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Global Business Today Ninth Edition Chapter 7
Government Policy and
International Trade
Chapter Outline
OPENING CASE: Sugar Subsidies Drive Candy Makers Abroad
INTRODUCTION
INSTRUMENTS OF TRADE POLICY
Tariffs
Subsides
Country Focus: Are the Chinese Illegally Subsidizing Auto Exports?
Import Quotas and Voluntary Export Restraints
Local Content Requirements
Administrative Polices
Antidumping Policies
Management Focus: U.S. Magnesium Seeks Protection
THE CASE FOR GOVERNMENT INTERVENTION
Political Arguments for Intervention
Country Focus: Trade in Hormone-Treated Beef
Economic Arguments for Intervention
THE REVISED CASE FOR FREE TRADE
Retaliation and Trade War
Domestic Politics
DEVELOPMENT OF THE WORLD TRADING SYSTEM
From Smith to the Great Depression
1947-1979: GATT, Trade Liberalization, and Economic Growth
1980-1993: Protectionist Trends
The Uruguay Round and the World Trade Organization
WTO: Experience to Date
The Future of the WTO: Unresolved Issues and the Doha Round
Country Focus: Estimating the Gains from Trade for America
FOCUS ON MANAGERIAL IMPLICATIONS
Global Business Today Ninth Edition Chapter 7
Trade Barriers and Firm Strategy
Policy Implications
SUMMARY
CRITICAL THINKING AND DISCUSSION QUESTIONS
CLOSING CASE: China Limits Exports of Rare Earth Metals
Learning Objectives
1. Identify the policy instruments used by governments to influence international trade flows.
2. Understand why governments sometimes intervene in international trade.
3. Summarize and explain the arguments against strategic trade policy.
4. Describe the development of the world trading system and the current trade issues.
5. Explain the implications for managers of developments in the world trading system.
Chapter Summary
This chapter begins with a discussion of the six main instruments of trade policy, including tariffs,
subsidies, import quotas, voluntary export restraints, local content requirements, and
administrative policies. This section is followed by a discussion of the merits of government
intervention into international trade. The author provides a balanced view of this difficult issue.
The second half of the chapter focuses on the development of the global trading system. A
historical context is provided, along with a view of the global trading system as it exists today.
The author acquaints the reader with the General Agreement on Trade and Tariffs (GATT) and the
World Trade Organization.
Opening Case: Sugar Subsidies Drive Candy Makers Abroad
Summary
The opening case explores protectionism in the U.S. sugar industry. Using a combination of
tariffs, quotas, subsidies, and price supports, the U.S. government has effectively shut out foreign
sugar producers from all but 15 percent of the U.S. market. The net result is that sugar prices in
the United States are significantly higher than prices in the rest of the world and U.S. consumers
are paying more than they should for sugar, candy, and other products containing sugar. U.S.
candy makers are now circumventing the situation by shifting production to lower cost locations
like Mexico. Discussion of the case can revolve around the following questions:
QUESTION 1: Reflect on the U.S. policy on sugar. As a producer, how do you feel about the
policy? Does your opinion change if you are a candy manufacturer? What is your perspective as a
consumer of candy and other products containing sugar? As a displaced worker in Ohio, how do
you feel about the policy? Should a government protect a few at the expense of many? Is the
policy fair?
QUESTION 2: Why do you think the policy on sugar in the United States is so heavily slanted
towards sugar producers at the expense of candy manufacturers and consumers? What can
manufacturers do? What does your response tell you about the benefits of free trade?
04-04/sugar-producers-want-to-spread-good-news-about-their-mortal-enemy-big-candy},
{http://www.businessweek.com/articles/2013-11-12/corn-syrup-prices-tumble-in-battle-with-
cheap-sugar}, and {http://www.businessweek.com/news/2014-10-08/sugar-shortage-seen-
looming-by-drake-as-drought-cuts-brazil-crop}.
Chapter Outline with Lecture Notes, Video Notes, and Teaching Tips
INTRODUCTION
A) This chapter explores the political reality of international trade. Free trade refers to a situation
where a government does not attempt to restrict what its citizens can buy from another country or
Global Business Today Ninth Edition Chapter 7
what they can sell to another country. While many nations are nominally committed to free trade,
they tend to intervene in international trade to protect the interests of politically important groups.
B) The major objective of this chapter is to describe how political realities have shaped, and
continue to shape, the international trading system.
INSTRUMENTS OF TRADE POLICY
A) In this section, the text reviews seven main instruments of trade policy. These are: tariffs,
subsidies, import quotas, voluntary export restraints, local content requirements, antidumping
policies and administrative policies.
Tariffs
B) A tariff is a tax levied on imports (or exports) that effectively raises the cost of imported (or
exported) products relative to domestic products. Specific tariffs are levied as a fixed charge for
each unit of a good imported, while ad valorem tariffs are levied as a proportion of the value of
the imported good. The important thing to understand about a tariff is who suffers and who gains.
The government gains, because the tariff increases government revenues. Domestic producers
gain because the tariff affords them some protection against foreign competitors by increasing the
cost of imported foreign goods. Consumers lose since they must pay more for certain imports.
C) Thus, tariffs are unambiguously pro-producer and anti-consumer, and tariffs reduce the overall
efficiency of the world economy.
Video Note: The video in the International Business Library on Pinterest
(http://www.pinterest.com/mheibvideos/) Trade Tensions Flare between U.S., China As G-20
Nears explores the implications of the tariffs implemented by the United States on tires imported
from China.
Subsidies
D) A subsidy is a government payment to a domestic producer. By lowering costs, subsidies help
domestic producers in two ways: they help producers compete against low-cost foreign imports
and they help producers gain export markets. However, many subsidies are not that successful at
increasing the international competitiveness of domestic producers. Moreover, consumers
typically absorb the costs of subsidies.
Country Focus: Are the Chinese Illegally Subsidizing Auto Exports?
Summary
This feature explores the subsidies paid by China’s government to Chinese producers of autos and
auto parts. U.S. lawmakers have raised concerns that the subsidies are unfair and have filed a
complaint with the World Trade Organization (WTO) arguing that the subsidies have effectively
Global Business Today Ninth Edition Chapter 7
hurt U.S. auto and auto parts producers. While some in the U.S. auto industry support the
complaint, others are concerned that it could jeopardize their investments in the Chinese market.
Discussion of the feature can begin with the following questions:
Suggested Discussion Questions
1. In your opinion, could U.S. complaints about China’s policies toward its auto exports actually
harm U.S. producers more than they help? Should the U.S. dismiss its complaint with the WTO?
Discussion Points: The vast market potential in China is attractive to most companies including
2. As a U.S. consumer, do you support China’s subsidies on autos and auto parts? Does your
response change if you work for a U.S. auto maker? Why or why not?
Lecture Note: To extend this discussion, consider {http://www.bbc.co.uk/news/business-
16827138} and {http://www.bbc.co.uk/news/world-asia-china-16713608} to learn more.
Import Quotas and Voluntary Export Restraints
E) An import quota is a direct restriction on the quantity of some good that may be imported into
a country. A tariff rate quota is a hybrid of a quota and a tariff where a lower tariff is applied to
imports within the quota than to those over the quota. A voluntary export restraint is a quota on
trade imposed by the exporting country, typically at the request of the importing country’s
government.
F) While import quotas and voluntary export restraints benefit domestic producers by limiting
import competition, they raise the prices of imported goods. The extra profit that producers make
when supply is artificially limited by an import quota is referred to as a quota rent.
Local Content Requirements
© 2016 by McGraw-Hill Education.
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
127
production, or as selling goods in a foreign market at below their “fair” market value. Dumping is
viewed as a method by which firms unload excess production in foreign markets. Alternatively,
some dumping may be the result of predatory behavior, with producers using substantial profits
from their home markets to subsidize prices in a foreign market with a view to driving indigenous
competitors out of that market. Once this has been achieved the predatory firm can raise prices
1. What is dumping? Were Chinese and Russian producers guilty of dumping? How did U.S.
Magnesium justify its claims against Russian and Chinese producers?
Discussion Points: Dumping is defined as selling goods in a foreign market below the cost of
2. What does the ITC’s ruling mean for American consumers of magnesium? In your opinion,
was the ruling fair?
Lecture Note: Complaints about alleged dumping have hit a number of industries recently. To
extend this discussion, consider exploring some of the other cases. Go to
{http://www.businessweek.com/news/2014-08-04/vikram-solar-opposes-dumping-duties-as-
manufacturer-split}, {http://www.businessweek.com/news/2014-03-25/u-dot-s-dot-steel-says-
south-korean-companies-are-dumping-pipes-in-u-dot-s} and
{http://www.businessweek.com/news/2014-04-21/argentina-to-cut-taxes-on-biodiesel-amid-eu-
anti-dumping-dispute} to learn more.
Teaching Tip: U.S. Magnesium’s web site is available at {http://www.usmagnesium.com/}.
THE CASE FOR GOVERNMENT INTERVENTION
A) In general, there are two types of arguments for government intervention, political and
economic. Political arguments for intervention are concerned with protecting the interests of
Usually this results from political pressures by unions or industries that are threatened by more
efficient foreign producers, and have more political clout than the consumers who will eventually
pay the costs.
National Security
Global Business Today Ninth Edition Chapter 7
D) Protecting industries because they are important for national security is another argument for
trade restrictions. The U.S. government protects industries like steel, aerospace, and electronics,
on the basis of this argument, and has made special arrangements to protect the semiconductor
industry.
Lecture Note: In the United States, the Bureau of Export Administration enhances the nation's
security and its economic prosperity by controlling exports for national security, foreign security,
foreign policy, and short supply reasons. To learn more, go to
{http://www.bis.doc.gov/about/index.htm}. Click on “Policies and Regulations” and then on
“Export Administration Regulations”.
Retaliation
E) Government intervention in trade can be used as part of a "get tough" policy to open foreign
markets. By taking, or threatening to take, specific actions, other countries may remove trade
barriers. But when threatened governments do not back down, tensions can escalate and new trade
barriers may be enacted.
Lecture Note: The trading relationship between China and the United States is an ongoing topic of
discussion for many. To expand the discussion on the role of government and retaliatory trade
measures, consider {http://www.businessweek.com/ap/2012-05-25/china-challenges-us-trade-
penalties-at-wto}, {http://www.businessweek.com/ap/2012-04-26/senior-republican-urges-us-
china-investment-treaty}, and {http://www.businessweek.com/ap/2012-08-20/china-says-us-
energy-projects-violate-free-trade}.
Protecting Consumers
F) Consumer protection can also be an argument for restricting imports. The Country Focus below
suggests that the European Union’s concern over beef was, in part, due to an interest in protecting
consumers. Since different countries do have different health and safety standards, what may be
acceptable in one country may be unacceptable in others.
Country Focus: Trade in Hormone-Treated Beef
Summary
This feature describes the trade battle between the United States and the European Union over beef
from cattle that have been given growth hormones. It outlines the basic issues that led to the
dispute, and shows how the World Trade Organization has treated the case.
Suggested Discussion Questions
1. Why is the European Union so concerned about beef from cattle that have been given growth
hormones?
Global Business Today Ninth Edition Chapter 7
2. Why did the WTO rule against the European Union?
Lecture Note: Recent trade negotiations between the European Union and the United States have
brought the issue of hormone-treated beef to the forefront once again. To learn more, consider
{http://www.bbc.com/news/business-29572475}.
Teaching Tip: The WTO maintains a site for students. Go to {www.wto.org} and click on the
“resources for students” to search the site, research countries, and even see a list of internships that
are available at the WTO.
Furthering Foreign Policy Objectives
G) On occasion, governments will use trade policy to support their foreign policy objectives. One
aspect of this is to grant preferential trade terms to countries that a government wants to build
strong relations with. Trade policy has also been used several times as an instrument for
pressuring punishing “rogue states” that do not abide by international laws or norms. In recent
years the United States has imposed trade restrictions against Libya, Iran, Iraq, Cuba, and other
Global Business Today Ninth Edition Chapter 7
Economic Arguments for Intervention
I) Economic arguments for intervention include the infant industry argument and strategic trade
policy.
The Infant Industry Argument
J) The infant industry argument suggests that an industry should be protected until it can
develop and be viable and competitive internationally. Unless an industry is allowed to develop
and achieve minimal economies of scale, foreign competitors may undercut prices and prevent a
domestic industry from developing. The infant industry argument has been accepted as a
justification for temporary trade restrictions under GATT.
K) A problem with the infant industry argument is determining when an industry "grows up."
Some industries that are just plain inefficient and uncompetitive have argued they are still infants
after 50 years. The other problem is that given the existence of global capital markets, if the
country has the potential to develop a viable competitive position its firms should be capable of
raising the necessary funds without additional support from the government.
Strategic Trade Policy
L) Strategic trade policy suggests that in cases where there may be important first mover
advantages, governments can help firms from their countries attain these advantages. Strategic
trade policy also suggests that governments can help firms overcome barriers to entry into
industries where foreign firms have an initial advantage.
THE REVISED CASE FOR FREE TRADE
A) While strategic trade policy identifies conditions where restrictions on trade may provide
economic benefits, there are two problems that may make restrictions inappropriate: retaliation and
politics.
Retaliation and Trade War
B) Krugman argues that strategic trade policies aimed at establishing domestic firms in a dominant
position in a global industry are beggar-thy-neighbor policies that boost national income at the
expense of other countries. A country that attempts to use such policies will probably provoke
retaliation.
Video Note: The video in the International Business Library on Pinterest
(http://www.pinterest.com/mheibvideos/) U.S. Economist Krugman Wins Nobel Prize in
Economics explores Krugman’s contributions to the fields of international business and
economics.
Domestic Politics
Global Business Today Ninth Edition Chapter 7
C) Governments do not always act in the national interest when they intervene in the economy.
Instead special interest groups may influence governments. Thus, a further reason for not
embracing strategic trade policy, according to Krugman, is that such a policy is almost certain to
be captured by special interest groups within an economy, who will distort it to their own ends.
DEVELOPMENT OF THE GLOBAL TRADING SYSTEM
A) Many governments recognize the value of unrestricted free trade, but are hesitant to unilaterally
lower their trade barriers in case other countries do not follow suit. Since World War II, an
international trading framework has evolved that enables governments to negotiate a set of rules to
govern cross-border trade and lower trade barriers. For the first 50 years, the framework was
known as the General Agreement on Tariffs and Trade (GATT). Since 1995, it has been known as
the World Trade Organization (WTO).
From Smith to the Great Depression
B) Up until the Great Depression of the 1930s, most countries had some degree of protectionism.
Great Britain, as a major trading nation, was one of the strongest supporters of free trade.
C) Although the world was already in a depression, in 1930 the United States enacted the Smoot-
Hawley Act, which created significant import tariffs on foreign goods. As other nations took
similar steps and the depression deepened, world trade fell further.
1947-1979: GATT, Trade Liberalization, and Economic Growth
D) After WWII, the United States and other nations realized the value of freer trade, and
established the General Agreement on Tariffs and Trade (GATT).
E) The approach of GATT (a multilateral agreement to liberalize trade) was to gradually eliminate
barriers to trade. Over 100 countries became members of GATT, and worked together to further
liberalize trade.
Teaching Tip: A full review of GATT, containing an actual copy of the agreement, is available at
{http://www.ciesin.org/TG/PI/TRADE/gatt.html}.
1980-1993: Protectionist Trends
F) During the 1980s and early 1990s the world trading system as “managed” by GATT came under
strain. First, Japan’s economic strength and huge trade surplus stressed what had been more equal
trading patterns, and Japan’s perceived protectionist (neo-mercantilist) policies created intense
political pressures in other countries. Second, persistent trade deficits by the United States, the
world’s largest economy, caused significant economic problems for some industries and political
problems for the government. Third, many countries found that although limited by GATT from
Global Business Today Ninth Edition Chapter 7
utilizing tariffs, there were many other more subtle forms of intervention that had the same effects
and did not technically violate GATT (e.g. VERs).
The Uruguay Round and the World Trade Organization
G) Against the background of rising protectionist pressures, in 1986 GATT members embarked on
their eighth round of negotiations to reduce tariffs (called the Uruguay Round). This was the most
ambitious round to date.
H) One goal was to expand beyond the regulation of manufactured goods and address trade issues
related to services and intellectual property, and agriculture.
The World Trade Organization
Lecture Note: To see current issues at the WTO, go to {http://www.wto.org/}.
I) When the WTO was established in 1995, its creators hoped the WTO’s enforcement
mechanisms would make it a more effective policeman of the global trade rules than the GATT
had been. The WTO encompassed GATT along with two sister organizations, the General
Agreement on Trade in Services (GATS) and the Agreement on Trade Related Aspects of
Intellectual Property Rights (TRIPS).
WTO: Experience to Date
J) At the time of its establishment, the great hope was that the WTO might emerge as an effective
advocate and facilitator of future trade deals, particularly in such areas as services. In general, the
experience so far has been encouraging.
WTO as Global Police
K) So far, the WTO’s policing and enforcement mechanisms are having a positive effect. In
general, countries have adopted WTO recommendations for trade disputes.
Expanding Trade Agreements
L) In 1997, 68 countries that account for more than 90 percent of world telecommunications
revenues pledged to open their markets to foreign competition and to abide by common rules for
fair competition in telecommunications. Similarly, 102 countries pledged to open to varying
degrees their banking, securities, and insurance sectors to foreign competition. Like the
telecommunications deal, the agreement covers not just cross-border trade, but also foreign direct
investment.
The Future of the WTO: Unresolved Issues and the Doha Round
Global Business Today Ninth Edition Chapter 7
M) Substantial work still remains to be done on the international trade front. Four issues on the
current agenda of the WTO are the rise of anti-dumping policies, the high level of protectionism in
agriculture, the lack of strong protection for intellectual property rights in many nations, and
continued high tariffs on nonagricultural goods and services in many nations.
Anti-Dumping Actions
O) There has been a proliferation of antidumping actions in recent years, perhaps because of the
rather vague definition of what constitutes dumping. The WTO is encouraging members to
strengthen the regulations governing the imposition of antidumping duties.
Protectionism in Agriculture
P) The WTO is concerned with the high level of tariffs and subsidies in the agricultural sector of
many economies. However, the advanced countries of the world defend the current system
because they want to protect their producers from lower-cost producers from developing nations.
Protecting Intellectual Property
Q) The agreement to protect intellectual property (TRIPS) obliges WTO members to grant and
enforce patents lasting at least 20 years and copyrights lasting 50 years. The basis for this
agreement was a strong belief among signatory nations that the protection of intellectual property
rights is an essential element of the international trading system.
Market Access for Nonagricultural Goods and Services
R) The WTO would like to bring down tariff rates on nonagricultural goods and services, and
reduce the scope for the selective use of high tariff rates. The hope is that at some point, rates
would move to zero.
Country Focus: Estimating the Gains from Trade for America
Summary
This feature explores the results of a study by the Institute for International Economics. The study,
which estimated the gains to the U.S. economy from free trade, found that the United States’ GDP
in 2003 was more than 7 percent higher as a result of reductions in trade barriers than it would
have been if the barriers remained. The study also estimated that if tariffs were reduced to zero,
significant gains would still result.
Suggested Discussion Questions
1. What does the Institute for International Economics suggest about the benefits of free trade?
Global Business Today Ninth Edition Chapter 7
© 2016 by McGraw-Hill Education.
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
135
Discussion Points: The Institute for International Economics found that thanks to reductions in
trade restrictions, the United States’ GDP was up. The Institute also estimated that even greater
gains in the country’s GDP would occur if protectionism was eliminated all together. Students
should recognize that these findings follow the principles of Adam Smith and David Ricardo and
suggest that free trade is beneficial.
2. According to the Institute for International Economics study, a move toward free trade would
cause disruption in employment. Is it still worth pursuing free trade if it means that some people
lose their jobs?
Teaching Tip: The Web site for Petersen Institute for International Economics is available at
{http://www.iie.com/}.
A New Round of Talks: Doha
R) In late 2001, the WTO launched a new round of talks at Doha, Qatar. The agenda includes
cutting tariffs on industrial goods and services, phasing out subsidies to agricultural producers,
reducing barriers to cross-border investment, and limiting the use of anti-dumping laws. As of
2014, the talks were still underway.
Lecture Note: While the Doha negotiations have seemingly stalled, countries are still working to
achieve its objectives. One effort is the formation of the Trans-Pacific Partnership. To extend the
discussion of the Doha Round and to learn more about the Trans-Pacific Partnership, go to
{http://www.businessweek.com/news/2014-02-06/ford-to-oppose-trans-pacific-trade-pact-without-
currency-limits}.
Video Note: To extend this discussion, consider {http://www.businessweek.com/videos/2013-11-
07/trans-pacific-partnership-is-on-track-amb-dot-carden}.
Video Note: The video in the International Business Library on Pinterest
(http://www.pinterest.com/mheibvideos/) Trade Talks Collapse Highlight Differences Between
Developing, Developed Worlds explores the current status of the talks at the World Trade
Organization.
Video Note: To expand this discussion, consider the video in the International Business Library on
Pinterest (http://www.pinterest.com/mheibvideos/) China’s President to Meet India’s PM in Key
Visit.
FOCUS ON MANAGERIAL IMPLICATIONS
Global Business Today Ninth Edition Chapter 7
A) What does all of this mean for business? Managers need to consider how trade barriers impact
firm strategy, and what role they can play in promoting free trade or trade barriers.
Trade Barriers and Firm Strategy
B) Trade barriers are a constraint upon a firm’s ability to disperse its productive activities. First,
trade barriers raise the cost of exporting products to a country. Second, voluntary export restraints
(VERs) may limit a firm’s ability to serve a country from locations outside that country. Third, to
conform to local content requirements, a firm may have to locate more production activities in a
given market than it would otherwise. All of the above effects are likely to raise the firm’s costs
above the level that could be achieved in a world without trade barriers. In addition, the threat of
antidumping action could limit the ability of a firm to use aggressive pricing as a way to gain
market share.
Policy Implications
C) In general, international firms have an incentive to lobby for free trade, and keep protectionist
pressures from causing them to have to change strategies. While there may be short-term benefits
to having governmental protection in some situations, in the long run these can backfire and other
governments can retaliate.
Critical Thinking and Discussion Questions
1. Do you think governments should consider human rights when granting preferential trading
rights to countries? What are the arguments for and against taking such a position?
2. Whose interests should be the paramount concern of government trade policy - the interests of
producers (businesses and their employees) or those of consumers?
Global Business Today Ninth Edition Chapter 7
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This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
137
Answer: The long run interests of consumers should be the primary concern of governments.
Unfortunately consumers, each of whom may be negatively impacted by only a few dollars, are
less motivated and effective lobbyists than a few producers that have a great deal at stake. While
in some instances it could be argued that domestic consumers will be better off if world-class
domestic producers are nurtured and allowed to gain first mover advantages in international
markets, it is doubtful that the government will be better than international capital markets at
picking winners, and will more likely pick the firms with the greatest political clout. While
employees may well lose jobs if there are more efficient foreign competitors, some would argue
that this is just the nature of competition, and that the role of government should be to help these
employees get jobs where they can be efficiently employed rather than to protect them from reality
in inefficient firms.
3. Given the arguments relating to the new trade theory and strategic trade policy, what kind of
trade policy should business be pressuring government to adopt?
4. You are an employee of an U.S. firm that produces personal computers in Thailand and then
exports them to the United States and other countries for sale. The personal computers were
originally produced in Thailand to take advantage of relatively low labor costs and a skilled
workforce. Other possible locations considered at that time were Malaysia and Hong Kong. The
U.S. government decides to impose punitive 100 percent ad valorem tariffs on imports of
computers from Thailand to punish the country for administrative trade barriers that restrict U.S.
exports to Thailand. How should your firm respond? What does this tell you about the use of
targeted trade barriers?
States.
5. Reread the Management Focus feature on U.S. Magnesium Seeks Protection. Who gains most
from the anti-dumping duties levied by the United States on imports of magnesium from China
and Russia? Who are the losers? Are these duties in the best national interests of the United
States?
Global Business Today Ninth Edition Chapter 7
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This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
138
Answer: Most students will probably recognize that U.S. producers and their employees are the
primary beneficiaries of the anti-dumping duties levied by the United States on Chinese and
Russian magnesium imports. As a result of the duties, consumers in the United States will pay
higher prices for magnesium-based products. Some students may suggest that by imposing the
duties, the United States runs the risk of retaliatory measures from both China and Russia.
Closing Case: China Limits Exports of Rare Earth Materials
Summary
The closing case explores the export quotas imposed by China on rare earth metals. The metals,
which are used in a wide range of high tech products, are toxic to refine prompting most countries
to establish strict environmental regulations on their production. China’s new policy cut global
production of the materials significantly and now many countries including the United States have
filed complaints with the World Trade. Discussion of this case can revolve around the following
questions:
QUESTION 1: Which groups benefitted the most from China imposing an export quota on rare
earth metals? Did it give the Chinese domestic manufacturers a significant cost advantage? Did it
result in dramatically increased quality and environmental standards?
QUESTION 2: Given that 97 percent of rare earth metal production is now done in China, an
increase from 27 percent to 97 percent between 1990 and 2010, do you think countries such as
Australia, Canada, and the United States should reconsider their environmental restrictions of the
production of such metals?
QUESTION 3: The restrictions imposed by China on rare earth metals has resulted in some
companies (e.g. Toyota, Renault, Tesla) starting to look for alternatives. They plan to use parts
that do not include rare earth metals. Is this a good solution?
Global Business Today Ninth Edition Chapter 7
argue that using substitute products should be a more reliable strategy long-term than relying on a
dwindling resource that is subject to government policy whims.
Teaching Tip: To extend this discussion, consider {http://www.businessweek.com/news/2013-12-
17/pentagon-less-dependent-on-china-s-rare-earths-u-dot-s-dot-report-says} and
{http://www.businessweek.com/news/2014-03-26/trade-panel-sides-with-u-dot-s-dot-in-dispute-
over-china-s-rare-earths}.
Continuous Case Concept
As automakers establish production operations in multiple countries around the world, and rely on
suppliers from numerous countries, the question of tariffs and quotas becomes more important. In
this chapter’s Continuous Case Concept, explore what happens if a country places a tariff or other
trade barrier on imported cars.
• Ask students to consider, for example, how consumers would react if the U.S. charged a
tariff on every car that is imported from Japan. What would be the likely reaction of
Japanese automakers? What would American producers do?
• Next, ask students to consider whether such as tariff is “fair.” Who really pays the tariff?
Who benefits from the tariff? Who would benefit from free trade in automobiles and car
parts?
• Finally, explore the decision by the state of Tennessee to offer German automaker VW
incentives totaling over $165 billion to open a new factory. As part of the deal, Tennessee
will also provide a grant of $12 million to train workers for the new VW facility. Is this
fair to U.S. automakers? How does it affect the competitiveness of U.S. companies?
Should Tennessee offer similar incentive packages to U.S. companies to encourage them to
locate production in the state? Why or why not?
This exercise works well after the notion of trade barriers has been introduced. It can also be used
to extend the discussion of The Case for Government Intervention and the section on Policy
Implications for managers.
globalEDGE Exercises
The resources for each exercise can be easily located by using the search box at the top of the
globalEDGE website at http://globalEDGE.msu.edu
Exercise 1
Global Business Today Ninth Edition Chapter 7
Search phrase: import and export regulations
Resource Name: National Trade Estimate Report on Foreign Trade Barriers
Website: http://www.ustr.gov/about-us/press-office/reports-and-publications
globalEDGE Category: Trade Tutorials
Additional Info:
Compiled annually by the Office of the U.S. Trade representative, each country’s report features
information on tariff and non-tariff trade barriers that U.S. exporters face in exporting products and
services to the country of choice.
Exercise 2
Search phrase: World Trade Organization
Resource Name: World Trade Organization (WTO)
Website: http://www.wto.org/
globalEDGE Category: Organizations
Additional Info:
The information about member countries and those countries with observer status is found under
the “About WTO” section of the website.
Additional Readings and Sources of Information
Rice Crop Seen Shrinking by FAO on Weather End of Thai Subsidy
http://www.businessweek.com/news/2014-10-14/rice-crop-seen-shrinking-by-fao-on-weather-end-
of-thai-subsidy
India Said to Consider $32 a Ton Subsidy for Raw Sugar Exports
http://www.businessweek.com/news/2014-01-24/india-said-to-consider-32-a-ton-subsidy-for-raw-
sugar-exports
Sugar Falls as Indian Subsidy May Damp Imports Cocoa Falls
http://www.businessweek.com/news/2014-02-13/sugar-falls-as-indian-subsidy-may-damp-
imports-cocoa-slides
Why Fuel Subsidies in Developing Nations Are an Economic Addiction
http://www.businessweek.com/articles/2014-03-13/why-fuel-subsidies-in-developing-nations-are-
an-economic-addiction
Tata Steel Continues to Invest in South Wales
http://www.bbc.com/news/uk-wales-politics-29650187
China Trade Accord Unlikely to Aid Manufacturers Survey Shows
Global Business Today Ninth Edition Chapter 7
http://www.businessweek.com/news/2014-10-26/china-trade-accord-unlikely-to-aid-
manufacturers-survey-shows
U.S. China Trade Relations Worse under Obama
http://www.businessweek.com/videos/2012-03-20/u-dot-s-dot-china-trade-relations-worse-under-
obama
Obama Takes Aim at China
http://www.businessweek.com/videos/2012-03-14/obama-takes-aim-at-china
China, North Korea Set up Trade Zone Cooperation
http://www.businessweek.com/ap/2012-08-14/china-north-korea-step-up-trade-zone-cooperation
S. Korea and China Start Talks on Free Trade Accord
http://www.businessweek.com/ap/2012-05-02/skorea-china-start-talks-on-free-trade-accord
China’s New Protectionism
http://www.businessweek.com/magazine/chinas-new-protectionism-10272011.html
U.S.-Pacific Rim Nations End Round of Trade Talks
http://www.businessweek.com/ap/2012-07-10/us-pacific-rim-nations-end-round-of-trade-talks
Rushing to Finish a Global Free Trade Deal
http://www.businessweek.com/articles/2012-05-31/rushing-to-finish-a-global-free-trade-deal
