ch05 international trade theory

7/29/2019 Ch05 International Trade Theory

1/15

IBM, Fall 2012

Frank C. Huang

Global Business Today

by Charles W.L. Hill

McGraw-Hill/Irwin Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 5

International

Trade Theory

Question:

Why countries trade the products they do?

Opening Case:The Ecuadorian Rose Industry

Describe the benefits that the rose industry

has brought to Ecuador. In your opinion, do

the benefits outweigh the disadvantages?

Why or why not?

Ecuador is now the worlds fourth largest producer

of roses. Rose farms in the country support tens ofthousands ofjobs . Revenues and taxes from the

industry have been used to help pave roads, build

schools, and construct irrigation systems. Many

workers earn more in the industry than they could

elsewhere. Most of you will probably argue that

indeed the industry has been beneficial to the

country. Some however, may note that in rose-

growing cities like Cayambe, populations have

swelled significantly putting pressure on the

resources within the region. In addition,

environmentalists worry that the industry is now

following proper safety precautions with the

chemicals it uses.

Consumer groups in Europe have pushed forreforms to Ecuadors environmental

regulations for its rose industry. Other

groups have encouraged trade sanctions to

force Ecuadorian rose growers to be more

environmentally responsible. Consider the

impact these groups could have on Ecuador

and workers in the rose industry if they are

successful in their efforts.


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Frank C. Huang

In response to the suggestions of consumer

groups in Europe, some Ecuadorian rose

growers have voluntarily joined a program

certifying they are responsible growers. Aspart of the program , the growers must

supply workers with appropriate protective

gear, train them in the proper use of

chemicals, and hire doctors to visit workers

on a weekly basis. Most of you will

recognize that the cost of this type of

program will affect the profits of growers, and

could lead to layoffs within the industry,

higher prices for consumers, or both.5-8

Introduction

International trade theory

explains why it is beneficial for

countries to engage in international

trade

helps countries formulate their

economic policy

explains the pattern of international

trade in the world economy

5-9

An Overview of Trade Theory

Question: What is free trade?

Free trade refers to a situation where a

government does not attempt to

influence through quotas or duties what

its citizens can buy from another country

or what they can produce and sell to

another country

5-10

An Overview of Trade Theory

Question: How has international trade theory

evolved?

Mercantilism (16th and 17th centuries) promotedthe idea of encouraging exports anddiscouraging imports

In 1776, Adam Smith promoted the idea ofunrestricted free trade

In the 19th century, David Ricardo built on Smithideas, and in the 20th century, Eli Heckscherand Bertil Ohlin refined Ricardos work

5-11

The Benefits of Trade

Question: Why is it beneficial for countries toengage in free trade?

The theories of Smith, Ricardo and Heckscher-Ohlin show why it is beneficial for a country toengage in international trade even for productsit is able to produce for itself

International trade allows a country to specializein the manufacture and export of products thatcan be produced most efficiently in thatcountry, and import products that can beproduced more efficiently in other countries

5-12

The Pattern o f

International Trade

International trade theory helps explain trade

patterns

Some patterns of trade are fairly easy to

explain - it is obvious why Saudi Arabia

exports oil, Ghana exports cocoa, and Brazil

exports coffee

But, why does Switzerland export chemicals,

pharmaceuticals, watches, and jewelry?

Why does Japan export automobiles,

consumer electronics, and machine tools?


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IBM, Fall 2012

Frank C. Huang

5-13

The Pattern o fInternational Trade

Ricardos theory of comparative advantagesuggests that existing trade patterns are related to

differences in labor productivity

Heckscher and Ohlins theory explains trade

through the interplay between the proportions in

which the factors of production are available in

different countries and the proportions in which

they are need for producing particular goods (land,

labor, and capital)

Ray Vernon suggested that trade patterns could

be explained by looking at a products life cycle

(most new products were produced in

countri es where they were developed)5-14

The Pattern o fInternational Trade

Paul Krugman developed new trade theory

which suggests that the world market can only

support a limited number of firms in some

industries, and so trade will skew toward those

countries that have firms that were able to capture

first mover advantages (Boeing in US)

Switching cost

Michael Porter focused on the importance of

country factors to explain a nations dominance in

the production and export of certain products

Porters Diamond Model

Human resources

physical resourcesknowledge resources

capital resources and

infrastructure

Domestic consumers

demand for more

innovative and more

advanced products

can produce cost-

effective inputs, but they

also participate in the

upgrading process, thus

stimulating other

companies in the chain

to innovate. (6th force)

5-16

Trade Theoryand Government Policy

While the theories all suggest that trade isbeneficial, they lack agreement in theirrecommendations for government policy

Mercantilism makes a case for governmentinvolvement in promoting exports andlimiting imports

Smith, Ricardo, and Heckscher-Ohlin

promote unrestric ted free tradeNew trade theory and Porter justify limited

and selective government intervention tosupport the development of certain export-oriented industries

5-17

Mercantilism

Mercantilism (mid-16th century) asserted that itis in a countrys best interest to maintain a tradesurplus, to export more than it imports

it advocated government intervention toachieve a surplus in the balance of trade

it viewed trade as a zero-sum game (one inwhich a gain by one country results in a lossby another)

Mercantilism is problematic and noteconomically valid, yet many political viewstoday have the goal of boosting exports whilelimiting imports by seeking only selectiveliberalization of trade

Characteristics of Mercantilism 1500~1750 A.C. Originated in pursuing gold & silver by

people in the Big Ocean TimeWealth: trade as a zero-sum game (one gains results in one loss) Build a strong army & fleet is the major means to acquire &

maintain national wealth. (trade surplus)

Believe in Labor Theory of Value The value of commodity is determined by labor input

Government Intervention Export subsidies Import limitation (tariffs & quotas)

Criticized by: David Hume

Trade surplus increase domestic ms, increasing wages & commodity pricesfollowed, and export competitivenessdeclines. Vice versa.

Therefore, a nation would not remain in surplus or deficit status (can notaccumulate wealth ), this is called Price-Specie-Flow Mechanism.

Adam SmithAbsol ute Ad vantage : wealth is reflected in productivity, a laissez-faire stance

toward trade was in the best interests of a country, and therefore created apositive-sum game.


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Country Focus:Is China a Neo-Mercantil ist Nation?

Are the claims that China is following a neo-mercantilist policy valid? Why or why not?

What incentive does China have to open its

markets to foreign products? Why might

China resist such a move?

Is there evidence that China is pursuing an

import substitution policy? How would this

type of policy benefit the country?

Hard Choices on U.S.-China Trade

Absolute Advantage

In 1776, Adam Smith attacked the mercantilistassumption that trade is a zero-sum game and arguedthat countries differ in their ability to produce goodsefficiently, and that a country has an absoluteadvantage in the production of a product when it is moreefficient than any other country in producing it

According to Smith, countries should specialize in theproduct ion of goods for which they have an absoluteadvantage and then trade these goods for t he goodsproduced by other countries

5-21

Absolute Advantage

Assume that two countries, Ghana and South

Korea, both have 200 units of resources that

could either be used to produce rice or cocoa

In Ghana, it takes 10 units of resources to

produce one ton of cocoa and 20 units of

resources to produce one ton of rice

So, Ghana could produce 20 tons of cocoaand no rice, 10 tons of rice and no cocoa, or

some combination of rice and cocoa

between the two extremes

5-22

Absolute Advantage

In South Korea it takes 40 units of resources

to produce one ton of cocoa and 10

resources to produce one ton of rice

So, South Korea could produce 5 tons of

cocoa and no rice, 20 tons of rice and no

cocoa, or some combination in between

Ghana has an absolute advantage in theproduction of cocoa

South Korea has an absolute advantage

in the production of rice

5-23

Absolute Advantage

Without trade

Ghana would produce 10 tons of cocoa and5 tons of rice

South Korea would produce 10 tons of riceand 2.5 tons of cocoa

If each country specializes in the product inwhich it has an absolute advantage and tradesfor the other product

Ghana would produce 20 tons of cocoa

South Korea would produce 20 tons of rice

5-24

Absolute Advantage

Suppose

Ghana could trade 6 tons of cocoa to SouthKorea for 6 tons of rice

After trade

Ghana would have 14 tons of cocoa left, and6 tons of rice

South Korea would have 14 tons of rice leftand 6 tons of cocoa

Both countries gained from trade


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5-25

Absolute Advantage

The Theory of Absolute Advantage

Absolute AdvantageAbsolute Advantage and the Gains from Trade

Another example

Lets say Taiwan has limitation of workforce for 40, and

Vietnam has 120. Both of these two countries produce only

sausage and bread (the labor force needed for 1 unit of

product is shown as followed).

Without trade, Taiwan has to allocate 8 labor force to

bread factory and 32 to sausage factory to produce 8 hot

dogs.

On the other hand, Vietnam has to send 48 to produce

bread and 72 to produce sausage in order to get 24 hotdogsBread Sausage

Taiwan 1 4

Vietnam 2 3

Unit: labor force needed for 1 unit product

If there is a Economics prophet suggest that the Taiwanese

40 labor force only produce bread, and 120 Vietnamese

only product sausage. Then Taiwanese can produce 40

breads and Vietnamese can produce 40 sausages (under

the Principle of Absolute Advantage).

With trade, Taiwanese can exchange 30 breads for 10

sausages from the Vietnamese. Then Taiwanese will have

10 hot dogs, and Vietnamese will have 30 hot dogs to

eat. Both countries have more hot dogs to enjoy if trade

exists. This is Gains from trade (a positive-sum game).

Bread Sausage

Taiwan 40 0

Vietnam 0 40

Productivity to use all of it s labor force engaging in

one product

Contribution & Blind Spots of PoAA

It explained trade styles between countries

For example: the technology of Taiwanese automakers

is far behind Western countries, so Taiwanese imported

automobiles from those countries. The technology of

making electronic appliances in Taiwan is better than

Southeast Asia, so it exports.

However, during 70s, the technology of Taiwan in

producing most products were far behind the

United States. Taiwan still exported a large

volume of products to US. This is something that

Absolute Advantage could not explain.

Comparative Advantage In 1817, David Ricardo explored what might

happen when one country has an absoluteadvantage in the productio n ofall goods

According to Ricardos theory ofcomparativeadvantage, it makes sense for a country tospecialize in the production of those goods that itproduces most efficiently and to buy the goodsthat it produces less efficiently from other countries,even if this means buying goods from othercountries that it could produce more efficientlyitself


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Frank C. Huang

5-31

Comparative Advantage

Assume

Ghana is more efficient in theproduction of both cocoa and rice

In Ghana, it takes 10 resources toproduce one tone of cocoa, and 13 1/3resources to produce one ton of rice

So, Ghana could produce 20 tons ofcocoa and no rice, 15 tons of rice andno cocoa, or some combination of thetwo

5-32


In South Korea, it takes 40 resourcesto produce one ton of cocoa and 20resources to produce one ton of rice

So, South Korea could produce 5 tonsof cocoa and no rice, 10 tons of riceand no cocoa, or some combination ofthe two

If each country specializes in theproduction of the good in which it has acomparative advantage and trades forthe other, both countries will gain

5-33


With trade

Ghana could export 4 tons of cocoa to

South Korea in exchange for 4 tons of

rice

Ghana will still have 11 tons of cocoa,

and 4 additional tons of riceSouth Korea still has 6 tons of rice

and 4 tons of cocoa

5-34


The Theory of Comparative Advantage

Example of Comparative Advantage

Opportunity Cost:

The Korean have comparative advantage in producing

Wine since its opportunity cost in producing wine (3/4

car) is less than the opportunity cost in producing wine

(2/3 car) by Vietnamese.

Car Wine

S. Korea 40 30

Vietnam 100 150

Unit: labor force needed for 1 unit product

5-36

Classroom Performance System

Which theory did not suggest that there

could be gains from specialization and

trade?

a) Mercantilism

b)Absolute advantage

c) Comparative advantage

d) Heckscher-Ohlin theory


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Frank C. Huang

5-37

The Gains from Trade

The theory of comparative advantageargues that trade is a positive sum gainin which all gain

Potential world producti on isgreater with unrestricted free tradethan it is wit h restricted trade

The theory of comparative advantageprovides a strong rationale forencouraging free trade

Qualifications and Assumptions

The simple example of comparative advantageassumes

only two countries and two goodsIn reality, there are many countries and many

goods

zero transportation costs

Means no t rade barriers

similar prices and values

No difference in the prices of resources indifferent countries.

resources are mobile between goods withincountries, but not across countries

Resources do not always shift qui te so easilyfrom produ cing one good to another

Qualifications and Assumptions

The simple example of comparative advantageassumes

constant returns to scale

Specialization by a countr y has no effect on theamount of resources required to produce goods.In fact, the amount of r esources required toproduce a good might decrease or inc rease as anation specializes in production of that good.

fixed stocks of resources

no effects on income distribution within countries

5-40

Extensions ofthe Ricardian Model

Suppose the following assumptions are

relaxed

1. Resources move freely from the

production of one good to another

within a country

2. There are constant returns to scale3. Trade does not change a countrys

stock of resources or the efficiency

with which those resources are utilized

Extensions of the Ricardian Model

1. Immobile Resources Resources do not always move freely from one economic

activity to another

Governments may help retrain displaced workers

2. Diminishing Returns The simple model assumes constant returns to

specialization (the units of resources required toproduce a good are assumed to remain constant), butan assumption of diminishing returns is more realistic sincenot all resources (productivity by a Chinese & an Americanis different) are of the same quality and different goods useresources in different proportions

Extensions of the Ricardian Model

3. Dynamic Effects and Economic Growth

Ricardo assumed that trade does not change a

countrys stock of resources or the efficiency

with which it utili zes those resources. However

Trade might increase a country's stock of resources

as increased supplies (labor, capital, technology)

become available from abroad

Free trade might increase the efficiency of resource

utilization, and free up resources for other uses


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IBM, Fall 2012

Frank C. Huang

5-43


The Samuelson Critique

Paul Samuelson argued that in somecases, dynamic gains can lead to lessbeneficial outcomes

He is concerned that the ability tooffshore services jobs that weretraditionally not internationally mobilemay have the effect of a mass inwardmigration into the United States,where wages would then fall

5-44


The Link between Trade and Growth

Studies exploring the relationship

between trade and economic growth

suggest that countries that adopt a more

open stance toward international trade

enjoy higher growth rates than those that

close their economies to trade

Higher growth rates raise income

levels and living standards

Country Focus: Moving U.S. WhiteCollar Jobs Offshore

Will the United States suffer from the loss of

highly skilled and high paying jobs? What

does the transference of white-collar jobs

mean to the average American?

This issue is a highly sensitive one for many

Americansespecially those who have seen their

once secure jobs being shipped offshore. You

probably know someone who has suffered from

this very situation, and may claim that companies

have lost all loyalty to their employees and simply

become profit seekers. Some of you may point

that companies are in business to make a profit,

and do well for other stakeholders such as

investors. Some will simply argue that the loss ofwhite-collar jobs is merely a manifestation of

companies viewing the world as a borderless

marketwhere they seek resources wherever

they are cheapest, produce in the optimal location,

and sell wherever there is demand.

What does the transference of white-collar

jobs mean to recipient countries such as

India and the Philippines?

For developing countries like India and the

Philippines, the transference of white-collarjobs from the United States not only

generates new jobs, it also brings new skills

and knowledge that could be vital to the

countries as they continue on the path

toward greater economic development.

You should recognize that greater

employment levels will have the effect of

pushing wages up, and creating greater

economic prosperity in these nations. This

in turn should be beneficial for American

companies as new export markets develop.


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Frank C. Huang

Why do American companies transfer

white-collar jobs to countries like India and

the Philippines?

Is Outsourcing always beneficial forcompanies?

Why Small Tech Companies Aren't utsourcing

Outsourcing call centers is common in manyindustries today, however it can also becontroversial. Many people dislike speakingto foreigners who may not have a completegrasp of their language, and get frustratedwith the responses they receive.

The Ethics of Outsourcing Customer

Service

India offers companies a well-educated workforce

that is willing to work for a fraction of what

companies would pay in the United States. By

transferring skilled jobs to India or the Philippines,

American companies increase their global

competitiveness and profitability. You probably

note that the trend to outsource is likely to

continue as companies seek an edge wherever

they can find one. Already, the trend is being

seen in new industries such as healthcare wherenot only paperwork but even radiology services

are now being routinely outsourced.

5-52

Heckscher-Ohlin Theory

Heckscher and Ohlin argued that comparativeadvantage arises from differences in nationalfactor endowments (the extent to which acountry is endowed with resources such asland, labor, and capital)

The more abundant a factor, the lower itscost

Countries will export goods that makeintensive use of those factors that are locallyabundant, and import goods that makeintensive use of factors that are locallyscarce. Ex., capital-intensive, labor-intensiveindustries

5-53

The Leontief Paradox Empirical tests of H-O theory.

Wassily Leontief (1953) argued that since the U.S.was relatively abundant in capital, it would be anexporter of capital intensive goods and an importerof labor-intensive goods.

Leontief found however, that U.S. exports wereless capital intensive than U.S. imports

Possible explanations for these findings include

that the U.S. has a special advantage inproducing products made with innovativetechnologies that are less capital intensive

differences in technology lead to differences inproductivity which then drives trade patterns

5-54


Which theory viewed trade as a zero sum

game?

a)Mercantilism

b)Absolute advantage

c)Comparative advantage

d)Heckscher-Ohlin theory


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5-55

The Product Li fe Cycle Theory

Raymond Vernon (mid-1960s ) proposed

the product l ife-cycle theory suggesting

that as products mature both the location of

sales and the optimal production location

will change affecting the flow and direction

of trade

In the mid-1960s, the wealth and size of the

U.S. market gave a strong incentive to U.S.

firms to develop new products

The Product Life Cycle Theory

Stage 1:

According to Vernon, in the early stages of aproducts life cycle demand may grow in the U.S.,

but demand in other advanced countries is limited

to high-income groups

High uncertainty and risks to move production overseas

Non-price factor provide firms with sufficient cash flow

Therefore, it is not worthwhile for firms in those

countries to start producing the new product, but it

does necessitate some exports from the U.S. to

those countries


Stage 2:

Over time, demand for the new product starts togrow in other advanced countries making itworthwhile for foreign producers to beginproducing for their home markets

U.S. firms might also set up production facilitiesin those advanced countries where demand isgrowing limiting the exports from the U.S.

As the market in the U.S. and other advancednations matures, the product becomes morestandardized, and price becomes the maincompetitive weapon

The Product Life Cycle Theory

Stage 3:

Producers based in advanced countries wherelabor costs are lowerthan the United Statesmight now be able to export to the U.S.

If cost pressures become intense, developingcountries begin to acquire a productionadvantage over advanced countries

Consequence:The United States switches from being an

exporterof the product to an importerof theproduct as production becomes moreconcentrated in lower-cost foreign locations


5-60

Evaluating The

Product L ife Cycle Theory

While the product life cycle theory accuratelyexplains what has happened for products likephotocopiers and a number of other hightechnology products developed in the US in the1960s and 1970s, the increasing globalization andintegration ofthe world economy has made thistheory less valid in today's world

Today, many new products are initiallyintroduced in Japan or Europe, or areintroduced simultaneously in the U.S., Japan,and Europe

Production may also be dispersed to thoselocations where it is most favorable


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New Trade Theory

New trade theory (1970s) suggests

1. Because ofeconomies of scale (unit cost reductionsassociated with a large scale of output), trade canincrease the variety of goods available to consumersand decrease the average cost of those goods

2. In those industries when the output required to attaineconomies of scale represents a significant proportion oftotal world demand, the global market may only b e ableto support a small number of firms (The rule of threeand four)

5-62

Increasing Product Varietyand Reducing Costs

Without tradea small nation may not be able to support the

demand necessary for producers to realizerequired economies of scale, and so certainproducts may not be produced

With trade

a nation may be able to specialize inproducing a narrower range of products andthen buy the goods that it does not make fromother countries

each nation then simultaneously increasesthe variety of goods available to itsconsumers and lowers the costs of thosegoods

Sounds like Smiths theory

5-63

Economies of Scale, First MoverAdvantages and the Pattern of Trade

Firms with first mover advantages (the

economic and strategic advantages that

accrue to many entrants into an industry)

will develop economies of scale and

create barriers to entry for other firms

The pattern of trade we observe in theworld economy may be the result of first

mover advantages and economies of

scale (ex., VHS vs. Beta, AirBus)

Strong R&D vs. Strong manufacturing

capability 5-64

Implications of New Trade Theory

New trade theory suggests

nations may benefit from trade even when

they do not differ in resource endowments or

technology

a country may predominate in the export of a

good simply because it was lucky enough to

have one or more firms among the first toproduce that good

Thus, new trade theory provides an economic

rationale for a proactive trade policy that is at

variance with other free trade theories

5-65

National Competitive Advantage:

Porters Diamond

Porter (1990) tried to explain why a nationachieves international success in a particularindustry

Porter identified four attributes he calls thediamond that promote or impede the creationof competitive advantage

1. Factor endowments

2. Demand conditions

3. Related and supporting industries

4. Firm strategy, structure, and rivalry

In addition, Porter identified two additionalvariables (chance and government) that caninfluence the diamond in important ways

5-66

National Competitive Advantage:

Porters Diamond

Determinants of National Competitive

Advantage: Porters Diamond


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Factor Endowments

A nation's position in factor endowments (factorsof production) can lead to competitive advantage

These factors can be eitherbasic (naturalresources, climate, location) oradvanced(skilled labor, infrastructure, technologicalknow-how)

Basic factors can provide an initial

advantage that is then reinforced

and extended by investment

in advanced factors

Demand Conditions

Demand conditi ons refers to the nature of home

demand for an industrys product or serviceDemand conditions influence the development of

capabilities

Sophisticated and demanding customerspressure firms to be more competitive and toproduce high quality, innovative products

Related and Suppor ting Indus tries

Related and supporting industries refers to thepresence supplier industries and relatedindustries that are internationally competitive (the6th force)

Investing in these industries can spill over andcontribute to success in other industries

Successful industries tend to be grouped in

clusters in countries which them promptsknowledge flows between firms (Silicon Valley)

Having world class manufacturers of semi-conductor processing equipment can lead to (andbe a result of having) a competitive semi-conductorindustry

5-70


Economies of scale and first moveradvantages are central to which theory oftrade

a) Porters diamond of competitiveadvantage

b) New trade theory

c) Vernons product life cycle

d) Comparative advantage

Firm Strategy, Structure, and Rivalry

Firm strategy, structure, and rivalry refers to theconditions in the nation governing how companies arecreated, organized, and managed, and the nature ofdomestic rivalry

Different nations are characterized by differentmanagement ideologies which influence the ability of firmsto build national competitive advantage

Example: German and Japanese firms place emphasis onimproving manufacturing process and product design. Oncontrast, American focus on

short-term financial return.

There is a strong association between vigorous domestic

rivalry and the creation and persistence of competitive

advantage in an industry. Ex., Japans electronicappliances (Sony, Sharp, Toshiba, Panasonic.)

The Diamond of National Advantage

Firm Strategy,

Structure and

Rivalry

Related and

Supporting

Industries

Demand

Conditions

Factor

Conditions

Chance

Government


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5-73

Evaluating Porters Theory

Porter suggests that the four attributes of thediamond togetherwith government policy,and chance work as a reinforci ng system,complementing each other and in combinationcreating the conditions appropriate forcompetitive advantage

Porter believes that government policy canaffect demand through product standards,influence rivalry through regulation and antitrustlaws, and impact the availability of highlyeducated workers and advanced transportationinfrastructure

5-74

Evaluating Porters Theory

Question: Is Porter right?

If Porter is correct, his model should predict thepattern of international trade in the real world

Countries should export products fromindustries where the diamond is favorable

Countries should import products fromareas where the diamond is not favorable

So far there has been little empirical testing ofthe theory

5-75

Implications for Managers

Question: What are the implications ofinternational trade theory forinternational businesses?

There are at least three mainimplications for international

businesses1. Location implications

2. First-mover implications

3. Policy implications

5-76

Location

Different countries have advantages in

different productive activities

These differences influence a firms

decision about where to locate

productive activities

It makes sense for a firm to disperseits various productive activities to

those countries where they can be

performed most efficiently

5-77

First-Mover Advantages

Firms that establish a first-mover

advantage in the production of a new

product may later dominate global trade

in that product

It can be worthwhile for a firm to

invest resources in trying to build first-

mover advantages, even if it means

losses for a few years before a

venture becomes profitable

5-78

Government Policy

Government policies with respect to free

trade or protecting domestic industries

can significantly impact global

competitiveness

Businesses should work to encourage

governmental policies that support

free trade


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5-79


Porters Diamond is made up of all of the

following except

a)Factor endowments

b)Related and supporting industries

c)Firm strategy, structure, and rivalry

d)Supply conditions

5-80

Critical Discussion Question

1. Mercantilism is a bankrupt theory that

has no place in the modern world.

Discuss.

5-81


2. Is free trade fair? Discuss!

5-82


3. Unions in developed nations often

oppose imports from low-wage countries

and advocate trade barriers to protect jobs

from what they often characterize as

unfair import competition. Is such

competition unfair? Do you think that this

argument is in the best interests of (a) the

unions, (b) the people they represent,

and/or (c) the country as a whole?

5-83


4. What are the potential costs of adopting

a free trade regime? Do you think

governments should do anything to reduce

these costs? What?

5-84


5. Reread the Country Focus on Is China

a Neo-Mercantilist Nation?

a) Do you think China is pursuing an

economic policy that can be characterized

as neo-Mercantilist?

b) What should the United States, and

other countries, do about this?


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5-85


6. Drawing upon the new trade theory and

Porters theory of national competitive

advantage, outline the case for

government policies that would build

national competitive advantage in

biotechnology. What kind of policies would

you recommend that the government adopt?

Are these policies at variance with the

basic free trade philosophy?

5-86


7. The worlds poorest countries are at a

competitive disadvantage in every sector of

their economies. They have little to export.

They have no capital; their land is of poor

quality; they often have too many people

given available work opportunities; and

they are poorly educated. Free trade

cannot possibly be in the interests of such

nations! Discuss.

ch05 international trade theory

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