Limitations of the Hecksher Ohlin Theory

19. After reading this chapter, what do you believe are the two greatest obstacles preventing poor countries from becoming rich?

Following World War II, economic policies were marked by two major trends. On one hand, industrialized economies gradually removed trade barriers. These policies were based on the idea that free trade is not only a factor for economic prosperity of nations, but also for the promotion of peace. On the other hand, economic policies of many developing countries with the exception of few countries in Southeast Asia have been conditioned by the belief that the key to development rests in the establishment of a powerful manufacturing sector, and that the best way to create such an area was to protect local industries from international competition through substitution imports policies.

A country needs to export more than import in order to maintain a good working economy. Wealth and power equal more export than import in a country’s trading system

Globalization over the past twenty has become an issue in many countries. This industrialization of second and third world countries by Western Civilization creates many opportunities for the inhabitants. Not only does it expand trading markets, but also promotes productivity and efficiency; thus improving the country and integrating it into the industrial world. This process not only benefits third world counties, but also industrialized nations by allowing them to export goods to the developing world and increase their profit margin.

Intuitively, countries that adopt ELI need markets to which they can export. Import substitution industrialization, which focuses on domestic industrial production, has less of an emphasis on creating goods for the international market. In contrast, countries that follow an export-led industrialization strategy, by the very nature of ELI, must find markets to which they can export their goods. In the absence of sufficient demand, ELI strategies fail. Put positively, ELI strategies require sufficient demand for the goods of the country in question. Where, then, does demand come from? This is a particularly vexing problem. It seems a reasonable intuition that developing countries would not, prima facie, produce goods of sufficient quality that external, developed markets would demand. Moreover, only developed markets would be worthwhile targets for exports; exports to developing markets would not provide sufficient capital flows to fuel transformation into a developed country. In other words, embarking upon an ELI strategy is a fundamental catch-22. A solution to this problem of demand is the presence of not only a willing market for the developing country’s goods, but also a market that is willing to make investments of capital and technology into that developing country. Doing so would enable domestic firms to develop their industry to levels of quality and

The infant industry argument is one of the leading arguments why G20 countries should enact trade protectionism policies, it argues that newly formed industries do not have the economies of scale that the older competitors from other countries may have, thus they need to be protected so that they can attain the economy of scale (Stiglitz, 70-73). This argument illustrates Stiglitz’s point that many times these protectionist policies must stay in place to protect infant industries because the industries “never grow up and demand to be permanently insulated from outside competition” (Stiglitz, 70). Another argument in support of these policies will create more jobs domestically for the country, but these jobs will only be temporary and the jobs that depended on the exportation of goods will be lost. By turning inward and developing industries domestically, countries as a whole will become less competitive internationally. The products that they develop domestically will be hire priced, and will not feel the need to continuously innovate because they have no competition, ultimately people will be paying higher prices for lower quality products. This has been demonstrated with American cars in the 1970s, Ford produced standard cars that had no quality so when Toyota, a Japanese company broke into the American car market with

On one hand, it can be argued that by partaking within these mass production trade systems, one nation can develop economically by providing mass produced products at low prices due to cheap labor and material costs. Here is where things seem to become clouded, the free trade agreement between different countries. It is this agreement that allows different countries to import and export goods with the reduction and or elimination of tariffs. (Globalization Pt. II). However, this hinders all countries on a global scale, as the promotion and exploitation of these unjust working conditions are used to keep under developed countries from achieving a higher quality of

After the end of the World War II the world faced the challenges of economic and social recovery. The majority of developing countries based their economies on Import Substitution Industrialization (ISI), the state-oriented approach to a trade and economic policy. ISI supports the replacement of import with domestic production in order to reduce foreign dependency. This protectionist policy dominated in developing countries, especially in Latin America and sub-Saharan Africa, during the first 30 years after the World War II. By 1980s, when the main gains of ISI were exhausted and it demonstrated its inefficiency, the countries of East Asia adopted a new development strategy. Consequently, this new export-oriented and market-friendly strategy, so-called East Asian model, has determined the successful economic and trade policy of East Asian countries during the next several decades. To understand the reasons of the shift from ISI to the East Asian model, it is needed to carefully examine and contrast these two approaches and their supporting theories.

The country can maximize their wealth by putting the resources in the most competitive industries. Government created comparative advantage rather than free trade because now easier moves the production processes and the machines into countries that can produce more goods (Yeager & Tuereck, 1984). However, many countries now move to new trade theory suggests the ability firms to limit the number of competitors associated with economic scale (reduction of costs with a large scale of output) (Krugman, 1992). The comparative advantage occurs when two-way trade in identical products, it will useful where economic scale is important, but it will create problem with this model. As a result, government must intervene in international trade for protection to domestic firms (Krugman, 1990)

Some of the countries with surplus commodities may dumb them on international markets at a low price. Under such conditions, some of the efficient industries can might find difficulties in competing for long period. Furthermore, countries whose economies are mostly rural will face unfavourable terms of trade. For example, ration of export prices to import prices. Which means that their export income is more smaller than their import payments the make for high value added imports, as it leads to subsequently large foreign debt levels.

Free trade has long be seen by economists as being essential in promoting effective use of natural resources, employment, reduction of poverty and diversity of products for consumers. But the concept of free trade has had many barriers to over come. Including government practices by developed countries, under public and corporate pressures, to protect domestic firms from cheap foreign products. But as history has shown us time and time again is that protectionist measures imposed by governments has almost always had negative effects on the local and world economies. These protectionist measures also hurt developing countries trying to inter into the international trade markets.

Throughout the years, there has been a constant controversy over whether the World Trade Organization should enforce global free trade. The primary idea is to establish in which all are happy. Although there are many advocates for trade liberalization, as well as many who oppose. I believe free trade may be advantageous for both large and small-industrialized countries, but it does not favor the smaller developing countries needs primarily.

Ever since the first involvement of government in international trade, many people have posed their opinion about what the role of government should be in it. Different factors are involved when it comes to deciding what this should be. It impacts a lot of people, so in order to do that, trade policy must be properly defined, identify what the roles of government currently are, and their involvement in it, and then analyse what should be their role. Trade policy is how a country carries out trade with other countries (Commercial Policy, n.d). Even though a lot of people support government intervention in international trade, countries would benefit a lot more if the government removes protectionism and promotes free trade instead.

The international trade of goods across the world accounts for approximately 60% of the world Gross Domestic Product (The World Bank, 2014). A great proportion of goods transactions occur every second. The primary question is whether international trade benefits a country as an entirety, and, if so, why would a country implement protective trade policies to restrict particular exports? To address this question, this essay aims to explore the impact of trade on various economic stakeholders, including consumers, producers, labour and government and, furthermore, will compare models and theories with reality to ascertain the true winner/ loser in the international trade market.

Government intervention in the trade process may be either economic or noneconomic in nature. [See Table 7.1.]