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The Alternative International Trade Theories: The Reasons of
Occurrence and the Significance
Modern theories of international trade are generally considered:
on the one hand, as alternative ones to the Heckscher-Ohlin theorem, because they examine the circumstances which are not covered by the factor proportions theory. These theories characterize international trade mainly on the basis of goods supply;
on the other hand, as alternative ones to the classical theories, which are considered to be obsolete. These theories analyze international trade mainly on the basis of demand from the point of view of consumer preferences.
The main alternative theories usually include: the product life-cycle theory; the country similarity theory, the theory of economies of scale.
The basic positions of the product life-cycle theory were developed by Raymond Vernon in 1966. It is based on the concept of the product life-cycle, proposed since the early 1960s by specialists of Harvard Business School, who declared that sales of the products and their profits from them change over time.
A product consistently passes four stages of life cycle:
1. The stage of appearance of a new product on the market shows the low sales. The costs of implementation of this product make the profits low too.
2. The stage of growth is characterized by growth of profits and sales growth.
3. In the stage of maturity, the development of competition and market saturation stabilize the sales and profits.
4. In the stage of decay, the products become obsolete, the sales and profits fall off.
R. Vernon proves that in building up of trade relations between countries an important role is played by technologies and researches, that the industrialized countries have much more technological and scientific possibilities to develop a new product. In countries such as the United States, companies may have comparative advantages in science and technology, which will lead them to a competitive advantage in the new products development. To stretch the stage of growth of their product life-cycle, these firms most probably will export the goods developed by themselves. On the other hand, American import will have a tendency of advantage of the goods, the production of which does not much depend on technology or scientific research.
The product cycle-theory characterizes the dynamic aspect of comparative advantages, assuming that during its life cycle a product consistently changes its suppliers in the world market.
The country similarity theory was developed by a Swedish economist Stefan Linder in 1961, where he takes as a basis the volume of exchange of similar goods between countries with a comparable level of development, without regard to the Heckscher-Ohlin theorem. A new approach was founded on the following principles:
the conditions of production depend on the conditions of demand. Efficiency of production is as high as demand;
the conditions of domestic production depend mainly on the domestic demand. It is the domestic representative demand that is the basis of production and is necessary, but not a sufficient condition to export the goods;
the foreign market is just a continuation of the internal one, and the international exchange is only the continuation of the interregional one.
There is a conclusion, that international trade in manufactured goods will be more intensive between the countries with the similar income levels, in comparison with product turnover between the countries with different income levels, while the exchange is carried out by identical or similar goods. The convergence of countries according to the level of development requires to align the quality of goods. However, the Linder's theory does not specify what manufactured goods a country will export and which of them it will import.
The theory of economies of scale is not related to the theories of comparative advantage or to the ratio of production factors. It recognizes the different levels of market’s monopolization and non-optimal using of factors of production.
As the factors of production growth, the cost-per-unit reduces as a result of: increased specialization of production, the relatively slow growth in auxiliary departments than in the scale of the production, technological economy.
Economies of scale is the production development, at which the growth of unit production factors costs lead to increased production of more than one unit.
The theory of economies of scale explains trade between countries that are so close in factor endowments that even minor discrepancies in its endowment cannot explain the mutual trade, and also explains the trade between the countries by close to or technologically homogeneous products. According to this theory, in countries with a large domestic market, production must be placed to ensure the growth of the economics of scale effect of production. Fundamental to this concept is the assumption that the developed countries are endowed with factors of? production in almost equal proportions, and therefore trade between them is suitable in the event that they specialize in the manufacture of goods of different industries due to what costs are reduced as a result of mass production. Because of the international trade, the number of firms and a variety of manufactured goods manufactured by them increase, and the price of goods reduces. This was reflected in the works of the American economist Paul Krugman.
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