ABSTRACT
This chapter begins by discussing traditional theories of trade that explain the rationale for importing and exporting of goods among nations. In mercantilism, the objective of between-country trade is for a country to win by exporting more than it imported. Adam Smith countered noting that, when nations engage in international trade, world productivity increases. The chapter then follows with the Heckscher–Ohlin theory that argues a nation's comparative advantage comes from the relative abundance of its factor endowments. Product life cycle theory notes that some countries have companies that excel at creating new products, while other countries have companies that more efficiently produce mature products. Other perspectives are introduced such as Michael Porter's view that local demand, the existence of related and supporting industries, as well as factor endowments, give industries in certain countries an international competitive advantage. The chapter also introduces arguments against free trade including free trade as a threat to national sovereignty, the need to protect infant industries, the argument that trade must be fair, and the protection of local jobs and the environment. The chapter ends with a discussion of foreign direct investment (FDI) and some of the theoretical reasons for FDI.
