International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 5
05-1
Module 5: Political Forces That Affect Global Trade
YOUR CONTENT
Summary
Learning Objectives
Key Terms and Definitions
Content Outline
ENGAGEMENT & APPLICATION
Boxed Text Discussion Questions with Suggested Answers
End of Module Exercises
Critical Thinking Questions
globalEDGE Research Task
MiniCase
Bonus Activities
CONNECT TOOLS FOR ASSESSEMENT OF LEARNING
Connect Content Matrix
Connect Activities
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 5
YOUR CONTENT
SUMMARY
This module looks at political forces that may affect international business. It discusses
government ownership of business and reasons for both nationalization and privatization. The
LEARNING OBJECTIVES
LO 5-1 Describe the goals of nationalizing and privatizing business.
LO 5-3 Describe the role of country risk assessment in international business.
KEY TERMS AND DEFINITIONS
ad valorem duty (p. 143)
An import duty levied as a percentage of the invoice value of
imported goods
compound duty (p. 143)
A combination of specific and ad valorem duties
countervailing duties (p. 140)
Additional import taxes levied on imports that have
benefited from export subsidies
country risk assessment (CRA)
(p. 134)
An assessment of a country’s economic situation and politics
to determine how much risk to employees, property, and
investment exists for the firm doing business there
cybercrime (p. 132)
Any illegal Internet-mediated activity that takes place in
electronic networks
dumping (p. 139)
Selling a product abroad for less than the cost of production,
less than the price in the home market, or less than the
price to third-party countries
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 5
instability (p. 128)
Characteristic of a government that cannot maintain itself in
power or that makes sudden, unpredictable, or radical
policy changes
nationalization (p. 126)
The taking of private property by a government to make it
public
nontariff barriers (NTBs) (p.
144)
All forms of discrimination against imports other than
import duties
orderly marketing
arrangements (p. 145)
Formal agreements between exporting and importing
countries
privatization (p. 127)
The selling of government-owned property to the private
sector
quotas (p. 144)
Numerical limits placed on specific classes of imports
specific duty (p. 143)
A fixed sum levied on a physical unit of an imported good
stability (p. 128)
Characteristic of a government that maintains itself in
power and whose fiscal, monetary, and political policies are
predictable and not subject to sudden, radical changes
subsidies (p. 139)
Financial contributions, provided directly or indirectly by a
government, that confer a benefit, including grants,
preferential tax treatment, and government assumption of
normal business expenses
tariffs (p. 140)
Taxes on imported goods for the purpose of raising their
price to reduce competition for local producers or stimulate
local production
terrorism (p. 130)
Unlawful acts of violence committed for a wide variety of
reasons
variable levy (p. 144)
An import duty set at the difference between world market
prices and local government-supported prices
voluntary export restraints
(VERs) (p. 144)
Export quotas imposed by the exporting nation
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 5
CONTENT OUTLINE
The following section provides the flow of information using the LEARNING OBJECTIVES as a
guide, KEY TERMS learners will need to take away from the course, and LECTURE NOTES to drive
home teaching points.
LO 5-1
Describe the goals of nationalizing and privatizing business.
• Governments and the Ownership of Business
o Nationalization: Why Governments Get
Involved
o Privatization: Why Governments Sell Businesses
Key Terms:
• nationalization
• privatization
I. Governments and the Ownership of Business
a. Most types of government own businesses, not only those with socialist-leaning or
centralized economies, or Communist ones.
b. U.S. government owns Export-Import Bank Farm Credit Bureau, Tennessee Valley
Authority, St. Lawrence Seaway, Gallaudet Univ., etc.
A. Nationalization: Why Governments Get Involved
1. Motivations are varied.
2. Belief that government can better manage businesses that provide public goods—
health care, education, national defense.
3. Nationalization is motivated by belief that government can manage a public good or
necessity better than can the private, profit-driven sector.
a. Extract more money from business for the public good.
b. Increase profitability.
c. Enact political goals (U.S with AIG and GM).
B. Privatization: Why Governments Sell Businesses
1. To gain more efficiency in business operations.
2. To raise money (British Royal Mail, defense sectors).
5. Major privatizers include U.S., Russia, China, Portugal, and Greece.
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 5
Explain government protection and stability and their
importance to business.
• Government Stability and Protection
• Stability: Issues with Lack of Peace and Predictability
• Protection from Unfair Competition
• Protection from Terrorism, Cybercrime, and Other
Threats
Key Terms:
• stability
• instability
• terrorism
• cybercrime
LO 5-3
Describe the role of country risk assessment in international
business.
• Country Risk Assessment and Countermeasures to
Threats
Key Terms:
• country risk
assessment (CRA)
II. Government Stability and Protection
1. Business prospers when there is a stable government with policies that do not change
or change slowly.
2. A stable government can maintain itself in power and hold to predictable fiscal,
monetary, and political policies.
3. Embassies and consular offices are how a country helps protect its citizen when abroad.
They can help with:
a. Information about political risks.
c. File protests to the foreign government on behalf of its citizens.
A. Stability: Issues with Lack of Peace and Predictability
1. Unstable governments can present challenges to business that range from inability to
B. Protection from Unfair Competition
1. Governments tend to protect the economic interests of their citizens over those of
foreigners.
3. Protection from Terrorism, Cybercrime, and Other Threats
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 5
a. Includes airplane hijackings, suicide missions, assassinations, kidnappings, and
bombings.
b. Several organizations rank countries by their level of terrorism risk.
2. Kidnapping: often targets international managers as well as tourists.
a. An estimated 80 percent of kidnappings are not reported to government
authorities.
b. Ransoms are often used as a source of funding for terrorist organizations.
c. Many governments and aid organizations claim not to pay ransoms because in the
long term it only encourages further kidnapping and pays for terrorism.
3. Piracy: hijacking and kidnapping on the seas.
a. This continues to be a concern mainly in Africa and Asia, but has recently increased
in Latin America and the Caribbean.
b. Many ships have installed defensive hardening including razor wire, electric fences,
and high-pressure water hoses.
4. Cybercrime: any illegal Internet-mediated activity that takes place in electronic
networks.
a. Because cybercrime is borderless, no one government or legal system can control it.
b. Companies’ expanded use of mobile devices and cloud storage increases their
III. Country Risk Assessment and Countermeasures to Threats
A. Country risk assessment (CRA) assesses:
a. Green key operation vs. extraction sector business.
b. Kidnap, ransom, and extortion (KRE) insurance.
1. Know country and region so risk-assessment is realistic.
3. Train for daily living skills (evasive driving, avoidance of routine, hardened cars).
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 5
LO 5-4
Explain the political motivations for government intervention
in trade and the major types of government trade
restrictions.
• Government Intervention in Trade
• Reasons for Restricting Trade
o Provide for National Defense
o Impose Sanctions
o Protect an Infant or Dying Industry
o Protect Domestic Jobs
o Ensure Fair Competition
o Retaliate
• Tariff Barriers
• Nontariff Barriers
o Quantitative Barriers
o Voluntary Export Restraints
o Nonquantitative Nontariff Barriers
Key Terms:
• dumping
• subsidies
• countervailing duties
• tariffs
• ad valorem duty
• specific duty
• compound duty
• variable levy
• nontariff barriers
(NTBs)
• quotas
• voluntary export
restraints (VERs)
• orderly marketing
arrangements
IV. Government Intervention in Trade
A. Cost of goods increases, born by consumer usually.
B. Trade flows and economic efficiency are reduced.
1. This is the case with agricultural subsidies, which are common, in order to protect
domestic farmers (see Figure 5.4)
a. U.S. 12 percent, EU 30 percent, Japan 50 percent.
b. Canada has a carveout in NAFTA: 241 percent on U.S. milk.
2. Arguments weak (economists say) and call on patriotism to gain emotional
advantage.
B. Impose Sanctions
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 5
05-8
2. Sanctions seldom achieve goal of forcing change and create collateral damage.
3. Sanctions give the market to international competitors.
C. Protect an Infant or Dying Industry
1. Give infant industries a chance to grow and build comparative advantage.
2. Slow down impacts on labor of a dying industry—time for retraining, movement of
capital into other sectors.
D. Protect Domestic Jobs
1. Cheap foreign labor argument is misleading, since labor only a portion of cost, and
wages only a portion of labor. Also productivity levels are relevant.
E. Ensure Fair Competition
2. Unfair advantage (technology, lower tax rates, lower labor costs).
3. Protects least efficient domestic producer; creates windfall profits for efficient
producers; increases costs to consumers.
F. Retaliate
1. Sought by producers from government to respond to tariffs they face abroad.
2. (Ex.: U.S. response to EU ban on hormone-treated beef)
3. Response to dumping (predatory, social, environmental).
4. Response to subsidies (such as those received by U.S. sugar producers).
VI. Tariff Barriers
A. Import duties levied to raise the selling price of imports to reduce competition for domestic
producers.
B. Smoot Hawley Tariff Act in U.S. contributed to depression.
C. Three types:
1. Ad valorem duty—percentage of invoice (U.S.: 6 percent on flavor extract imports).
2. Specific duty—fixed sum for specific units.
3. Compound duty—combination of ad valorem and specific duties.
4. Variable levy used to guarantee import and domestic products’ prices match.
5. Nuisance tariffs have low rates but administrative challenges (French review of
Japanese VCRs in Poitiers).
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 5
05-9
VII. Nontariff Barriers
A. All discrimination against imports other than import duties.
B. Quantitative nontariff barriers—Quota or numerical limit.
1. Voluntary Export Restraint (VER)—quota imposed by exporting government.
2. Orderly marketing arrangements—formalized VER.
C. Nonquantitative nontariff barriers:
1. Direct government participation in trade.
2. Customs and other administrative procedures.
3. Standards.
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 5
05-10
ENGAGEMENT & APPLICATION
BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS
GLOBAL DEBATE: Sugar Subsidies: Sweet for Producers but Sour for Food Manufacturers and
Consumers?
Sugar is the most trade-distorted commodity on the world market. Both the EU and the U.S.
protect their domestic sugar producers. In the U.S., the protection amounts to a subsidy of $1.5
1. Should sugar continue to be a protected commodity? Why or why not?
This question’s response rests on the cogency of the argument. U.S. consumers pay usually
more than twice the world market price for their sugar, and thus, higher prices for sugar-
2. Should the U.S. consumer continue to fund protection for U.S. sugar farmers? Why or why
not?
Most responses to this question may well lead toward non-protection, because such trade
IB IN PRACTICE: Trade as a Political Weapon: Sanctions for Russia’s Annexation of Crimea
The major international response to Russia’s 2014 occupation of Crimea was to use trade
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 5
05-11
Online and Hybrid: Questions may be assigned to be prepared and submitted by teams.
Face-to-face: Students are assigned to prepare responses to the questions in teams, either for
discussion submission or for presentation in class by calling on a team to respond.
1. Were punitive sanctions against Russia an appropriate response? Did they accomplish what
was hoped for? Why or why not?
2. What “carrots” might have been used in response to Russia’s actions regarding Crimea?
How might the outcomes have been different if this approach had been attempted?
GET THAT JOB! FROM BACKPACK TO BRIEFCASE: Fernando Villanueva: “There Is So Much
Beauty in the World!”
Fernando Villanueva shares his approach to his transition from his undergraduate studies to
international work. His approach began in high school and involved study in France with The
1. If you have had cross-cultural experiences, have you encountered challenges similar to
Fernando Villanueva’s? How have you addressed them? Or, if you have not faced this
situation, how do you anticipate that you would address them?