Business and Management
Submitted By hungdm
The international trade theory experienced several periods of development from Classical to Neoclassical, New Trade Theory, and then the New Classical Trade Theory. The earliest over international trade had its birth in the end of 15th century and initial period of 16th century. That is, during the period of western countries’ primitive accumulation of capital and the main theory is mercantilism. It is claimed of the theory that the only form of wealth is the metal---gold and silver. People can gain them though exchange and for a nation, it is to increase the social wealth. Hereby, the way to gain gold and silver is international trade.
II. THE DEVELOPMENT PROCESS OF THE THEORIES:
1. CLASSICAL INTERNATIONAL TRADE THEORY
In the late 1790s, the point of mercantilism was challenged by the classical economists. Based on criticizing the mercantilism, Adam Smith proposed the division of labor theory. It has been 41 years from Adam Smith proposed the absolute cost in his the Wealth of Nations in 1976 to David Ricardo proposed the comparative cost in his the Principles of Political Economy and Taxation in 1817. This is the foundation period of international trade theory, that is, the Classical period. The absolute cost of Adam Smith is based on the division of labor theory. Adam introduced the division of labor theory to the field of international trade and established his absolute cost theory, thus demonstrating the fact that a nation can make the sources of each country most efficiently used to gain the increase of the total production, the enhance of consumption level and the save of labor time as long as the nation specially produce the products of which its production cost is lower than any other country in order to exchange the products of which the cost is high than any other country with its cost-low products. Adam pointed out that the base of international trade lies in the difference of the absolute cost among the products of all countries. The British classical economist David Ricardo proposed the international trade theory of comparative interest based on Adam’s absolute interest. David’s theory is established with the premise of the assumption that only one production element is needed in production---labor force. David points out that the base of international trade lies in the price difference brought by the labor productivity difference (technical difference) when all the countries are producing the same product. When two kinds of products are produced, the labor productivity will further be the comparative technical difference when the countries produce different products. The reason or motivation of international trade is the price difference in the commodity and the producers’ pursuit of high price. And the structure of international production-sharing is that every country specially produce the products with their comparative advantage and further do exchange according to their need while the result of international trade is that each country can increase their real income level through international trade. The birth of Ricardo’s comparative cost theory means the establishment of international trade theory system. Applying the abstract method, Ricardo made a series of premise assumptions over the theory’s application. Since great difference exists between the premises of these assumptions and the real economic society, thus dramatically influencing the explanatory power of the theory. However, the construction of the theory model aims to prove the universality of the production-sharing and mutual-benefit of international trade and not to concretely plan for the international production-sharing pattern. 2. NEOCLASSICAL INTERNATIONAL TRADE THEORY In the 1930s, Swedish economist Ohlin published Interregional and International Trade, in which he put forward Factor Endowment Theory that replaces Ricardo's Single Production Element Theory with a variety of factors theory in interdependent structure of production. Ohlin's Factor Endowment Theory is called Neo- classical International Trade Theory, and his model is called H–O model. Heckscher and Ohlin think, in realistic production, what put in is not only labor, but also other factors. What's more， putting in two factors is a basic condition of production process. According to Factor Endowment Theory, if two countries produce the same product at the same level of technical skills, then price difference comes from cost difference; with the latter itself comes from the price difference of factors in the process of production. While price difference of factors depends on the country's comparative abundance degree, namely it is endowment differences. Different products require different proportions of the two factors, so when a production-intensive country produces a product that using its abundant factors, the cost is comparatively low; otherwise, it is comparatively high. As a result, price advantage comes into being because various countries produce and change the same products; the practice promotes the appearance of international trade and division of labor. This is the narrow definition of Factor Endowment Theory. While in a broader sense, Factor Endowment Theory points out, if the involved countries share same market price, same price of factors of production, and same technical skill, then the international trade depends on each country's endowment of factors of production. The structure of production shows that every country specializes in producing the products which it has comparative endowment advantage. Factor Endowment Theory hypothesizes that, when factors transfer between different departments, opportunity cost that increases production remains the same. The Factor Endowment Theory of the Neoclassical International Trade Theory seeks the reasons why international trade come into being from different structural factor endowment and different comparative prices between countries caused by it, thus overcomes the limitation of Ricardo's model of the hypothesis of one factor, which is a considerable success. However, in H-O model, as far as absolute figure is concerned, the resource endowment of a certain factor that one country owns may surpass another country with the premise excluding the possibility of return of scale, so it concerns only the comparative amount of resource endowment. If a country belongs to a laborabundant country, and compared with other countries its preference type lies in labor-intensive product, then the wage rate is higher when it is in a closed environment. Therefore, H-O model hypothesizes that both countries have the same preference. However, even this hypothesis exists, there are still some limitations in H-O model, namely the so called factor intensity reversal, which hypothesizes that laborintensive products in one country turns out to be produced with capital-intensive technology. If there is factor intensity reversal, H-O theory can no longer hold water. 3. NEW TRADE THEORY After H-O model, the driving force of the development of trade theory comes from the development of data collection and processing technology, as well as the possibility of provided empirical test on trade theory. Paul Krugman and other economists take the reasonable elements of traditional trade theories, build a new analysis framework and put forward the New Trade Theory. These economists use industrial organization theory and the theory of market structure to explain the new phenomenon of international trade, and also use imperfect competition, increasing returns to scale, product differentiation and other concepts and ideas to build the new trade theory model and analyze the basis of intra-industry trade, which comes to a series of new conclusions. Neoclassical Trade Theory holds that the reason why trade occurs is that the relative factor endowment differences between two countries is the root cause of the occurrence of international trade. New Trade Theory claims that the basic 278 cause of trade occurrence is due to the existence of economies of scale, relative factor endowment differences, and the degree of scale economy and monopoly power. Even if there are no relative factor endowment differences between two countries, the trade is likely to happen because of scale economy and monopoly. As for benefits of trade, the traditional trade theory holds that if trading countries develop comparative advantages, they will get benefits. Free trade is the best choice of trade. New Trade Theory points out that under the market structure of scale economy and imperfect competition, the economy run in a next-best condition, and for one country, the trade may lead its benefits to drop. Therefore, free trade policy may not be the best policy, which has also been the basis for all countries to perform strategic trade policy. Compared with the traditional trade theory, the hypotheses of New Trade Theory are more realistic, especially; it gives a better explanation of intra-industry trade. It doesn't totally repudiate the traditional theory, and its main ideas and analysis methods is not beyond the category of advantages and disadvantages. The difference between New Trade Theory and the traditional trade theory lies in the different trade pattern they study and different theoretical forms. The conflict of hypotheses is the root of different conclusions about the explanation of trade phenomenon.
4. NEW CLASSICAL INTERNATIONAL TRADE THEORY Before the new classical economics, the theory analysis framework of economy about consumers and makers is absolutely apart. And Mr. Yang Xiaokai, a Chinese economist, turned the study object of economy from a given organization structure under the optimal resource allocation problem to technical and economic organization of the interaction and evolution research, founded the new classical economics from the discussion of labor division of Smith in the absence of pure consumers and manufacturers had absolute separation condition. Yang Xiaokai and others in new classical framework of international trade study, called the New Classical Trade Theory, also called the Theory of Endogenous Trade. The New Classical Trade Theory is adopted to study the personal choice of the professional level of the decisions about the level of division of labor evolution to explain the development of the trade. Yang Xiaokai established an endogenous division of labor and specialization trade model, the research shows that: with the transaction efficiency of continuous improvement, increase the level of division of labor. While the economic development, trade and market structure change phenomena are different aspects of the process of division of labor evolution. Equilibrium structure of division of labor also from individuals provide for oneself (it is not necessary for both of domestic and international trade) jumps to partial division of labor (appears at the local market, trade does not exist between the local market and the 279 local market scale is smaller than the population size of a country, there is no unified domestic market), and then jumps to a larger part of the division of labor (it appears because of the high level of division of labor, there is no international trade), to the development of a greater part of division of labor(a number of countries form a united market, international trade, but the markets are divided between), finally to complete division of labor(the whole world formed the unified international market).
III. IMPLICATION FOR VIET NAM:
1. Positive impacts:
- Create conditions for better use of resources at home and abroad
- To Promote economic restructuring
- Open up more employment opportunities and improving the welfare of the people
- To promote external economic relations with countries
2. Negative impact:
- In the short term the economy easily affected by external market
- Reduce the interconnection of domestic industry
- To balance of payments deficit excessively can make a negative impact to the macro economy
- Caused the income distribution is uneven between regions producing.…...