Chapter 10 - Alternative Trade Theories

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Chapter 10 - Alternative Trade Theories

• These theories explain trade flows from different
  perspectives.
• Chapter Introduction Most Mexican exports are
  not clothing, fruits and vegetables.
• They are electrical machinery and equipment,
  vehicles, nuclear reactors, boilers and similar
  items. (p. 169)
• There is obviously a need for trade theory
  besides H-O

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Chapter 10 - Alternative Trade Theories

• These theories either examine trade flows that
  are counter to the H-O theory, or provide
  different explanations for trade flows.
• They are based on
• dynamic models of the economy
• different market structure, or
• different demand patterns, or on.
• No model of trade explains ALL international
  trade. Each model provides some understanding of
  underlying economic forces, and consequences to
  trade, and to economic choices.

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Chapter 10 - Alternative Trade Theories

• No model of trade explains ALL international
  trade. Each model provides some understanding of
  underlying economic forces, and consequences to
  trade, and to economic choices.

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The Product Cycle

• This theory addresses the pattern of trade based
  on the life cycle of products
• This theory is a dynamic theory of trade. Almost
  all other theories are static
• The idea is
• a country introduces a new product into the
  market
• at first the product is sold at home only
• This is the new product stage
• then the product is exported as the world learns
  of the product and starts to demand it

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Product Cycle

• After the product is exported, its production
  expands substantially
• the product reaches a point where production can
  spread to other countries
• to have better access to markets
• to have better feedback from markets
• to reduce transportation and production costs
• The exports from the home country start to fall,
  but country is not yet an importer
• this is the maturing product stage

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Product Cycle Standardized Product

• Finally so much production has moved out of the
  original country that this country is now a net
  importer of the product.
• Knowledge of the technology needed to produce the
  good is widespread, and the production is moved
  to where it is cheapest
• This is the Standardized product stage

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• Points
• the highest returns to factors can be paid to
  producers in the new product stage
• the lowest returns to factors go to producers in
  the standardized product stage
• There are two lags (see next slide)
• demand lag
• Imitation lag
• Export monopoly duration net lag
• length of imitation lag - demand lag net lag

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• Demand lag
• where the product exists but there is no
  international demand for it - it is both produced
  and consumed at home only
• Imitation lag
• the lag between products introduction at home
  and when it can be produced elsewhere.
• Export monopoly duration
• net lag
• length of imitation lag - demand lag net lag

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Dynamic Comparative Advantage

• Export source shifts through the life cycle of
  the product
• innovating country is the first exporter
• other developed countries then produce and export
  the good (note this implies investment in
  production abroad)
• developing countries are exporters of
  standardized products

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Dynamic Comparative Advantage

• Lesson for exporter Dont expect to maintain a
  comparative advantage in production forever!
• Dynamic comparative advantage can arise out of
  static comparative advantage (i.e. human capital
  used in RD)

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Technology cycle

• In high-wage, (high skill labour abundant
  imaginative?) countries
• there is cost incentive and market size needed
  for new product development and labour-saving
  technology
• Patents protect monopoly temporarily
• labour abundant country doesnt need
  labour-saving innovations
• import the product, not the technology
• as product reaches standard stage, produce and
  export it
• human capital abundant country has newer
  technology