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5 Sources of Gains from Trade in International Business

January 28, 2019 0 Comment

Auto makers across the world are trying to consolidate production of multiple varieties to obtain economies of scale. In addition to their traditional Indian brands, Tata Motors has recently acquired Jaguar and Land Rover to provide variety. It also distributes Fiat’s cars in India. Renault and Nissan’s alliance was formed to obtain twin benefits of variety and scale economies.

To achieve the benefits of scale and variety auto makers are expanding the use of platforms to share parts, components, and technology across models. For example, Maruti Suzuki Company uses the same engine for Maruti 800 and Alto, and Zen and Wagon R have one and the same engine.

It must be noted that economies of scale are measured not relative to national needs but relative to the needs of the many countries that obtain the product on international markets. However, it does not mean that one country can capture the market for all kinds of goods. Economies of scale require that every country specialize.

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Of late steel industry is trying to attain scale economies through multi-plant economies. To illustrate, Mittal Steel, the biggest steel company of the world, produces 26% in China, 18% in the EU, 14% in the Russian Commonwealth of Independent States, 13% in North America, 11% in Japan, 4.5% in Central and South America, and 14% in India, South Africa, Middle East and other parts of Asia.

2. Comparative Advantage:

History is witness to the fact that countries benefited from trade, by focusing on those sectors where they were relatively more productive. Countries differ significantly in terms of productivities, capabilities, and competencies. Opening up of China, Russia, India, and South-East Asia and potential development of Africa are providing new horizons for business organisations.

The international business creates value by developing new import and export activities and through participation in the expansion of activities within country borders. For the international manager, comparative advantage provides a practical rule of thumb. A look at the direction of trade of a country helps international manager to determine the best countries in which to find suppliers, partners, and customers.

3. Comparative Availability of Factors of Production:

Comparative availability of factors of production – labour, capital and other resources – provides another source of specialisation and gains from trade. Every country will specialize in production of those goods where it has advantage of relatively more intense factor. China is to produce household appliances, whereas the US is to produce machine tools. Both the countries are better off by exchange of goods, in which each one has a comparative advantage.

4. Differences in Preferences and Endowments:

The international business creates value by bringing buyers and sellers together and enhances efficiency of international markets. International trade does not mean trade only in manufactures, even the trade in natural resources ultimately add up to the barter value of final goods and services. A landlocked country with extensive forest and a costal country with an arid climate are likely to benefit by trading forest products with seafood.

5. Innovation and Technology:

Trade in technology is a big source of gain. Since the same technology can be put to use repeatedly across in different countries, it can be sold again and again. International business is gaining a lot through licensing, franchising.

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