978-1259929441 Chapter 6 Part 2

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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

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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

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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-

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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

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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?

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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

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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