entrepreneurship right! So,because there is a difference in this some countries would have an advantage insomething and others would have an advantage in something else ok.So, now because of these differences, because these differences exist, that is whysomebody would like to export what he is good at and try to import what he does nothave right! So, example you see United State imports textiles from Bangladesh right!since the efficient production of textiles requires a relatively cheap labor force andBangladesh has it right!Saudi Arabia’s oil and gas industry is very efficiently working, because the reasonsimple reason is there is a lot of natural resource in the Saudi the in the Gulf countries.Silicon Valley, the place where you know most of the companies the software company,tech companies are have opened their shop. You will see in the Silicon Valley there arehuge concentration of programmers drawn to the presence of massive because of themassive technical technology firms like Apple and Google.So, this is about for example, labor this is about the natural resource, land and so theseare the we are talking about the factors endowment right! the land, labor, capital and thespirit of entrepreneurship right! Then there is a difference in demand. So, because of thedifferences in the endowment and differences in the resources, so, there are differencesin demand also, as per the you know consumer needs.(Refer Slide Time: 06:47)So, what it says for example, Canadians may demand more beer right! the Dutch morewooden shoes, the Japanese more fish than Americans would; even if they are all facethe same prices and conditions.Similarly, if you look at the Indian market, the Indian market has been seeing a seachange in the last many years right! So, what has been the change Indians are demandingmore and more of the Western products and the high priced goods, the premium goodsand even if you see, the latest technology’s, cars, automobiles are today present in Indiaright!So, the demand from the Indian consumers has been tremendously increasing then, thescope of economies of scale in production. Now, first let us understand what iseconomies of scale. So, economies of scale means that, when a company tends toproduce more and more of a product, the cost of production goes down; that means, it isinverse relationship as the number of units goes up, the cost of producing a unit goesdown because why, what is the reason? Because you become an expert in the handling ofthe raw material you buy the raw material maybe with a in a with a through a goodnegotiation so, at a lower price.And, there is a very little wastage of time, there is a high hardly any switching costinvolved. So, because of these economies of scale is a very important factor right! Youcan see many automobile cell phone companies mobile phone companies assemble itsproducts in India right! The reason being is that first of all India itself is a huge market.So, the demand in this market is so large that, companies are finding it good andjustifiable, more rational to have their operations in India; because one the Indian marketis large, second there is a cheap labor force in India right! and the English speakingpeople right! So, all these advantages are supporting India in the Indian market and thusmany companies who to achieve such scales of economy, they are trying to have theirplants in India, operations in India right!So, this is a recent case Samsung launched the world’s largest mobile factory in Noida.Noida is around is Delhi; so, the capital of India. So, the new facility was set up with theaim of doubling its capacity for mobile phones from 68 million units a year to 120million units a year. This is taken from the economic times August 11 2019 right! So,you can understand that the demand is changing and there is a scope for achievingeconomies in the production.(Refer Slide Time: 09:23)Next point is why there is international trade is growing? The supportive governmentpolicies. Now, when there is a government when there is a new government; there arechange in policies right! So, these policies may be highly supportive and sometime theymight not be supportive, looking at the orientation of the government. For example,when the Americans had the democrat and then they had the republic republican form.So, there was a change in the policy right! So, people were more scared that now themaybe the Indians would have a tough time to settle in America right!Because of the large number of programmers and other people who are going to work inAmerica, they thought it would be tough because the republicans might not encourage;so, many people to stay in America. But, during the democrat time it was not that, therewas this fear was not there during Obama time for example. Indian government forexample, you see offers incentives and facilities to the units in the special economiczones for attracting foreign investments right!Duty free import, domestic procurement of goods for development, operation andmaintenance of the SEZ unit for example right! So, the government is offeringincentives, Exemption from Central Sales Tax, Exemption from Service Tax; Exemptionfrom States sales tax these have now subsumed to into GST, the Goods and Services Taxright! and supplies to SEZs are zero rated.So, these changes has helped the companies to have more faith and trust in the Indianmarket and the Indian government through the for the Indian government. Now thepresent government, the NDA government is now talking about, single windowclearance for Central and State level proposals right! the approvals and proposals.So, what does it mean? They want that businessmen should not feel the heat, they shouldnot feel disturbed and they should not be harassed and they should be able to start theirbusiness very early, very fast right! It should not be unnecessary, lot of obstacles shouldnot be there.So, all this has resulted you see that, there has been a 23 rank jump right! in the ease ofdoing business, India has moved from 100 rank to 77 right! recently. So, that is a verygood achievement. But still that is not all, because you cannot be happy we cannot behappy, when we are a 7th economy powerful economy and in we are 77 in ease of doingbusiness; that means, there is a lot and lot of opportunity to grow right! Where theproblems still lying in the taxes and resolving insolvency.So, these are the 2 areas there are many other areas, but the bright! the 2 important areasare which have a very high impact in welcoming the foreign investors is to resolve thetaxation problem and the insolvency problem. If India can achieve, solve these twoproblems and make it as minimal as possible these problems then India’s rank I am surewould go would be much better right! in the times to come.(Refer Slide Time: 12:23)So, what international trade allows a country? So, it says international trade allows acountry to specialize now that is very interesting, specialize in the manufacture andexport of products that it can produce efficiently. So, what it says international tradehelps one country to export something that it is doing best right!So, if Indians are very good at textiles for example, then we would like to export more oftextiles because we have an expertise in that right! To import products that can beproduced more efficiently in other countries.For example, in many of the machine tools or let us say the technology driven things,India would like to import because, still we are not as good as some of our counterpartslike Germany, Sweden and you know like countries and so, we would like to importsome of the technology for our own growth right! International trade helps in creatingjobs and boost the economic growth; obviously, when companies like Ford, whenSamsung are coming into India and setting up their offices and their operations.Obviously, it is creating jobs for the local people right! Companies gain a competitiveadvantage in global trade, we will explain that; the countries and the companies in thesecountries they tend to have a competitive advantage. So, in comparison when it is there isa comparison they might be better off in one thing and. So, they would tend to do moreof that so, right!So, there is a competitive advantage in doing certain things for example, India has acompetitive advantage because of its English speaking people as I said, largedemography and huge population that is and then the people are well educated the skillsets are also growing with time. So, this is all creating a competitive advantage for India.(Refer Slide Time: 14:22)What is the approach to exports and imports? Now let us see basically there are 2approaches. Now, if you seen one is called the laissez faire approach. Now what is thislaissez faire approach? Let us see, if you look at this diagram, now laissez faire versusthe command economy which is interventionist right! that means, there is an interventionsomebody is interfering now who is that somebody? That somebody is not nobody, butthe government here in this case.So, the government intervenes ok! So, when you compare a laissez faire versus acommand economy, what is happening? Now in the laissez faire economy if you see,what to produce is determined by the consumer’s preferences. How to produce isdetermined by the producers seeking profits. Now how much profit will it make. So, thatwill decide how to produce that. For whom to produce? So, that will be determined bythe purchasing power of the people.So, is there a demand? Demand means something which is backed by paying power. So,if there is a demand only they will make the product then only it is profitable. On thecontrary if you see in the command economy or in when there is an intervention what toproduce? How to produce? And for whom to produce? These things are determined bythe government.So, this is in you know spectrum where you can see through if you look at this diagram.So, where there is more government control, and there is a extreme end is the laissezfaire. So, there is no government control you can understand this is as a low or very lessgovernment control no or less government control.So, every country falls somewhere. So, India also must be somewhere what you can do isyou can think where India should fall if this is an extreme government control and this isa no government control or less government control you can understand. For example,North Korea to some extent China, to a large extent why some extent large extent China,but North Korea is an at perfect example; where the government control is extremelyhigh, extremely high right!China is not as high as North Korea in terms of government control, but still it is still youknow largely controlled by the government. Hong Kong, USA other site other laissezfaire government’s right! or the government is more free right! So, they did not want tohave controls. So, they want the market mechanism to work.If you have listened to the prime minister of India Mr. Narendra Modi in the August 15speech he spoke about this point where he said about the point where he said. Thegovernment has no role to play in the running of companies.So, the government should only be like you know stand as a savior or a facilitator tosupport, but not interfere in the businesses. So, that is a statement which shows that theprime minister of this country is now thinking towards moving towards a model which ismore market driven, what are the approaches?(Refer Slide Time: 17:18)So, we said the first is the laissez faire approach, it says one that allows the market forcesto determine the relations because some countries believe government programs lead toinefficiency it is not wrong also. If you see many of the opinion holds true in India, manyof the public sector units you see are today running highly inefficiently.And whatever the reasons may be, but the end result is they are inefficient and almostmany of them have become sick and these some of them are in the verge of gettingclosed down. So, there are several problems. So, it is thought that the government shouldnot be running the business that is not a very great idea, it restricts the governmentintervention in the economy.So, laissez-faire approach says less of government intervention in the economy. The onlyrole of government is to prevent any coercion against individuals. So, that means, forexample, if the companies that forming a cartel and trying to control the prices forexample, or you know any kind of coercion that is happens right! So, in such cases thegovernment would intervene. So, that is what you know the Prime Minister NarendraModi said in his Independence Day speech and he said the government should only stayas a supporter, support system and not interfere.So, whenever the role is required they will jump into right! The next point is free tradetheories. So, there are 2 points in this, one is the absolute advantage theory and thecomparative advantage theory we will do it in detail; which prescribes that thegovernment should not intervene directly to affect trade. So, these 2 theories one givenby Adam Smith, the other given by David Ricardo. They said these are the free tradetheory which says, the minimum the governments intervention is there in any economyor in any business setup it is better for the companies and the economy at large.(Refer Slide Time: 19:15)Now, what is this interventionist approach? Ok. So, we can understand it from two pointof view. So, one is called the mercantilism and the neo-mercantilism which prescribe agreat deal of government intervention to affect trade. Now what is that? Let us see. Tradetheories shows why it is beneficial for a country to engage in international trade even forproducts it is able to produce for itself. That means, suppose country A let us say India isgood at something right! is good at something still it should be in a trade relationshipwith another country to get the maybe to import or export the same item which it is doingstill good.Suppose, we are a good producer of rice or good producer of spices or good producer oftextiles, but that does not mean that India should not involve in trade relationship withother countries in these 3 items ok! Whether taking interventionists or laissez-faireapproach countries rely on the trade theories to guide policy development. So, how arethe countries economic policies developed? They are developed on basis of theseapproaches, looking at these approaches.(Refer Slide Time: 20:21)To meet its international objective, a company must gear its strategy to trading andtransferring its means of operations across borders; say from home country to hostcountry. once this process has taken place the countries are current economically. So, forexample, you see today in today’s time you can see India versus Pakistan for example,the trade relationship has become has been severed very badly right! it has been severed;it has affected very badly.So, because there is a lack of trade between these two countries are very very less oftrade. In fact, now at a we are a standstill position. So, the none of the economies aregoing to benefit. Nobody should think that India being a larger economy it will not getaffected, that is a very very wrong way of thinking.On the other side, if say somebody says only Pakistan is going to be you know be at aloss that is also wrong, both the countries will be at loss, but it is not about alwayseconomy so, there are other issues. So, which is not my you know part of my class. So, Iam not getting into it. But these are political and patriotic reasons for which we might notbe able to do business with them, but economically if you say it is a loss, there is nodoubt about it right!(Refer Slide Time: 21:32)So, what is this interventionist theory? First it says the mercantilism. It is a trade theoryholding that a country’s wealth is measured by its holding of “treasure”, now what is thistreasure? Treasure is usually means gold right! it started in the it was during this 1500 to1800 year time period, that this belief of economic thought was prevalent at that time.So, countries thought [FL] whoever was holding more treasure; that means, in more goldsimple terms was in a better position right! It emerged in England in the mid-16thcentury it started in 15, but it was largely prevalent in the mid-16th century. Countriesshould export more than they import what it said, countries should be more exportoriented than import because, they felt export is positive, import is negative; you see thatis why when you do more import it there is a deficit word attached right!And they say it is a favorable balance of trade for if you export more and it said there is adeficit created when you are trying to import more right! So, if successful received goldfrom the country that run deficit. So, what it says? You tend to export goods and get ingold right! So, more the treasure you have the better the country’s economy condition is.So, thus you can see buy less sell more.(Refer Slide Time: 22:57)This mercantilism is viewed as a zero-sum game right! One in which the gain by onecountry results in a loss by another. So, what is it what is the meaning? The total let ussay this is the total. Now if suppose A takes away this position. So, B is in a loss, but thetotal is the same. Now if you see if there is a suppose change right! if I try to make it thesame point same you know suppose I make it now B has gained in comparison to thesetwo diagrams B as gained, but A has shrinked, but the total is the remain the same. So,the total does not change right!So, what did he saying? In which a gain by one country results in a loss by another. So,what are the government policies accordingly for such a condition? Maximize theexports through subsidies. So, to export to export more you have to give subsidies toyour producers in the domestic market right! But that is a very questionable thing that wewill debate later on maybe through the classes.But the government thinks, you let us give subsidies; we Chinese economy is has thismodel is applied in the Chinese economy. So, when they have given lot of subsidies toimprove the exports right! and minimize the imports through tariff and quotas. Now yourestrict imports by increasing the tariff by putting some quotas you know some tradebarriers so, that people will not try to import the raw materials; rather try to make iteither in the domestic produce in the domestic market or not rely on such things.But that is a very you know very wrong idea to me it is a very fancifully wrong idearight! Some countries used their colonial positions you know for example, India was thecolony to the British right! So, British had lot of large number of colonies right! So, whatthey did was this countries France, Spain they had lot of Portugal, they had lot ofcolonies they use their colonial positions to support this trade policy.So, what they would do? They would get in the raw materials. So, there was hardly anyimport duty or any cost for them and they would use this raw material for their benefitand then supply it to other countries and export high. So, that was a very free you knowthere was a much larger gain for these countries. Example: China has been accused ofoffering state supported subsidies for industry, which I was just saying. Leading tooversupply of industries such as steel and others.For example you look at the lot and lot of industries for example, it starts from batterymanufacturing to toy manufacturing to even technological components right! whateveryou see China has been a you know has a large producer, the reason is because of thegovernments subsidies largely right!So, now, this has led other countries to compete because the other countries have notbeen able to go in a way as China did. A surge of protectionist sentiments example UStariffs on Chinese imports now. Now recently also the US has you know because of thetrade war which has happened between US and China.The US has levied a huge amount of you know tariff. Now this increase in tariff has ledto a decrease in the Chinese goods to get into the US market. So, now, these are theexamples where the government intervenes to control this right! What is the criticism?The criticism is that mercantilism views trade as a zero-sum game - one in which a gainby one country results in a loss by another, rather than a positive some game.So, as I said we are thinking that the total volume of this and this is same. Why cannot ithappen? That the entire market can grow right! Why do not we think it that way? Let thecondition remain the same. Suppose here A has 65 and B has 35 percentage let it be thesame here. But if I am increasing the size of the market right! So, this 35 does not meananymore the same 35 and the 65 does not mean the same 65.So, the value absolute value has increased right! Due to surplus gold another problemmoney supply will increase because of the reserves which gold is one of the majorreserves. The money supply in the market domestic market will increase and that leads toa high inflation because money becomes cheaper. So, this will lead to high inflation. So,these are the criticisms for the mercantilism view right! So, today we will wind up here.In the next lecture what we will do is we will continue from this mercantilism we will getinto the other theories other ways of thinking and then we will move further right! so.Thank you very much.