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Chapter 06 – International Trade Theory
6-9
The balance-of-payments accounts keep track of the payments to foreigners for imports
of goods and services, and receipts from foreigners for goods and services exported to
them.
There are three main accounts: the current account, the capital account, and the
financial account.
In the United States, the current account deficit has been growing because of its imports
of physical products, but the country runs a current account surplus in trade in services.
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 principal tenet 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 bankrupt for at least two reasons. First, it is inconsistent with the general
consumers suffer.
QUESTION 2: Is free trade fair? Discuss.
ANSWER 2: This question will probably generate a fair amount of discussion. Trade
theory suggests that specialization and free trade benefits all countries. However, a case
can be made in some situations for imposing trade barriers. For example, if a developing
Chapter 06 – International Trade Theory
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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
“unfair” import competition. Is such competition “unfair”? 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?
ANSWER 3: The theory of comparative advantage suggests that a country should
specialize in producing those goods that it can produce most efficiently, while buying
goods that it can produce relatively less efficiently from other countries. Furthermore, the
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?
ANSWER 4: Students will probably be divided on this question, and a lively debate
should ensue. For example, students should recognize that by adopting a free trade
QUESTION 5: Reread the Country Focus feature, Is China Manipulating Its Currency in
Pursuit of a Neo-Mercantilist Policy?
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 nearly $2 trillion, China had been criticized as following a neo-mercantilist policy. For
years, China’s exports grew faster than its imports, and some critics suggest that China is
b. Students will probably suggest that the United States and other countries continue to
put pressure on China to open its markets to imports or risk retaliatory measures. With
Chapter 06 – International Trade Theory
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Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
$231 billion was down significantly from the record surplus in 2011. While this recent
data suggests that China’s trade surplus may have peaked for now, it is still a cause for
concern in many developed countries, particularly the United States.
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 6:
a. Most students will recognize that developing countries benefit from the outsourcing of
skilled white-collar jobs in numerous ways including job creation, higher wages, and
training and development. Some students might also point out that because of these
b. Responses to this question will vary by student. Many students will probably suggest
that loss of high-skilled, high-paying jobs is indeed detrimental to developing nations
including the United States as it displaces workers in the developed country. Other
c. This question is likely to generate a lively debate. Many students will suggest that the
outward flow of white-collar jobs is indeed a serious issue, one that should be the focus
of government attention. Students taking this perspective are likely to suggest that white-
Chapter 06 – International Trade Theory
6-12
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
the company is able to remain viable, and keep other people, white-collar and blue-collar,
employed.
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 promote or impede the creation of competitive advantage. These attributes are:
factor endowments, demand conditions, related and supporting industries, and firm
strategy, structure, and rivalry. Porter goes on to argue that firms are most likely to
succeed in industries in which the diamond (which are the four attributes collectively) is
favorable. Porter adds two factors to the list of attributes described above: chance and
government policy. New trade theory addresses a separate issue. This theory argues that
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.
ANSWER 8: This is a difficult question. Certainly, most students will recognize that
these countries are in dire straits and need assistance from richer countries. Most students
will probably be sympathetic to their cause and suggest various aid programs including
Chapter 06 – International Trade Theory
6-13
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
form with multiple nations working together. The question is an interesting one that
should provide students with an eye-opening experience.
CLOSING CASE: The Trans Pacific Partnership (TPP)
Summary
The closing case explores the Trans Pacific Partnership or TPP. The agreement is a free
trade deal spanning 12 countries including the United States, Japan, Australia, South
Korea, Chile, Canada, Mexico, and Vietnam. As a group, these countries account for 36
percent of the world’s GDP and 26 percent of world trade. Even so, President Trump has
promised to pull out of the deal because he feels it does not adequately benefit the United
States. Discussion of the case can begin with the following questions:
QUESTION 1: What are the benefits of the TTP?
ANSWER 1: If the free trade deal between 12 nations known as the TPP is enacted, it
will eliminate or reduce some 18,000 trade barriers within the 12-country bloc allowing
QUESTION 2: Can you think of any drawbacks to the TTP?
ANSWER 2: While U.S. agriculture and tech firms are in clear support of the TPP and
the market access it implies, other U.S. companies have criticized the agreement claiming
QUESTION 3: Why do you think that Donald Trump is so adamantly opposed to the
TPP?
ANSWER 3: Donald Trump ran on a campaign of isolationism and an America-first
policy. As part of this, Trump promised to undo the trade deals he and his supporters
believe are responsible for the loss of American manufacturing jobs. Like his supporters,
QUESTION 4: Is the RECP a threat to American economic interests?
Chapter 06 – International Trade Theory
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ANSWER 4: The Regional Comprehensive Economic Partnership, or RCEP, is China’s
alternative to the TPP. As Trump has continued to criticize the TPP as being “a terrible
QUESTION 5: What is the opportunity cost to the United States of withdrawing from the
TPP?
ANSWER 5: By withdrawing from the TPP, the United States forgoes the opportunity to
become a leader in the Trans Pacific region in areas related to trade, but also in the
political arena too. Many students will note that rather than working to expand market
access for U.S. companies, by withdrawing from the agreement, Trump is harming them
MHE INTERNATIONAL BUSINESS VIDEO LIBRARY
Please click here to visit our International Business Video Library which provides an
ongoing stream of updated video suggestions correlated by key concept and major topic.
Every new clip posted is supported by teaching notes and discussion questions. Please
feel free to leave comments in the library that you feel 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
Chapter 06 – International Trade Theory
6-15
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 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 Exercises
Exercise 1 Answer
Search phrase: World Trade Organization International Trade Statistics
Exercise 2 Answer
Search phrase: Australian suppliers
Resource Name: Australian Suppliers Directory
