International Trade (Intl Trade) 101: International Trade Theories - New Trade Theory, Economies of Scale First-Mover Advantage Intra-Industry Trade Krugman

What This Is

The New Trade Theory (NTT) explains how international trade patterns have changed in recent decades. It highlights the importance of economies of scale, first-mover advantage, and intra-industry trade. A concrete example is the rise of Chinese electronics exports to the US, where Chinese companies like Huawei and Xiaomi have gained a significant market share due to their large economies of scale and first-mover advantage.

Key Terms & Rules

• Economies of Scale: The cost advantage that a company gains from producing and selling a large quantity of goods or services. This leads to lower prices and increased competitiveness in international trade.
• First-Mover Advantage: The benefit that a company gains from being the first to enter a new market or industry. This can lead to brand recognition, customer loyalty, and a competitive edge.
• Intra-Industry Trade: The trade of similar goods between countries, often within the same industry. This type of trade is driven by differences in productivity and economies of scale.
• Krugman Model: A theoretical model developed by Paul Krugman to explain the rise of intra-industry trade. It suggests that trade is driven by differences in productivity and economies of scale.
• Comparative Advantage: The idea that countries should specialize in producing goods and services for which they have a lower opportunity cost. This leads to increased efficiency and productivity.
• Trade Multipliers: The increase in trade that occurs when a country specializes in producing a particular good or service. This can lead to increased economic growth and development.
• New Trade Theory (NTT): A theoretical framework that explains the rise of intra-industry trade and the importance of economies of scale and first-mover advantage.
• Heckscher-Ohlin Model: A theoretical model that explains trade patterns based on differences in factor endowments between countries.
• Factor Endowments: The resources and inputs that a country has available to produce goods and services.
• Productivity Differences: The differences in productivity between countries that drive trade patterns.

Step-by-Step Process

1. Identify the Industry: Determine the industry in which the trade is taking place and the goods or services being traded.
2. Analyze the Trade Pattern: Examine the trade pattern to determine if it is intra-industry or inter-industry trade.
3. Determine the Comparative Advantage: Identify the country's comparative advantage in producing the good or service.
4. Calculate the Trade Multiplier: Estimate the increase in trade that will occur as a result of specialization.
5. Consider the First-Mover Advantage: Evaluate the impact of the first-mover advantage on the trade pattern.
6. Assess the Economies of Scale: Determine the impact of economies of scale on the trade pattern.

Common Mistakes

• Mistake: Confusing intra-industry trade with inter-industry trade.
• Correction: Intra-industry trade involves the trade of similar goods between countries, while inter-industry trade involves the trade of different goods between countries.
• Example: A US company exports cars to Japan, while a Japanese company exports electronics to the US. This is an example of inter-industry trade.
• Mistake: Assuming that first-mover advantage is the only factor driving trade patterns.
• Correction: Economies of scale, comparative advantage, and trade multipliers also play important roles in driving trade patterns.
• Example: A Chinese company has a first-mover advantage in the electronics market, but a US company has a comparative advantage in producing high-end electronics due to its skilled workforce.
• Mistake: Misunderstanding the concept of trade multipliers.
• Correction: Trade multipliers estimate the increase in trade that will occur as a result of specialization.
• Example: A country specializes in producing textiles, leading to an increase in trade of 20% due to the trade multiplier.

Exam / Certification Tips

• Common Question Pattern: Questions may ask you to apply the New Trade Theory to a specific trade scenario.
• Tricky Distinctions: Be aware of the differences between intra-industry and inter-industry trade, as well as the impact of first-mover advantage and economies of scale.
• Memory Aid: Use the acronym "E-F-C-P" to remember the key factors driving trade patterns: Economies of scale, First-mover advantage, Comparative advantage, and Productivity differences.

Quick Practice Scenario

A Chinese company exports electronics to the US under FOB Shanghai. Who pays for the main carriage?

Answer: The buyer (US company) pays for the main carriage.

Explanation: Under FOB (Free on Board) terms, the seller (Chinese company) is responsible for delivering the goods to the buyer at the port of shipment (Shanghai). The buyer is responsible for the main carriage (transportation) from the port of shipment to the final destination.

Last-Minute Cram Sheet

• Economies of Scale: Cost advantage gained from producing large quantities of goods or services.
• First-Mover Advantage: Benefit gained from being the first to enter a new market or industry.
• Intra-Industry Trade: Trade of similar goods between countries.
• Krugman Model: Theoretical model explaining the rise of intra-industry trade.
• Comparative Advantage: Idea that countries should specialize in producing goods and services for which they have a lower opportunity cost.
• Trade Multipliers: Increase in trade resulting from specialization.
• New Trade Theory (NTT): Theoretical framework explaining the rise of intra-industry trade.
• Heckscher-Ohlin Model: Theoretical model explaining trade patterns based on factor endowments.
• Factor Endowments: Resources and inputs available to produce goods and services.
• Productivity Differences: Differences in productivity between countries driving trade patterns.
• Under FOB, risk transfers when goods are on board the vessel – not at the port gate or on the dock.