Chapters 6-9 CONNECT Assignments & Quizzes

Trade Diversion Products

- computer chips - solar panels - cocoa

Which level of regional economic integration best describes the new free trade agreement in North America currently referred to as USMCA?

free trade area - the new agreement, referred to as USMCA by Donald Trump, is a free trade area in which barriers to the trade of goods and services among member countries are removed

HOST-Country Benefits

- increase in direct and indirect employment - transfer of new technology - substitute for imports

economic arguments for intervention

- infant industry - promote investment inflows - essential industry argument - import substitution

HOME-Country Benefits

- inflows of foreign earnings - skills that can be leveraged internationally

HOME-Country Costs

- loss of jobs - host country limits profit expatriation

HOST-Country Costs

- outflow of earnings from a foreign subsidiary - loss of local entrepreneurship - loss of economic independence

political arguments for intervention

- protecting jobs - national security - protecting consumers - protecting the environment

Trade Creation Products

- textiles - sugar

Exporting, Licensing, or FDI

A firm has three basic choices if it wants to sell its products in a foreign market—exporting, licensing, and foreign direct investment (FDI). The choice of the best option depends on characteristics of the product, the processes used to make these products, the control a firm needs to exercise over operations, and how the know-how of the firm might be protected. The best option is a strategic choice the international business manager must make, considering the interplay among these factors. Internalization theories explore the limitations of exporting and licensing from both explanatory and business perspectives. These theories identify with some precision how the relative profitability of foreign direct investment, exporting, and licensing vary with circumstances. Other theories help explain the direction of FDI. The internalization theories help explain why firms prefer FDI to licensing or exporting.

Which countries belong to the agreement referred to as USMCA by Donald Trump?

Canada, Mexico, and the United States

China has been accused of prohibiting U.S. companies that offer cloud computing from offering their services in China. Which argument best explains this?

China wants to protect its firms from their more competitive U.S. rivals - the reason why China limits market access by U.S. firms in cloud computing is to allow its own, less-competitive companies to avoid U.S. firms

The new trade deal in North America called USMCA by Donald Trump is a revision of the North American Free Trade Agreement (NAFTA). What was the initial impetus for NAFTA?

NAFTA was designed to eliminate barriers to trade among member countries thereby creating a larger and more efficient productive base for the entire region

Regional Integration

Regional economic integration is an agreement among countries in a geographic area to reduce tariff and nontariff barriers to the free flow of goods, services, and factors of production between each other. There are costs and benefits associated with regional economic integration. According to economists, the amount of benefits versus costs can be measured by whether the integration leads to trade creation versus trade diversion.

The Costs and Benefits of FDI

To a greater or lesser degree, many governments can be considered pragmatic nationalists when it comes to foreign direct investment (FDI); this means it has both benefits and costs. FDI can benefit a host country by bringing capital, technology, and jobs, and it can also have a negative effect on a country's balance of payments. Accordingly, government policies are shaped by a consideration of these costs and benefits of FDI. Home countries can adopt policies designed to both encourage and restrict FDI. Host countries try to attract FDI by offering incentives and try to restrict FDI by dictating ownership restraints and requiring that foreign multinational enterprises (MNE) meet specific performance requirements

Why Governments Intervene

Why should a manager in an international business care about the political economy of free trade or about the relative merits of arguments of free trade and protectionism? There are two answers. The first concerns the effects of trade barriers on a firm's strategy. The second concerns the role that business firms can play in promoting free trade or trade barriers. International businesses are major players on the international trade scene. If the business decides to stay out of the political and economic debates, it is likely that the firm's interests may be threatened or compromised. A firm should participate as fully as possible, and with a thorough understanding of the arguments, as a vital part of its strategy. Because the firm may be involved with a number of countries as markets or places for investment, its interests and the governments that affect those interests are wide-ranging and dynamic. Arguments for government intervention take two paths: political and economic. Political arguments for intervention are concerned with protecting the interests of certain groups within a nation (usually producers), often at the expense of other groups (usually consumers), or with achieving some political objective that lies outside the sphere of economic considerations, e.g., protecting the environment or human rights. Economic arguments are typically concerned with boosting the overall wealth of a nation to the benefit of both producers and consumers.

C&M Sees Tough Trade Issues Between China and the United States

as a manager, you must be able to recognize that while many countries support free trade in theory, the reality is that governments intervene in international trade to protect the interests of politically important groups or promote the interests of key domestic producers

Toyota's van Zyl on USMCA Deal, Brexit, Electric Vehicles

as a manager, you must be able to understand regional economic integration; its different levels, the arguments for and against it, and what it means to international businesses

A(n) __________ has no barriers to trade among member countries, includes a common external trade policy, and allows factors of production to move freely among members, but does not have a common currency

common market - a common market has no barriers to trade among member countries, includes a common external trade policy, and allows factors of production to move freely among members. A common market does not have a common currency, which requires a higher level of economic integration such as economic union

__________ is variously defined as selling goods in a foreign market at below their costs of production or as selling goods in a foreign market at below their "fair" market value

dumping - in the context of international trade, dumping is variously defined as selling goods in a foreign market at below their costs of production or as selling goods in a foreign market at below their "fair" market value

The United States has accused China of

exacerbating the global glut of steel by investing in additional production - the United States has accused China of exacerbating the global glut of steel by investing in additional production

The effect of bulky or heavy products on transportation costs can make _______ an inappropriate strategy

exporting - transportation costs of heavy or bulky products add to production costs, and it becomes unprofitable to ship those products over a long distance

If your household goods can be efficiently produced through economies of scale, it would be a good idea to use a(n) _______ strategy

exporting - when a firm uses its fixed assets (i.e., machinery) to create a high volume of production, it will gain economies of scale. All else being equal, this is more efficiently done through one factory rather than replicating factories in different countries

If your proprietary know-how of "green" processes is difficult to transfer to other firms, the most effective approach would be

exporting or foreign direct investment - FDI ensures that the firm has control over its own proprietary know-how in the foreign country, while exporting ensures that the firm is using its own proprietary know-how in its home country

The economic and strategic advantages that accrue to early entrants into an industry are called

first-mover advantages - are the economic and strategic advantages that accrue to early entrants into an industry

The economic and strategic advantages that accrue to early entrants in an industry are called

first-mover advantages - are the economic and strategic advantages that accrue to early entrants into an industry - the ability to capture scale economies ahead of later entrants, and thus benefit from a lower cost structure, is an important first-mover advantage

If the firm is facing the threat of trade barriers such as high import tariffs or quotas and the firm has proprietary technology, the firm should consider

foreign direct investment - if there is a threat of high trade barriers and the firm has proprietary technology, the firm should choose foreign direct investment

When Norway, Iceland, Liechtenstein, and Switzerland established the EFTA, all barriers to the free flow of goods and services between the countries were removed. Member nations were allowed to determine the level of trade protection for goods coming from all other nations. What level of economic integration does this represent?

free trade area - in a free trade area, all barriers to the trade of goods and services among member countries are removed. Each country, however, is allowed to determine its own trade policies with regard to nonmembers

Identify the correct sequence of economic integration starting from the least integrated to the most integrated

free trade area, customs union, common market, economic union, and political union

Most economists would agree that the best interests of international business are found in a nation with a

free trade policy - most economists would probably argue that the best interests of international business are served by a free trade stance but not a laissez-faire stance. It is probably in the best long-run interests of the business community to encourage the government to aggressively promote greater free trade by, for example, strengthening the WTO. Business probably has much more to gain from government efforts to open protected markets to imports and foreign direct investment than from government efforts to support certain domestic industries in a manner consistent with the recommendations of strategic trade policy

How did President Trump react to the two multilateral trade agreements, the Trans Pacific Partnership and the Transatlantic Trade and Investment Partnership, which were being pursued by the Obama administration?

he pulled the United States out of these negotiations - under President Obama, the United States was pursuing two major multilateral trade agreements: the Trans Pacific Partnership (TPP) with 11 other Pacific Rim countries (including Australia, New Zealand, Japan, South Korea, Malaysia, and Chile) and the Transatlantic Trade and Investment Partnership (TTIP) with the European Union. However, President Trump, who appears to be opposed to free trade, pulled the United States out of the TPP and negotiations on the TTIP have been put on hold

A South American nation has a direct restriction on the amount of vegetables that may be imported into the country. Which instrument of trade policy does this reflect?

import quota - an import quota is a direct restriction on the quantity of some good that may be imported into a country

A tariff rate quota provides a lower tariff rate to

imports within the quota - a common hybrid of a quota and a tariff is known as a tariff rate quota. Under a tariff rate quota, a lower tariff rate is applied to imports within the quota than those over the quota

Mexico agreed to NAFTA after it was determined that the country's oil industry would be controlled by Mexico. Why did Mexico fight for this right?

it wanted to maintain national sovereignty - an impediment to integration arises from concerns over national sovereignty. Concerns about national sovereignty arise because close economic integration demands that countries give up some degree of control over such key issues as monetary policy, fiscal policy (e.g., tax policy), and trade policy

If a firm's know-how, skills, and capabilities can be protected by contract, and if tight control over foreign operations is not vital to remain competitive, and there are reasons to believe that additional costs through transportation or tariffs would be high, the most effective approach would be

licensing - under the right conditions, licensing offers the firm a very attractive approach. All of the conditions mentioned in the question should be met

An implication of trade barriers for business practice is that they

limit a firm's ability to serve a country from locations outside of that country - clearly, trade barriers constrain a firm's ability to disperse its productive activities in such a manner. First and most obvious, tariff barriers raise the costs of exporting products to a country (or of exporting partly finished products between countries). This may put the firm at a competitive disadvantage to indigenous competitors in that country. Second, quotas may limit a firm's ability to serve a country from locations outside that country. Again, the response by the firm might be to set up production facilities in that country—even though it may result in higher production costs

When the management team reviewed its government contract on office chairs, they noticed that in order to bid on the project, at least 37 percent of the value of the office chairs had to be produced in the United States. This stipulation is an example of a(n)

local content requirement - a local content requirement (LCR) is a requirement that some specific fraction of a good be produced domestically. The requirement can be expressed either in physical terms (e.g., 75 percent of component parts for this product must be produced locally) or in value terms (e.g., 75 percent of the value of this product must be produced locally)

The government of a South American nation enforces tariffs and quotas to limit imported goods, while exports are subsidized. By using these instruments, the government seeks to achieve a surplus in the balance of trade. Based on this information, which approach is influencing the international trade efforts in this nation?

mercantilism - the mercantilist doctrine advocated government intervention to achieve a surplus in the balance of trade - the mercantilists saw no virtue in a large volume of trade - rather, they recommended policies to maximize exports and minimize imports - to achieve this, imports were limited by tariffs and quotas, while exports were subsidized

Subsidies and quotas are examples of __________ barriers a county might impose

nontariff - a fall in tariff barriers in recent decades has been accompanied by a rise in nontariff barriers, such as subsidies, quotas, voluntary export restraints, and antidumping duties

The United States is demanding that China reduce overcapacity in which industry?

steel the United States is demanding that China reduce overcapacity in the steel industry

In order to encourage the wine production industry, the Italian government provided low-interest loans for the purchase of equipment and plants. The government also gave cash grants and made tax reductions. Which instrument of trade policy is being used by the Italian government?

subsidies - a subsidy is a government payment to a domestic producer. Subsidies take many forms, including cash grants, low-interest loans, tax breaks, and government equity participation in domestic firms

If China provides cash assistance to its companies in the steel industry, China is using which type of trade instrument?

subsidy - if China provides cash assistance to its companies in the steel industry, China is using a subsidy

In his theory of absolute advantage, Adam Smith advocated that __________ should determine what a country imports and what it exports

the market mechanism - according to Adam Smith, the invisible hand of the market mechanism and not government policy should determine what a country imports and what it exports.

Why is the announcement of the new trade agreement, referred to as USMCA by Donald Trump, so important for companies like Renault?

the new agreement reduces uncertainty about trade in the region allowing firms to make strategic decisions - companies are happy with the announcement that a new trade deal had been reached by the United States, Canada, and Mexico because it reduces the uncertainty that had existed whilst the future of NAFTA was unknown

Two South American countries formed a free trade agreement. As a result, one of the countries that used to produce its own refrigeration units at a higher cost now imports them from the other country at a lower cost. This is an example of

trade creation - trade creation occurs when high-cost domestic producers are replaced by low-cost producers within the free trade area. It may also occur when higher-cost external producers are replaced by lower-cost external producers within the free trade area

Foreign producers agree to __________ imposed by an exporting country because they fear more damaging punitive tariffs or import quotas might follow if they do not

voluntary export restraints - a voluntary export restraint (VER) is a quota on trade imposed by the exporting country, typically at the request of the importing country's government. Foreign producers agree to VERs because they fear more damaging punitive tariffs or import quotas might follow if they do not. Agreeing to a VER is seen as a way to make the best of a bad situation by appeasing protectionist pressures in a country

A situation in which an economic gain by one country results in an economic loss by another is called a

zero-sum game - the flaw with mercantilism was that it viewed trade as a zero-sum game - is one in which a gain by one country results in a loss by another