International trade is the exchange of goods, services, and capital across international borders (Fujita, Krugman & Venables, 2001). International trade theories are the various economic analyses of the origin, patterns as well as implications of international trade. They therefore explain international trade. There are numerous international trade theories but they are all classified into two categories that is: the country based trade theories and the firm based trade theories.
The country-based trade theories are also referred to as the classical trade theories and were developed by economists before World War II. Firm-based trade theories are also referred to as modern trade theories and were developed by professors in business schools after World War II. This paper shall give a detailed description of the various international trade theories.
Mercantilism is the earliest international trade theory that according to Fujita, Krugman & Venables (2001) was developed in the 16th century. According to this theory, the amount of gold and silver held in any given country determines its wealth. Therefore, exports should be encouraged for they increase the amounts of gold and silver holding and imports discouraged for they deplete the gold and silver holdings. This basically means increasing trade surplus and avoiding trade deficit at all cost. Despite being the oldest theory it is still used today in counties like Taiwan, China, and Japan.
The second classical trade theory is the absolute-advantage trade theory. It was developed by Adam Smith in 1776, and focuses more on a counties ability to produce a given commodity better than another. According to Adam Smith, the respective governments of the countries involved in trade should attempt to regulate trade between them. The fair competition will thus encourage efficiency in production.
The last classical trade theory is the comparative advantage theory. That was introduced by David Ricardo in 1817. According to him, a country should specialise with the product it is efficient in producing and trade it with what they are not efficient in producing. This theory too advocated for international trade that is free from government intervention.
The most recent modern international trade theory is the global strategic rivalry theory. It was introduced in the 1980s by Kelvin Lancaster and Paul Krugman. They emphasised that firms should expect global competition. To survive, they need to improve their efficiency with shall grant them a competitive advantage over their global competition.
Lastly is the Porters national competitive advantage theory. It was developed by Michael Porter in 1990 and stated that any industries capability to upgrade or even innovate, is what determines the competitive advantage of that country in the industry. To explain this theory, Porter linked four determinates of national competitiveness that is: the characteristics of the local firms, capabilities and resources of the local market, local supplies, and local demand.
- Fujita, M., Krugman, P. R., & Venables, A. J. (2001). The spatial economy: Cities, regions, and international trade. MIT press.