978-1259578113 Chapter 9 Solutions Manual Part 2

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OPENING CASE: Regional Trade Pacts Give the Mexican Auto Industry an Edge

Summary

The opening case describes the growth of the Mexican auto industry due to a wave of foreign

direct investment spurred by regional trade agreements. Beginning with the establishment of the

North American Free Trade Agreement (NAFTA) in 1994, Mexico has established over 40

different free trade agreements that provide Mexican automakers duty-free access to markets

throughout the world. These agreements, along with Mexico’s relatively low labors costs, have

attracted investments from many of the world’s largest car companies and auto parts suppliers,

making Mexico the sixth-largest car producer in the world. Discussion of the case can revolve

around the following questions:

QUESTION 1: What benefits have Mexico’s regional trade agreements had on the country’s

economy?

ANSWER 1: Initially, NAFTA and other free trade agreements led to the increased availability of

QUESTION 2: How do Mexico’s trade agreements benefit businesses or consumers in other

countries?

ANSWER 2: Businesses benefit from trade agreements with Mexico in several ways. Low labor

QUESTION 3: BMW recently decided to open a factory in central Mexico instead of expanding

its operations in South Carolina. Do events like these signal that the North American Free Trade

Agreement (NAFTA) was a bad deal for the United States?

ANSWER 3: Student response will vary. In general, economists would argue that Mexico has a

CRITICAL THINKING AND DISCUSSION QUESTIONS

QUESTION 1: NAFTA has produced significant benefits for the Canadian, Mexican, and U.S.

economy. Discuss.

ANSWER 1: NAFTA’s proponents argue that the agreement should be viewed as an opportunity

to create an enlarged and more productive base for the U.S., Canada, and Mexico. As

low-income jobs move from Canada and the United States to Mexico, the Mexican economy

QUESTION 2: What are the economic and political arguments for regional economic

integration? Given these arguments, why don’t we see more substantial examples of integration

in the world economy?

ANSWER 2: The economic case for regional integration is straightforward. As we saw in

Chapter 5, unrestricted free trade allows countries to specialize in the production of goods and

QUESTION 3: What in general was the effect of the creation of a single market and a single

currency within the EU on competition within the EU? Why?

ANSWER 3: By creating a single market and currency, member countries can expect significant

gains from the free flow of trade and investment. This will result from the ability of the

countries within the EU to specialize in the production of the product that they manufacture the

most efficiently, and the freedom to trade those products with other EU countries without being

QUESTION 4: Do you think it is correct for the European Commission to restrict mergers

between American companies that do business in Europe? (For example, the European

Commission vetoed the proposed merger between WorldCom and Sprint, both U.S. companies,

and it carefully reviewed the merger between AOL and Time Warner, again both U.S.

companies.)

ANSWER 4: Many students will probably suggest that the European Commission has a right to

regulate the European market, even if the regulation involves American companies. Students

QUESTION 5: What were the causes of the 2010–2012 sovereign debt crisis in the EU? What

does this crisis tell us about the weaknesses of the euro? Do you think the euro will survive the

sovereign debt crisis?

ANSWER 5: Since 2008, the euro has weakened, reflecting persistent concerns over slow

economic growth and large budget deficits among several EU members, particularly Greece,

QUESTION 6: How should a U.S. firm that currently exports to only ASEAN countries respond

to the creation of a single market in this regional grouping?

ANSWER 6: A U.S. business firm that is currently exporting to only ASEAN countries should

seriously consider opening a facility somewhere in this grouping, as the economics of a common

QUESTION 7: How should a firm with self-sufficient production facilities in several ASEAN

countries respond to the creation of a single market? What are the constraints on its ability to

respond in a manner that minimizes production costs?

ANSWER 7: The creation of the single market means that it may no longer be efficient to

operate separate duplicative production facilities in each country. Instead, the facilities could

QUESTION 8: After a promising start, Mercosur, the major Latin American trade agreement, has

faltered and made little progress since 2000. What problems are hurting Mercosur? What can be

done to solve these problems?

ANSWER 8: Mercosur originated in 1988 as a free trade pact between Brazil and Argentina.

The pact was expanded in 1990 to include Paraguay and Uruguay with the goal of becoming a

full free trade area by 1994, and a common market sometime after. While initially considered a

To solve the problems of Mercosur, the countries should reduce or eliminate high tariffs on

products that can be produced more efficiently in other parts of the world. It should strive to

develop industries in which it has a comparative advantage and direct its financial resources to

QUESTION 9: Would establishment of a Free Trade Area of the America’s (FTAA) be good for

the two most advanced economies in the hemisphere, the United States and Canada? How might

the establishment of FTAA impact the strategy on North American firms?

ANSWER 9: In 1994, a Free Trade of the Americas (FTAA) was proposed. If the agreement

comes about, it would effectively create a free trade area of nearly 800 million people

CLOSING CASE: Tomato Wars

The closing case explores the complicated case of importing tomatoes from Mexico and the

impact on both sides of the border. When NAFTA went into effect, tariffs on imported tomatoes

from Mexico were dropped. U.S. growers firmly believed that they would lose much of their

business to their Mexican counterparts. The U.S. growers lobbied the government to set a

minimum floor price for Mexican tomatoes, with the idea being that such a pricing structure

would stop Mexican producers from cutting prices below the floor. As it turned out, the deal

didn’t offer much protection to U.S. tomato growers. Discussion of the case can revolve around

the following questions:

QUESTION 1: Was the establishment of a minimum floor price for tomatoes consistent with the

free trade principles enshrined in the NAFTA agreement?

QUESTION 2: Why have imports from Mexico grown over the years despite the establishment

of a minimum floor price?

ANSWER 2: Mexico has several competitive advantages that allow it to make a profit on

tomatoes sold at the floor price, while U.S. tomato growers find it difficult to compete,

QUESTION 3: Who benefits from the importation of tomatoes grown in Mexico? Who suffers?

ANSWER 3: The major beneficiaries of imported tomatoes in the United States are consumers

and food producers, who have year-round access to high-quality tomatoes. Without the reliable

shipments of tomatoes from Mexico, consumers would be at risk of experiencing long periods

QUESTION 4: Do you think that Mexican producers were dumping tomatoes in the United

States?

ANSWER 4: Student answers will vary. It is possible that Mexican tomato growers found it

QUESTION 5: Was the Commerce Department right to establish a new minimum floor price,

rather than scrap the agreement and file an antidumping suit? Who would have benefited from an

antidumping suit against Mexican tomato producers? Who would have suffered?

ANSWER 5: Student answers will vary. Whether Florida tomato growers will be able to

maintain their competitiveness into the future depends on a number of variables, including the

effects of climate change, fluctuations in the economic conditions in the United States, and the

QUESTION 6: What do you think will be the impact of the new higher floor price? Who benefits

from the higher floor price? Who suffers?

ANSWER 6: It is very likely that Mexican growers will continue to produce tomatoes at a cost

well below the floor price and that they will continue to provide the large majority of tomatoes

QUESTION 7: What do you think is the optimal government policy response in this situation?

Explain your answer.

ANSWER 7: Student answers will vary. Some may argue from a protectionist viewpoint,

suggesting that NAFTA itself was a mistake and that the government should actively discourage

low-cost imports in order to support domestic producers. Many economists, however, would

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 {globaledge.msu.edu} to complete the following exercises:

Exercise 1

The World Trade Organization maintains a database of regional trade agreements. You can

search this database to identify all agreements that a specific country participates in. Search the

database to identify the trade agreements that Japan currently participates in. What patterns do

you see? Which region(s) of the world does Japan seem to be focusing on its trade endeavors?

Exercise 1 Answer

Search phrase: Regional Trade Agreements

Resource Name: World Trade Organization: Regional Trade Agreements

Website: http://www.wto.org/english/tratop_e/region_e/region_e.htm

globalEDGE Category: Regional Trade Agreements

Additional Info:

The Regional Trade Agreements page of the WTO provides a lot of background and analysis on

RTA’s around the world. To access individual agreements, one has to enter the “RTA Database”

following a link on this page. You can also access Maps of RTAs by Country to see the

agreements for each country.

Exercise 2

Your company has assigned you with the task of investigating the various trade blocs in Africa to

see if your company can benefit from these trade agreements while expanding into African

markets. The first trade bloc you come across is COMESA. Prepare a short executive summary

for your company, explaining the level of integration the bloc has currently achieved, the level it

aspires to accomplish, and the relationships it has with other African trade blocs.

Exercise 2

Search phrase: COMESA

Resource Name: COMESA: Introduction

globalEDGE provides information on the history and objectives of the trade bloc, as well as its

member states.