International trade can be simply defined as the activity of buying and selling, or

exchanging, goods and/or services between people or countries across the country borders,
typically through exporting and importing. International trade produces many benefits to
countries both exporting and importing products. For countries importing products, the benefits
are that they get goods or services they cannot produce enough of on their own. Likewise, for the
exporter, one of the benefits is though the trade they can also get either the goods or services
they need or the money in which to purchase these goods from another country or source.
International trade also helps the economics of the countries. International trade encompasses
many aspects in relation to various countries. There are many theories regarding international
trade.

International trade theories are simply different theories to explain international trade.
There are several international trade theories which have evolved over time. Some of them
explain the cause of international trade, other concentrate on its process. The international trade
theories can be further grouped into classical country based theories and modern firm based
theories as seen below:-

Mercantilism; is an economic theory and practice common in Europe from the 16th to
the 18th century that promoted governmental regulation of a nation’s economy for the purpose of
augmenting state power at the expense of rival national powers. In particular, it demands a
positive balance of trade. The main goal was to increase a nation's wealth by imposing
government regulation concerning all of the nation's commercial interests. The main principal of
mercantilism was that it was in a country’s best interest to maintain a trade surplus, to expand
more that it imported. By doing so, a country would accumulate gold and silver and
consequently, increase its national wealth, prestige and power. The mercantilist advocated
government intervention to achieve a surplus in the balance of trade. The mercantilist saw no
virtue in a large volume of trade. Rather, they recommend policies to maximize exports and
minimize imports. To achieve this, imports were limited by tariffs and quotas, while exports
were subsidized. Although mercantilism is one of the oldest trade theories, it remains part of
modern thinking. Countries such as Japan, China, Singapore, Taiwan, and even Germany still favor
exports and discourage imports through a form of neo-mercantilism.
CRITICISMS OF MERCANTILISM.

 Mercantilism contained many interlocking principles. Precious metals, such as gold and
silver, were deemed indispensable to a nation’s wealth. If a nation did not possess mines
or have access to them, precious metals should be obtained by trade. It was believed that
trade balances must be “favorable,” meaning an excess of exports over imports.
 Adam Smith’s “The Wealth of Nations” (1776) – argued for benefits of free trade and
criticized the inefficiency of monopoly.
 Mercantilism is a philosophy where people benefit at the expense of others. It is not a
philosophy for increasing global growth and reducing global problems. Trying to
impoverish other countries will harm our own growth and prosperity.
 Mercantilism which stresses government regulation and monopoly often lead to
inefficiency and corruption.
 Mercantilism justified Empire building and the poverty of colonies to enrich the Empire
country.
 Mercantilism leads to tit for tat policies – high tariffs on imports leads to retaliation.
 The growth of globalization and free trade during the post-war period showed
possibilities from opening markets and respecting other countries as equal players.

EXAMPLES OF MERCANTILISM

 England Navigation Act of 1651 prohibited foreign vessels engaging in coastal trade.
 All colonial exports to Europe had to pass through England first and then be re-exported
to Europe.
 Under the British Empire, India was restricted in buying from domestic industries and
was forced to import salt from the UK. Protests against this salt tax led to the ‘Salt tax
revolt’ led by Gandhi.
 In seventeenth-century France, the state promoted a controlled economy with strict
regulations about the economy and labor markets.
 Some have accused China of mercantilism due to industrial policies which have led to an
oversupply of industrial production – combined with a policy of undervaluing the
currency.
 Absolute Advantage; is the ability of a country, individual, company or region to produce a
good or service at a lower cost per unit than the cost at which any other entity produces that
good or service. Entities with absolute advantages can produce something using a smaller
number of inputs than another party producing the same product. As such, absolute
advantage can reduce costs and boost profits. In 1776, Adam Smith questioned the leading
mercantile theory of the time in The Wealth of Nations.Adam Smith, An Inquiry into the
Nature and Causes of the Wealth of Nations (London: W. Strahan and T. Cadell, 1776).
Recent versions have been edited by scholars and economists. Smith offered a new trade
theory called absolute advantage, which focused on the ability of a country to produce a good
more efficiently than another nation. Smith reasoned that trade between countries shouldn’t
be regulated or restricted by government policy or intervention. He stated that trade should
flow naturally according to market forces. The theory was introduced by Professor Adam
Smith. According to this theory every country will be specialized in producing a product in
which it has more advantage than other country. This theory assumes the followings:

1. Only two countries and two products.

CRITICISMS OF ABSOLUTE ADVANTAGE THEORY.

 The Absolute Advantage Theory assumed that only bilateral trade could take place
between nations and only in two commodities that are to be exchanged.
 Thus, this theory did not take into account the multilateral trade that could take place
between countries.
 This theory also assumed that free trade exists between nations. It did not take into
account the protectionist measures that are adopted by countries.
 It is too simplistic. It assumes perfect information and perfect market.
EXAMPLES OF ABSOLUTE ADVANTAGE.

  The Canadian economy, which is rich in low cost land, has an absolute advantage in
agricultural production relative to some other countries.
 China and other Asian economies export low-cost manufactured goods, which take
advantage of their much lower unit labor costs.
 India has an absolute advantage in operating call centers compared to the Philippines
because of its low cost of labor and abundant labor force. 

Heckscher - Ohlin theory( Factor endowment theory); The Heckscher–Ohlin model (H–O
model) is a general equilibrium mathematical model of international trade, developed by Eli
Heckscher and Bertil Ohlin at the Stockholm School of Economics. It builds on David Ricardo's
theory of comparative advantage by predicting patterns of commerce and production based on
the factor endowments of a trading region. The model essentially says that countries will export
products that use their abundant and cheap factor(s) of production and import products that use
the countries' scarce factor(s). Nations have varying factor endowments, and different factor
endowments explain differences in factor costs; specially, the more abundant a factor, the lower
its cost. This theory predicts that countries will export those goods that make intensive use of
factors that are locally abundant, while importing goods that make intensive use of factors that
are locally scarce.

CRITICISM AGAINST THE HECKSCHER–OHLIN THEORY.

 Poor predictive power. It is hard to believe that factor endowments theory Heckscher–
Ohlin Model could offer an adequate explanation of international trade patterns.
 Factors like education of labor, technology, management and marketing know-how are
not considered.
 Does not explain intra industry trade.
 No room for firms: Standard Heckscher–Ohlin theory assumes the same production
function for all countries. This implies that all firms are identical. The theoretical
consequence is that there is no room for firms in the HO model. By contrast, the New
Trade Theory emphasizes that firms are heterogeneous.

EXAMPLES OF FACTOR ENDOWMENT THEORY.

 China and India are home to cheap, large pools of labor. Hence these countries have
become the optimal locations for labor-intensive industries like textiles and garments.
 The Netherlands exported almost $506 million in U.S. dollars in 2017, compared to
imports that year of approximately $450 million. Its top import-export partner was
Germany. Importing on a close to equal basis allowed it to more efficiently and
economically manufacture and provide its exports.
 Country Similarity Theory; this International trade theory says that once a company has
developed a new product in response to observed market conditions in the home market, it will
turn to markets it sees as most similar to those at home. In addition, markets in industrial
countries can support products and their variations. Thus, companies from different countries
produce different product models, and each may gain some markets abroad.  Observations of
trade patterns reveal that most of the world's trade occurs among countries that have similar
characteristics, specifically among industrial, or developed, countries. Swedish economist
Steffan Linder developed the country similarity theory in 1961, as he tried to explain the concept
of intra industry trade. Country similarity is the idea that countries with similar qualities are most
likely to trade with each other. These qualities may include level of development, savings rates,
and natural resources, among others. The country similarity theory is based on the idea that
economic actors with similar qualities are going to want many of the same things. However
mostly developing countries do not trade between each other as the surplus of most countries
would be raw materials and agricultural products and their requirements would be technology
and high technology oriented products, For example Vietnam and Ethiopia.

CRITICISMS OF COUNRTY SIMILARITY THEORY.

 Not really a theory of International trade but only a sound explanation of why companies
engage in intra-industry trade.

EXAMPLES OF COUNTRY SIMILARITY THEORY.

 Japan exports Toyota vehicles to Germany and imports Mercedes-Benz automobiles from
Germany.
