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International Trade Theory
International trade is the exchange of capital, goods, and services across international borders. The benefits of trading include lower prices, better products for consumers, improvement of political ties among nations, and efficiency gains for domestic producers.
Mercantilism
Mercantilism asserts that by maximizing exports and minimizing imports a country would keep wealth within its borders instead of spending money overseas by purchasing goods from other countries.
The flaw with mercantilism is that it treats trade as a zero-sum game; because of its shortsighted approach, the gain or loss of one country is exactly balanced by the loss or gain of another country, ultimately no country benefits from trading.
Absolute Advantage
Absolute advantage compares the productivity of different producers or economies. In other words, a country that has an absolute advantage can produce a product with lower marginal cost to include, fewer and less expensive materials, productivity in less time, fewer workers and lower wages. The producer that requires a smaller quantity inputs to produce a good, has proven to have an absolute advantage in producing that good. A country with an absolute advantage can sell a good for less than a country that does not have absolute advantage. Absolute advantage refers to a difference in productivity of nations, while comparative advantage refers to differences in opportunity costs. Absolute advantage is important, but comparative advantage is what determines what country will specialize in a specific product.
Comparative Advantage
In economics, comparative advantage refers to the ability of a party to produce a good or service at a lower marginal and opportunity cost over another. This is the concept that a certain good can be produced more efficiently than others due to several factors such as productive skills, climate, and natural resource availability.
Why Should We Care?
Boeing is America’s biggest manufacturing exporter as well as the world’s largest aerospace company and leading manufacturer of commercial jetliners, defense, space and security systems, and service provider of aftermarket support. To assemble just one model of airplane, the 737, its smallest and most popular commercial jet, still containing 367,000 parts, the company relies on a complex web of hundreds of suppliers. “We can’t be experts in everything,” said Helene Michael, vice president of manufacturing operations for the 737 program. Boeing’s area of specialization is getting all the parts in the right place at the right time, and then putting them together quickly. Boeing does not hesitate to outsource when there is cost savings, this concept is directly tied to comparative advantage and specialization. According to Linn, “About five years ago, it [Boeing] went so far as to spin off the Wichita, Kan., operation that makes 737 fuselages and other airplane parts. That now-independent company, Spirit Aerosystems, also does work for competing aerospace companies.” Creating an independent company that provides products to your competition can still be an advantage to Boeing by limiting their overall opportunity cost and therefore increasing their competitive advantage.
Examples Here in Utah
Martin Smith / Tail End /
Boeing employs more than 140,000 people both in the United States and across more than 65 countries with 964 employees in Utah making an average of wage of $65,000 a year. Boeing works with many external suppliers, over 200 vendors in Utah alone, these suppliers employ hundreds of thousands of skilled workers worldwide. In 2016, Boeing spent $246.5 million with these Utah suppliers. What is it that keeps such a valuable global company in Utah? There are several reasons why Utah has both competitive and comparative advantage for Boeing.
In 2014 Boeing selected Alliant Techsystems, ATK, in Clearfield, Utah to make center and aft fuselage frames for the Dreamliner 787-9 and 787-10. ATK’s existing clean room facility offers the space Boeing needs while Utah’s non-union workforce, already skilled in metal components appeals to labor adaptability, both are important factors in calculating opportunity cost. Hill Airforce Base located in Ogden, Utah is an Air Force center for excellence in composite repair and composite material research, they’ve persuaded dozens of firms to locate or expand in the area. Another advantage of Utah’s workforce and existing industry is the availability of a 10-week training course in advanced composites offered at Salt Lake Community College, paid for by Boeing. Why is Boeing so focused on Utah and it’s composite manufacturing abilities? Boeing CEO James McNerney told The Seattle Times, “Composite design and manufacturing remains a fundamental competitive advantage for this company,” this means that Utah is positioned to thrive in the aerospace composites industry. Composites is an industry that can bring technology, jobs, education, and competitive advantage to the Utah workforce. In turn, Utah provides Boeing with advantage and increased efficiency, each of which effect Boeing’s opportunity cost and therefore comparative advantage.
References
Boeing Commercial Airplanes Communications. (2015). Boeing Salt Lake completes 787-9 dreamliner production expansion [Press Release]. Retrieved from http://business.utah.gov/news/boeing-salt-lake-completes-787-9-dreamliner-production-expansion/
Boeing Company (n.d.). Company general information. Retrieved from http://www.boeing.com/company/general-info/
Boeing Company (n.d.). University relations. Retrieved from http://www.boeing.com/principles/university-relations.page
Boeing Company (2018, February 23). Utah job postings [Data set]. Retrieved from https://jobs.boeing.com/location/utah-jobs/185/6252001-5549030/3
Boeing Company (2016). [Graphic illustration PDF]. Improving the quality of life in Utah. Retrieved from http://www.boeing.com/resources/boeingdotcom/government-operations/state_cards/Card_UT.pdf
Boeing Company (n.d.). Boeing international. Retrieved from http://www.boeing.com/company/key-orgs/boeing-international/index.page
Boeing Company (n.d.). Business internship program. Retrieved from http://www.boeing.com/careers/college/business-internships.page
Business Examiner (2012, March 15). Boeing will expand 787 work to Utah. Retrieved from http://www.businessexaminer.com/blog/March-2012/Boeing-will-expand-787-work-to-Utah/
Composites World (2010, September 10). Boeing will expand composites manufacturing capabilities in Seattle. Retrieved from https://www.compositesworld.com/news/report-boeing-will-expand-composites-manufacturing-capabilities-in-seattle
Composites World (2010, October 25). Boeing reportedly considering bringing 787 tail work in-house. Retrieved from https://www.compositesworld.com/news/boeing-reportedly-considering-bringing-787-tail-work-in-house
Foy, P. (2014, March 6). Utah gives Boeing incentives to open 787 tail piece factory. Standard Examiner. Retrieved from http://www.standard.net/Business/2013/01/12/Utah-gives-Boeing-incentives-to-open-787-tail-piece-factory
Gates, D. (2013, December 23). Bid for Boeing’s 777X: Salt Lake City specializes in composites. Retrieved from http://old.seattletimes.com/html/businesstechnology/2022493730_boeing777xsitesslcxml.html
Gates, D. (2014, November 11). Boeing picks Utah supplier to make some 787 composite parts. The Seattle Times. Retrieved from https://www.seattletimes.com/business/boeing-picks-utah-supplier-to-make-some-787-composite-parts/
Linn, A. (2010, April 28). Hundreds of suppliers, one Boeing 737 airplane. NBC News. Retrieved from http://www.nbcnews.com/id/36507420/ns/business-us_business/t/hundreds-suppliers-one-boeing-airplane
Schiffbauer, L. (2018). International trade theory [Power Point Slides]. Retrieved from https://www.dropbox.com/s/4x0809x4yp4ijnj/
LICENSES AND ATTRIBUTIONS
Introduction to International Trade by Lumen Learning is licensed under CC BY-NC-SA 4.
