978-1259712357 Chapter 2

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subject Authors Bruce Money, John Graham, Mary Gilly, Philip Cateora

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Chapter 02 - The Dynamic Environment of International Trade
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Chapter 2 The Dynamic Environment of International Trade
Teaching Objectives
This chapter has a short history of international trade. Included is a history of GATT and the role of
multinationals from the end of World War II through the present time and beyond.
The aim of this chapter is to provide a brief overview of the international trade issues that constitute the
environment of global business. Issues reflecting the political and economic trade policies that affect how
international business is conducted. The teaching objectives are to:
1. Provide some insight into the balance of payments and the relationship of a country’s current
account and balance of trade.
2. Show the U.S. government’s role in helping to ease restrictions on trade through the Omnibus
Trade and Competitiveness Act.
3. Explore the provisions and effects of protectionism on world trade and to show that no country,
including the United States, has “clean hands” when it comes to protecting home markets.
4. Illustrate the types of trade barriers that may confront a business.
5. Explore how GATT and the new World Trade Organization are designed to eliminate trade
restrictions and provide a means for countries to settle trade disputes.
6. The importance of the Internet to global business.
Comments and Suggestions
1. The discussion on the evolution of the multinational company during the 21st Century and the decade
of the nineties may be used as an extension of the discussion of Chapter One since it illustrates the
changing role of the U.S. multinational. The focus in this section is how the relative importance of
U.S. MNCs after WW II changed from one of dominating world markets to a more competitive world
market where U.S. multinationals compete with strong multinationals from Japan, Western Europe,
Asia and many developing countries. This competitive environment is forcing MNCs to examine new
ways to remain competitive. Some of these changes will be discussed as the course evolves.
2. Besides the discussion of the concept of protectionism and different trade barriers, a class discussion
on how markets are protected can be interesting. On the one hand the United States alleges to be for
free trade, yet it ignores the WTO in its trade dispute with Japan over opening its markets for a
variety of products and services from America. The U.S. also has trade barriers. See, for example,
Crossing Borders 21.
3. You might have the students check the latest information on President Trump’s criticism and actions
against the WTO.
Lecture Outline
GLOBAL BUSINESS ENVIRONMENT
I. The 21st Century
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Chapter 02 - The Dynamic Environment of International Trade
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A. World Trade and U.S. Multinationals
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Chapter 02 - The Dynamic Environment of International Trade
II. Balance of Payments
A. Current Account
B. Balance of Trade
III. The Omnibus Trade and Competitiveness Act
IV. Protectionism
A. Protection Logic and Illogic
B. Trade Barriers
1. Tariffs
2. Quotas
3. Voluntary Export Restraints
4. Boycott
5. Monetary Barriers
6. Standards
V. Easing Trade Restrictions
A. General Agreement on Tariffs and Trade (GATT)
B. World Trade Organization
C. International Monetary Fund
Discussion Questions
1.
Define:
GATT
Protectionism
Balance of payments
IMF
Nontariff barriers
Current Account
Voluntary export restraint (VER)
Tariff
WTO
2. Discuss the globalization of the U.S. economy.
America’s involvement in the global economy has passed through two distinct periods: a
mid-1980s, that figure had more than doubled. American farmers now sell 30 percent of their grain
production overseas; 40 percent of U.S. farmland is devoted to crops for export. In fact, more U.S.
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3. Differentiate among the current account, balance of trade, and balance of payments.
BALANCE OF PAYMENTS
CURRENT ACCOUNT
BALANCE OF TRADE
4. Explain the role of price as a free market regulator.
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5. “Theoretically, the market is an automatic, competitive, self-regulating mechanism which provides
6. Interview several local businessmen to determine their attitudes toward world trade. Further, learn if
Independent project.
7. What is the role of profit in international trade? Does profit replace or complement the regulatory
function of pricing? Discuss.
8. Why does the balance of payments always balance even though the balance of trade does not?
9. Enumerate the ways in which a nation can overcome an unfavorable balance of trade.
10. Support or refute each of the various arguments commonly used in support of tariffs.
(1) Infant industry theoretically this argument has a considerable degree of validity. However,
(2) Protection of the home market this argument asserts that low costs of production in other
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Chapter 02 - The Dynamic Environment of International Trade
(3) Keep money at home this fallacious reasoning is based on the mercantilist identity of money
and wealth. A higher volume of money makes no direct contribution to the real income and
(4) Capital accumulation a country indeed does increase capital accumulation by imposing tariffs,
(5) Standard of living and real wage this argument is parallel to number (4), except that the
(6) Conservation of natural resources tariffs tend to cause extreme dependence on national
(7) Industrialization of low wage nation quite pertinent to underdeveloped countries. However,
many times the foreign competition isn’t the problem, but the paucity of capital and technical
(8) Maintain employment and reduce unemployment this argument becomes useless upon
retaliation of other countries. The problem compounds itself. Also, if countries don’t retaliate,
(9) National defense in particular instances there may be merit to this argument, but it becomes
invalid if applied indiscriminately. We must trade to get the proper resources and conserve ours.
(10) Increase business size with fully employed resources, aggregate domestic production can’t be
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(11) Retaliation and bargaining retaliation doesn’t recover the losses that are suffered due to
foreign tariffs. Retaliation further reduces the volume of trade. Bargaining as a reciprocal tool;
11. France exports about 18 percent of its GDP, neighboring Belgium exports 46 percent. What areas of
economic policy are likely to be affected by such variations in exports?
12. Does widespread unemployment change the economic logic of protectionism?
13. Review the economic effects of major trade imbalances such as those caused by petroleum imports.
14. Discuss the main provisions of the Omnibus Trade and competitiveness Act of 1988.
Just as its name implies, the Omnibus Trade and Competitiveness Act is many faceted, focusing on
assisting businesses to be more competitive in world markets as well as correcting perceived
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Deregulation and the divestiture of American Telephone and Telegraph assured foreign
telecommunications suppliers full access to the American market. By contrast, U.S. companies enjoy
limited access to the major foreign telecommunications markets, most notably in Europe. The 1988
15. The Tokyo Round of GATT has emphasized the reduction of nontariff barriers. How does the
Uruguay Round differ?
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Chapter 02 - The Dynamic Environment of International Trade
16. Discuss the impact of GATS, TRIMS, AND TRIPS on global trade.
An important objective of the United States in the Uruguay Round was to reduce or eliminate barriers
to international trade in services. While there is still much progress to be made before free trade in
services will exist throughout the world, the General Agreement on Trade in Services (GATS) is the
first multilateral, legally enforceable agreement covering trade and investment in services sector. It
17. Discuss the evolution of world trade that has led to the formulation of the WTO.
Since the inception of GATT, there have been eight “rounds” of intergovernmental tariff negotiations.
The most recently completed was the Uruguay round which built on the success of the Tokyo Round,
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18. Visit http://hts.usitc.gov/ (U.S. Customs tariff schedule) and look up the import duties on leather
footwear. You will find a difference in the duties on shoes of different value, material composition,
19. The GATT has had a long and eventful history. Visit http://www.wto.org/ and write a short report on
the various Rounds of GATT. What were the key issues addressed in each round?

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