The rationale for international trade and investment has economic, political, and legal perspectives. There are economic advantages every country derives from international trade since no country can produce everything it needs. It is through trade with other countries that a country earns foreign exchange, which it requires to buy what it needs from other countries.
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Politically, international trade enhances ideological cooperation among nations, which in turn contributes to international security. Legally, international trade promotes the development of common laws between trading partners and in the process contributes to the development of legal systems. These perspectives contribute to the “progressive integration of economies” (Rivera-Batiz & Oliva xv).
The goals of international trade fall into two broad categories. The first one is the attraction of foreign investment and the second one is the expansion of markets. Through international trade, capital moves from one country to another as investors find opportunities for a good return on their investment in overseas destinations.
This brings down the burden on the investment destination to raise capital, freeing its resources for use in development of infrastructure and the provision of services. On the other hand, a country seeking trading partners, establishes a relationship allowing them to offload extra products from their country. This makes possible the earning of foreign exchange that many countries cherish.
Theories of international trade and investment include mercantilism, the theories of absolute advantage, and comparative advantage, the Heckscher-Ohlin theory, and the product life cycle theory. Mercantilism stresses that the only way for a country to benefit from international trade is by encouraging exports and discouraging imports. In practice, it has the effect of choking trade since all countries are only interested in selling, leaving very few buyers in the international market.
The theory of absolute advantage, developed by Adam Smith, postulates that there is a benefit in every item traded between countries, for both countries. It adds that each country is better off concentrating on producing what it has absolute advantage in, such that no country must produce everything it needs. It fails to address the challenge of what to produce that a country with no absolute advantage faces.
The theory of relative advantage addresses these challenges. This theory encourages countries to produce what it has comparative advantage in, and to concentrate on it. This way, each country has a contribution to international trade. However, based on production costs, it wrongly assumes that working conditions and market demand do not hold much influence to international trade.
The Heckscher-Ohlin theory focuses on the abundance of resources available for production. It encourages countries to base their production for export on resources that they have in abundance as opposed to what they can produce efficiently. Similarly, it encourages the basing of imports on resources that are in scarce supply in the country.
Zhang observes, “The Heckscher-Ohlin model was a break-through because it showed how comparative advantage might be related to general features of a country’s capital and labor” (49). The product life cycle theory proposes that the basis for a country’s export be the product life cycle.
Initially, the country is the sole exporter but as the product moves through its life cycle, the trade reverses such that in the end, the country becomes an importer of the same product. International trade has the potential to foster global unity and peace like no other force since it is in the interest of all nations that it remains peaceful to improve the living standards of her citizens.
Rivera-Batiz, Luis, & Oliva, Maria-Angels. International Trade: Theory, Strategies, and Evidence. Oxford: Oxford University Press, 2003. Print.
Zhang, Wei-Bin. International Trade Theory: Capital, Knowledge, Economic Structure, Money, and Prices over Time. Berlin: Springer-Verlag, 2008. Print.