The concept of international trade implies that there is exchange of goods and services as well as technology between the countries which in turn contributes to the welfare of the economy. The international trade provides the countries with the scope to expand the market for country’s output beyond the national boundary (Manova, 2013). However the imports within the country bring in goods, services as well as technologies that were unavailable in the host country. There is a need for the countries to participate in the international trade because each country produces different things and the exchange of goods increases the level of resources within the trading partners (Chor and Manova, 2012).
The international trade also raises the GDP of the economy and the trading partners are at a beneficial position with economic growth within the nations (Becker, Chen and Greenberg, 2013). The theory of international trade implies that one countries purchases goods from the other nation at low prices and sells the products at high prices in the other country (Steen-Olsen, et al., 2012). The trade involves the transfer of not only the goods and services but also machinery and equipments within the nations. The paper aims at considering the various trade theories in order to discuss the most relevant trade theory for United States. The paper also allows the scope to understand the significance of different trade theories in the international market.
According to the research there are two resources in the economy of United States that is labour as well as capital which are used in the production of goods and services. However the prices of these resources are affected by the international trade (Ahn, Amiti and Weinstein, 2011). The demand for the products manufactured in United States rises as the prices of the goods falls. Further the country carries out its international trade by importing goods from other countries in order to maintain a trade relationship with the trading partners.
The comparative advantage theory of Ricardo deals with the fact that the countries specialise on particular good and that good it exported to other country in order to earn profit (Bayne and Woolcock, 2011). Further the other trading partner specialises in a good that is imported in order to enhance the production process (Johnson and Noguera, 2012; Kasahara and Lapham, 2013). The research suggests that United States has a comparative advantage in producing vehicular parts, machinery and electrical equipments that are exported to other countries such as Canada. According to the researcher, Canada is considered as the largest trading partner of United States with $632 billion of total goods traded in 2013 (Fowler, 2013).
Figure 1: Import of Goods and Services (% of GDP) (Canada)
(Source: World Bank, 2015b)
The trade deficit of U.S goods and services with that of Canada was around $40 million in 2012 (Fowler, 2013; World Bank, 2015b). The figure has increased in the later years and the country exports goods in large quantity in order to earn a huge profit. The services exports from United States were around $61 billion in 2012 (Fowler, 2013). Further research suggests that US exports agricultural goods to Canada which was around $21.3 billion in 2013 which included fresh fruits and vegetables within the economy (Fowler, 2013). There were other services such as business and technical services exported to Canada and US earns huge revenue with the export of these goods and services (Fowler, 2013). This implies that US has a comparative advantage in production of these goods and services.
On the contrary US also imported goods from Canada in order to enhance the availability of goods and services with United States (Fowler, 2013). The country imports mineral oil, vehicles, machinery as well as plastic from Canada. The private services were imported by US from Canada which amounts to $29.8 billion in 2012 (Fowler, 2013).
Figure 2: Imports of Goods and Services (% of GDP) (United States)
(Source: World Bank, 2015b)
The research suggests that the FDI of US on China was around $351.5 billion in 2012 and the investment was led by financial as well as the manufacturing sectors (Fowler, 2013). This implies that both the country gain in the international market due to the comparative advantage that they posses. It also enhances the level of GDP within the countries and contributes to the economic growth prospect (Bayne and Woolcock, 2011).
Figure 3: Exports of goods and services (% of GDP) (United States)
(Source: World Bank, 2015a)
Another theory that is applicable to the trade relations followed by United States is that of the Heckscher-Ohlin Theory which suggests that the traded commodities are a bundle of factors that involves labour, land as well as capital. According to the model the factor services are sold externally with the transfer of the factors from the local market to the global market (Harrod and O'Brien, 2012). The country exports that particular good which is intensive in the abundant factor of the country. For example United States participates in the international trade with France as both the countries have identical technologies and the goods that they manufacture are steel and clothing (Harrod and O'Brien, 2012).
The research suggests that United States is rich in capital and it has more capital per unit of worker whereas France has more labour per unit of capital (Waugh, 2010). This indicates that US is a capital abundant country whereas France is a labour abundant country. According to the researcher steel is a capital abundant good whereas cloth is a labour abundant good (Harrod and O'Brien, 2012).