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Chapter 5: Trading Internationally
Chapter Outline
LO1: Use the resource-based and institution-based views to explain why nations trade.
1. Key Concepts
International trade is far more complex than domestic trade. So why do nations go through
the trouble of trading internationally? Without getting into details, one can safely say that
there must be economic gains from trade. More importantly, such gains must be shared by
both sides. Otherwise, there would be no willing exporters and importers. In other words,
international trade is a win-win deal. According to the resource-based view, there are
economic gains from international trade because some firms in one nation generate exports
that are valuable, unique, and hard to imitate that firms and consumers from other nations
find it beneficial to import. According to the institution-based view, different rules governing
trade are designed to determine how such gains are shared (or not shared).
2. Key Terms
3. Discussion Exercise
To succeed in international trade, it is crucial to know what to sell and how to sell a product
or service. For example, a company that specializes in pork-based products would likely not
find a willing trade partner in Muslim countries where the consumption of pork is outlawed.
The cable news outlet CNBC is an example of international trade done well. The network
offers a source of journalism that is unique to particular regions throughout the world. In
addition to the U.S. broadcast, CNBC offers local channels that focus on the business issues
that are pertinent to each region in the local language. At most times, the only similarity
between the various iterations of CNBC is the aesthetics, i.e., the network logo and the set
design. Through this approach, CNBC has created an increasing level of awareness of its
brand throughout the world and has established a reliable source of revenue within an
industry that is in the midst of a revolution thanks to digital media.
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Based on this case, what is an effective way of developing a sense of where and how to sell
your products? Given the variety of strategies that may be needed to reach multiple markets,
how will you decide which market is worth entering and which is not? Are there instances in
which you think that successful international trade can occur by emphasizing American
values and norms?
LO2: Identify and define the classical and modern theories of international trade.
1. Key Concepts
Theories of international trade provide one of the oldest, richest, and most influential bodies
of economic literature. This section introduces six major theories of international trade: (1)
mercantilism, (2) absolute advantage, (3) comparative advantage, (4) product life cycle, (5)
strategic trade, and (6) national competitive advantage of industries. The first three are often
regarded as classical trade theories, and the last three are viewed as modern trade theories.
Overall, classical and modern theories have significantly contributed to today’s ever
deepening trade links around the world.
2. Key Terms
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3. Discussion Exercise
The theory of strategic trade states that strategic intervention by governments in certain
industries can enhance their odds for international success. In 2008, the U.S. government
enacted strong interventionist measures in the auto industry. In December 2008, the U.S.
government enacted a bailout package of $13.4 billion for General Motors (GM) and
Chrysler. The following summer, the U.S. government purchased a majority stake of GM for
$50 billion. It also obtained a minority stake in Chrysler for $6.6 billion while also
facilitating its reorganization and sale to the Italian automaker Fiat.
The questions for discussion are as follows: Was this level of government intervention worth
the cost? Would the American auto industry have been better served if GM and Chrysler
were allowed to go out of business? What about the public interest? Would you want the
federal government to take such drastic measures in your firm?
LO3: Explain the importance of political realities governing international trade.
1. Key Concepts
Although most theories support free trade, plenty of trade barriers exist. While some trade
barriers are being dismantled, many will remain. The two broad types of trade barriers are as
follows: tariff barriers and non-tariff barriers. A tariff barrier is a means of discouraging
imports by placing a tariff (tax) on imported goods. A nontariff barrier (NTB) discourages
imports using means other than tariffs on imported goods. Overall, trade barriers reduce or
eliminate international trade. While certain domestic industries and firms benefit, the entire
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country—or at least a majority of its customers—tends to suffer. Given these well-known
negative aspects, why do people make arguments against free trade? Two prominent
economic arguments against free trade are (1) the need to protect domestic industries and (2)
the need to shield infant industries. Political arguments against free trade are based on
advancing a nation’s political, social, and environmental agenda regardless of possible
economic gains from trade. These arguments include national security, consumer protection,
foreign policy, and environmental and social responsibility.
2. Key Terms
3. Discussion Exercise
The intertwined nature of politics, economics, and international trade was on full display in
the trade dispute between the United States and China that occurred in 2009. In fulfillment
of a campaign promise to restrict imports that hurt American workers, the then President
Barack Obama approved a 35 percent tariff on Chinese tires. In response, the Chinese
government announced that they would launch an investigation into whether the United
States was “dumping” (selling below cost) chicken and auto parts in China, a move that
many experts believe would have led to the increase in tariffs by the Chinese.
What are the costs and benefits of the U.S. tire tariff? What are the costs and benefits of
China’s response? In your opinion, does the potential of saving some jobs in the
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manufacturing industry outweigh the risk of angering the largest trading partner of the
United States?
LO4: Identify factors that should be considered when your firm participates in
international trade.
1. Key Concepts
In international trade, a savvy manager’s first job is to leverage the comparative advantage
of world-class locations. Second, comparative advantage is not fixed. Managers need to
constantly monitor and nurture the current comparative advantage of a location and take
advantage of new promising locations. Third, managers need to be politically savvy if they
appreciate the gains from trade. But they often fail to realize that free trade is not free—it
requires constant efforts to demonstrate and advance the gains from such trade.
Debate: Ethical Dilemma
Should Canada Diversify Its Trade?
1. Key Concepts
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Closing Case Discussion Guide
The China Trade Debate
Since 2011, China has dethroned Germany to become the world’s champion merchandise
(goods) exporter. Substantiating free trade theories’ claim that international trade is a win-win
game, active trading has not only made China richer, but also made its trading partners richer.
Since 2001, US exports to China soared by 500 percent, doubling the growth of US exports to
the rest of the world. Overall, US–China trade supports approximately 2.6 million US jobs and
adds 1.2 percent to US GDP (Exhibit 5.13). However, not all is rosy. The US trade deficit with
China has provoked an enormous debate (Exhibit 5.14). Despite enviable export success, the
United States, due to its extraordinary appetite for imports, runs the world’s largest merchandise
trade deficit. In 2015, it reached a $760 billion (5 percent of GDP). The lion’s share, $334 billion
(1.9 percent of GDP), was contributed by merchandise trade deficit with China.
Armed with classical theories, free traders argue that this is not a grave concern. They argue that
the United States and China mutually benefit by developing a deeper division of labor based on
comparative advantage. The real US trade deficit with China is often overstated, because
substantial value of Chinese exports is imported. If the value of such imported components is
subtracted from China’s exports, then the US trade deficit with China would be reduced in half,
to less than 1 percent of US GDP—about the same as the US trade deficit with the EU.
Quantitatively, such a level is manageable.
Critics strongly disagree. They argue that international trade is about competition—about
markets, jobs, and incomes. Economic Armageddon between the top two economies in the world
with a 45 percent tariff on all Chinese imports could shave off 13 percent from China’s exports
and 1.4 percent of its GDP growth. But the United States could hardly hope to do better, and the
poorest Americans would be the hardest hit.
Video Case
Watch “New Ventures” by John Stewart of McKinsey and Company
1. Stewart discusses how difficult it may be to successfully get into a new venture or industry.
Why are there such difficulties?
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2. Explain the connection between shifting into a new venture and the considerations of cost,
time, quality, and function.
3. Stewart discusses a friend who worked for an oil company. The friend began in oil
exploration, then moved into petrochemicals, and finally into plastics. Each type of business
had different demands upon that friend and required major adjustments. Do you think that
entire countries have a similar problem in terms of having an absolute or comparative
advantage in various industries? Why or why not? To what extent could that be used to
support the concept of comparative advantage?
4. Stewart pointed out that there are many instances of firms that have failed in new ventures.
Why? Governments often seek to develop new industries to compete in global trade. Do his
comments suggest anything they may keep in mind?
Additional Discussion Material
(From Prep Cards)
Critical Discussion Questions
1. Is the government of your country practicing free trade, protectionism, or something else?
Why?
Students’ answers will vary.
2. On Ethics: As a foreign policy tool, trade embargoes are meant to discourage foreign
governments. Examples include US embargoes against Cuba, Iraq (until 2003), and North
Korea. But embargoes also cause a great deal of misery among the population of the affected
countries (such as shortage of medicine and food). Are embargoes ethical?
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3. On Ethics: While the nation as a whole may gain from free trade, there is no doubt that
certain regions, industries, firms, and individuals may lose their jobs and livelihood due to
foreign competition. How can the rest of the nation help the unfortunate ones cope with the
impact of international trade?
Students’ answers will vary.
Review Questions
1. Why do nations trade? Why do some people argue that this question may be a bit
misleading?
2. Summarize the three classical theories of international trade.
3. Compare and contrast the three modern theories of international trade.
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4. What are the major political and economic arguments against free trade? How do
complementary assets and social complexity influence a firm’s organization?
5. Are theories of international trade still valid given the new realities of world trade?