Background
A trade theory is an assumption related to how businesses strategies get in place to achieve an organization’s goals and missions. These assumptions give the key ways of achieving realistic business goals in any business environment. Trade theories aim at overcoming trade barriers both locally and internationally.
Every business environment has utilizes one or a combination of the trade theories t come up with a route map to success. There are many trade theories inexistence in the business world. These are Heckscher-Ohlin factor endowment, Absolute advantage, and the comparative advantage trade theories. All these theories get applies in various favorable or appropriate business areas that seem suitable for their successful operation (Peng, 2010).
Absolute Cost Advantage Theory Explanation
To begin with, we take consideration of one the theories in detail, the absolute advantage cost theory. Adam smith put absolute cost advantage theory forward where he argued that countries could gain from trading when they put a strategy that would help them specialize in they have production advantages.
According to the absolute cost advantage theory, when one country can mobilize its resources and concentrate on producing goods and services that it is best at or where the cost of production is favorable to he country. Smith argues that nations cannot become financially able when they follow the olden day mercantilist prescriptions. This comes because of one nation having more raw materials of one commodity that are available locally.
When this nation mobilizes its production resources and majors in the production of the product. It is evident that the cost of producing this commodity will be much lower than that of a country that import the raw materials required to produce this products and services associated with it. In this way there will be countries importing goods and services from others who will be their exporters.
The exporting country is sufficiently able to sustain its needs for the products and the remaining surplus of the product gets sold to other countries as an export product. This creates markets for the countries in trade negotiations and it expands the trade zones or regions for the sale of their products and services.
According to this theory, all nations would have simultaneous trade gains as they allow and practice free trade for the betterment of all the nations involved in the trading. Through this practice, nations become interdependent in terms of production as one nation would totally rely on another nation for the supply one or several products (Salvatore, 2005).
Barriers to the Successful Application of a Selected Trade Theory
To begin with, we look at the political barriers that may inhibit the success of applying the absolute cost advantage theory. Politics of any nation determines principles and rules that govern a particular country. The political; influences may result into economic growth or inhibit the economic growth through imposing of laws and rules that may result into negative business operations.
Furthermore, tariffs and taxes that a country may impose on any products and services determine its final value or prices. The same impositions may increase cost of producing a certain commodity within a country and this will reflect on the end price of the commodity. Bad political, relationships between two nations may force one nation to inhibit imports from the other country simply by imposing high tariffs and taxes on the products from the other country.
This will influence or discourage importers of that commodity, as its final price will be so much high than normal this will force potential buyers not to concentrate on buying the product from the market. This situation results in one country whose production process is under the influence of political barrier to suffer losses as its products may lack a good market for its products (Kelly & McGowen, 2010).
Secondly, a country may have cheap available raw materials to produce a certain product very well but financial aspects may inhibit it from taking this absolute advantage and gain business wise by having control over the export of this product.
Many developing countries especially African countries suffer this blow as they readily have raw materials but lack the financial power to concentrate resources necessary for the production of the goods and services basing on the availability of this raw material at their disposal. This causes the same countries to import the same product made from the raw materials they have by countries that have a high economic power. This comes at cost as the products prices are usually higher and this drains away a country’s foreign exchange (Appleyard, Field & Cobb, 2006).
On the other hand, other factors or barriers inhibit the successful application of this theory include; cultural practices; economic factors and the physical factors. Economic or financial strength determines the terms of trade between the two countries applying the absolute cost advantage theory. This economic strength gives the nations in trade freedom and power to exercise importing of products that it needs from another country.
When a country lacks the economic power enough to help it produce goods that will balance trade between the two nations then the terms of trade may affect one side leading to failure of applying the theory. Some countries may be used to or not used to consuming certain products, for instance, Muslims do not eat and its associated products. Trading with having majority of its citizen practicing the Muslim faith will highly inhibit the applicatio9n of the theory to the advantage of both countries.
Finally, physical barrier may hinder transportation that is important for establishing trade between two or more nations. One nation may successfully produce goods and services that another country needs them so much but physical infrastructure may be the key inhibiting factor for the trade to occur a successfully (Kelly & McGowen, 2010).
References
Appleyard, D., Field, A., & Cobb, S. (2006). International economics. 5 edn. Boston, MA: McGraw-Hill.
Kelly, M. & McGowen, J. (2010). Busn. New York, NY: Cengage Learning
Peng, W. M.(2010). Global business. New York, NY: Cengage Learning.
Salvatore, D. (2005). Introduction to international economics. New Jersey, NJ: John Wiley & Sons Inc.