Instructor Manual
Chapter 5: Trading Internationally
(Prepared by Klaus E. Meyer, March 2019)
Introduction to the Topic
Learning Objectives
1. Use the resource-based and institution-based views to explain why nations trade
2. Understand classical and modern theories of international trade
3. Appreciate how economic and political institutions influence international trade
4. Participate in two leading debates on international trade
5. Draw implications for action
General Teaching Suggestions
This chapter introduces the foundation of international trade theory, along with a few
institutional/political issues arising in international trade. In many institutions, trade theory is
likely to have been covered in an (international) economics course – if so you may want to
just summarize the main insights as a review. If students do not have any grounding in
economics, they may find it a bit hard going. However, no pain no gain. Communicate to
your students that it is necessary to understand some basic theories to gain deeper
appreciation of IB. Thus, they have to get through this chapter (and chapter 7) and then more
exciting topics will be discussed.
While some politicians (even a US president) view trade as a zero sum game in which one
nation must lose if another wins, Smith and Ricardo showed two centuries ago that it can be a
win/win game. However, as newly emphasized in the third edition, the factor endowment
theorem suggests that some individuals within an economy may not benefit, meaning free
trade needs to be complemented with appropriate domestic policies.
The chapter leads into some policy issues that make international trade come alive. Some
instructors may want to merge this with the discussion of the WTO in chapter 9, but we felt
that for most purposes a separate treatment is merited.
Opening Case Discussion Guide
The opening case outlines the trading activities between emerging economies and European
economies, especially between China and Europe. It provides the most visible evidence of the
scope of international trade. It provides rich data on the patterns of international trade, which
raise questions this chapter aims to explain: what are the underlying economic forces that
generate this huge volume of activity we call international trade? In addition to comparative
advantages, the importance of geographic proximity is evident from the data.
Chapter Outline, Section by Section
Section 1: Why do nations trade?
Key Ideas
This section introduces some of the basic concept along with data on the growth of
international trade (Figure 5.3) scale of international trade worldwide (Table 5.1).
Key Concepts
exporting
Selling abroad.
importing
Buying from abroad.
trade deficit
An economic condition in which a nation imports more than it exports.
trade surplus
An economic condition in which a nation exports more than it imports.
balance of trade
The aggregation of importing and exporting that leads to the country-level trade surplus or deficit.
Section 2: Theories of International Trade
Key Ideas
To structure a complex set of materials, we distinguish classical and modern trade theories.
Classical theories include (1) mercantilism, (2) absolute advantage, (3) comparative
advantage and (4) factor endowments theorem. Modern theories include (1) product life
cycles, (2) strategic trade, and (3) “diamond.”
Key Concepts
classical trade theories
The major theories of international trade that were advanced before the 20th century, which consist of
mercantilism, absolute advantage, and comparative advantage.
modern trade theories
The major theories of international trade that were advanced in the 20th century, which consist of
product life cycle, strategic trade, and national competitive advantage.
theory of mercantilism
A theory that holds the wealth of the world (measured in gold and silver) is fixed and that a nation that
exports more and imports less would enjoy the net inflows of gold and silver and thus become richer.
free trade
trade uninhibited by trade barriers
theory of absolute advantage
A theory that suggests that under free trade, each nation gains by specializing in economic activities in
which it has absolute advantage.
absolute advantage
The economic advantage one nation enjoys that is absolutely superior to other nations.
theory of comparative advantage
A theory that focuses on the relative (not absolute) advantage in one economic activity that one nation
enjoys in comparison with other nations.
comparative advantage
Relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with
other nations.
opportunity cost
Given the alternatives (opportunities), the cost of pursuing one activity at the expense of another
activity.
resource (factor) endowments
The extent to which different countries possess various resources (factors), such as labor, land, and
technology.
factor endowment theory (or Heckscher-Ohlin theory)
A theory that suggests that nations will develop comparative advantage based on their locally abundant
factors.
product life cycle theory
A theory that accounts for changes in the patterns of trade over time by focusing on product life cycles.
first-mover advantage
Advantage that first entrants enjoy and do not share with late entrants.
strategic trade theory
A theory that suggests that strategic intervention by governments in certain industries can enhance their
odds for international success.
theory of national competitive advantage of industries (or “diamond” model)
A theory that suggests that the competitive advantage of certain industries in different nations depends
on four aspects that form a “diamond.”
resource mobility
The ability to move resources from one part of a business to another.
Section 3: National Institutions and International Trade
Key Ideas
Institutions change the incentives for firms to engage in international trade. In this section, we
focus on institutions created in individual nation states – multilateral institutions are
discussed in Chapter 9.
The net impact of various tariffs and NTBs is that the whole nation is worse off while certain
special interest groups (such as certain industries, firms, and regions) benefit. Economic
arguments against free trade center on (1) protectionism and (2) infant industries. Political
arguments against free trade focus on (1) national security, (2) consumer protection, (3)
foreign policy, and (4) environmental and social responsibility.
Key Concepts
protectionism
Government policies designed to protect a domestic industry from foreign competition.
tariff barrier
Trade barriers that rely on tariffs to discourage imports.
nontariff barrier (NTB)
Trade barriers that rely on nontariff means to discourage imports.
import tariff
A tax imposed on imports.
deadweight loss
Net losses that occur in an economy as the result of tariffs.
subsidy
Government payments to (domestic) firms.
import quota
Restrictions on the quantity of imports.
voluntary export restraint (VER)
An international agreement in which exporting countries voluntarily agree to restrict their exports.
administrative procedures
Bureaucratic rules that make it harder to import foreign goods.
antidumping duty
Costs levied on imports that have been “dumped” (selling below costs to “unfairly” drive domestic
firms out of business).
infant industry argument
The argument that temporary protection of young industries may help them to attain international c
competitiveness in the long run.
trade embargo
Politically motivated trade sanctions against foreign countries to signal displeasure.
Section 4: Debates and Extensions
Key Ideas
The debate section has been substantially rewritten in the second edition, and now focuses on
two themes:
• The first debate discusses whether trade surpluses and deficits are good or bad.
• The second debate discusses some of the implication that international trade may have
on employment.
Key Concepts
No new concepts
Section 5: Implications for Practice
Key Ideas
Managers should discover and leverage the comparative advantage of world-class locations.
Monitor and nurture current comparative advantage of certain locations and take advantage of
new locations. Be politically active to demonstrate, safeguard, and advance the gains from
international trade.
Key Concepts
No new concepts
Review Questions
Review questions are provided to students on the website accompanying the book. They
directly ask to summarize the material provided in the text. Instructors may also use the
questions to structure their lectures or review sessions.
Review Questions
(as provided to students on the website)
Material in the Book
1. What do the key terms in international trade mean?
2. What is the central idea of mercantilism?
Pages 120 & 123
Page 124
3. How do absolute advantages explain why
companies from different countries trade?
4. How do comparative advantages explain why
companies from different countries trade?
5. What is the factor endowments theory, and why has
it gained renewed interest recently?
6. How can the product life cycle explain the patterns
of international trade?
7. Why can government intervention in certain
industries, at least theoretically, improve a
countries trade position?
8. According to Michael Porter, what factors
contribute to a country’s competitiveness?
9. What are the strengths and weaknesses of the main
theories of international trade?
10. How do tariffs affect international trade?
11. How do different types of non-tariffs affect
international trade?
12. Why do governments use non-tariff barriers rather
than tariffs?
13. What are key economic arguments against free
trade?
14. What are key political arguments against free
trade?
15. Is a large trade deficit a problem for a country, and
if so why?
16. Why do some scholars argue that free trade is
undermining a fair and equitable distribution of
income?
Page 124-125
Page 126-128, incl In Focus
5.2
Page 127-129
Page 129
Page 129-131
Page 131-132
Table 5.5 and 5.6
Page 135-136,
Page 136-138
Page 136-138
Page 138-139
Page 139-141
Page 141-143, Table 5.7
Page 143 (also page 128-129)
At the end the chapter, we provide discussion questions that aim to stimulate students
thinking beyond memorizing the material learned in the chapter. They are designed to be
used at a basis for in-class discussions, group work, or individual assignments. Below,
provide some indicative answers of issues that may be raised in response to these questions.
Discussion Questions
(as provided in the book)
Indicative Responses
1. Obtain trade statistics for your
country. Which product categories
have seen large increases or
declines in exports or imports in
recent years? Why?
2. In recent years, has is the trade
policy of your country’s
government become more
protectionist? Why?
3. What is the ratio of total volume
of international trade (exports +
Union, Japan, Russia, China, and
Singapore? Do these ratios help
you answer question 1?
4. As a foreign policy tool, trade
embargoes, such as US embargoes
against Cuba, Iraq (until 2003),
discourage foreign governments.
But they also cause a great deal of
misery among the population
(such as shortage of medicine and
due to foreign competition. How
can the rest of the nation help the
All these are question in which the conclusion is
not as important as the thought process and the
ability to clearly demonstrate an understanding of
the key concepts and arguments.
1. The outcomes of this analysis will depend
on the data students find respect to their
own country. They should apply in
particular comparative advantage thinking,
along with a basic understanding of
protectionism, as applicable.
3. It should be noted that nations vary as to
the size of their internal markets and
resources and the resulting extent to which
they must depend on external trade.
4. It should be noted that embargoes are only
involves the use of military force. The
question might be asked as to which is less
likely to cause misery. Sometimes
5. Arguments may include policy
instruments, including the welfare state,
impact of international trade?
impact of such consequences more
effectively than trade policy – at least in
the long run.
Closing Case
The closing case provides further opportunities to apply ideas and concepts learned in this
chapter in a real world setting. The Closing Case for this Chapter is “INSERT” and focuses on
“INSERT”. Below are some indicative responses to the case discussion questions.
Case Discussion Questions
(as provided in the book)
Indicative Responses
1. Considering absolute and comparative
advantages, how can you explain the
growth AJC exports from China to the
United States?
2. From an institutional perspective,
what explains the imposition and the
reduction of tariffs for AJC?
3. Is this form of international trade
beneficial to home and host societies?
1. Students ought to list a long list of
absolute and comparative
advantages. Critical for this
assignment is that students
demonstrate their understanding of
absolute and comparative
advantages rather than the results
they list.
2. The key for this question is that
students should understand how
economic and political institutions
influence international trade, and
why they do these. Students ought
to understand the purpose rather
3. For this question, students could
identify specific groups within
may benefit or suffer from free
trade. In most cases, the aggregate
effect is likely to be positive, but
Further Learning Activities
In addition to the cases and discussion questions provided in the book, instructors may want
to use any of the following activities to further engage students with the material.
1. The Integrative Case “Negotiating Brexit” provides basic data on the UK international
trade along with the key parameters of different (hypothetical) trade regimes that the UK
might have developed with the EU after Brexit. Analysis of this information challenges
students to integrate what they have learned on international trade (Chapter 5) with the
institutions of the EU (Chapter 8) and the WTO (Chapter 9). The case thus helps
consolidating understanding of both international trade theories and concepts related to
supra-national trade institutions..
2. The Integrative Case “Canada and the EU Negotiate CETA” has been designed to
discuss bilateral trade and investment agreements, and their implications for policy and
businesses. It is best introduced after the foundations of international economics (Chapter
5 to 7), the basic structure of the EU (Chapter 8) and the pros and cons of multilateral and
bilateral trade agreements (Chapter 9) have been introduced. Instructors may advise
students to include or exclude in their deliberations the ‘Investor State Dispute
Settlement’ Tribunals (In Focus 9.5). Integrating them in the discussion will make the
analysis more policy relevant (ISDS are the most controversial aspect) but may also make
it hard to keep the discussion focused.
3. Cities worldwide differ considerably along many dimensions. However, one facet of
trading internationally is to identify global cities to base a network of operations. Choose
one dimension on which to measure different cities. Then, develop a report that discusses
your findings in detail.
One resource which can be used is “Global Cities Index”. This website can be
found by entering the search term “global cities” at the globalEDGE™ Resource
political engagement. If a student chose cultural experience as a measure, then
similarities and differences among these six cities alone.
4. At times, corporate tax rates in specific locations can be considered a trade barrier to
business development. As a result, locations that have lower tax rates may be trying to
encourage corporations to conduct operations or relocate headquarters there. Find a list of
tax rates for a variety of locations. If you were part of a company seeking to relocate its
operations, which location(s) would you recommend, and why?
One resource which can be used is “Forbes: Tax Misery Index”. This website can
(corporate income, personal income, wealth tax, employer social security,
employee social security, and VAT/Sales). However, presuming that corporate
operations at each location. Such decisions could be related to strategic intention.
Resource Name: Forbes: Tax Misery Index
Further Readings
At the end the chapter, suggested further readings are provided. The primary aim is to
provide students a starting point for further work, for example when preparing a class
assignment or dissertation. These references also are recommended for instructors not
familiar with the topic and wishing to ‘get ahead of the students’ before lecturing on a topic.
R. Baldwin, 2016. The Great Convergence, Cambridge, MA: Harvard University Press – A leading
economist analyzes how trends such as disaggregation of value chains and information technology
influence international trade.
J. Bhagwati, A. Panagariya, & T. Sribivasan, 2004, The muddles over outsourcing, Journal of Economic
Perspectives, 18, 93–114 – a recent statement of the benefits of free trade, applied to the question of
outsourcing.
S.J. Evenett, ed., 2017, Cloth for Wine: The Relevance of Ricardo’s Comparative Advantage in the 21st
Century, London: CEPR Press (free download from vox.eu) – on the 200th anniversary of Ricardo’s
work, leading economists reflect on the relevance to contemporary economics.
R.C. Feenstra, 2004, Advanced International Trade: Theory and Evidence, Princeton: Princeton
University Press – a specialized textbook that explains the theories and institutions of international trade.
P.R. Krugman & M. Obstfeld, 2011, International Economics: Theory and Practice, 9th ed, Boston:
Pearson. – a textbook that covers international trade extensively.
P. Rivoli, 2005, The Travels of a T-shirt in the Global Economy, Hoboken: Wiley – an economist is tracing
and explaining the interdependencies of international trade using the case of a T-shirt.
P. Samuelson, 2004, Where Ricardo and Mill rebut and confirm arguments of mainstream economists
supporting globalization, Journal of Economic Perspectives, 18, 135–146 – an esteemed international
trade economists outlining some concerns regarding free trade.