What are the main theories of international trade and how do they explain global commerce?

Overview

International trade theories help businesses understand the different ways in which countries trade with each other.

By understanding these theories, businesses can make informed decisions about which countries to trade with, what products to sell and how to price them.

Two well-known global brands that have used these strategies are Apple and Nike.

Apple has used outsourcing to countries like China to reduce manufacturing costs, while Nike has used the theory of comparative advantage to produce shoes in countries like Vietnam where labor is cheaper.

How to

There are different trade theories that businesses can use to inform their international trade decisions.

The most common ones are:

• Comparative advantage
• Factor endowment
• Product life cycle
• Country similarity
• New trade theory
• Porter’s diamond

Roles and responsibilities in implementing these theories will vary depending on the size and structure of the business.

However, some key responsibilities include:

• Conducting market research to identify potential trade partners
• Assessing the competitive landscape to identify opportunities and threats
• Developing pricing and marketing strategies that align with the chosen trade theory
• Managing supply chain logistics to ensure timely delivery of products

Best Practices

• Understand the trade theory that best aligns with your business goals
• Conduct thorough market research before entering a new market
• Develop strong relationships with suppliers and customers
• Stay up-to-date with changes in trade policies and regulations
• Invest in technology to streamline supply chain logistics
• Continuously evaluate and adjust your international trade strategy

Examples

Here are two potential examples of how small businesses can use international trade theories:

1. A small clothing retailer could use the theory of country similarity to identify markets with similar fashion tastes to their home market. They could then target these markets with their existing product line and marketing strategies.
2. A small manufacturer of electronic components could use the theory of factor endowment to identify countries with abundant supplies of the raw materials they need. They could then establish partnerships with suppliers in these countries to reduce their production costs.