International Trade Theories And Their Application To Current International Trade Practices

Trade structure of the chosen countries

Analyse International Trade Theories and their Application to Current International Trade Practices. 

International trade is one such phenomenon that incorporate the exchange of the goods and services as well as the capital, labour and others across the international border or within the states. During the 21^st century, there has been rise in the studies regarding the international trade owing to its magnitude and far reaching impact on the social welfare (Jones & Kierzkowski, 2018). International trade has been persistent event of the world history that took place since the earlier human life when the tribes started to exchange goods in lieu of other good that they cannot produce. Over the years, there has been rise in the international trade through rise in the globalisation which is such a phenomenon that is aimed to convert the world market into a single market. International trade is aimed to provide higher amount of growth prospect to the trade participating nations through providing lower cost goods and services and allowing them to export such goods and services in which said economy expertise (Feenstra, 2015). In addition to this international trade provide rise to the world economy where demand and supply, prices and global events are main factors that plays crucial role. On the other hand, considering the domestic market, it can be seen that these factors are also responsible for the influence on the domestic economy. With the rise in the trade, there will be scope for the higher growth of the development that will allow the said macroeconomic variables to fluctuate towards better growth prospect and future sustainability of the economy (Low, 2016). For instance, if international trade between two economies take place, then it can be seen that, trade participating nations face higher growth prospect through the rise in the labour employment, skill development of the labour and transforming the same from unskilled labour to the skilled labour that enhance the performance of the overall economy (Brack, 2017).

It has been clear that international trade around the world and it provides large scale of benefit to the trade participating nations, however, depending upon the economic condition of the trade participating nations, it can be seen that outcome of trading vary widely. In order to trace the impact of the international trade in present date, this report is aimed to perform analysis of International Trade Theories and Their Application to Current International Trade Practices (Van & Lewer, 2015). For better understanding of the same, the report will consider two economies, which are Switzerland and japan. In order perform the analysis of international trade theories and apply the same to current international trade, the report will at first state portray the trade structure of the chosen countries with the numerical values and then portray why trade occur between the two country. For this purpose, the report will consider the absolute advantage and comparative advantage theories, which are known as the corner stone of the trade theory. Post this analysis, the report will portray the trading of the chosen countries with the Hecksher-Ohlin model and Stolper-Samuelson model that will define the factor endowment trade and income distribution of the trade participating nations. Moreover, considering the new trade theories this report will define the economies of scale and imperfect completion and market power which will portray the performance of both the trade participating nations.

Japan’s trade structure

Selected economies for the report is Japan and Switzerland which are known for their outstanding trade development during the recent past. Considering the export volume of japan during 2017, the economy ranks 4^th among all the trading nations; whereas, when it comes to the Switzerland, then the economy is 15^th in the list showcasing the high trade potential of both the economies. The economy of japans is one of the highly developed and open market economies around the world, which is the third largest economy as per the nominal Gross Domestic Product (GDP) in the world. If the Purchasing Power Parity (PPP) is considered, then the economy is the fourth largest nation. Japans is well known or its trade surplus and additionally it has considerable net international investment surplus that highlights the magnitude of the trade (Omri et al., 2015). As per the 2010 data, japans has 13.7% of world’s financial assets that showcase the trade openness of the said economy (Gokmenoglu et al., 2015). In addition to this it can be seen that mineral abundance of the Japanese economy has aided the domestic economy to survive the destruction during the Second World War and transformed itself as one of the capital abundant economy. Trading history of Japanese economy is well established and well developed since the 16^th century, when the economy came into contact with the European civilisations (Jebli & Youssef, 2015). Through the renaissance japan has perceived sophisticated feudal society which has highly strong dominance over the peer nations in case of the technological advantage. Next to this, during the time of 16^th century to 18^th century it can be seen that trading between the various nations with japans eventually increased that has aided the economy to transform itself as one of the developed nations (Laursen, 2015). Nowadays japan has variety of industries ranging from handicrafts to large rockets and technologically upgraded equipment that has made the economy into a well-established trading nations. Trade is one of the main source of the total GDP income of the domestic economy and as per the statistics the economy is accounted for the 12.5% GDP share out of total GDP of the country. Main trading partners of japan is United States which is accounted for the 20.2% trade out of total goods and services exported from japan and next to this comes China (Castinot et al., 2016). Though presently japan and china, are going through the border dispute in South China Sea, it can be seen that there is lot of trade between these two trading partners. As per the statistics, china is accounted 17.6% trade share out of total trade of the japan making china one of the best and well-weathered trading partner of the economy (Levchenko & Zhang, 2016). On the other hand, European Union (EU), South Korea and Taiwan are the other nations that possess higher ranks in case of trade with japans. Considering the import volume from the countries from where Thailand import varies widely. For instance, china is accounted for the 25.8% goods and services out of total import, and EU is the second largest exporter to Thailand with the 12.4% share of total imports. As the main source of the export goods and service, japan sends motor vehicles by a large extent which is considered 14.9% of total export (Hanson et al., 2015). On the other hand petroleum is the highest importing goods that japan import from its trading partners. This large amount of trade has provided the Japanese economy to possess 683.3 billion of export value as per the 2017 data and it can be seen from the data of 2017 japan import 625.9 billion dollar of goods and services from its trading partners providing a positive trade value at the end of the financial year (Davis & Dingel, 2014). 

Switzerland’s economy and trade

Moving forward to the economy of Switzerland, it can be seen that, this economy is another developed economy around the world, which is depended upon the trading for the better growth prospect. Economy of Switzerland has a well-established service sector that produces 71% of GDP of the economy, whereas agricultural sector provide only 1.3% of the GDP and rest amount, which around 27.1% is sourced by the industrial sector making it one of the highly developed economy (Castinot et al., 2015). Switzerland is the third richest landlocked economy around world and as per the nominal GDP it is 19^th largest economy. When it comes to trade, then it export 3083 billion dollar of good and services as per the 201 data, which rose by 19.2% from 2010 (Do et al., 2014). Considering the import of the economy, it can be seen that economy of Switzerland is accounted for 299.6 billion dollar of goods and service import from its trading partners during 2011 that highlights a positive trade balance by the end of 2011 (Bowen, 2018). One of the most important trading partner of Switzerland is Germany, which is accounted for 21% of export for the country and 29% import toward the country out of total export and import volumes from the economy respectively (Vollrath, 2016). Second largest trading partner of Switzerland is US which is accounted for 9.1% export of total goods an service and 6.7% of import out of total import value. Among non-European trading partner, japans is the largest one, which is accounted for the 3.6% export out of total export quantity and 2% import volume out of total import quantity (Schumacher, 2012). Being a highly developed economy, Switzerland have skilled labour that has aided the economy to produce high tech finished product which is the main exportable for the country. Other than this, Switzerland is accounted for the export of medicaments, watches, vaccines and other products.

Switzerland	Japan
Land area (sq. km.)	41285	Land area (sq. km.)	377972
GDP (current USD, millions)	659850	GDP (current USD, millions)	4938644
GNI per capita (current USD)	80560	GNI per capita (current USD)	38550
Total Trade (X+M) (current USD, Billions)	556	Total Trade (X+M) (current USD, Billions)	1263
Total exports (current USD, Billions)	279	Total exports (current USD, Billions)	688
Total Imports (current USD, Billions)	277	Total Imports (current USD, Billions)	575
Trade to GDP ratio (%)	58.3	Trade to GDP ratio (%)	17.4
Share of exports (%) 2015
Agricultural products	3.2	Agricultural products	1.6
Fuels and mining products	2.6	Fuels and mining products	4.3
Manufactures	68.5	Manufactures	87.2
Share of imports (%) 2015
Agricultural products	5	Agricultural products	11.3
Fuels and mining products	5.4	Fuels and mining products	29.4
Manufactures	61.5	Manufactures	57.1

Table 1: Basic economic indicators and trade structure of Switzerland and Japan in 2016

Source: (Atlas Media, 2016) (Atlas Media, 2016) (WTO, 2015-2016) (WTO, 2015-2016) (Google.com, 2018) (Google.com, 2018) (World Bank Group, 2017)

Considering the given data it can be seen that japans is the largest nation among the two selected economy as per the land area. Switzerland have 41285 sq.km. of land, whereas japans is accounted for the 377972 sq.km. of land. As per the GDP japan again stands higher than the economy of Switzerland owing to the higher GDP at current price. It also showcase that the economy of japan has higher trade potential compared to the economy of Switzerland because, with higher GDP there will be higher job creation and the goods and service production will be higher as well. When it comes to Gross National Income (GNI) per capita, then it can be seen that Switzerland ranks first and japans has almost half of the GNI per capita as compared to the economy of Switzerland. This showcase that standard of living in Switzerland is higher than japan. Total trade value of japan is higher than Switzerland wing to the fact that japan is a larger economy than Switzerland that has land abundance as well as labour abundance compared to Switzerland. Higher total export of the Japanese economy showcase better growth prospect of the domestic economy with better trade balance. As it has been seen from the earlier discussion, japans exports manufacturing goods and services by maximum amount, and Switzerland does the same due to availability of skilled labour and capital. Both of the economies exports fuel by a small amount and agricultural output is the least in the list showcasing dependence of both economy on the capital intensive goods for the international trade (Samuelson, 1964). Owing to the fact that japans and Switzerland exports high tech finished products, it can be said that both the economies imports large amount of manufacturing goofs and the import of agricultural goods is also high.

Application of absolute advantage and comparative advantage theories

With the comparative analysis of both the economies it can be said that japan and Switzerland has almost identical trade structure.

Since the development of the civilisation during the earlier human history trade began among the different tribes and during 21^st century it has become one of the main part of the national income. Though the trading during initial days was subsistent in nature, however, in present date it is one of the main source of income that not only enhance the public earning rather enhance the production, performance and job creation as well. owing to the vast magnitude of trade and its reach that can provide better growth to the trading partners, over the decades there has been vast amount of research that has given rise to the modern trading theories, however, most of them has failed to provide reason of occurrence of trade and how trade flow from one trading partner to another one (Zhang, 2017). One of the major breakthrough came with the help of the Adam Smith who bring in the theory of absolute advantage and next to this David Ricardo introduced his theory of comparative advantage of international trade that revamped the theory of international trade and described how trade takes place between nations in present date. Details regarding these different types of international trading theory are as follows: 

Absolute advantage:

Absolute advantage of a country in case of international trade is the ability to produce goods and services at a lower cost compared to other entities that are able to produce same goods and services. Entities who poses absolute advantage can produce a good or service utilising smaller amount of inputs that makes it efficient than its competitors who can produce the same with higher amount of factor endowment. absolute advantage is one of the predominant theory of international trade as per which a country that poses absolute advantage in production of one goods or service specialises in the same that allow it to apply small amount of factor of production in order to produce same amount of goods and service as compared to its competitor (Lai & Bujang, 2016). between two trading partner if a country possess absolute advantage in production of one good, and another one possess absolute advantage in another good or service, then trade can take place between two nations. Though Adam smith pioneered the idea of absolute advantage during the 18^th century it is still present in present days. As the real life example of the absolute advantage, it can be seen that e United Stated being one of the grape abundant nation has advantage in production of wine compared to other western nations. However, when the production of wine is compared with Italy, it can be seen that, Italy has much amount of efficiency in production of the same. US can produce 700 million of wine per year, whereas Italy can produce 4 billion litre of wine within the same period. as per the absolute advantage theory it can be seen that Italy has much amount of efficiency in production wine and it can produce almost 4 and half time more amount of wine at a same time under a ceteris paribus situation (Beccalli et al., 2015).

Switzerland	Japan
Product	Total production (tone)	Yield (kg/hectare)		Total production (tone)	Yield (kg/hectare)
Apple	226487	58766.6	Apple	765000	20788
Apricots	8912	12360.5	Apricots	92700	5942.3
Currants	474	14316	Currants	10	1477.7
Maize	144406	9683.9	Maize	171	2634
Barley	159023	5552.3	Barley	170400	2775.7

Application of Hecksher-Ohlin model and Stolper-Samuelson model

Table 2: Production: five selected agricultural products of Switzerland and Japan in 2016

Source: (Food and Agriculture Organization, 2016)

Considering the chosen countries of the report it can be seen that Japan and Switzerland has absolute advantage in production of different goods and services, within the given product line-up. As it can be seen from the above table, when it comes to Apple, Switzerland has absolute advantage in the same because it has 58766.6 kg yield per hectare of land, and japan has only 20788 kg/hectare yield. However, owing to large land for the production, japan produce more amount of apple compared to Switzerland. Considering the Apricots, it can be seen that Switzerland has absolute advantage in same owing to almost double yield per hectare of land as compared to japan. Switzerland has absolute advantage in case of Currants because it has ten times larger productivity than japan and in case of also the Switzerland possess absolute advantage too (Atack, 2018). In case of barley, Japans fails to dominate the market because Switzerland has higher productivity per hectare of land. absolute advantage theory by large scale is a supply sided theory that define the international trading with the help of production, however, it fails to define the flow of trade if a country has absolute advantage in production of both goods and service under a 2×2 model. Thus, over the year of evaluation of trade theories David Ricardo bring in the comparative advantage theory of international trade (Ferrufino & Robertson, 2014).

Comparative advantage:

Comparative advantage is the developed version of the absolute advantage that defines trade can occur between two nations depending upon their relative cost advantage in production. Ricardo explained, if one country has comparative advantage in production in one good due to the relative advantage of price, then it will export the same and import the other good in which it has comparative disadvantage in production (David, 2015). As per the theory of Ricardo, if there is two countries, who operate under perfectly competitive market, and the cost of production is expressed in terms of labour, then a country will exercise comparative advantage in production of one good in which it has lower opportunity cost and the other nation will produce that good in which that country enjoys lower opportunity cost (Michael, 2016). Owing to the availability of difference in opportunity cost, there will be trade between the nations and one country out of two will export the same in which it has comparative advantage and import the same in which it has comparative disadvantage.

Switzerland		Japan
Product	Price per tone, USD)		Price per tone, USD)
Apricots	2588.2	Apricots	2644.5
Barley	305.5	Barley	1243.5
Beans, green	1140.8	Beans, green	5751.3
Cabbages and other brassicas	1485.9	Cabbages and other brassicas	729.8
Cherries	3614.4	Cherries	17331.1

Application of new trade theories

Table 3: Producer price: five selected products of Switzerland and Japan in 2016

Source: (Food and Agriculture Organization, 2016)

On the other hand, the other nation will import the same in which it has comparative disadvantage and export the same in which it has comparative advantage of production. Considering the given case of Switzerland and Japan, it can be seen that Switzerland has absolute advantage in all the products. However, trade occurs between the nations (Backhouse, 2015).

Comparative advantage in production of apricot in Switzerland = 2588.2/2644.5 = .97

Comparative advantage in production of apricot in Japan = 2644.5/2588.2 = 1.02

Comparative advantage in production of Barley in Switzerland = 305.5/1243.5 = .24

Comparative advantage in production of Barley in Japan = 1243.5/305.5 = 4.07

Comparative advantage in production of Beans, green in Switzerland = 1140.8/5751.3 = .19

Comparative advantage in production of Beans, green in Japan = 5751.3/1140.8 = 5.04

Comparative advantage in production of Cabbages and other brassicas in Switzerland = 1485.9/729.8 = 2.03

Comparative advantage in production of Cabbages and other brassicas in Japan = 729.8/1485.9 = 0.49

Comparative advantage in production of Cherries in Switzerland = 3614.4/17331.1 = .20

Comparative advantage in production of Cherries in Japan = 17331.1/3614.4 = 4.79

Considering the above opportunity cost, it can be seen that, apart from cabbage and other brassicas, Switzerland enjoys comparative advantage in production of all the products.

Hecksher-Ohlin model:

Comparative advantage model of international trade failed to analyse the reason of comparative cost and thus Hecksher and Ohlin provided a modified version of the same. As per the H-O model different region has different factor endowment and different goods need different factor proportion for the production that leads to the difference in the comparative cost (Jones, 2018).

Switzerland	Japan
Factors	Factors
Agricultural Land (Square Km)	15088	Agricultural Land (Square Km)	44960
Agricultural Land (% of land area)	38.2	Agricultural Land (% of land area)	12.3
Labour (Thousands)	49304.84	Labour (Thousands)	66503.54
Capital (USD, millions)	160889.62	Capital (USD, millions)	165415.21
Five major exported products	Five major imported products	Five major exported products	Five major imported products
Precious Stones & Metals	Precious Stones & Metals	Motor Vehicles & Parts	Oil & Mineral Fuels
Pharmaceuticals	Pharmaceuticals	Industrial Machinery	Electrical Machinery
Industrial Machinery	Industrial Machinery	Electrical Machinery	Industrial Machinery
Clocks & Watches	Motor Vehicles & Parts	Items Nesoi	Pharmaceuticals
Organic Chemicals	Electrical Machinery	Precision Instruments	Precision Instruments

Table 4: Factor endowment and pattern of trade of Switzerland and Japan in 2016

Source: (World Bank Group, 2015) (World Bank Group, 2017) (World Bank Group, 2016) (World Bank Group, 2015) (Global Edge, 2016) (Global Edge, 2016 

As per the H-O, factor that is abundant in a country will aid the same to produce that factor related goods and services at lower cost and export the same; whereas allowed the other one to import that good and service in which it lacks in case of factor endowment. Considering the given data, it can be seen that, Switzerland has abundance in case of agricultural land that depicts it will produce those products which are land intensive. On the other hand, japans is labour and capital abundant economy which will produce capital and labour extensive goods (Meisser & Kreuser, 2017). From the given import and export data of both the countries it can be seen that Switzerland export mostly land intensive goods, whereas import those products such as electrical machinery, motor vehicles and parts, which are capital intensive. On the other hand japan export capital intensive goods and import land intensive products.

Stolper-Samuelson model:

S-S theorem is the modification of the H-O theorem under that under the specific economic assumptions enhance the relative price of a good that will lead to growth in the return to that factor that is being used intensively in the production of the said good (Feenstra, 2015). As per the given data it can be seen that if price of the agricultural products rises, the price of the land based inputs will also rise; whereas, price of the products that are capital and labour intensive will fall. In case of the Japan there in case of rise in the price of the capital intensive goods, there will be rise in the price of capitals as well (Costinot & Rodriguez, 2014). 

Economies of scale:

Economies of scale depicts the cost advantage in production of goods and services by a firm in case it enhance its output. Advantage due to the rise in production is faced by the economy or firm owing to the inverse relationship between the quantities produced and fixed cost of the same. Larger quantity of production reduce the fixed cost leading to fall in the overall cost of input. In addition to this, economies of scale can lead to fall in the Average Variable costs as well with the rise in output (ATsubuku, 2016 ). If a firm enjoys economies of scale, then it can be seen that it will reduce the price of the operation of the firm through the fall in the input cost. Moreover, it will reduce the fixed cost as well as the variable cost of production leading to rise in the further expansion of the production capability of the firm. Economies of scale is such a phenomenon that comes with the long operation of a firm. With the rise in the operation of a firm over the years, it can be seen that labours will have specialization in their work and over the year technology will also be matured that will provide better efficiency to the firm. Under this situation production cost per unit of output will be lower and then internal function cost will also be reduced leading to rise in the productivity, whereas, cost of operation will eventually fall (Yamarik, 2018). Economies of scale can be divided into three subcategories that a firm face during its long run endeavours (Polkinghorn, 2016). During the initial days, there will be IRS that depict the increasing returns to scale which means as the firm expands and endow more factor of production, firm will produce proportionately more output than input. With the rise in the expenditure and saturation in the market, then the firm will face CRS where the output and input will be same and next to this there will be DRS, where in case of further expansion of the firm, there will be fall in the production (Athanassiou, 2015). During the IRS, positive economies of scale can be observed as the labourers will be specialising in production and firm will get funds through rise in exposure. Next to this as the firm will expand and market will be saturated, there will be fall in the income for the firm leading to diseconomies of scale.

Switzerland	Japan
Product	Domestic consumption (tone)	Exports (tone)		Domestic consumption (tone)	Exports (tone)
Apple	233394	4157	Apple	734465	32458
Barley	192739	437	Barley	1331943	6
Cabbages and other brassicas	51435	9	Cabbages and other brassicas	15620473	1076
Chestnut	2668	5	Chestnut	22993	663
Maize	310095	180	Maize	15341919	38

Table 5: domestic consumption and export: five selected agricultural products of Switzerland and Japan in 2016

Source: (World Bank Group, 2015)  (World Bank Group, 2017) (World Bank Group, 2016) (World Bank Group, 2015) (Global Edge, 2016) (Global Edge, 2016)

Considering the given details regarding the Switzerland and Japans, it can be seen that there are 5 products in which in case of Apple, Cabbages and other brassicas as well as in case of Chestnut production japan enjoys economies of scale. Seeing the domestic consumption and export figure for 2016, it can be said that Switzerland has economies of scale in production of Barley and maize (Baumers et al., 2016).

Imperfect completion and market power:

Imperfect competition is a form of market operation where availability of data regarding the price and strategies of other firms is not known to the peers within the market. In case of imperfect competition market lose its competitiveness and under the speculative nature of market, it tends to operate as the oligopoly.

Agricultural product name: Apple
Top five producing/exporting countries	Volume of production (tone)	Share of world production (%)
China	39682618	19.6
USA	4081608	13.1
Poland	3085074	4.6
Italy	2216963	13
France	1737482	7.9

Table 6: One selected agricultural product in 2016

Source: (World Atlas, 2016) (World Exports, 2017)

Firms which have larger market share starts to influence the market price, and in case of the firms which have lower market share, it can be seen that they operate as per the market price decided by the large firms. Considering the given data regarding Apple production it can be seen that China has 19.6% market share in the world apple market. It produces 39682618 ton of apple per year and Poland has the least amount of market share (Baumers et al., 2016). Poland only possess 4.6% market share that depicts less amount of price controlling power to Poland in case of apple market. USA, Italy and France possess second, third and fourth position with 13.1%, 13% and 7.9% market share respectively. As per the given data, it can be said that China is the market leader and it has large amount of market apple market controlling power. 

Conclusion:

Considering the above analysis, it can be seen that international trade is one of the essential phenomenon of the world economy that depicts the growth of the respective economies. Over the years, there have been large amount of researches that has brought in two different theories regarding international trade, which are theory of absolute advantage and theory of comparative advantage by Adam Smith and David Ricardo respectively.  under this situation, the report has found that as per the given data, Switzerland has absolute advantage in production of apple, maize, cabbage and other, whereas considering the theory of comparative advantage it can be seen that japan enjoys comparative advantage in production of Cabbage and other brassicas. Moving forward the report has considered the modern approaches of trade theories and has found that it depicts different outcomes in different scenarios.  At last the report has traced the imperfect market competition and economies of scale and their importance in trade. it has found that economies of scale is such a phenomenon that allows the firms to enhance their production by large extent through enhancing their investment and with large market share comes large amount of trade with the trade participating nations.  To conclude, it can be said that trade has become an integral part of the human development history and over the year it has sharpened the growth path of the trade participating nations as well as aided the economies to become more sustainable. 

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