MBAC 600 The Theory of Competitive Advantage
It is hard, if not impossible, to argue that a group of people can produce more if each specializes
and produces what they are best at producing relative to other people or groups they can
interact with. If a region or nation can clearly produce more output at less resource cost of
inputs, then it has an absolute advantage. Free trade theory argues that each nation should
produce where they have an absolute advantage and trade with other nations who are also
producing where they have an absolute advantage. By doing this we are all producing more at
least cost and the global society benefits.
Comparative advantage takes this concept one step further and says that even if a nation does
not have an absolute advantage, they should produce where they are most efficient relative to
other nations. For example, say Mexico and the U.S.A. only have two items to trade Manufactured Goods and Banking. Let’s say the U.S.A. can produce both items at a lower cost
per unit due to high knowledge content in Banking and highly automated Manufacturing
processes. The theory of Comparative Advantage states that even though the U.S.A. is
technically more efficient in both (absolute advantage), it should focus its limited resources more
towards Banking if Mexico’s efficiency in Manufacturing is more comparable to the U.S.A. than
its efficiency in Banking. Hence, the two nations come out ahead if the U.S.A. produces all the
Banking and both nations produce Manufacturing, thereby utilizing all the resources at hand.
The historical data tends to support the notion that those nations that engage more in free trade
tend to grow more economically as long as they are both exporting and importing. Despite this,
free trade is very difficult to achieve primarily due to political realities and the difference between
the short-term and long-term. While it is very difficult to argue that in the long-term more free
trade is better for overall societies and the world (or any economic unit engaging in free trade)
the political realities center on who specifically benefits in the short-term and the hardships
created when free trade is pursued. As John Maynard Keynes once said, In the long-term,
we’re all dead. He was referring to the benefit derived from short-term policy intervention to
improve economic conditions.
These shorter-term realities lead to extensive tariff and non-tariff forms of trade barriers. In fact,
barriers to trade versus free trade is more like a pendulum which swings back and forth based
upon specific macro-economic and industry level micro-economic conditions. In general, the
consumption side of the equation generally benefits more from free-trade while the production
side (employment and returns on capital investment) tend to suffer more. Pizur, Anthony (2013) MBAC 600
Exchange rates and balance of payments also come into play in regulating the flows of trade
between nations. Most currencies of the world have little value. The currencies fail a major test
for good money, i.e. the currency does not store value very well. Money is only as good as
what you can do with it. Hence, most currencies have to be pegged to other currencies to
establish their exchange rate and then the countries with those fixed currencies must not see
their national balance of payments (between them and the rest of the world) be constantly
negative unless they have extensive reserves to fund the negative balance of payments. In this
sense, the national balance of payments is like household or company checking and savings
accounts. One can only run in the red as long as there are adequate reserves.
Managing this process is less of a problem with floating exchange rates. When the relative
value of a currency fluctuates based upon market supply and demand factors, then running a
persistent negative balance of payments will generally cause the value of the currency to
decline relative to other currencies. This will in turn make importing more expensive and
exporting easier which will might turn the balance of payments situation around. Other factors
such as capital flows (investments) and the flow of services and wages earned in one nation
versus another can also impact the balance of payments.
Sometimes barriers to trade are established to promote economic development objectives.
Governments will limit imports in certain sectors so the industry can have more sales while they
develop the logistics, Ramp;D, and other business processes necessary to compete effectively.
This happens in both old industries like steel in the U.S. and emerging industries like autos from
S. Korea. Governments will also use trade barriers to support geo-political agendas. They will
impose sanctions in an attempt to exert political pressure and will allow tariff free imports from
nations they support.
The World Trade Organization (WTO) is a relatively new organization which supplanted the
General Agreement on Tariffs amp; Trade (GATT). The WTO exists to enforce trade agreements
and to support the expansion of free trade worldwide. Because of the sensitive role of this
organization, the WTO often is a political hotbed that becomes a forum for the developed and
developing world to debate a wide range of issues such as the distribution of wealth between
rich and poor nations. Environmental groups also frequent these forums to highlight dangers to
the environment which result from an emphasis on globalism.
Two global financial institutions include the World Bank and the International Monetary Fund
(IMF). The former funds longer term economic development projects in developing economies.
It was an outgrowth of the redevelopment efforts of post World War II. The IMF tends to focus
more on monetary flows, exchange rates, and balance of payment issues. In this sense the
World Bank is a long-term lender while the IMF is a short-term lender. Both advise on financial
issues and advocate for prudence in monetary and national banking issues worldwide.
The above represent the primary aspects of international economics. They also play critical
roles in the international trend towards globalism. While globalism encompasses these aspects,
it is not the outgrowth of any one aspect. In fact globalism refers to the greater economic
integration and interdependence of national and regional economies on a worldwide basis. This
trend is primarily related to technological advancements in transportation and communication,
the growing sophistication of international capital and money markets, the emergence of multinational business and non-governmental organizations around the world, and geo-political
posturing of national governments and coalitions of governments. While the movement towards Pizur, Anthony (2013) MBAC 600
globalism appears inevitable on the surface, it requires non-binding cooperation to continue its
development unless an international enforcer or world government with the power of
enforcement emerges. Equal to the forces of globalism are forces encouraging regionalism, or
the promotion of freer trade and factor mobility within geographic regions such as Europe, the
Americas, or the Pacific Rim. Trade patterns are much more regional (as opposed to global) as
a general rule and there is an inherent sensibility to cooperating more regionally than globally
from an economic perspective. Pizur, Anthony (2013) Economics