978-1259578113 Chapter 6 Solutions Manual

Unlock access to all the studying documents.

View Full Document

OPENING CASE: China and Australia Enter into a Free Trade Agreement

The opening case explores a new free trade agreement between China and Australia. China is

Australia’s biggest trading partner, and the agreement is expected to offset declines in Chinese

demand for Australian minerals by limiting or eliminating tariffs on exports to Chinese markets.

Australian service exporters, particularly in the financial services and hospitality industries, will

also receive preferential treatment by the Chinese government. In return, Australia will eliminate

tariffs on Chinese manufacturing imports and eliminate restrictions on Chinese investments

under $1 billion. Although Australia is expected to receive a larger share of the financial gain

stemming from the deal, economists also argue that China is purposely exposing its domestic

industries to foreign competition to encourage innovation and efficiency improvements.

Discussion of the case can revolve around the following questions:

QUESTION 1: Discuss how a free trade agreement between the China and Australia could

benefit both parties in terms of economic growth.

ANSWER 1: Because China’s economy is much larger than Australia’s, the immediate economic

impact of the trade agreement between Australia and China is expected to be more apparent in

2. Economists suggest that Australia may receive a larger share of the financial benefits from its

agreement with China. Explain why China would still be willing to enter into an agreement

under these circumstances.

ANSWER 2: There are several reasons why China is willing to enter into a seemingly

unbalanced trade deal. First, the Chinese economy has performed spectacularly over the past

decade, and producers there are not as concerned with gaining access to the relatively small

3. How would a changing economic situation in China or Australia affect the success of their

new trade agreement?

An economic downturn in Australia would have a relatively minor effect on the Chinese

economy, given that Australia makes up a small percentage of Chinese exports (1.7 percent in

2014, according to the Australian Department of Foreign Affairs and Trade). Chinese investors

who open businesses in Australia would likely experience the most significant losses. An

CRITICAL THINKING AND DISCUSSION QUESTIONS

QUESTION 1: Mercantilism is a bankrupt theory that has no place in the modern world.

Discuss.

ANSWER 1: In its purest sense, mercantilism is a bankrupt theory that has no place in the

modern world. The principle tenant of mercantilism is that a country should maintain a trade

surplus, even if that means that imports are limited by government intervention. This policy is

QUESTION 2: Is free trade fair? Discuss.

Another Perspective: The textile industry in Bangladesh has benefitted from trade barriers

designed to allow the industry to grow. In 2005, those barriers were eliminated. For more

information on why the barriers were erected, and the situation in Bangladesh after they were

dismantled, go to

{http://www.globalpolicy.org/component/content/article/220-trade/47246.html}.

QUESTION 3: Unions in developed nations often oppose imports from low-wage countries and

advocate trade barriers to protect jobs from what they often characterize as fiunfair” import

competition. Is such competition fiunfair”? Do you think that this argument is in the best interests

of (a) the unions, (b) the people they represent, and/or (c) the country as a whole?

QUESTION 4: What are the potential costs of adopting a free trade regime? Do you think

governments should do anything to reduce these costs? What?

QUESTION 5: Reread the Country Focus feature, Is China a Neo-Mercantilist Nation?

a. Do you think China is pursuing an economic policy that can be characterized as

neo-mercantilist?

b. What should the United States, and other countries, do about this?

ANSWER 5:

a. Previously, with a trade surplus of $295 billion in 2011, and foreign exchange reserves of

b. Students will probably suggest that the United States and other countries continue to put

QUESTION 6: Reread the Country Focus on moving white-collar jobs offshore.

a. Who benefits from the outsourcing of skilled white-collar jobs to developing nations? Who

are the losers?

b. Will developing nations like the United States suffer from the loss of high-skilled and

high-paying jobs?

c. Is there a difference between the transference of high-paying white-collar jobs, such as

computer programming and accounting, to developing nations, and low-paying blue-collar jobs?

If so, what is the difference, and should government do anything to stop the flow of white-collar

jobs out of the country to countries like India?

ANSWER: This question is likely to generate a lively debate. Many students will suggest that

QUESTION 7: Drawing on the new trade theory and Porter’s theory of national competitive

advantage, outline the case for government policies designed to build a national competitive

advantage in biotechnology. What kind of policies would you recommend the government

adopt? Are these policies at variance with the basic free trade philosophy?

ANSWER 7: Porter’s theory of national competitive advantage argues that four broad attributes

of a nation shape the environment in which local firms compete, and that these attributes

QUESTION 8: The world’s poorest countries are at a competitive disadvantage in every sector

of their economies. They have little to export. They have no capital; their land is of poor quality;

they often have too many people given available work opportunities; and they are poorly

educated. Free trade cannot possibly be in the interests of such nations. Discuss.

CLOSING CASE: Creating the World’s Biggest Free Trade Zone

Summary

The closing case explores the possible positive economic outcomes of a free trade agreement

between the United States and the European Union (EU), which U.S. President Obama

committed to in his 2013 State of the Union address. Such an agreement could reduce current

tariff (tax) levels on both sides of the Atlantic—for the United States and the 27 countries that

make up the EU. In addition, many nontariff barriers could be reduced or eliminated as a result

of the free trade deal. Discussion of the case can revolve around the following questions:

QUESTION 1: What are the benefits of the proposed TTIP?

ANSWER 1: Despite the fact that the United States and the European Union have already

QUESTION 2: Can you think of any drawbacks to the TTIP?

ANSWER 2: Opponents of the TTIP raise several concerns over the agreement’s economic,

QUESTION 3: Two decades ago when the United States entered into the North American Free

Trade Agreement (NAFTA) with Canada and Mexico, there was significant opposition from

organized labor and some politicians. There does not seem to be the same level of opposition to

the TTIP. Why do you think so?

ANSWER 3: Student answers may vary. The TTIP has not received the kind of media scrutiny

MHE INTERNATIONAL BUSINESS VIDEO LIBRARY

Please click here to visit our International Business Video Library on Pinterest, which is updated

on a monthly basis. While there, be sure to “like” the clips that work well for you, and add notes

that might be helpful to your colleagues.

INCORPORATING globalEDGE™ EXERCISES

Use the globalEDGE™ site {http://globalEDGE.msu.edu/} to complete the following exercises:

Exercise 1

The WTO’s International Trade Statistics is an annual report that provides comprehensive,

comparable, and updated statistics on trade in merchandise and commercial services. This report

allows for an assessment of world trade flows by country, region, and main product or service

categories. Using the most recent statistics available, identify the top 10 countries that lead in the

export and import of merchandise trade, respectively.

Exercise 2

Food is an integral part of understanding different countries, cultures, and lifestyles. You run a

chain of high-end premium restaurants in the United States, and you are looking for unique

Australian wines you can import. However, you must first identify which Australian suppliers

can provide you with premium wines. After searching the Australian supplier directory, identify

three to four companies that can be potential suppliers. Then develop a list of criteria you would

need to ask these companies to select which one to work with.

Answers to Exercise Questions

Exercise 1

The report can be accessed by searching the term fiInternational Trade Statistics” at

http://globaledge.msu.edu/ResourceDesk/. The WTO: International Trade Statistics comes up as

the second source in this search. As this is a published report that primarily focuses on statistical

data, the resource is found under the globalEDGE category fiResearch: Statistical Data Sources”.

Be sure to click on the Resource Desk link to search this area of the globalEDGE website.

Exercise 2

The information requested is related to Australia’s registered wine suppliers. After searching the

term fiAustralian suppliers” at http://globaledge.msu.edu/ResourceDesk/, the Australian

Suppliers Directory is the only source returned. Once at the webpage, a search for suppliers with

the search fired AND wine” as well as fiwhite AND wine” provides a basic list for comparison.

As this is a government resource, the source is found under the globalEDGE category fiResearch:

Government Resources”. Be sure to click on the Resource Desk link to search this area of the

globalEDGE website.