Foreign trade theory

A foreign trade theory is an economic theory that explains international trade and its effects on the actors involved. There are several individual foreign trade theories. As a scientific field of work, foreign trade theory is a branch of foreign trade theory .

Classical foreign trade theory

mercantilism

The mercantilism (from the Latin. Mercator = merchant) refers to the government's economic policies at the time of absolutism (17th-18th c.). The finance minister Louis XIV , Jean-Baptiste Colbert , introduced it for the first time, which is why it is also known as Colbertism. The aim of this economic policy is to achieve an active trade balance, i. This means that the value of exports should exceed that of imports in order to ultimately fill the state treasury (it was heavily indebted in France under Louis XIV) through the increased tax income. The core idea is to produce all the goods required in your own country so that at most raw materials have to be purchased abroad. In order to implement this project, measures to promote trade and industry are being taken:

Construction of roads, canals, ports and ships,
Subsidies and tax relief for the manufacturing industry or for domestic entrepreneurs and merchants who want to open a shop or a factory (see below),
Elimination of internal tariffs,
Standardization of dimensions and the imposition of high import duties on foreign manufactured goods.

In addition, there is the acquisition of colonies, mainly to avoid expensive middlemen in the import of raw materials as much as possible, on the other hand, colonies naturally offer new sales markets. Furthermore, the founding of manufactories is also very important, as the craftsmen who are specialized in the division of labor in the production steps can now manufacture the products both faster and of higher quality. The measures described lead, as they protect the state economy before abroad to protectionism .

Theory of Absolute Cost Advantages

Main article: absolute cost advantage

The theory of absolute cost advantages , developed by Adam Smith in 1776 in his book An Inquiry into the Nature And Cause of the Wealth of Nations (shortened German title: Wealth of Nations), is the basic building block of the classical foreign trade theory and is in contrast to the Mercantilism strategies in which one country can gain advantages only at the expense of another.

Smith's theory suggests that every state should specialize in producing the goods it can produce more cheaply than other states. These should then be exchanged for required goods abroad. That form of foreign trade and the international division of labor brings advantages to all countries, so that in the end they receive more goods than with self-sufficiency and thus both trading partners achieve more prosperity.

To ensure this, certain requirements must be met. For example, tariffs and other barriers to action should be avoided. However, this theory is limited only to trade between countries that have an advantage in the production of certain goods. Countries without such an advantage would, according to the theory , be excluded from international trade . David Ricardo explains why these countries should also participate in foreign trade with his theorem of comparative cost advantages , which Smith's ideas develop further.

Theory of comparative cost advantages

Main article: Comparative cost advantage

The theory of comparative cost advantages consists of the Ricardo model and the Heckscher-Ohlin theorem (also called factor proportion theorem).

The basic idea of the Ricardo theory is that trade is controlled by relative cost differences between different countries.

The Heckscher-Ohlin theorem assumes that trade between different countries is set in motion due to different factors in labor and capital. Since every country has either an abundance of labor or capital, it will export those products for the production of which the respective factor is important. Conversely, it imports the products for which the other production factor is required.

Factor proportion theory

Main article: Heckscher-Ohlin model

The factor proportion theory is based on the different endowments of national economies with capital and labor potential. Further basic conditions are that

the respective factors, i.e. capital and labor potential, cannot be relocated beyond the borders of the respective country and
Production technologies are freely available internationally.

It follows that those countries which have one (production) factor in excess of the other factor produce and export the products that benefit from it. Conversely, it follows that these countries import the products for whose manufacture the respective deficit factor is required. For example, For example, a country with high capital reserves imports technologically highly developed and therefore capital-intensive products and imports labor-intensive and technologically less sophisticated products. It follows from these assumptions that the deficit factor in a country loses value because it is not used, and the factor that is available in excess increases in value because there is high demand. In the ideal case, this in turn results in an international balance between the value of capital and labor. This theory is therefore also referred to as the “factor price equalization theorem”.

The advantages of this model are that it explains the international division of labor and, in part, shows its impact on world trade.

The disadvantages of the model lie in its rather rigid basic assumptions, such as the fact that no capital can be shifted across the border of the respective country. Above all, production technologies that require extensive infrastructure, legal investment security and qualified labor are not freely available everywhere at the same cost.

Newer foreign trade theories

Theory of the technological gap

Technological gap theory extends the concept of comparative cost advantages to technology. According to her, a country whose product has a technological lead over the others exports this product until other countries are able to manufacture the same product. In the following period, the comparative cost advantages will be decisive. If a country creates an even more mature product, it is now exported to the other countries.

Product life cycle theory

The theory of the product life cycle can be extended to international trade. It is assumed that the export of products depends on where they are on the product life cycle curve. As long as a new product is in the introductory phase, the company has a monopoly on this product and can export it abroad, with cost considerations playing a subordinate role. If the product is in the growth phase, other companies start copying the product. Finally, in the maturity phase, other companies at home and abroad are able to manufacture the product in the same quality and quantity. The demand in a country can thus be met by the companies located there. Costs are now becoming the decisive factor and production begins to be relocated to countries that can offer the lowest production costs (especially wage costs).

Experience curve theory

The experience curve effect can also be extended to international trade. The starting point is again the company that develops a new type of product and exports it to other countries. Thanks to economies of scale , this company is able to keep unit costs lower than those of subsequent competitors, which temporarily creates a market entry barrier. However, more favorable location conditions are not taken into account here. A foreign company may be able to produce cheaper from the very first product, or introduce an optimized production system. In addition, the foreign company already knows the market potential and can use this knowledge when introducing its production system. The foreign company is therefore able to achieve the same cost level as the first mover more quickly.

Demand structure theory

The demand structure theory was developed by Linder and published in 1961. It fundamentally differentiates between exports of natural resources and industrial products. While it relies on the theory of comparative cost advantages in the trade of natural resources, the trade in industrial products is examined further.

Linder differentiates between a potential and a current area for foreign trade. He assumes that potential export goods will initially only be offered domestically. The determination of potential export goods is now based on the examination of the product domestically, in particular the domestic demand and the growth limit for domestic sales. As soon as a product reaches its growth limit domestically, the company will look for new sales markets abroad. In doing so, it will take into account those countries whose demand structure is similar to the domestic market. Linder equates the demand structure with per capita income. According to Linder, the more similar their demand structure, the greater the trade between countries.

This potential foreign trade is offset by factors that hinder or promote trade. Theoretically, factors conducive to foreign trade are e.g. B. a worldwide monopoly position for the product, lower production costs or a technological lead over competitors. Potential foreign trade is hindered by ignorance of distant markets, high transport costs or trade barriers ( customs duties , import restrictions, etc.). This explains the difference between potential and current (actual) foreign trade.

International location theory

The international location theory is based on a so-called “distance factor” that determines the extent of foreign trade. The distance factor is made up of four parts:

Transport costs,
Transport time,
economic horizon (social and economic knowledge that a person possesses about abroad),
artificial barriers (tariffs and other restrictions).

The international location theory states that the trade between countries is greater, the smaller the distance factor between the countries.

Economies of Scale Theory

The economies of scale theory can be extended to international trade. It limits its informative value to products that can be efficiently mass- produced. For such products, it states that the country with the greatest domestic demand also exports this product abroad, as it has a competitive advantage over other countries due to the degression of fixed costs .

The country with the largest domestic market will export the goods that benefit most from mass production (fixed cost degression effect). The size of the domestic market is then determined by the level of GDP, population size and population density of a country. The production volume and the production factors are interdependent. If the production factors change by a certain value, the production quantity also changes by the corresponding amount, which is indicated by the theory of economies of scale (e.g. through division of labor on a national and international level). Marginal productivity, on the other hand, shows the change in which only a single production factor is changed.

With regard to the international division of labor, this means an advantage for countries that produce valuable industrial products compared to those that produce low-value products, such as B. Cotton. This is due to the fact that the production volume increases faster than the invested funds, i.e. the marginal productivity is exceeded.

Theory of intra-sectoral trade

The starting point of the theory of intra-sectoral trade is the assumption that, due to increasing globalization, the production conditions for industrial products are steadily converging internationally. In addition, supply and demand are largely balanced through the imitation of production techniques in the industrialized nations. In this case, exports can no longer be explained by one of the above theories.

The theory of intra-sectoral trade now sees increasing product differentiation as a reason for further foreign trade. More or less serious changes to the physical or aesthetic properties of a product, for example, would create new demand and thus drive foreign trade.

literature

Karl Farmer and Ronald Wendner: Growth and Foreign Trade. An introduction to the equilibrium theory of growth and foreign trade dynamics. Physica-Verlag, Heidelberg 1999, ISBN 978-3-7908-1238-1

Web links

Foreign trade theory - Article in the Gabler Wirtschaftslexikon