POINT/COUNTER-POINT:
Should Trade Restrictions be Used to Influence Human Rights Issues?
POINT: Yes. Some countries do not protect human rights in the same manner as the U.S. At times, the U.S.
should threaten to restrict U.S. imports from or investment in a country if it does not correct human rights
violations. The U.S. should use its large international trade and investment as leverage to ensure that
human rights violations do not occur. Other countries with a history of human rights violations are more
likely to honor human rights if their economic conditions are threatened.
COUNTER-POINT: No. International trade and human rights are two separate issues. International trade
should not be used as the weapon to enforce human rights. Firms engaged in international trade should not
be penalized by the human rights violations of a government. If the U.S. imposes trade restrictions to
enforce human rights, the country will retaliate. Thus, the U.S. firms that export to that foreign country will
be adversely affected. By imposing trade sanctions, the U.S. government is indirectly penalizing the MNCs
that are attempting to conduct business in specific foreign countries. Trade sanctions cannot solve every
difference in the beliefs or morals between the more developed countries and the developing countries. By
restricting trade, the U.S. will slow down the economic progress of developing countries.
WHO IS CORRECT? Use the Internet to learn more about this issue. Which argument do you support?
Offer your own opinion on this issue.
Answers to End of Chapter Questions
1. Balance of Payments.
a. What are the main components of the current account?
b.What are the main components of the financial account?
2. Inflation Effect on Trade.
a. How would a relatively high home inflation rate affect the home country’s current account, other
things being equal?
International Flow of Funds 2
b. Is a negative current account harmful to a country? Discuss.
3. Government Restrictions. How can government restrictions affect international payments among
countries?
4. IMF.
a. What are some of the major objectives of the IMF?
b. How is the IMF involved in international trade?
5. Exchange Rate Effect on Trade Balance. Would the U.S. balance of trade deficit be larger or smaller
if the dollar depreciates against all currencies, versus depreciating against some currencies but
appreciated against others? Explain.
6. Demand for Exports. A relatively small U.S. balance of trade deficit is commonly attributed to a
strong demand for U.S. exports. What do you think is the underlying reason for the strong demand for
U.S. exports?
7. Impact on International Trade. Why do you think international trade volume has increased over time?
In general, how are inefficient firms affected by the reduction in trade restrictions among countries and
the continuous increase in international trade?
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International Flow of Funds 3
8. Effects of the Euro. Explain how the existence of the euro may affect U.S. international trade.
9. Currency Effects. When South Korea’s export growth stalled, some South Korean firms suggested
that South Korea’s primary export problem was the weakness in the Japanese yen. How would you
interpret this statement?
10. Effects of Tariffs. Assume a simple world in which the U.S. exports soft drinks and beer to France and
imports wine from France. If the U.S. imposes large tariffs on the French wine, explain the likely
impact on the values of the U.S. beverage firms, U.S. wine producers, the French beverage firms, and
the French wine producers.
Advanced Questions
11. Free Trade. There has been considerable momentum to reduce or remove trade barriers in an effort to
achieve “free trade.” Yet, one disgruntled executive of an exporting firm stated, “Free trade is not
conceivable; we are always at the mercy of the exchange rate. Any country can use this mechanism to
impose trade barriers.” What does this statement mean?
12. International Investments. U.S.-based MNCs commonly invest in foreign securities.
a. Assume that the dollar is presently weak and is expected to strengthen over time. How will these
expectations affect the tendency of U.S. investors to invest in foreign securities?
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International Flow of Funds 4
the foreign currency (as the investment is liquidated) into dollars at a less favorable exchange rate than
the exchange rate at which they converted dollars into the foreign currency. That is, the exchange rate
effect would reduce the yield that they earn on their investment.
b. Explain how low U.S. interest rates can affect the tendency of U.S.-based MNCs to invest abroad.
c. In general terms, what is the attraction of foreign investments to U.S. investors?
Exchange Rate Effects on Trade.
a. Explain why a stronger dollar could enlarge the U.S. balance of trade deficit. Explain why a
weaker dollar could affect the U.S. balance of trade deficit.
b. It is sometimes suggested that a floating exchange rate will adjust to reduce or eliminate any
current account deficit. Explain why this adjustment would occur.
c. Why does the exchange rate not always adjust to a current account deficit?
14. Impact of Government Policies on Trade. Governments of many countries enact policies that can
have a major impact on international trade flows.
a. Explain how governments might give their local firms a competitive advantage in the international
trade arena.
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International Flow of Funds 5
b. Why might different tax laws on corporate income across countries allow firms from some
countries to have a competitive advantage in the international trade arena?
c. If a country imposes lower corporate income tax rates, does that provide an unfair advantage?
15. China – U.S. Balance of Trade. There is an ongoing debate between the U.S. and China regarding
whether the Chinese yuan’s value should be revalued upward. The cost of labor in China is
substantially lower than that in the U.S.
a. Would the U.S. balance of trade deficit in China be eliminated if the yuan was revalued upward by
20%? Or by 40%? Or by 80%?
b. If the yuan was revalued to the extent that it substantially reduced the U.S. demand for Chinese
products, would this shift the U.S. demand toward the U.S. or toward other countries where wage
rates are relatively low? In other words, would the correction of the U.S. balance of trade deficit
have a major impact on U.S. productivity and jobs?
CRITICAL THINKING
Cause and Effects of International Trade Conflict Conduct an online search of the terms “international
trade conflict” and also insert the prevailing month and year. You will likely see that an international trade
conflict exists at the time that you conduct your search. Review the online articles on a recent conflict.
Write a short essay to summarize the source of the conflict, and whether there one country’s trade barriers
represents retaliation due to actions by the other country. Describe the types of MNCs that are most likely
to suffer from the trade conflict.
ANSWER:
Solution to Continuing Case Problem: Blades, Inc.
1. How could a higher level of inflation in Thailand affect Blades (assume U.S. inflation remains
constant)?
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International Flow of Funds 6
ANSWER: A high level of inflation in Thailand relative to the United States could affect Blades favorably.
2. How could competition from firms in Thailand and from U.S. firms conducting business in Thailand
affect Blades?
ANSWER: Blades would be favorably affected relative to Thai roller blade manufacturers and relative
3. How could a decreasing level of national income in Thailand affect Blades?
4. How could a continued depreciation of the Thai baht affect Blades? How would it affect Blades’
relative to U.S. exporters invoicing their roller blades in U.S. dollars?
5. If Blades increases its business in Thailand and experiences serious financial problems, are there any
international agencies that the company could approach for loans or other financial assistance?
Solution to Supplemental Case: Savanta Company
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International Flow of Funds 7
a. Savanta’s business could be adversely affected because its imports from Ketraz may be prevented by
the U.S. government due to violations of child labor laws. Even if the U.S. government does not impose
restrictions, consumers in the U.S. may no longer purchase the jewelry produced by Savanta as a form
of protest against the child labor violations in Ketraz.
b. Savanta could consider establishing an arrangement with a specific business in Ketraz that has an
excellent reputation for treatment of its employees (including the avoidance of child labor).
Alternatively, it may establish its own subsidiary in Ketraz to obtain the stones and produce them there.
This would allow it to have full control over the employment.
c. The U.S. government could impose restrictions on all imports from Ketraz due to violations of child
labor laws, even if Savanta could prove that its imports are not contributing to the violations.
Alternatively, if Savanta establishes a subsidiary in Ketraz and the U.S. government does not impose
restrictions, Savanta’s strategy would likely shift its labor from the U.S. to Ketraz. Thus, it may have
to lay off U.S. workers as a result, which could cause some U.S. consumers to stop buying jewelry
from Savanta as a form of protest against the layoffs.
Small Business Dilemma
Identifying Factors That Will Affect the Foreign Demand at the Sports Exports Company
Identify the factors that affect the current account balance between the U.S. and the U.K. Explain how each
factor may possibly affect the British demand for the footballs that are produced by the Sports Exports
Company.
ANSWER:
1. High inflation in the U.K. could cause a shift in the demand for U.S. products instead of British
2. High national income in the U.K. could increase the amount of spending by British consumers, and
3. Government restrictions could be imposed by the British government on goods (such as the footballs)
4. The exchange rate of the British pound will change over time. However, since the Sports Exports
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