Comparative Advantage And Strategic Trade Theory example essay topic

Nowadays, the modern economy has a dramatically increase, and also the economic globalization has been formed. Trade, especially international trade has become the most important role in the world economy. However, what is trade, and what is international trade? Trade is the voluntary exchange of goods, services, assets or money between one person or organization and another.

Through the trade, both parties believe they will gain the benefit from the exchange. International trade is trade between residents of two countries (Mahoney, Trigg, Griffin, & Pustay, 2001). Similarly, there are lots of different trade theories such as mercantilism, absolute advantage, comparative advantage and strategic trade theory. Now, in this essay, I! d like to discuss the difference between classical trade theories and strategic trade theory. As I mentioned above, the classical trade theories include mercantilism, absolute advantage and comparative advantage. In the early trade theories, the absolute advantage and comparative advantage trade are two main trade theories.

Absolute advantage theory (Adam Smith) suggests that a country should export those goods and services for which it is more productive than other countries, and import those goods and services for which other countries are more productive than it is (Mahoney, Trigg, Griffin, & Pustay, 2001). Comparative advantage theory (David Ricardo) states that a country should produce and export those goods and services for which it is relatively more productive than are other countries, and import those goods and services for which other countries are relatively more productive than it is (Mahoney, Trigg, Griffin, & Pustay, 2001). In the eighteenth and nineteenth century, the theories of absolute and comparative advantage were developed, and these have a major impact on the thinking and the policy prescriptions of economics. First the British economist Adam Smith, then his compatriot David Ricardo, demonstrated that trade is beneficial for both of two countries participating in it. In these classical trade theories, absolute advantage and comparative advantage trade still have some differences. Smith!'s absolute advantage trade is based on an absolute advantage, especially when it was recognized that climatic differences and natural endowment with resources made some countries hold such an absolute advantage in the production of a variety of products (Mirus, & Vong, 1999).

The labor productivity is the most important part in absolute advantage. A country has an absolute advantage in the production of a good relative to another country if it can produce the good at lower cost or with higher productivity. However, Ricardo!'s opinion was a country did not have an absolute advantage in the production of any product would be able to successfully export, hence import (Mirus, & Vong, 1999). Therefore, the comparative advantage is the ability to produced one good at a relatively lower opportunity cost than other goods; it is based on the notion of opportunity costs within one country as compared to its economic partners.

The opportunity cost of a good is the value of what is given up to get that good (Mahoney, Trigg, Griffin, & Pustay, 2001). Comparative advantage determines which products and services a country will export. Every country is a potential beneficiary of international trade because every country has a comparative advantage in some products and services (Mirus, & Vong, 1999). Therefore, we can see that even if in classical trade theories, the absolute advantage and the comparative advantage trade theory have differences.

Even though the comparative advantage trade in the economics textbooks looks very perfect, it is still have differences compare with the real world. In a number of industries where technology advantages are significant only a few large firms compete. This creates a market structure that has possible ramifications for how trade is conducted. In particular, it opens up the possibility that free trade is not the optimal arrangement for a country (Mirus, & Vong, 1999). Therefore, the new trade theory was developed which called!

^0 strategic trade theory! +/-. This theory is desirable to have such first mover firms, as they bring tax revenue and high wages. So that it aims to attract or help to create such firms by providing subsidies or protection to particular candidate firms. Strategic trade theory suggests that a national government can make its country better off if it adopts trade policies that improve the competitiveness of its domestic firms in such oligopolistic industries (Mahoney, Trigg, Griffin, & Pustay, 2001).

Therefore, we can find the difference between classical trade theory and strategic trade theory, the character of trade. Classical trade is a free trade; the voluntary exchange creates benefits for all parties to the exchange. The classical theory of comparative advantage for free trade argues that such trade is good for a country even if other countries do not return the favor. However, the strategic trade likes monopolistic trade because of government trade intervention and protection. We can see that in situations where unit costs of production decrease with output or where significant commitment to research and development expenditures are necessary, there is only a few firms competing with each other.

In such situations, the first mover, by obtaining a technology advantage or lower costs, gains a so-called first mover advantage over others which are therefore deterred from entering the industry (Mirus, & Vong, 1999). In addition, the strategic subsidy is decisive in a new industry. We can see the example in the textbook (Mahoney, Trigg, Griffin, & Pustay, 2001, P 247-248), if there was no strategic subsidy for Alcatel and Mitsubishi, they all can not have payoff from this item. When the French government offered Alcatel a subsidy of $2 billion to develop this new item, Alcatel had the absolute advantage to defeat Mitsubishi which have no subsidy support. Therefore, the strategic subsidy has the decisive effect in the strategic trade. In conclusion, the difference between classical trade theories and strategic trade theory is the character of trade theory.

As I mentioned above, classical trade is free trade, and strategic trade likes monopolistic trade, different situations use different trade theories. There are no absolute correct or wrong trade theories in the real world economy.