Global Pattern of Trade and the Role of Comparative Advantage in Explaining This Pattern - Research Proposal Example

AN INVESTIGATION OF THE GLOBAL PATTERN OF TRADE AND THE ROLE OF COMPARATIVE ADVANTAGE IN EXPLAINING THIS PATTERN Customer Inserts His/Her Name Customer Inserts Grade Course Customer Inserts Tutor’s Name 2nd March 2012 CHAPTER ONE 1.1: Introduction The pattern of trade at the global landscape has experienced immense and dramatic shifts in the recent decades. This dynamism can be traced back since World War II where the world trade has expanded and most notable acceleration being experienced over the past decades (International Monetary Fund, 2011). According to Kowalski (2011), comparative advantage has been an imperative determinant of trade at the global scale in the sense that it has changed overtime, including as a result of changing policies and institutions. However, these dynamics in the global pattern of trade and the principle role played by comparative advantage in explaining them has been subjected to inadequate scholarly investigation. Consequently, this research will be a profound effort to address this gap and result in sufficient explanation of the correlation between these two valuables. 1.2: Rationale of the study The intended research will play an integral role in the field of international business in two aspects. To begin with, this study aims at updating the existing literature on the global pattern of trade and how it has changed overtime amid the influence of globalization. This is based on the background that limited researches have been conducted in the recent past, aimed at exploring the relationship between global pattern of trade and comparative advantage being the chief explaining theory. The above phenomenon is supported by Davis (2000) who determines that the work in the 1990s seeking to understand trade patterns at the international level lacks a single grand unifying theme, as did in the prior decade. A research like this is therefore an imperative thematic approach in analyzing the explanations of comparative advantage on the tenets of the global pattern of trade. Another reason why this study is important is to determine and gauge the extent to which the trade pattern in the global spectrum has changed overtime, and the how comparative advantage elucidates this evolution. This will elicit clarity and bring a comprehensive understanding in regard to the relationship between these variables. 1.3: Literature review According to Davis (2000), there are two theories of why countries trade: comparative advantage and increasing returns. The efforts to integrate these two perspectives were spearheaded by Helpman (1981), Krugman (1980) and Helpman and Krugman (1985). The latter portrayed that the basic insights about trade patterns were robust to a wide variety of imperfectly competitive market structures, including monopolistic competition, free entry oligopoly, and contestable market (Davies, 2000). Nevertheless, there was contention in regard to robustness of this relation across different market structures. This is founded on the background that it suggested that the specific trade patterns of interest emanated from a deeper phenomenon which is specialization (ibid). Davis (1995; 1997) and Deardorff (1995) were proponents of the latter point by pointing out that various facets of trade patterns, for instance a great deal of north-north trade, a large scale of intra-industry trade, and a good fit of gravity equation, could all be explained within traditional models of comparative advantage (Davis, 2000). Davis (2000) cites that in a comparative advantage model, a country which possesses strong demand for a good, which is unusual, compels that country to import that good. Nevertheless, when there are evident economies of scale, there is a non-trivial location decision. Consequently, the producers will prefer locating near unusually strong source of demand in order to lower the cost. As a result of this, this effect is a magnification of the demand deviation itself, leading countries which have unusual strong demands to become exporters of goods, all else equal (ibid). According to Davis (2000), this approach of drawing a distinction between comparative advantage and increasing returns is implemented empirically in Davis & Weinstein (1996; 1998; 1999). Kowalski (2011), cites that for close to two centuries now, there has been intensive utility of the comparative advantage hypothesis as one of the chief explanations of international trade and, through gains from trade, as one of the most potent explanations of higher income growth rates of open economies. International Monetary Fund (2011) cites that the expansion in global trade was characterized by three important trends: the rise of emerging market economies (EMEs) as imperative trade partners; the growing importance of regional trade; and the shift of higher technology exports towards dynamic EMEs. In a specific analysis, Bradford & Branson (1987) determine that patterns of trade have undergone substantial change between the Organization for Economic Cooperation and Development (OECD) area (North America, Japan, Europe) and the developing world of Latin America, Africa and Asia since the early 1960s. This is supported by the World Trade Organization (2011) who exemplifies this phenomenon by inferring that the emergence of “Factory Asia” reflects changing demand for more products variety in the US market. Overtime, the respective economic roles within East Asia have changed, resulting in a regional clustering of supply chains based on close industrial interconnection. In this regard, industrial development is perceived as a structural change in the global trade patterns. This change is a cause of growth and should not be considered as an autonomous market driven result of trade openness and outward oriented growth (Guarneri, 1998). From this viewpoint, the generation of comparative advantage is also an articulated process, in which the accumulation of physical capital interacts with skills development and technological endowments (Chesnais, 1986; Dosi et al. 1990) In addition, Huang (2004) also infers that the changing global trade pattern in fruits and vegetables is related to supply and demand, institutional and economic factors, and national, regional and international characteristics. Thus, it is evident from the above analysis that comparative advantage as opposed to increasing returns proves to be a formidable explanation of the global pattern of trade. However, this ought to be subjected to scholarly investigation in order to develop a comprehensive understanding in regard to the pattern of trade on the global level with comparative advantage being a prudent explanation. 1.4: Research questions There are several questions that the research will seek to answer, a success of which will result in accomplishment of the research objectives. The following questions will be utilized. Which are the diverse epochs that the global pattern of trade has evolved through? Which are the dynamics in the pattern of trade at the global level and what is the role of comparative advantage in explaining them? How have the transformations in the global pattern of trade impacted on the conduct of commerce in the contemporary world? Which interventions can be put to utility in the endeavor to streamline the global pattern of trade? What is the position of comparative advantage in explaining the global pattern of trade amid other theories? 1.5: Scope of the research This research will only center on comparative advantage as an explanation of global pattern of trade. It will investigate the role of the aforementioned theory and validate its utility, and will thus ignore other theories that have been proposed in efforts to explain the pattern of trade at the international level. This will be geared towards addressing the research problem as well as answering the questions highlighted in the preceding section. 1.6: Anticipated findings The study is expected to elicit diverse findings in regard to the global pattern of trade and the role of comparative advantage in explaining it. Firstly, comparative advantage is vital in explaining the pattern of trade at the global scale. Therefore, the research will be vital in validating the role played by comparative advantage in the efforts to expound on the global pattern of trade. Secondly, the research will explicate on the dynamics in the global pattern of trade. This will be through a comprehensive investigation and analysis of the latter phenomenon, while concurrently utilizing comparative advantage in eliciting an explanation. In addition, the research will be prudent in proposing ideal interventions that can be used to streamline the global pattern of trade, albeit at a minimal level. 1.7: Research approach and methodology In the philosophical context, this study will be interpretivist. This is founded on the assumption that it is only through the subjective interpretation of and intervention in the reality of the global pattern of trade can that reality of the role played by comparative advantage in explaining it be comprehensively understood. Questionnaires will be used as the primary data collection tool. A survey questionnaire will be designed which will entail structured and unstructured questions due to both the nature of data being collected and also the research design. In addition, in-depth interviews will be conducted which will aid in the collection of qualitative data. This will necessitate designing intensive interview schedules to be administered on respondents who participate in international trade. Data analysis will entail examining the collected data in order to elicit viable inference on the role of comparative advantage in explaining the global pattern of trade. Several analysis methods such as graphs, pictorials, percentages will be used to analyze the data collected from the questionnaires. 1.6: Timeframe The study will take one and a half years, March 2012 - August 2013. All the tasks are broken down in the following Gantt chart. Task March – April, 2012 May-August, 2012 Sept- Dec, 2012 Jan-Feb, 2013 March-June, 2013 July-August, 2013 Planning of the research Data collection Data analysis Conclusion & Recommendations Amendment & Revision Presentation and report writing 1.7: Conclusion The pattern of trade at the global scale has undergone diverse changes in the recent decades. Albeit the availability of various explanations in regard to this phenomenon is manifest, comparative advantage has proved to be formidable among scholars in the realms of international business. Nevertheless, there has been insufficient research on the role played by comparative advantage in explaining the global pattern of trade. Consequently, this has resulted in limited literature in regard to the above concept. This research will thus be a paramount spring board towards expounding on other explanations of global pattern of trade by future scholars. REFERENCES Bradford CI & Branson WH, 1987, Patterns of trade and Structural Change, viewed 03 March 2012, < http://www.nber.org/chapters/c6914.pdf> Chesnais F,1986, Science, Technology and Competitiveness, Organization of Economic Cooperation and Development STI Review, n.1 Davis, DR 1995, Intra-industry Trade: A Heckscher-Ohlin-Ricardo Approach’, Journal of International Economics, vol. 29, pp. 201-206. Davis, DR, 1997 ‘Critical Evidence on Comparative Advantage? North-North Trade in a Multilateral World.” Journal of Political Economy, vol.105, no. 5, pp. 1051-1060. Davis DR, 2000, Understanding International Trade Patterns: Advances of the 1990s, viewed 03 March 2012, < http://www.columbia.edu/~drd28/IADB_Article.pdf>. Davis, DR & Weinstein, DE 1996, Does Economic Geography Matter for International Specialization?” NBER Working No. 5706. Davis, DR & Weinstein, DE 1998, Market Access, Economic Geography, and Comparative Advantage: An Empirical Assessment, NBER Working Papers no. 6787. Davis, DR & Weinstein, DE 1999, ‘Economic Geography and Regional Production Structure: An Empirical Investigation’, European Economic Review, vol.43, no. 2, pp. 379-407. Deardorff, AV 1995, "Determinants of Bilateral Trade: Does Gravity Work in a Newclassical World?". Regionalization of the World Economy. Chicago, University of Chicago and NBER. Dosi G, Pavitt K & Soete L 1990, The Economics of Technical Change and International Trade, Brighton, Wheatsheaf. Guarneri P 1998, Trade Patterns, FDI, and Industrial Restructuring of Central and Eastern Europe, BRIE Working Paper no. 124 Helpman E, 1981, ‘International trade in the Presence of Product Differentiation, Economies of Scale and Monopolistic Competition: A Chamberlin-HeckscherOhlin Approach’, Journal of International Economics, vol. 11, pp. 305-340. Helpman, E & Krugman, PR 1985, Market Structure and Foreign Trade, Cambridge, MIT Press. Huang SW 2004, Global Trade Patterns in Fruits and Vegetables, United States Department of Agriculture, ATRN Report no. WRS-04-06. International Monetary Fund, 2011. Changing Patterns of Global Trade, viewed 03 March 2012, Krugman, PR, 1980, ‘Scale Economies, Product Differentiation, and the Pattern of Trade’, American Economic Review, vol. 70, pp. 950-959. Kowalski P, 2011, Comparative Advantage and Trade Performance: Policy Implications, OECD Trade Policy Working Papers, No. 121. World Trade Organization, 2011, Trade Patterns and Global Value Chains in East asia: From Trade in Goods to Trade in Tasks, viewed 03 March 2012, Read More