Introduction
In contemporary economics, there is considerable literature concerning the concept of international trade and its effects on the global economy. Although economists agree that international trade involves two or more countries and typically occurs with nations having different levels of economic development, there is debate surrounding the nature of international trade, with some economists advocating free trade, while others arguing in favor of protectionism. Furthermore, there is also debate concerning the degree of competition in international trade and whether conditions of ‘imperfect competition’ exist. This essay begins by examining the concept of competition in international trade and outlining the key debates concerning the factors that create imperfect competition. Secondly, the essay then turns to consider the implications of imperfect competition for international trade and evaluates the degree to which the evidence supports the assertion that imperfect competition characterizes a significant proportion of international trade.
Nature of Competition in International Trade
At its most basic level, international trade typically involves two countries engaging in exchange, with each trading what it has in excess of its domestic demand for similar products (Hufbauer & Schott, 2005, p.6). Economists, however, are divided concerning the underlying competitive conditions that characterize international trade, with some economists advocating free trade, while others arguing in favor of protectionism (Hufbauer & Schott, 2005, p.7). From the standpoint of free trade, market competition leads to the most efficient allocation of global resources by encouraging innovation and specialization to create the greatest value for consumers (Hufbauer & Schott, 2005, p.8). Protectionist advocates, however, point to the ability of trade barriers, such as tariffs and quotas, to protect the domestic economy from producing products and services that are undersold by foreign firms and thereby benefit consumers, while creating economic efficiency in the form of domestic jobs and investment, which would not otherwise be created in an open competitive market (Hufbauer & Schott, 2005, p.8).
Economic theorists, however, have long criticized the notion of free trade and point to the concept of ‘imperfect competition’ in international trade, which is argued to characterize a significant proportion of global exchange. On the surface, imperfect competition occurs when there are limitations to the market power of an individual firm or industry group, and there is a lack of true price competition among market participants (Hufbauer & Schott, 2005, p.10). Specifically, economists typically identify four key conditions that characterize imperfect competition, namely: the existence of a small number of firms; the ability for firms to collude; the existence of high barriers to entry; and the presence of differentiated products (Hufbauer & Schott, 2005, p.10). Consequently, economists have argued that these conditions distort the nature of the international market and reduce market efficiency, particularly when the conditions are combined with additional limitations on the scope for foreign-owned firms to compete in foreign markets (Hufbauer & Schott, 2005, p.10).
Implications of Imperfect Competition for International Trade
Imperfect competition has a number of implications for international trade that are closely related to the specific conditions of each individual case. First, in terms of market structure, the presence of a small number of firms implies that the market is oligopsony, i.e. dominated by a few buyers (Hufbauer & Schott, 2005, p.11). This can lead to market inefficiencies and the limited access to global resources or lower prices available in open markets. Furthermore, the ability for firms to collude implies that firms are in a position to drive up prices and reduce the potential for innovation and competition (Hufbauer & Schott, 2005, p.11). Moreover, the presence of high barriers to entry creates a significant advantage for incumbents and is argued to lead to a lack of incentives for firms to invest in research and development and therefore reduced growth potential for the market as a whole (Hufbauer & Schott, 2005, p.12). Finally, the presence of differentiated products can reduce market efficiency and lead to oversupply of certain products, particularly in comparison to more open markets characterized by the ability for firms to market their products to the entire global market (Hufbauer & Schott, 2005, p.12).
Evidence on Imperfect Competition in International Trade
There exists a body of evidence regarding the degree to which imperfect competition characterizes a significant proportion of international trade. Studies have shown that the conditions characteristic of imperfect competition exist in various industries, particularly those involving a large degree of intellectual property and technological complexity, such as the computer, aerospace and telecommunications sectors (Hay, 2002). Furthermore, the evidence indicates that such conditions can lead to higher market prices and reduce the potential benefit of cost discovery associated with open competition. This is especially the case when firms are in a position to collude and drive up prices, as occurs in the oil and gas sectors (Gawande, 2007). Furthermore, numerous studies have highlighted the prevalence of market concentration as a result of high barriers to entry and the lack of incentives for firms to invest in research and development (Krugman, 1997). Moreover, the evidence also indicates that the presence of differentiated products can lead to an oversupply of certain products and a lack of ability to market products to the entire global market (Croteau, 2005).
Conclusion
In summary, this essay has examined the concept of competition in international trade and identified the key debates concerning imperfect competition in the global market. Imperfect competition is argued to exist in various industries, particularly those that involve intellectual property and technological complexity, with the most prevalent conditions being a small number of firms, the ability to collude, the presence of high barriers to entry and the presence of differentiated products. Moreover, the evidence suggests that imperfect competition not only affects the global market in terms of structure, such as market concentration, but can also result in higher prices and the reduced potential benefit of cost discovery associated with open competition. In conclusion, the evidence indicates that imperfect competition is present in a significant proportion of international trade, thereby impacting the global market.
