International Trade Theories – Global Business Management

Subject: Management
Pages: 8
Words: 1954
Reading time:
7 min
Study level: College


The following essay discusses the theories of international trade. The essay first identifies two international organizations that help countries trade, which include the World Bank and the World Trade Organization. The essay looks into the application of the theory of absolute advantage between Japan and Saudi Arabia.

Two regional international institutions

The first institution is the World Bank that aims at poverty reduction in developing countries by promoting international trade between nations and funding infrastructural developments (Woods, 2006). The aim of the World Bank is to provide capital to nations in form of repayable loan so that the recipient nation can improve its infrastructure, educational levels as well as health. This helps the country to have competitive advantage in certain areas enabling trade with other nations (Woods, 2006).

The second international organization is the World Trade Organization. This is an organization, which aims at liberalizing markets such that trade tariffs usually imposed on imported goods are removed and countries within the organization trade freely without discrimination and restrictions on the exports (Fergusson, 2007). This allows countries to negotiate for better trading terms, which promotes trade between nations. It also allows export, which has absolute advantage as well as import with no absolute advantage (Fergusson, 2007).

To explore this discussion it is important to discuss the theory that will apply in this essay when comparing the competiveness of nation’s products and how countries can make use of the international institutions to finance trade and develop their own industries (Schumpeter, 1981). The theory of absolute advantage in international trade states that there are countries with absolute advantage in the production or manufacture of certain goods and services, which enable them produce products for domestic consumption and export the surplus (Smith, 1776).

The absolute advantage in international trade applies when a country manages to produce different kinds of goods at a relatively low cost compared to other countries. The absoluteness results when the cost of the product imported is usually lower than the locally made products of similar nature (Smith, 1776). This is because a country cannot sell imported products at a higher price than the locally produced goods.

The absolute advantage implies that each country can invest in skills and infrastructure that will lead to economic growth (Irwin, 1996). This theory presumes that all countries have absolute advantage in the manufacture and production of a given commodity. However, this is not always true as some countries have absolute advantage in many industries thereby disadvantaging such countries in free market, as their goods are usually cheaper than locally made products (Schumpeter, 1981).

The application of this theory made economic disparity and regulation of imports to discourage importation of products. The World Bank and the World Trade Organization have sought to liberalize the markets by ensuring that each country has its own absolute advantages in international trade (Schumpeter, 1981).

Two countries that can apply the theory of absolute advantage

The two countries selected are Japan and Saudi Arabia. Japan is a manufacturing country that is the leading car exporter in the world. The country has absolute advantage in the manufacture of vehicles mainly because it has many technical laborers that maintain the cost of production low. The country has many qualified engineers, power plants and infrastructure to support the manufacture of vehicles at a relatively low cost. Saudi Arabia on the other hand would find it expensive and costly to manufacture cars.

The first reason is that they do not have engineers as well as technical team to manufacture vehicles. Outsourcing of such jobs in Saudi Arabia will make the cost of production very high in the global market (Irwin, 1996). Saudi Arabia however has an absolute advantage in the production of oil. The country has expansive oil reserves and invested heavily in oil production facilities thereby enabling the country to produce oil at a relatively low cost.

This gives the country an absolute advantage in oil production. Japan on the other hand has few or no oil reserves. Due to its investments in industrial manufacture and production, the country need to import energy especially fuel (Irwin 1996). Although the nuclear energy is an option, the costs of setting up nuclear plants as well as the dangers posed by their existence make production of nuclear energy expensive. The country has to import oil from Saudi Arabia for energy generation (Irwin, 1996).

Since having absolute advantage is what enables a country to trade with other nations, the following are suggestions on how Japan can increase its absolute advantage in the manufacture of vehicles in order to remain competitive in the Saudi Arabia market. The first one is to look for ways of minimizing the costs of production such that the vehicles are manufactured at the lowest cost possible, which will make them competitive (Schumpeter, 1981).

The country must take note of the economies of scale because of having incurred the cost of setting up assembly lines as well as manufacture plants (Smith, 1776). Therefore, the country has a higher absolute advantage over the countries that have not met the initial costs of setting up power plants. The country should therefore produce more units of vehicles than previously. The country should have an absolute advantage in Saudi Arabia especially considering that other countries such as the United States also have vehicle manufacturing industry.

This can be achieved by having an assembly line in Saudi Arabia from where they hire the labor. This will lead to decreased labor and importation costs of fully assembled vehicles thereby giving the country an absolute advantage. The other way of gaining the absolute advantage is by enhancing bilateral agreements with Saudi Arabia such that their goods receive preferential treatment hence restricting other exporters who might compete with Japan’s export.

Saudi Arabia can also promote its oils exports to Japan and other countries by ensuring that they have absolute advantage in oil production. The absolute advantage in oil production can come in because of the country investing its resources in the development of the country’s pipeline and refinery industries. Rather than selling crude oil, the country can sell refined and processed oil, which has greater benefits as its selling price is higher (Schumpeter, 1981).

This can give the country an absolute advantage not only as an oil producer but also as a producer of refined oil products. To make the country have absolute advantage as most of the countries have their own refineries, the country can have its oil products selling at a low cost. This is mainly because they have oil reserves and can produce products at a lower cost than other countries. The country must also invest in having a well-trained and efficient labor in order to lower the costs of production (Smith, 1776).

In some instances, the country has to outsource labor from poor countries as the work force is cheaper and with appropriate training, it can have the efficiency to produce the amount of oil needed to give the country absolute advantage.

To ensure that the country has absolute advantage in exporting oil to other countries, it can embark in having bilateral and unilateral trade agreements with various countries that are not oil producers but they have absolute advantage in other sectors such as agriculture and manufacturing. The role of these bilateral agreements is to give the country an advantage in the creation of markets for the produced goods in a certain country.

World Bank facilitation of the trading process

The way in which World Bank can facilitate trade between Japan and Saudi Arabia is by funding industrial development in both countries. The funding must take into account the industries that each country has absolute advantage (Woods, 2006). In the case of Japan, the absolute advantage is in the development of more vehicle manufacturing plants or vehicle assembly and parts manufacture plants in order to produce more vehicles at reduced cost than the competing nations.

The bank must also consider funding the country to establish industry lines in Saudi Arabia especially if it is going to give the country an edge in lowering labor and shipping costs. The other financial help that World Bank can assist the industries in the country with is the infrastructure development (Woods, 2006).

Although the country is well developed, improvement of the rail transport, which is cost effective in the transportation of the manufactured vehicles to the seaport, can be a major infrastructural development that will help the country to have absolute advantage in manufacture of vehicles (Woods, 2006).

The bank can fund a railway system between the two countries such that Japan can export its vehicles to Saudi Arabia using the railway line. In addition, the bank can assist Saudi Arabia by funding a pipeline system to export the oil directly to Japan. Such developments create mutual benefits and trading patterns between the two countries as they have different absolute advantages. The World Bank can help Saudi Arabia build modern oil refineries such that the country can start refining its crude oil for export.

World Trade Organization facilitation of the trading process

The World Trade Organization promotes the relationship between countries in terms of having unilateral trade agreements between the member nations. The unilateral trade agreement calls for unrestricted flow of goods from one country to another. It advocates for the removal of trade barriers between member nations (Fergusson, 2007). The World Trade Organization offers each particular member nation an opportunity to have a market for the products.

With each particular country identifying its absolute advantages, the member country allow unrestricted importation of goods from other countries in which they do not have an absolute advantage. By being members of World Trade Organization, both Japan and Saudi Arabia can expand their international markets by reaching out to the nations where they can sell their products at lower prices. The other advantage for being members of World Trade Organization is having preferential treatment compared with non-member nations.

The preferential treatment implies that the goods are not subject to discriminatory standards of quality and tariffs imposed by other nations (Fergusson, 2007).

As both Japan and Saudi Arabia are members of the World Trade Organization, they can utilize bilateral agreements to trade by providing preferential treatment to each other’s absolute advantage imports. The absolute advantage imports are imports that have no local substitutes in the country as the country does not have the capacity to manufacture or produce such goods (Fergusson, 2007).

By belonging to the World Trade Organization, Saudi Arabia would have an advantage if it opts to develop its own refined petroleum industry as it can produce large volume of such products at a relatively lower cost than its competitors can. When looking for the market of the products, the country’s goods will not face restrictions as they can be sold to the members of the World Trade Organization.


There is need to recognize the role of international bodies and their contribution to the international trade. Without these bodies, international trade would be unimpressive and some countries would end up having many absolute advantages. The role played by the World Bank is to ensure that each country develops its own industries and production lines that give it a particular advantage in the international market, thereby contributing to a balanced international trade (Woods, 2006).

The situation where one country has absolute advantage, which makes it exporter and other countries importers deprive them foreign currency (Smith, 1776).The World Trade Organization role is to create markets for goods or exports, which the country has absolute advantages. The markets come in the form of free entry of goods to the member countries. The role-played by the two institutions link them to the theory of absolute advantage in international trade.


Fergusson, F. (2007). The World Trade Organization: Background and issues. Congressional Research Service, 4, 5-10.

Irwin, D. (1996). Against the tide: An intellectual history of free trade. Princeton: Princeton University Press.

Schumpeter, J. (1981). History of economic analysis. London: George Allen & Unwin.

Smith, A. (1776). An inquiry into the nature and causes of the wealth of nations: The Glasgow edition. London: Liberty Press.

Woods, N. (2006).The globalizers: The IMF, the World Bank, and their borrowers. Ithica and London: Cornell University Press.