Trade theories:

Adam Smith claimed that a country should specialise in, and export, commodities in which it had an absolute advantage. An absolute advantage existed when the country could produce a commodity with less costs per unit produced than could its trading partner. By the same reasoning, it should import commodities in which it had an absolute disadvantage,.
While there are possible gains from trade with absolute advantage, comparative advantage extends the range of possible mutually beneficial exchanges. In other words it is not necessary to have an absolute advantage to gain from trade, only a comparative advantage.
Comparative cost advantage (David Ricardo, 1817)
Main articles: Comparative advantage and Ricardian economics
David Ricardo argued that a country need not have an absolute advantage in the production of any commodity for international trade between it and another country to be mutually beneficialAbsolute advantage meant greater efficiency in production, or the use of less labor factor in production.Two countries could both benefit from trade if each had a relative advantage in production.Relative advantage simply meant that the ratio of the labor embodied in the two commodities differed between two countries, such that each country would have at least one commoditiy where the relative amount of labor embodied would be less than that of the other country.
Gravity model of trade (Walter Isard, 1954)
Main article: Gravity model of trade
The gravity model of trade in international economics, similar to other gravity models in social science, predicts bilateral trade flows based on the economic sizes of (often using GDP measurements) and distance between two units. The basic theoretical model for trade between two countries takes the form of:
with:
: Trade flow
: Country i and j
: Economic mass, for example GDP
: Distance
: Constant
The model has also been used in international relations to evaluate the impact of treaties and alliances on trade, and it has been used to test the effectiveness of trade agreements and organizations such as the North American Free Trade Agreement (NAFTA) and the Worl Trade Organization (WTO).
Heckscher-Ohlin model (Eli Heckscher, 1966 & Bertil Ohlin, 1952)
Main article: Heckscher-Ohlin model
The Heckscher-Ohlin model (H-O model), also known as the factors proportions development, is a general equilibrium mathematical model of international trade, developed by Eli Heckscher and Bertil Ohlin at the Stockholm School of Economics. It builds on David Ricardo's theory of comparative advantage by predicting patterns of commerce and production based on the factor endowments of a trading region. The model essentially says that countries will export products that utilize their abundant and cheap factor(s) of production and import products that utilize the countries' scarce factor(s).
The results of this work has been the formulation of certain named conclusions arising from the assumptions inherent in the model. These are known as:
Heckscher-Ohlin theorem
Rybczynski theorem
Stolper-Samuelson theorem
Factor-Price Equalization theorem
Leontief paradox (Wassily Leontief, 1954)
Main article: Leontief paradox
Leontief's paradox in economics is that the country with the world's highest capital-per worker has a lower capital:labour ratio in exports than in imports.
This econometric find was the result of Professor Wassily W. Leontief's attempt to test the Heckscher-Ohlin theory empirically. In 1954, Leontief found that the U.S. (the most capital-abundant country in the world by any criteria) exported labor-intensive commodities and imported capital-intensive commodities, in contradiction with Heckscher-Ohlin theory.
Linder hypothesis (Staffan Burenstam Linder, 1961)
Main article: Linder hypothesis
The Linder hypothesis (demand-structure hypothesis) is a conjectue in economics about international trade patterns. The hypothesis is that the more similar are the demand structures of countries the more they will trade with one another. Further, international trade will still occur between two countries having identical preferences and factor endowments (relying on specialization to create a comparative advantage in the production of differentiated goods between the two nations).
Location theory
Main article: Location theory
Location theory is concerned with the geographic location of economic activity; it has become an integral part of economic geography, regional science, and spatial economics. Location theory addresses the questions of what economic activities are located where and why. Location theory rests — like microeconomic theory generally — on the assumption that agents act in their own self interest. Thus firms choose locations that maximize their profits and individuals choose locations, that maximize their utility.
Market imperfection theory (Stephen Hymer, 1976 & Charles P. Kindleberger, 1969 & Richard E. Caves, 1971)
Main article: Market failure
In economics, a market failure is a situation wherein the allocation of production or use of good and services by the free market is not efficient. Market failures can be viewed as scenarios where individuals' pursuit of pure self-interest leads to results that can be improved upon from the societal point-of-viewThe first known use of the term by economists was in 1958but the concept has been traced back to the Victorian philosopher Henry Sidgwick.
Market imperfection can be defined as anything that interferes with tradeThis includes two dimensions of imperfectionsFirst, imperfections cause a rational market participant to deviate from holding the market portfolioSecond, imperfections cause a rational market participant to deviate from his preferred risk level.Market imperfections generate costs which interfere with trades that rational individuals make (or would make in the absence of the imperfectionThe idea that MNEs owe their existence to market imperfections was first put forward by Hymer, Kindlebergr and CavesThe market imperfections they had in mind were, however, structural imperfections in markets for final products.According to Hymer, market imperfections are structural, arising from structural deviations from perfect competition in the final product market due to exclusive and permanent control of proprietary technology, privileged access to inputs, scale economies, control of distribution systems, and product differentationbut in their absence markets are perfectly efficientBy contrast, the insight of transaction costs theories of the MNEs, simultaneously and independently developed in the 1970s by McManus (1972), Buckley and Casson (1976), Brown (1976) and Hennart (1977, 1982), is that market imperfections are inherent attributes of markets, and MNEs are institutions to bypass these imperfections. Markets experience natural imperfections, i.e. imperfections that are due to the fact that the implicit neoclassical assumptions of perfect knowledge and perfect enforcement are not realized.
New Trade Theory
Main article: New Trade Theory
New Trade Theory (NTT) is the economic critique of international free trade from the perspective of increasing returns to scale and the network effect. Some economists have asked whether it might be effective for a nation to shelter infant industries until they had grown to a sufficient size large enough to compete internationally.
New Trade theorists challenge the assumption of diminishing returns to scale, and some argue that using protectionist measures to build up a huge industrial base in certain industries will then allow those sectors to dominate the world market (via a Network effect).
Specific factors model
Main article: International trade#Specific factors model
In this model, labour mobility between industries is possible while capital is immobile between industries in the short-run. Thus, this model can be interpreted as a 'short run' version of the Heckscher-Ohlin model.

Internationalization

In economics, internationalization has been viewed as a process of increasing involvement of enterprises in international markets,although there is no agreed definition of internationalization or international entrepreneurship.There are several internationalization theories which try to explain why there are international activities.
Contents

1 Trade theories
1.1 Absolute cost advantage (Adam Smith, 1776)
1.2 Comparative cost advantage (David Ricardo, 1817)
1.3 Gravity model of trade (Walter Isard, 1954
1.4 Heckscher-Ohlin model (Eli Heckscher, 196 & Bertil Ohlin, 1952)
1.5 Leontief paradox (Wassily Leontief, 1954
1.6 Linder hypothesis (Staffan Burenstam Linder, 1961)
1.7 Location theory
1.8 Market imperfection theory (Stephen Hymer, 1976 & Charles P. Kindleberger, 1969 & Richard E. Caves, 1971)
1.9 New Trade Theory
1.10 Specific factors model
2 Traditional approaches
2.1 Diamond model (Michael Porter)
2.2 Diffusion of innovations (Rogers, 1962)
2.3 Eclectic paradigm (John H. Dunning)
2.4 Foreign direct investment theory (FDI)
2.5 Monopolistic advantage theory (Stephen Hymer)
2.6 Non-availability approach (Irving B. Kravis, 1956)
2.7 Technology gap theory of trade (Posner)
2.8 Uppsala model
3 Further theories
3.1 Behavioral theory of the firm (Richard M. Cyert & James G. March, 1963; Yair Aharoni, 1966)
3.2 Contingency theory
3.3 Contract theory
3.4 Economy of scale
3.5 Internalisation theory (Peter J. Buckley & Mark Casson)
3.6 Product life cycle theory (Vernon L. Smith)
3.7 Transaction cost theory
3.8 Theory of the growth of the firm (Edith Penrose, 1959)

Import

An import is any good (e.g. a commodity) or service brought in from one country to another country in a legitimate fashion, typically for use in trade. It is a good that is brought in from another country for sale. Import goods or services are provided to domestic consumers by foreign producers. An import in the receiving country is an export to the sending country.
Imports, along with exports, form the basis of international trade. Import of goods normally requires involvement of the customs authorities in both the country of import and the country of export and are often subject to import quotas, tariffs and trade agreements. When the "imports" are the set of goods and services imported, "Imports" also means the economic value of all goods and services that are imported. The macroeconomic variable I usually stands for the value of these imports over a given period of time, usually one year.[citation needed]
Contents
1 Balance of trade
2 Types of import
3 Role of the Internet
4 References
5 See also
Balance of trade
Balance of trade represents a difference in value for import and export for a country. A country has demand for an import when domestic quantity demanded exceeds domestic quantity supplied, or when the price of the good (or service) on the world market is less than the price on the domestic market.
The balance of trade, usually denoted NX, is the difference between the value of the goods (and services) a country exports and the value of the goods the country imports:
NX = X − I, or equivalently I = X − NX
A trade deficit occurs when imports are large relative to exports. Imports are impacted principally by a country's income and its productive resources. For example, the US imports oil from Canada even though the US has oil and Canada uses oil. However, consumers in the US are willing to pay more for the marginal barrel of oil than Canadian consumers are, because there is more oil demanded in the US than there is oil produced.[citation needed]
In macroeconomic theory, the value of imports I can be modeled as a function of the domestic absorption A and the real exchange rate σ. These are the two largest factors of imports and they both affect imports positively:
I = I(A,σ)
Types of import
There are two basic types of import:
Industrial and consumer goods
Intermediate goods and services
Companies import goods and services to supply to the domestic market at a cheaper price and better quality than competing goods manufactured in the domestic market. Companies import products that are not available in the local market.
There are three broad types of importers:
Looking for any product around the world to import and sell.
Looking for foreign sourcing to get their products at the cheapest price.
Using foreign sourcing as part of their global supply chain.
Direct-import refers to a type of business importation involving a major retailer (eg. Wal-Mart) and an overseas manufacturr. A retailer typically purchases products designed by local companies that can be manufactured overseas. In a direct-import program, the retailer bypasses the local supplier (colloquial middle-man) and buys the final product directly from the manufacturer, possibly saving in added costs. This type of business is fairly recent and follows the trends of the global economy.
Role of the Internet
Many online auction websites are now providing wholesalers through a wholesale list, generally, the lists that require a fee to view, may not be updated frequently, the data may be old, and the companies listed may no longer be in business.[citation needed]
Another form of online middlemen are B2B trade companies. These cater mainly to big businesses who are importing large quantities of goods from foreign countries. They also have sister sites that serve smaller orders for small businesses.[citation needed] In addressing the concerns of listed companies' legitimacy and dependability, such B2B portals may inspect suppliers at their actual premises before they list suppliers. Alternatively, these companies may also branch out of cyberspace and organize their own sourcing fairs, where thousands of buyers and suppliers can meet face-to-face

International trade law

International trade law includes the appropriate rules and customs for handling trade between countries or between private companies across borders. Over the past twenty years, it has become one of the fastest growing areas of international law. There is some debate, however, over whether "international trade law" can truly be considered "law."
Contents
1 Overview
2 World Trade Organization
3 Trade in goods
4 Trade and Human Rights
5 Dispute settlement
6 See also
7 References
8 External links
Overview
International trade law should be distinguished from the broader field of international economic law. The latter could be said to encompass not only WTO law, but also law governing the international monetary system and currency regulation, as well as the law of international development.
The body of rules for transnational trade in the 21st century derives from medieval commercial laws called the lex mercatoria and lex maritima — respectively, "the law for merchants on land" and "the law for merchants on sea." Modern trade law (extending beyond bilateral treaties) began shortly after the Second World War, with the negotiation of a multilateral treaty to deal with trade in goods: the General Agreement on Tariffs and Trade (GATT).
International trade law is based on theories of economic liberalism developed in Europe and later the United States from the 18th century onwards..
World Trade Organization
In 1995, the World Trade Organization, a formal international organization to regulate trade, was established. It is the most important development in the history of international trade law.
The purposes and structure of the organization is governed by the Agreement Establishing The World Trade Organization, also known as the "Marrakesh Agreement". It does not specify the actual rules that govern international trade in specific areas. These are found in separate treaties, annexed to the Marrakesh Agreement.
Trade in goods
The GATT has been the backbone of international trade law throughout most of the twentieth century. It contains rules relating to "unfair" trading practices — dumping and subsidies.
Trade and Human Rights
The World Trade Organisation Trade Related Intellectual Property Rights (TRIPS) agreement required signatory nations to raise intellectual property rights (also known as intellectual monopoloy privileges). This arguably has had a negative impact on access to essential medicines in some nations.
Dispute settlement
Since there are no international governing judges (2004) the means of dispute resolution is determined by jurisdiction. Each individual country hears cases that are brought before them. Governments choose to be party to a dispute. And private citizens determine jurisdiction by the Forum Clause in their contract.
Besides forum, another factor in international disputes is the rate of exchange. With currency fluctuation ascending and descending over years, a lack of Commerce Clause can jeopardize trade between parties when one party becomes unjustly enriched through natural market fluctuations. By listing the rate of exchange expected over the contract life, parties can provide for changes in the market through reassessment of contract or division of exchange rate fluctuations.

Gravity model of trade

The gravity model of trade in international economics

, similar to other gravity models in social vscience, predicts bilateral trade flows based on the e

conomic sizes of (often using GDP measurements) and distance between two units. The model was first used by Walter Isard in 1954. The basic theoretical model for trade between two countries (i and j) takes the form of:
Where F is the trade flow, M is the economic mass of each country, D is the distance and G is a constant. The model has also been used in international relations to evaluate the impact of treaties and alliances on trade, and it has been used to test the effectiveness of trade agreements and organizations such as the North American Free Trade Agreemet (NAFTA) and the World Trade Organization (WTO).
Contents

1 Theoretical justifications and research
1.1 United States trade
2 Econometric Estimation of Gravity Equations
4 References
5 External links
5.1 Information
5.2 Data

Theoretical justifications and research
The model has been an empirical success, but the theoretical justifications for the model are the subject of some dispute. The model clearly has a relationship with a geographic view of trade, but other theoretical justifications for the model have also been proposed.
The gravity model estimates the pattern of international trade. While the model’s basic form consists of factors that have more to do with geography and spatiality, the gravity model has been used to test hypotheses rooted in purer economic theories of trade as well. One such theory predicts that trade will be based on relative factor abundances. One of the common relative factor abundance models is the Heckscher-Ohlin model. This theory would predict that trade patterns would be based on relative factor advantages. Those countries with a relative abundance of one factor would be expected to produce goods that require a relatively large amount of that factor in their production. While a generally accepted theory of trade, comparative advantage has suffered empirical problems. Investigations into real world trading patterns have produced a number of results that do not match the expectations of comparative advantage theories. Notably, a study by Wassily Leontief found that the United States, the most capital endowed country in the world actually exports more in labor intensive industries. Comparative advantage in factor endowments would suggest the opposite would occur. Other theories of trade and explanations for this relationship were proposed in order to explain the discrepancy between Leontief’s empirical findings and economic theory. The problem has become known as the Leontief paradox.
An alternative theory, first proposed by Staffan Lindr, predicts that patterns of trade will be determined by the aggregated preferences for goods within countries. Those countries with similar preferences would be expected to develop similar industries. With continued similar demand, these countries would continue to trade back and forth in differentiated but similar goods since both demand and produce similar products. For instance, both Germany and the United States are industrialized countries with a high preference for automobiles. Both countries have automobile industries, and both trade cars. The empirical validity of the Linder hypothesis is somewhat unclear. Several studies have found a significant impact of the Linder effect, but others have had weaker results. Studies that do not support Linder have only counted countries that actually trade; they do not input zero values for the dyads where trade could happen but does not. This has been cited as a possible explanation for their findings. Also, Linder never presented a formal model for his theory, so different studies have tested his hypothesis in different ways.
Elhanan Helpman and Paul Krugman asserted that the theory behind comparative advantage does not predict the relationships in the gravity model. Using the gravity model, countries with similar levels of income have been shown to trade more. Helpman and Krugman see this as evidence that these countries are trading in differentiated goods because of their similarities. This casts some doubt about the impact Heckscher-Ohlin has on the real world. Jeffrey Frankel sees the Helpman-Krugman set up here as distinct from Linder’s proposal. However, he does say Helpman-Krugman is different from the usual interpretation of Linder, but, since Linder made no clear model, the association between the two should not be completely discounted. Alan Deardor adds the possibility, that, while not immediately apparent, the basic gravity model can be derived from Heckscher-Ohlin as well as the Linder and Helpman-Krugman hypotheses. Deardorff concludes that, considering how many models can be tied to the gravity model equation, it is not useful for evaluating the empirical validity of theories.
Adding to the problem of bridging economic theory with empirical results, some economists have pointed to the possibility of intra-industry trade not as the result of differentiated goods, but because of “reciprocal dumping.” In these models, the countries involved are said to have imperfect competition and segmented markets in homogeneous goods, which leads to intra-industry trade as firms in imperfect competition seek to expand their markets to other countries and trade goods that are not differentiated yet for which they do not have a comparative advantage, since there is no specialization. This model of trade is consistent with the gravity model as it would predict that trade depends on country size.
The reciprocal dumping model has held up to some empirical testing, suggesting that the specialization and differentiated goods models for the gravity equation might not fully explain the gravity equation. Feenstra, Markusen, and Rose (2001) provided evidence for reciprocal dumping by assessing the "home market effect" in separate gravity equations for differentiated and homogeneous goods. The home market effect showed a relationship in the gravity estimation for differentiated goods, but showed the inverse relationship for homogeneous goods. The authors show that this result matches the theoretical predictions of reciprocal dumping playing a role in homogeneous markets.
Past research using the gravity model has also sought to evaluate the impact of various variables in addition to the basic gravity equation. Among these, price level and exchange rate variables have been shown to have a relationship in the gravity model that accounts for a significant amount of the variance not explained by the basic gravity equation. According to empirical results on price level, the effect of price level varies according the relationship being examined. For instance, if exports are being examined, a relatively high price level on the part of the importer would be expected to increase trade with that country (Bergstrand and Summary).
United States trade
Rebecca M. Summary specifically investigated American trade in an attempt to examine the specific role of political factors on United States trade. Her model consisted of the basic gravity equation, but did not multiply GDP or population (she used these separately and excluded income level) to find an interaction since she only looked at United States data and all data would be weighted by the same, cross-sectional factor. Summary’s study concluded that American exports and imports are affected by a number of political and social factors related to business ties, alliances, and foreign policy as well as the basic factors usually included in the gravity model.

Free trade area

Description
Unlike a customs union, members of a free trade area do not have a common external tariff (same policies with respect to non-members), meaning different quotas and customs. To avoid evasion (through re-exportation) the countries use the system of certification of origin most commonly called rules of origin, where there is a requirement for the minimum extent of local material inputs and local transformations adding value to the goods. Goods that don't cover these minimum requirements are not entitled for the special treatment envisioned in the free trade area provisions.
Cumulation is the relationship between different FTAs regarding the rules of origin — sometimes different FTAs supplement each other, in other cases there is no cross-cumulation between the FTAs. A free trade area is a result of a free trade agreement (a form of trade pact) between two or more countries. Free trade areas and agreements (FTAs) are cascadable to some degree — if some countries sign agreement to form free trade area and choose to negotiate together (either as a trade bloc or as a forum of individual members of their FTA) another free trade agreement with some external country (or countries) — then the new FTA will consist of the old FTA plus the new country (or countries).
Within an industrialized country there are usually few if any significant barriers to the easy exchange of goods and services between parts of that country. For example, there are usually no trade tariffs or import quotas; there are usually no delays as goods pass from one part of the country to another (other than those that distance imposes); there are usually no differences of taxation and regulation. Between countries, on the other hand, many of these barriers to the easy exchange of goods often do occur. It is commonplace for there to be import duties of one kind or another (as goods enter a country) and the levels of sales tax and regulation often vary by country.
The aim of a free trade area is to so reduce barriers to easy exchange that trade can grow as a result of specialisation, division of labour, and most importantly via (the theory and practice of) comparative advantage. The theory of comparative advantage argues that in an unrestricted marketplace (in equilibrium) each source of production will tend to specialize in that activity where it has comparative (rather than absolute) advantage. The theory argues that the net result will be an increase in income and ultimately wealth and well-being for everyone in the free trade area. However the theory refers only to aggregate wealth and says nothing about the distribution of wealth. In fact there may be significant losers, in particular among the recently protected industries with a comparative disadvantage. The proponent of free trade can, however, retort that the gains of the gainers exceed the losses of the losers.

Foreign investment

China's investment climate has changed dramatically with more than two decades of reform. In the early 1980s, China restricted foreign investments to export-oriented operations and required foreign investors to form joint-venture partnerships with Chinese firms. The Encouraged Industry Catalogue sets out the degree of foreign involvement allowed in various industry sectors. From the beginning of the reforms legalizing foreign investment, capital inflows expanded every year until 1999. Foreign-invested enterprises account for 58–60% of China’s imports and exports.
Since the early 1990s, the government has allowed foreign investors to manufacture and sell a wide range of goods on the domestic market, eliminated time restrictions on the establishment of joint ventures, provided some assurances against nationalization, allowed foreign partners to become chairs of joint venture boards, and authorized the establishment of wholly foreign-owned enterprises, now the preferred form of FDI. In 1991, China granted more preferential tax treatment for Wholly Foreign Owned Enterprises and contractual ventures and for foreign companies, which invested in selected economic zones or in projects encouraged by the state, such as energy, communications and transportation.
China also authorized some foreign banks to open branches in Shanghai and allowed foreign investors to purchase special "B" shares of stock in selected companies listed on the Shanghai and Shenzhen Securities Exchanges. These "B" shares sold to foreigners carried no ownership rights in a company. In 1997, China approved 21,046 foreign investment projects and received over $45 billion in foreign direct investment. China revised significantly its laws on Wholly Foreign-Owned Enterprises and China Foreign Equity Joint Ventures in 2000 and 2001, easing export performance and domestic content requirements.
Foreign investment remains a strong element in China's rapid expansion in world trade and has been an important factor in the growth of urban jobs. In 1998, foreign-invested enterprises produced about 40% of China's exports, and foreign exchange reserves totalled about $145 billion. Foreign-invested enterprises today produce about half of China's exports (note that the majority of China's foreign investment come from Hong Kong, Macau and Taiwan), and China continues to attract large investment inflows. However, the Chinese government's emphasis on guiding FDI into manufacturing has led to market saturation in some industries, while leaving China's services sectors underdeveloped. From 1993 to 2001, China was the world's second-largest recipient of foreign direct investment after the United States. China received $39 billion FDI in 1999 and $41 billion FDI in 2000. China is now one of the leading FDI recipients in the world, receiving almost $80 billion in 2005 according to World Bank statistics. In 2006, China received $69.47 billion in foreign direct investment.
Foreign exchange reserves totaled $155 billion in 1999 and $165 billion in 2000. Foreign exchange reserves exceeded $800 billion in 2005, more than doubling from 2003. Foreign exchange reserves were $819 billion at the end of 2005, $1.066 trillion at the end of 2006, $1.9 trillion by June 2008. In addition, by the end of September 2008 China replaced Japan for the first time as the largest foreign holder of US treasury securities with a total of $585 billion, vs Japan $573 billion. China has now surpassed those of Japan, making China's foreign exchange reserves the largest in the world.
As part of its WTO accession, China undertook to eliminate certain trade-related investment measures and to open up specified sectors that had previously been closed to foreign investment. New laws, regulations, and administrative measures to implement these commitments are being issued. Major remaining barriers to foreign investment include opaque and inconsistently enforced laws and regulations and the lack of a rules-based legal infrastructure. Warner Bros., for instance, withdrew its cinema business in China as a result of a regulation that requires Chinese investors to own at least a 51 percent stake or play a leading role in a foreign joint venture.
Outward foreign direct investment is a new feature of Chinese globalization, where local Chinese firms seek to make investments in both developing and developed countries