New Trade Theory Research Paper

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New Trade Theory

Since the end of the Cold War, the world has been undergoing a major transformation. This is because of globalization and advances in technology are making countries more interdependent upon one another. The basic idea is to reduce trade barriers and increase the total amounts of competition. Over the course of time, this will increase productivity and specialization (which will help to improve the standard of living in specific regions). However, the recent economic implosion from 2007 to 2009, are illustrating how all economic theories are filled with flaws. (Taylor, 2008, pp. 1 -- 11)

As a result, a host of new theories are being introduced to address these issues. In some cases, this involves taking old ideas and combining them with new techniques. While at other times, these views are building off of the mistakes of the past to create the best economic philosophy. To fully understand what is taking place requires examining different theories in conjunction with one another. This will offer the greatest insights at to which economic theory is the most effective. (Taylor, 2008, pp. 1 -- 11)

Economic Theories

After the downfall of the Soviet Union, is when there were renewed interests in promoting more liberal economic programs (i.e. free trade). This is because the prominence of Japan on the world stage, highlighted the challenges of bi lateral relations between two countries (i.e. The U.S. And Japan). At the heart of these issues were: protecting nationalized industries and how fast any kind of liberalization should occur. This had an impact on the U.S. -- Japan relationship, with America running a trade deficit. While Japan, was having trouble ensuring that select nationalized industries (such as: agriculture) would not be squeezed by U.S. food imports. In response to these challenges were various trade rules that were established on the international level. To objectively enforce these regulations, is the World Trade Organization (WTO). As a result, the main focus of economic policies and theories has been on how to liberalize trading between countries. (Jones, 1994, pp. 151- 157) (Ssennoga, 2006, pp. 218 -- 249)

Moreover, the economic realities after the end of World War II are illustrating how smaller nations have trouble competing on the world stage. This is because importing or exporting products into each country individually can become very costly and frustrating (from the different regulations). As a result, trading and political blocks were established to address these issues (i.e. The EU and NAFTA). This is highlighting how there has been a focus on having more liberal trading strategies with a shift to new economic theories (most notably: free trade). (Jones, 1994, pp. 151- 157) (Ssennoga, 2006, pp. 218 -- 249)

Increasing Exports

One theory that has been introduced is to have manufacturers concentrate on increasing exports as much as possible. The main reason is because most international markets and producers are highly inefficient. In the majority of cases, only those firms with the economic backing and capital can be able to increase their profit margins using these ideas. Once this happens, is when they will see an increase in productivity and their profit margins. (Greenway, 2007, pp. F134 -- F161)

Moreover, these kinds of firms are able to compete directly in the world markets (which gives them the flexibility to adjust to a host of challenges). This means that these producers can outsource select functions to specific areas that will give them a competitive advantage. Over the course of time, this changes these kinds businesses into multinational corporations with multiple streams of income. (Greenway, 2007, pp. F134 -- F161)

In the case of domestic producers, they are unable to compete on the world stage (which is why they are focusing on specific localized markets). Once trade barriers have been removed and new competitors are emerging, is when they will have trouble adjusting. This increases the chances that these kinds of firms will more than likely be forced out of business. To deal with these challenges, all producers need to abandon their beliefs in localized markets. Instead, they must seek out strategies to increase their exports as much as possible. This will improve their ability to compete on the world stage by forcing these companies to adjust early. Over the course of time, this kind of focus will turn domestic firms into multinational powerhouses. This is when they will be able to more effectively compete with the transformations inside the marketplace. (Greenway, 2007, pp. F134 -- F161)

These areas are showing how those companies that are taking a more global focus will be able to effectively compete on the world stage. As a result, all firms should be concentrating on the international markets and preparing for the challenges they will be facing in future. This is different from current economic policies, with an emphasis on free trade. Yet, manufacturers are focusing on both domestic and international markets. (Greenway, 2007, pp. F134 -- F161)


Despite the claims about how increasing exports will improve productivity and profit margins, many critics believe that this idea ignores movements in the currency. This is troubling because, different nations will often let their currencies float against each other on the world markets. Those developing countries that are using a peg may be reluctant to remove them. This is from the belief that it will increase the volatility in their currency (which could lead to an exodus of foreign direct investment capital). (Greenway, 2007, pp. F134 -- F161)

However, despite these criticisms there is evidence showing that a mass exodus will not occur because of significant declines. Instead, the economy will suffer short to medium term pain. The difference is that this process will help the currency to adjust with the forces of supply and demand. Over the long-term, this allows the economy to become more competitive. (Greenway, 2007, pp. F134 -- F161)

For example, during the Asian financial crisis it was feared that Indonesia would see a loss of investment capital after the decline of the currency in 1997. The reality was that these events helped to make the manufacturing base more efficient. At which point, they were able to compete effectively on the global stage. (Greenway, 2007, pp. F134 -- F161)

Evidence of this can be seen with comments from Greenway (2007) who said, "The 2 to1 devaluation of the Indonesian rupiah against the U.S. dollar between 1996 and 1998 did not lead to an aggregate export boom. Deeper analysis showed that although there was an expansion of export activity by established exporters and new entry by non-exporters, new activity was offset by cessation of exporting by previous exporters." (Greenway, 2007, pg. F141) This is significant, in showing how these ideas can help to address the challenges facing many countries that are worried about the pace of liberalization. Despite these concerns, those nations that are able to increase exports were more competitive on the world stage. (Greenway, 2007, pp. F134 -- F161)

Porter's Diamond Model

Another strategy that has been often discussed is Porter's Diamond Model. This is when there is a focus on looking at specific procedures that will help to make a country more competitive over the long-term. At the heart of this approach, are several different areas that must be focused on to include: factor conditions, demand, related supporting industries, firm strategy / rivalries, government and chance. Factor conditions are those specific areas that will allow industry to function (i.e. roads, sewage and the power grid). Demand is when there is a focus on if localized market can push producers to innovate and create better products / services. Related supporting industries are those producers that can provide manufacturers with the material to build the final product (such as: iron ore for steel production). (Gonzalez, 2011, pp. 17-30)

Firm strategy / rivalries are when there is a focus, on creating procedures that will keep firms competitive over the long-term. Government is when actuaries are studying their impact on the local economy based on: business traditions and the way they intervene in select areas. Chance is those areas that are outside of the control of executives and government officials (i.e. recessions). The combination of these factors is illustrating how this approach can help countries to establish economies that are more balanced. This is when they will be able to ensure consistent growth that adapts with changes in the marketplace. (Gonzalez, 2011, pp. 17-30)

Evidence of this can be seen by looking no further than a study that was conducted by Gonzalez (2011). She found that this model is effective at helping organizations and governments to troubleshoot the issues that impacting the economy with her saying, "The adapted model places more importance on the role of rivalry and therefore, it is considered as an independent determinant factor. Fierce and strong competition has played a critical role in the development of the national firms. Consequently, it should be included in the model as a distinct factor from the firm strategy, structure, and rivalry determinant in Porter's model. The…

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