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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.
