INTERNATIONAL TRADE
In the current era of globalization, almost all countries carry out
international trade activities. This is because international trade has an
important role in economic growth. This chapter discusses various theories
of international trade.
A. International Trade Trends and Patterns
International trade can be interpreted as the purchase, sale, or
exchange of goods and services between one country and another (across
national borders). International trade is different from domestic trade which
only occurs within the domestic boundaries of a country. One of the benefits
of international trade is the availability of more choices of products and
services for consumers. In addition, international trade also has an important
role in creating jobs in many countries. The existence of various benefits of
international trade encourages an increase in the value and volume of trade
itself. Indonesia itself is also inseparable from international trade. The
number of goods exported provides great profits for local producers. In
addition, Indonesia also imports a lot of manufactured goods
International trade carried out by countries illustrates the level of
dependence between these countries. Many companies in developed
countries conduct buying and selling transactions with various companies
in other developed countries. Developing countries that are directly adjacent
to developed countries often have a high dependence on richer countries.
The existence of international trade transactions does provide great benefits
for the economic development of a country, but this high level of
dependence on international trade can pose various threats when an
economic recession occurs. In addition, other threats stemming from
political upheaval also have the potential to harm countries that have high
dependence.
Trade transactions between countries show a sustainable pattern.
Trade between high-income countries accounts for about 60% of total trade
in the world. Furthermore, two-way trade transactions between high-income
countries and other middle- and lower-income countries account for about
34% of total trade. Meanwhile, trade transactions between middle- and low-
income countries only account for about 6% of total trade in the world.
B. Theory of International Trade over Time
Trade between various groups of people has been going on for
thousands of years. However, the reason for this trade only began to be
explained in the 15th century. In this day and age, people are starting to
explain why international trade is done and how these international trade
transactions can provide benefits to both parties who are doing the trade.
Since then, various theories of international trade have emerged, ranging
from the theory of mercantilism that emerged in the middle of the 15th
century, to the new theory of trade that emerged at the end of the 19th
century
C. Mercantilism
Mercantilism is a trade theory that states that countries must accumulate
or accumulate financial wealth in the form of gold. This theory is very
encouraging exports and tends to reject import activities. This theory states
that measures of a country's well-being such as standard of living and
community development are highly irrelevant. Several countries in Europe
adhered to a mercantilism system from the 15th century to the end of the
17th century. Some of the countries that adhere to this system are the United
Kingdom, France, the Netherlands, Portugal and Spain. The practice of
mercantilism is based on three main pillars as follows.
1. Trade Surplus
The system believes that countries should increase their wealth by
maintaining trade surpluses. Trade surplus is a condition when the value
of a country's exports is greater than its imports. The opposite of a trade
surplus is a trade deficit, which is a condition when exports have a
smaller value compared to the value of imports. In the mercantilism
system, a trade surplus means that a country obtains a larger amount of
gold (from export activities) than it spends (for import activities).
2. Government Intervention
It has been explained in the previous section that the mercantilism
system strongly supports the existence of a trade surplus to increase the
amount of wealth of a country. In order to maintain this trade surplus, an
active role and government intervention in international trade is needed.
The mercantilism system believes that the accumulation of a country's
wealth depends on an increase in trade surpluses, and not an increase in
trade volume. To increase the trade surplus, the government established
various policies in the field of international trade. This policy can be in
the form of import bans for certain products or import restrictions in the
form of import tariffs and quotas.
3. Colonialism
Countries that adhere to the mercantilism system form territories
(colonies) with the aim of obtaining various resources. Resources
obtained from these countries or colonies are then sent to their countries
to be used as raw materials for production. Furthermore, the finished
goods produced will be resold to the colony countries at a higher price.
Thus, mercantilist countries tend to build stronger political and
economic power compared to other countries
Although it provides various positive benefits, this mercantilism
system has various drawbacks. One of the main problems is that if all
nations shut down their markets from imports and only encourage
exports, international trade will be severely restricted. Mercantilist
countries believe that they can only increase their wealth by sacrificing
other countries (zero-sum game). In addition, exporting goods at low
prices from the colony countries and then importing goods into the
country at much higher prices can damage the economies of the colony
countries.
D. Absolute Advantage
The theory of absolute superiority was developed by an economist
from Scotland named Adam Smith in 1776. Absolute superiority can be
interpreted as a country's ability to produce goods more efficiently
compared to other countries. In other words, a country that has an absolute
advantage can produce certain outputs or services in the same amount, but
with fewer resources. Smith stated that international trade should not be
limited by tariffs and quotas. This international trade flow should be
determined by market forces. Through international trade, countries do not
need to produce all the goods consumed. Each country can concentrate on
producing certain types of goods where they have an absolute advantage in
producing them. Furthermore, for other types of goods that are needed, but
not produced, can be obtained from trading activities. To make it easier to
understand the theory of absolute superiority
E. Comparative Advantages
The theory of absolute superiority has one major problem, which is
when a country does not have absolute superiority in producing any product.
To answer this problem, David Ricardo developed the theory of comparative
advantage in 1817. This theory states that if one country does not have an
absolute advantage in producing both products, then specialization and trade
can still benefit both countries. A country is said to have a comparative
advantage if it is not able to produce goods more efficiently than other
countries, but can produce those goods more efficiently than other types of
goods. To make it easier to understand.
F. Theory of Proportional Factors
In the early 19th century, a theory of international trade emerged that
focused on factors of production. The cost of the production factor is
determined by the interaction between supply and demand. If the supply of
production factors has a larger amount compared to demand, then the price
of production factors tends to be cheap, and vice versa. The theory of the
proportional factor states that countries produce and export goods that
require resources that are available in abundance in the country. Instead,
countries will import goods that require resources that are available in small
quantities in the country. This theory comes from research conducted by
economists named Eli Heckscher and Bertil Ohlin. Thus, this theory is often
known as Heckscher Ohlin's theory.
The theory of factors of production is different from the theory of
comparative advantage. This is because the theory of comparative
advantage focuses on productivity through specialization in production on
goods that can be produced more efficiently. On the other hand, the theory
of factors of production states that the state should specialize in the
production of goods that require resources that are available in abundance
and at low prices. The theory of factors of production divides a country's
resources into two categories, namely labor and capital equipment. This
theory states that a country will specialize in the production of products that
require labor if the cost of labor is relatively cheaper than the cost of capital
goods.
G. Paradox Leonetic
Despite its conceptual interest, the theory of factors of production is
not supported by studies that examine trade flows between countries. One
of the large-scale studies was carried out by Wassily Leontief in the early
1950s. Leontief conducted a study to test whether the United States, which
is rich in capital equipment, exports goods that require capital-intensive
production techniques and imports goods that require labor-intensive
production. Contrary to the theory of production factors, research conducted
by Leontief actually found that the United States exports more labor-
intensive goods. The paradox between the prediction of the theory of
production factors and the actual trade that occurs is known as the Leontief
Paradox. The results of this research conducted by Leontief are also
supported by several other studies in various countries. One of the reasons
for the Leontief paradox is because the theory of production factors
considers that the production factors owned by a country are homogeneous,
especially labor.
H. International Product Life-cycle
The international product life cycle theory was put forward by
Raymond Vernon in the mid-1960s. This theory states that companies start
exporting activities and then make foreign investments when the product
moves throughout its life cycle. This theory also states that for various
reasons, a country's exports will eventually become imports. Although
developed in the United States, this theory can be generalized to various
developed countries such as Australia, the European Union and Japan.
There are three stages that a product goes through in its life cycle. The
first stage is known as the new product stage. At this stage, the high
purchasing power of consumers in industrialized countries will encourage
companies to develop and introduce a new product concept. At this stage,
the company carries out production activities in its home country and tends
to have a low production volume. This is because there is an uncertain level
of domestic demand and market conditions. Although there is no export
market at first, export activities will begin to be carried out at the end of the
new product development stage.
Furthermore, the second stage is known as the maturing product stage.
At this stage, both the domestic market and the foreign market are beginning
to realize the presence and benefits of the product. Thus, the number of
requests will increase over a long period of time. When the export value
exceeds the total sales of products, the company will build production
facilities in other countries with high demand. When it is nearing the end of
the product maturity stage, the company's products will start generating
sales in various developing countries, and even have manufacturing plants
in those countries
The last stage is known as the standardized product stage. At this
stage, the high level of competition from many other companies producing
the same product will encourage the company to reduce the price. This is
done to maintain the company's existence in the market. When the market
becomes price-sensitive, companies will start looking for production sites
that result in low production costs in developing countries.
I. New Trading Theory
During the period of 1970 and 1980, another theory emerged that
explained the pattern of international trade. The new regional regulation
theory states that (1) specialization and increasing economies of scale will
provide benefits, (2) the first company to enter the market can create
obstacles for other companies to enter the market, and (3) the government
has a role to play in helping companies in each country. Since the new trade
theory emphasizes more on productivity, it is in line with the theory of
comparative advantage, but it is contrary to the theory of factors of
production.
Based on the new trade theory, when a company specializes in
producing a specific product, then the output will increase in line with the
increase in efficiency. The company has fixed production costs such as
research and development (R&D) costs, factory buildings and production
equipment that do not depend on the amount of output produced. This theory
states that with increased specialization and output levels, companies will
achieve economies of scale that can reduce the average cost of production.
This is what causes companies to grow, so they will reduce prices and force
new companies that want to enter the market to produce the same level of
output. Thus, the economies of scale of several large companies will create
an industry that only supports a small number of companies.
First-mover advantage is a strategic advantage obtained by being the
first company to enter the industry. First-mover advantage can create
barriers for new companies looking to enter the market. The new trade
theory states that a country can dominate the export of certain products
because it has domestic companies that have a first-mover advantage.
Because of the benefits for the first companies to enter the industry, some
entrepreneurs asked for government assistance. They believe that if
companies can cooperate with the government to achieve certain targets, it
can provide great benefits for both parties.
J. National Competitive Advantage
The theory of national competitive advantage was developed by Michael
Porter in 1990 to explain why some countries have a competitive advantage
in producing certain types of products. This theory of competitive advantage
states that a country's competitiveness in a particular industry is largely
determined by the industry's capacity to innovate. There are four elements
proposed by Porter that explain the differences in competitiveness of each
country. The four elements are factor conditions, demand conditions, related
supporting industries and firm strategy, structure, and rivalry. The following
is an explanation of each of these elements.
1. Factor Conditions
The theory of the proportional factor states that the resources
that a country has such as labor force, natural resources, and climate
are the main determining factors of the type of products that the
country produces and exports. Porter recognizes the value of these
resources and categorizes them as basic factors. But Porter is also
familiar with another category of resources known as advanced
factors. Advanced factors include the level of proficiency of the
workforce and the quality of infrastructure in a country. Advanced
factors are the result of investment in the field of education and
innovation, including worker training and research and development
activities in the field of technology.
2. Demand Conditions
The characteristics of buyers in the domestic market also greatly
affect the competitive advantage. The sophisticated domestic market
will encourage companies to add and develop various product features
and develop new products using more advanced technology.
Companies operating in this sophisticated domestic market will
experience increased competitiveness.
3. Industri Pendukung (Related Supporting Industries) Industri
Pendukung (Related Supporting Industries)
Companies that are in a competitive industry do not come of
their own. There are various other supporting industries that are
present to provide the inputs needed by the industry. This is because
companies that gain advantages in a competitive industry will form
clusters of various economic activities within the same geographical
area. Each industry in the cluster has a role in increasing productivity
and competitiveness from other industries in the same cluster.
4. Firm Strategy, Structure, And Rivalry
The company's strategy and various decisions from the
company's leaders and managers have a lasting influence on the
company's competitiveness. Every company needs a manager who
has a high commitment to producing products with superior quality
and maximizing market share and company profits. Another thing that
is no less important is the structure of the industry and the level of
competition between companies. The higher the level of competition,
the greater the company's competitiveness. This is because high
competition helps companies to compete with imported goods.
5. Government and Chance
In addition to the four elements that have been stated, Potter also
identifies the important role of government and opportunities that also
affect a country's competitiveness. The government can increase the
competitiveness of domestic companies and industries through
various policies. Governments in developing countries encourage
economic growth by accelerating the privatization process of state-
owned enterprises. This is because this privatization can encourage
companies to grow and have higher competitiveness in the global
market. However, certain events can also be a threat to the
improvement of a country's competitiveness.
