INTERNATIONAL TRADE
International trade consists of exporting (selling abroad) and importing (buying from abroad). Relative to
domestic trade, international trade entails much greater complexities. So why do nations go through the trouble
of trading internationally? More importantly, such gains must be shared by both sides. Otherwise, there would be
no willing exporters and importers. In other words, international trade is a win-win deal. Figure 5.1 shows that
world trade growth (averaging about 6% during 1998–2008) routinely outpaces GDP growth (averaging 3%
during the same period). Even in 2008, a very diffi cult year, trade growth (2.2%) still exceeded GDP growth
(1.8%). Why are there gains from trade? How do nations benefi t from such gains?
Altough some times nations directly buy and sell from each other (such as arms sales), the majority of trade is
conducted by firms. For example, Tekzen, Koçtaş imports large quantities of goods into Turkey and does not
export much. Koçtaş thus directly contributes to Turkish trade deficit.
A trade deficit occurs when a nation imports more than it exports. Turkish government is alarmed by the trade
deficit however as a marketing economu cannot warn the firms such as Tekzen, or Kocçtaş not to import.
Likewise, when we discuss Turkey-China trade, we are really referring to hundreds of Turkish firms buying
from and selling to China, which also has hundreds of firms buying from and selling to Turkey. Unlike Turkey,
China has a trade surplus, which occurs when a nation exports more than it imports. The aggregation of such
buying (importing) and selling (exporting) by both sides leads to the country-level balance of trade—namely,
whether a country has a trade surplus or deficit. Overall, we need to be aware that when we ask “Why do nations
trade?” we are really asking “Why do firms from different nations trade?”
Theories of International Trade
Classical Theories
a-Mercantilism
Widely practiced during the 17th and 18th centuries, the theory of mercantilism viewed international trade as a
zero-sum game. Its theorists, led by French statesman Jean-Baptiste Colbert, suggested that the wealth of the
world (measured in gold and silver at that time) was fi xed, and so a nation that exported more and imported less
would enjoy the net inflows of gold and silver and become richer. On the other hand, a nation experiencing a
trade deficit would see its gold and silver flowing out and, consequently, would become poorer. The upshot?
Self-sufficiency would be best. Although ercantilism is the oldest theory in international trade, it is not an extinct
dinosaur. Very much alive, mercantilism is the direct intellectual ancestor of modern-day protectionism, which
is the idea that governments should actively protect domestic industries from imports and vigorously promote
exports. Even today, many modern governments may still be mercantilist at heart.
b-Absolute Advantage
The theory of absolute advantage, advocated by British economist Adam Smith in 1776, opened the floodgates
for the free trade movement that is still going on today. Smith argued that, in the aggregate, the “invisible hand”
of the free market,not government, should determine the scale and scope of economic activities. This is known
as laissez faire (see Chapter 2). Thus, the principles of a market economy should apply for international trade as
they apply for domestic trade. By trying to be self-suffi cient and to (ineffi ciently) produce a wide range of
goods, mercantilist policies reduce the overall wealth of a nation in the long run. Smith thus argued for free
trade, which is the idea that free market forces should determine how much to trade with little or no government
intervention. Specifi cally, Smith proposed a theory of absolute advantage: With free trade, a nation gains by
specializing in economic activities in which that nation has an absolute advantage.
What is absolute advantage? A nation that is more efficient than anyone else in the production of any good or
service is said to have an absolute advantage in the production of that good or service. For example, Smith
argued that Portugal enjoyed an absolute advantage over England in producing grapes and wines because
Portugal had better soil, water, and weather. Likewise, England had an absolute advantage in raising sheep and
producing wool compared to Portugal. It cost England more to grow grapes: an acre of land that could raise
sheep and produce fine wool would only produce an inferior grape and a lower quality wine. Has anyone heard
of any world famous English wines? Smith recommended that England specialize in sheep and wool, that
Portugal specialize in grapes and wines, and that they trade with each other.
Smith’s two greatest insights are: (1) By specializing in the production of goods for which each has an absolute
advantage, both can produce more. (2) Both can benefit more by trading. By specializing, England produces
more wool than it can use and Portugal produces more wine than it can drink. When both countries trade,
England gets more (and better) wine and Portugal more (and better) wool than either country could produce on
its own. In other words, international trade is not a zero-sum game as mercantilism suggests. It is a win-win
game.
c-Comparative Advantage
According to Adam Smith, each nation should look for absolute advantage. However, what can nations do when
they do not possess absolute advantage? Continuing our two-country example of China and the United States,
what if China is absolutely inferior to the United States in the production of both wheat and aircraft (which is the
real case today)? What should China do? What should the United States do? Obviously, the theory of absolute
advantage runs into a dead end.
In response, British economist David Ricardo developed a theory of comparative advantage in 1817. This
theory suggests that even though the United States has an absolute advantage in both wheat and aircraft over
China, as long as China is not equally less efficient in the production of both goods, China can still choose to
specialize in the production of one good (such as wheat) in which it has comparative advantage. Comparative
advantage is defined as the relative (not absolute) advantage in one economic activity that one nation enjoys in
comparison with other nations. China’s comparative advantage lies in its relatively less inefficient production of
wheat. By letting China specialize in the production of wheat and importing some wheat from China, the United
States is able to leverage its strengths by devoting its resources to aircraft. In this case both countries produce
and consume more than what they would produce and consume if they inefficiently devoted half of their
resources to each activity.
Modern Theories
a-Product Life Cycle
In 1966, American economist Raymond Vernon developed the product life cycle theory, which is the first
dynamic theory to account for changes in the patterns of trade over time. Vernon divided the world into three
categories: the lead innovation nation (which, according to him, is typically the United States), other developed
nations, and developing nations. Further, every product has three life cycle stages: new, maturing, and
standardized. The first stage involves production of a new product (such as a VCR) that commands a price
premium. Such production will concentrate in the United States, which exports to other developed nations. In the
second, maturing stage, demand and ability to produce grow in other developed nations such as Australia and
Italy, so it becomes worthwhile to produce there. In the third stage, the previously new product is standardized
(or commoditized). Therefore, much production will now move to low-cost developing nations that export to
developed nations. In other words, comparative advantage may change over time. Although this theory was first
proposed in the 1960s, some later events such as the migration of the PC production have supported its
prediction. However, this theory has been criticized on two accounts. First, it assumes that the United States will
always be the lead innovation nation for new products. This may be increasingly invalid. For example, the cell
phones are now routinely pioneered in Asia and Europe. Second, this theory assumes a stage-by-stage migration
of production, taking at least several years, if not decades. In reality, however, an increasing number of firms
now launch new products such as iPods simultaneously around the globe.
b-Strategic Trade Theory
Except mercantilism, none of the theories above say anything about the role of governments. Since the days of
Adam Smith, government intervention is usually regarded by economists as destroying value because, they
contend, it distorts free trade. But government intervention is extensive and is not going away. In fact, thanks to
the global recession, government intervention has been increasing around the world since 2008. Can government
intervention actually add value? Since the 1970s, a new theory, strategic trade theory, has been developed to
address this question.
Strategic trade theory suggests that strategic intervention by governments in certain industries can enhance
their odds for international success. What are these industries? They tend to be highly capital-intensive industries
with high barriers to entry where domestic firms may have little chance of entering and succeeding without
government assistance. These industries also feature substantial first-mover advantages, namely, advantages that
first entrants enjoy and do not share with late entrants. A leading example is the commercial aircraft industry.
Boeing has long dominated this industry. In the jumbo jet segment, Boeing’s first-mover advantages associated
with its 400-seat 747, first launched in the late 1960s, are still significant today. Alarmed by such US dominance,
British, French,German, and Spanish governments realized then that individual European aerospace firms might
be driven out of business by US rivals if these governments did not intervene. So these European governments
agreed to launch and subsidize Airbus. The subsidy has given Airbus a strategic advantage and the policy to
assist Airbus is known as a strategic trade policy. This has indeed been the case, as the 550-seat A380 entered
service in 2007 and became a formidable competitor for the Boeing 747.
Strategic trade theorists do not advocate a mercantilist policy to promote all industries. They propose to help
only a few strategically important industries. However, this theory has been criticized on two accounts. First,
many scholars and policymakers are uncomfortable with government intervention. What if governments are not
sophisticated and objective enough to do this job? Second, many industries claim that they are strategically
important. So, where to draw the line between strategic and nonstrategic industries is tricky.
c-National Competitive
Diamond Model)
Advantage
of
Industries
(Porter’s
The most recent theory is known as the theory of national competitive advantage of industries. This is
popularly known as the diamond theory because its principal architect Michael Porter, presents it in a diamondshaped diagram. This theory focuses on why certain industries (but not others) within a nation are competitive
internationally. For example, whereas Japanese electronics and automobile industries are global winners,
Japanese service industries are notoriously inefficient. Porter is interested in finding out why. Porter argues that
the competitive advantage of certain industries in different nations depends on four aspects, which form a
“diamond.”
First, he starts with factor endowments, which refer to the natural and human resources. Some countries (such as
Saudi Arabia) are rich in natural resources but short on population, whereas others (such as Singapore) have a
well-educated population but few natural resources. Not surprisingly, Saudi Arabia exports oil, and Singapore
exports semiconductors (which need abundant skilled labor).
Second, tough domestic demand propels firms to scale new heights. Why are American movies so competitive
worldwide? One reason might be the level of extraordinary demand in the US market for exciting movies.
Endeavoring to satisfy domestic demand, US movie studios unleash High School Musical first and then High
School Musical 2 and 3, or Spider-Man first and then Spider-Man 2 and 3, each time packing in more
excitement. Most movies—in fact, most products—are created to satisfy domestic demand first. Thus, the ability
to satisfy a tough domestic crowd may make it possible to successfully deal with less demanding overseas
customers.
Third, domestic firm strategy, structure, and rivalry in one industry play a huge role in its international success or
failure. Both sports giants Adidas and Puma hail from Herzogenaurach, a small town in Germany that few have
heard of. Yet, they manage to turn the cross-town rivalry into global battles. One reason the Japanese electronics
industry is so competitive globally is because its domestic rivalry is probably the most intense in the world.
Finally, related and supporting industries provide the foundation upon which key industries can excel. In the
absence of strong related and supporting industries, such as engines, avionics, and materials, an aerospace
industry cannot become globally competitive. Each of these related and supporting industries requires years (and
often decades) of hard work and investment. For instance, emboldened
by the Airbus experience, the Chinese, Korean, and Japanese governments poured money into their own
aerospace firms. Eventually, they all realized that Europe’s long history and excellence in a series of related and
supporting industries made it possible for Airbus to succeed. A lack of such industries made it unrealistic for the
Chinese, Korean, and Japanese aerospace industry to take off.
Overall, Porter argues that the dynamic interaction of these four aspects explains what is behind the competitive
advantage of leading industries in different nations. This theory is the first multilevel theory to realistically
connect firms, industries, and nations, whereas previous theories work on only one or two levels. However, it has
not been comprehensively tested. Some critics argue that the diamond places too much emphasis on domestic
conditions. The recent rise of India’s IT industry suggests that its international success is not entirely driven by
domestic demand, which is tiny compared with overseas demand; it is overseas demand that matters a lot more
in this case.
Table: Exporting of Some Country Groups (000, $)
2000
OECD
19 672 362
EFTA
324 252
KEİ-BEC
2 466 867
EİT-ECO
873 613
BDT-ICO
1 516 966
Turkish republics
572 451
İKÖ-IDO
3 573 099
D-8
19 672 362
Total
27 774 906
Source: www.tuik.gov.tr
2005
45 846 867
820 849
8 619 516
2 669 869
4 784 950
1 409 257
13 061 019
45 846 867
73 476 408
2010
57 394 215
2 416 381
14 456 173
7 617 077
10 288 272
3 921 072
32 469 556
57 394 215
113 883 219
Table: Top 10 Countries Turkey Exports (000, $)
2010
2012
Total
113 883 219
152 461 737
2014
76 727 288
3 795 624
19 695 022
11 724 055
15 624 701
7 112 176
48 664 452
8 580 242
157 815 040
2014
157 715 040
1
2
3
Almanya
Irak
İngiltere
11 479 066
6 036 362
7 235 861
13 124 375
10 822 144
8 693 599
15 156 028
10 896 203
9 914 028
4
5
İtalya
Fransa
6 505 277
6 054 499
6 373 080
6 198 536
7 144 642
6 466 708
6
7
ABD
Rusya
3 762 919
4 628 153
5 604 230
6 680 777
6 345 064
5 945 713
8
9
İspanya
BAE
3 536 205
3 332 885
3 717 345
8 174 607
4 763 140
4 662 881
3 044 177
9 921 602
3 888 292
10
İran
Source: tuik.gov.tr
Table: Top 10 Countries Turkey Imports (bin $)
2010
2012
2014
Toyal
185 544 332
236 545 141
242 223 959
1
Rusya
21 600 641
26 625 286
25 293 392
2
Çin
17 180 806
21 295 242
24 918 238
3
Almanya
17 549 112
21 400 614
22 369 253
4
ABD
12 318 745
14 130 546
12 727 481
5
İtalya
10 139 888
13 344 468
12 055 916
6
İran
7 645 008
11 964 779
9 833 329
7
Fransa
8 176 600
8 589 896
8 122 565
8
G. Kore
4 764 057
5 660 093
7 548 311
9
Hindistan
3 409 938
5 843 638
6 898 554
10
İspanya
4 840 062
6 023 625
6 075 844
Kaynak: tuik.gov.tr