978-0134324838 Chapter 7 Solution Manual Part 2

North American Free Trade Agreement (NAFTA)

■ 1994– NAFTA (http://www.nafta-sec-alena.org)– Canada, the U.S. and Mexico

■ Most significant economic bloc in the Americas

■ Maquiladora program facilitated NAFTA passage – since the 1960s U.S. firms have located

■ NAFTA:

◘ Increased market access between Canada, Mexico and the U.S.

■ NAFTA RESULTS:

◘ Canada and Mexico are the most important export markets of the U.S. – accounting for

about 1/3 of U.S. exports

El Mercado Comun del Sur (MERCOSUR)

■ 1991– MERCOSUR or (the Southern Common Market) is the strongest economic bloc in

South America (www.mercosur.int).

■ Includes Argentina, Brazil, Paraguay, and Uruguay.

■ MERCOSUR established the free movement of products and services, a common external

Association of Southeast Asian Nations (ASEAN)

Inc. 1 | Page

■ 1967– One of the few examples of economic integration in Asia, ASEAN was created with the

goal of maintaining political stability and promoting regional economic and social development

(www.aseansec.org).

■ ASEAN created a free trade area in which many tariffs were reduced to less than 5%.

■ Economic diversity has slowed further regional integration.

Asia Pacific Economic Cooperation (APEC)

■ APEC aims for greater free trade and economic integration of the Pacific Rim countries.

■ It incorporates 21 nations on both sides of the Pacific, including Australia, Canada, Chile,

China, Japan, Mexico, Russia, and the U.S. (www.apec.org).

Australia and New Zealand Closer Economic Relations Agreement (CER)

■ 1966– Australia and New Zealand reached a free trade agreement that removed 80% of tariffs

and quotas between the two nations, but was relatively complex and bureaucratic.

■ 1983 – the CER sought to accelerate free trade, leading to further economic integration of the

two nations.

Economic Integration in the Middle East and Africa

■ 1981– Gulf Cooperation Council (GCC) (www.gcc-sg.org.htm)- The Middle East’s primary

regional organization

■ Established to coordinate economic (oil), social, and cultural affairs, the GCC consists of

Inc. 2 | Page

OTHERS

Caribbean Community and Common Market (CARICOM)

■ 1973– Composed of roughly 25 member and associate member states around the Caribbean

Sea.

■ CARICOM was established to lower trade barriers and institute a common external tariff

(www.caricom.org).

Comunidad Andina de Naciones (CAN)

■ 1969– Called the Andean Pact, the CAN includes Bolivia, Colombia, Ecuador, Peru, and

Venezuela (www.comunidadandina.org).

■ Other regional economic integration examples in the Middle East:

◘ Arab Maghreb Union (composed of Algeria, Libya, Mauritania, Morocco, and Tunisia)

– still struggling to become a viable economic bloc.

ADDITIONAL INFORMATION:

◘ Regional Cooperation for Development (RCD; composed of Pakistan, Iran, and

Turkey) – the RCD was dissolved in 1979 and replaced by the Economic Cooperation

Organization (ECO).

◘ The ECO includes ten Middle Eastern and Asian countries, seeking to promote trade

and investment opportunities in the region.

7-16. Why do nations seek to join or form economic blocs? What are the advantages of

such arrangements?

■ Economic integration contributes to corporate and industrial growth, to economic progress,

better living standards, and higher tax revenues for the member countries.

■ Nations seek at least four objectives in pursuing regional integration:

Inc. 3 | Page

EXPAND MARKET SIZE

■ Regional integration greatly increases the scale of the marketplace for firms inside the

economic bloc.

ACHIEVE SCALE ECONOMIES AND ENHANCED PRODUCTIVITY

■ Expansion of market size within an economic bloc gives member country firms the opportunity

ATTRACT DIRECT INVESTMENT FROM OUTSIDE THE BLOC

■ Compared to investing in stand-alone countries, foreign firms prefer to invest in countries that

are part of an economic bloc because factories that they build within the bloc receive

ACQUIRE STRONGER DEFENSIVE AND POLITICAL POSTURE

■ Strengthen member countries relative to other nations and world regions- this was one of the

motives for initially creating of the European Community (precursor to the EU), whose members

 7-17. What strategies should companies use to maximize the benefits of regional

integration?.

(LO 7.8; AACSB: Analytical Thinking)

● APPLY YOUR UNDERSTANDING

7-18. TelComm Corporation is a manufacturer of components for the cell phone industry.

TelComm founder Alex Bell heard that China has the world’s largest number of cell

phone users and wants to begin exporting the firm’s products there, but TelComm has

little international experience. Mr. Bell is unaware of the various types of nontariff trade

barriers that TelComm might face in China and other foreign markets. Please summarize

major nontariff trade barriers to Mr. Bell. What types of investment barriers might

TelComm face in the event management decides to establish a factory in China to

manufacture cell phone components? What can TelComm management do to minimize

the threat of these nontariff trade and investment barriers?

TO: Mr. Alex Bell

FROM: Tommy Edison

DATE:

RE: Nontariff Trade and Investment Barriers

Inc. 4 | Page

Nontariff Trade Barriers

■ Government policies that restrict trade without imposing a direct tax or duty – quotas, import

licenses, local content requirements, government regulations, and administrative or bureaucratic

procedures

■ The use of nontariff barriers has grown substantially in recent decades- they are easier to

conceal from the WTO and other monitoring organizations.

■ Administrative or bureaucratic procedures that hinder the activities of importers or foreign

firms

■ Government procurement policies constitute an indirect form of nontariff trade barrier.

Investment Barriers

■ Example–

■ China –

Inc. 5 | Page

◘ 1949- Mao Tse Tung established a communist regime.

◘ 1980s- China began to open itself to the global economy.

◘ 1992 – China joined the Asia-Pacific Economic Cooperation (APEC) group, a

free-trade organization.

◘ 2001 – China joined the World Trade Organization (WTO) and has committed to

◘ 2004 – China’s GDP was four times the level it was in 1978, and foreign trade

◘ 2014 – China’s GDP reached a record high of 10360.10 USD Billion, representing

http://www.tradingeconomics.com/china/gdp

http://china-trade-research.hktdc.com/business-news/article/Fast-Facts/Economic-and-Trade-Inf

ormation-on-China/ff/en/1/1X000000/1X09PHBA.htm

Accessed September 26, 2015

◘ Balance of Trade –

http://www.tradingeconomics.com/china/balance-of-trade

Accessed September 26, 2015

7-19. Ethical Dilemma:

You are Vice President for International Sales at FoodTrade, a large trading company that

exports processed foods to Africa. You are often frustrated that African countries impose

high tariffs (typically 75 percent) on processed food imports. These barriers raise

FoodTrade’s cost of doing business and make your prices less competitive in African

markets. But Africa suffers from widespread poverty and African governments use tariffs

to raise needed revenues and achieve policy objectives. Using the concepts in this

chapter and the Ethical Framework in Chapter 4, analyze the arguments for and against

high agricultural tariffs in Africa. How do the tariffs harm or benefit Africa? Do you

perceive any ethical concerns in Africa’s use of high tariffs on agricultural goods? What

ethical concerns do you perceive in FoodTrade’s efforts to avoid the tariffs? How should

FoodTrade respond to the tariffs?

The tariffs that African countries impose can be justified for various reasons. First, tariffs and

other forms of intervention can generate substantial amounts of revenue for national

Inc. 6 | Page

1. Identify the problem

2. Examine the facts

3. Create alternatives

Evaluate each proposed action to assess its consistency with accepted ethical

standards, using the approaches described earlier:

■ Utilitarian—which action results in the most good and least harm?

■ Rights—which action respects the rights of everyone involved?

■ Fairness—which action treats people most fairly?

■ Common good—which action contributes most to the overall quality of

life of the people affected?

■ Virtue—which action embodies the character strengths you value?

4. Implement course of action

5. Evaluate results

As a general rule, in addressing this ethical dilemma, the manager should apply the following

steps.

1. Identify the problem

2. Examine the facts

3. Create alternatives

Inc. 7 | Page

■ Common good—which action contributes most to the overall quality of life of the people

affected?

■ Virtue—which action embodies the character strengths you value?

4. Implement course of action

Implement your decision.

5. Evaluate results

Then evaluate it to see how effective it was.

7-20. Levi Strauss & Co. (LS) makes and sells blue jeans, Dockers, and Slates brand

name apparel in over 60 countries. With the onset of regional integration in Europe and

Latin America, LS management decided to revise the firm’s production and marketing

strategies to make them more appropriate for regional, as opposed to national,

operations. Based on the regional integration changes underway in these areas, and on

your understanding of the business implications of regional integration, what should LS

do? In answering, think in terms of LS’s major value chain activities, especially

production and marketing. What are the pros and cons to LS of producing and marketing

its apparel on a regional basis, as opposed to a national or global basis? Justify your

answer.

■ Levi Strauss should reform its production and marketing activities to better facilitate its focus

■ The first step is for Levi to take advantage of the economic bloc’s market size. They can do

◘ Example- of this opportunity is taking advantage of another country’s natural

■ The second step is to reduce redundancy within the company. This is accomplished through

■ The third step is to look for a potential partnership or joint ventures. These coalitions can help

Inc. 8 | Page

■ The fourth step is for Levi to standardize their products and marketing activities. This is

■ The last step is for Levi to gain a physical presence within a member country through foreign

■ Levi should switch their operational focus from national to regional because it will launch a

7-21. Ethical Dilemma:

Suppose you are a member of a government task force evaluating the future of NAFTA

between Canada, Mexico, and the United States. Proponents want to transform NAFTA

into a common market by removing barriers to the movement of labor. The goal is to

reduce poverty in Mexico by allowing Mexican citizens to work freely and legally in

Canada and the United States. Critics oppose the common market because of the big

income difference between the two countries. They argue that an open border would

encourage millions of Mexicans to migrate northward seeking work, and threaten jobs in

the United States and Canada. Proponents argue that, as economic integration

progressed under a common market, average wages in the three countries would

equalize and eliminate pressures on northern job markets. Analyze this situation using

the Ethical Framework in Chapter 4. Should the task force recommend the common

market? What could U.S. and Canadian firms do to maintain their competitiveness

relative to Mexican firms, given Mexico’s low-wage advantage?

A FRAMEWORK FOR MAKING ETHICAL DECISIONS [Chapter 4]

1. Identify the problem

2. Examine the facts

3. Create alternatives

Evaluate each proposed action to assess its consistency with accepted ethical

standards, using the approaches described earlier:

4. Implement course of action

5. Evaluate results

1. Identify the problem

Currently NAFTA is a Free Trade Area. Should NAFTA be transformed into a Common Market,

similar to the EU?

Inc. 9 | Page

2. Examine the facts

■ There are five possible levels of regional integration.

[1] Free trade area– is the simplest and most common arrangement, in which member countries

agree to gradually eliminate formal barriers to trade in products and services within the bloc,

◘ Example– NAFTA

[2] Customs union- the next (second) level of regional integration- similar to a free trade area

◘ Example– MERCOSUR (Argentina, Brazil, Paraguay, and Uruguay)

[3] Common market (single market) – the next stage (third) of regional integration- trade

◘ Example– the EU

■ Common market challenges:

◘ Require substantial cooperation from the member countries on labor and economic

policies.

[4] Economic union– fourth stage of regional integration in which member countries enjoy all

◘ Example– the EU has made great strides toward this. Sixteen EU countries have

[5] Political union:

3. Create alternatives

Each proposed action should be evaluated according to the following accepted ethical

standards:

Inc. 10 | Page

Common Good – which action contributes most to the overall quality of life of the

people affected?

Here ethical actions should be based on the good of the community or the nation. This

Virtue – which action embodies the character strengths that you value?

The goal is to reduce poverty in Mexico by allowing Mexican citizens to work freely in Canada

and the U.S. By removing these barriers, per-capita income eventually achieves a state of

4. Implement course of action

Implement your decision.

5. Evaluate results

Then evaluate it to see how effective it was. How did it turn out? If you had it to do again, would

you do anything differently?

Inc. 11 | Page

Canada to help lesser-developed economies such as Mexico burst out of poverty, then the

answer might be yes.

■ What is the diplomatic course of action that does not devastate two world leaders’

economies?

Inc. 12 | Page