Chapter 05 - International Trade Theory
5
International Trade Theory
Learning objectives

Understand why nations
trade with each other.

Be familiar with the
different
theories
explaining trade flows
between nations.



Understand why many
economists believe that
unrestricted free trade
between nations will raise
the economic welfare of
countries that participate in
a free trade system.
Be familiar with the
arguments of those who
maintain that government
can play a proactive role in
promoting
national
competitive advantage in
certain industries.
This chapter presents the major theories of international
trade. Scholars first began to offer explanations for trade
in the fifteenth century. Since then, various trade
theories have developed, along with efforts to refine
them.
Approaches to trade range from support for free trade to
managed trade, to mercantilist approaches, to controlled
trade, and even, in extremely rare cases, to no trade.
Free trade, with no government interference, is certain
to hurt some domestic industries that are not
competitive globally. Workers in the U.S. textile
industry, for example, may lose jobs to workers in lower
wage economies. Yet consumers in the U.S. like to
purchase inexpensive, quality goods.
The opening case explores Ecuador’s successful effort
at building its rose industry. Thanks to advances in
transportation technology, in just twenty years, the
industry has grown from virtually nothing to a $240
million dollar industry employing thousands of people.
The closing case examines the growth of the
information technology industry in the U.S. During the
1960s, the sector thrived in the U.S., but really took off
after companies began to outsource the production of
commodity-like products in the early 1980s.
Understand the important
implications that international
trade theory holds for
business practice.
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Chapter 05 - International Trade Theory
OUTLINE OF CHAPTER 5: INTERNATIONAL TRADE THEORY
Opening Case: The Ecuadorian Rose Industry
Introduction
An Overview of Trade Theory
The Benefits of Trade
The Pattern of International Trade
Trade Theory and Government Policy
Mercantilism
Country Focus: Is China a Neo-Mercantilist Nation?
Absolute Advantage
Comparative Advantage
The Gains from Trade
Qualifications and Assumptions
Extensions of the Ricardian Model
Country Focus: Moving U.S. White Collar Jobs Offshore
Heckscher-Ohlin Theory
The Leontief Paradox
The Product Life-Cycle Theory
Evaluating the Product Life-Cycle Theory
New Trade Theory
Increasing Product Variety and Reducing Costs
Economies of Scale, First-Mover Advantages and the Pattern of Trade
Implications of New Trade Theory
National Competitive Advantage: Porter’s Diamond
Factor Endowments
Demand Conditions
Related and Supporting Industries
Firm Strategy, Structure, and Rivalry
Management Focus: The Rise of Finland’s Nokia
Focus on Managerial Implications
Location
First-Mover Advantages
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Chapter 05 - International Trade Theory
Government Policy
Chapter Summary
Critical Thinking and Discussion Questions
Closing Case: Trade in Information Technology and U.S. Economic Growth
CLASSROOM DISCUSSION POINT
Ask students why countries trade with each other. Write their response on the board and
try to groups the responses according to the various theories presented in the text.
Next, ask them what would happen if countries did not trade with each other. Again,
write the responses on the board using the same format.
Finally, identify how their responses fit into the country/firm framework, and then refer
back to their responses throughout the presentation of the material in the chapter.
OPENING CASE: The Ecuadorian Rose Industry
The opening case describes Ecuador’s rose industry. In the last 20 years, Ecuador has
built its rose industry from virtually nothing to a thriving industry generating $240
million in sales. Today, the industry employs tens of thousands of people at higher
wages than the average Ecuadorian receives. Yet, there are concerns that in the quest for
perfect flowers, the use of toxic chemicals such as pesticides may be hurting not only the
environment, but also the health of the workers. Discussion of the case can revolve
around the following questions:
1. Describe the benefits that the rose industry has brought to Ecuador. In your opinion,
do the benefits outweigh the disadvantages? Why or why not?
2. Consumer groups in Europe have pushed for reforms to Ecuador’s 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.
Teaching Tip: For more information on the rose industry in Ecuador, visit
{http://www.globalpolicy.org/globaliz/cultural/2003/02flowers.htm}.
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Chapter 05 - International Trade Theory
LECTURE OUTLINE
This lecture outline follows the Power Point Presentation (PPT) provided along with this
instructor’s manual. The PPT slides include additional notes that can be viewed by
clicking on “view”, then on “notes”. The following provides a brief overview of each
Power Point slide along with teaching tips, and additional perspectives.
Slide 5-3 An Overview of Trade Theory
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.
Slide 5-4 The Benefits of Trade
Smith, Ricardo and Heckscher-Ohlin show why it is beneficial for a country to engage in
international trade even for products it is able to produce for itself.
Slide 5-5 The Patterns of Trade
International trade allows a country to specialize in the manufacture and export of
products that it can produce efficiently, and import products that can be produced more
efficiently in other countries.
Some patterns of trade are fairly easy to explain - it is obvious why Saudi Arabia exports
oil, the US exports agricultural products, and Mexico exports labor intensive goods. Yet
others are not so obvious or easily explained, such as cars in Japan.
Slide 5-6 Trade Theory and Government Policy
The various theories have differing prescriptions for government policy on trade.
Mercantilism makes a crude case for government involvement in promoting exports and
limiting imports. Smith, Ricardo, and Heckscher-Ohlin promote unrestricted free trade.
New trade theory and Porter’s theory of national competitive advantage justify limited
and selective government intervention to support the development of certain exportoriented industries.
Slide 5-7 Mercantilism
Mercantilism suggests that it is in a country’s best interest to maintain a trade surplus -to export more than it imports, and advocates government intervention to achieve a
surplus in the balance of trade.
It views trade as a zero-sum game - one in which a gain by one country results in a loss
by another.
Another Perspective: A historical perspective of Mercantilism is available at the
following site {http://www.egss.ulg.ac.be/EconomieInternationale/Swe/SWEglobal.htm}.
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Slides 5-8-5-13 Absolute Advantage
Adam Smith argued that countries differed in their ability to produce goods efficiently,
and should specialize in the production of the goods they can produce the most
efficiently.
If Britain were to specialize in textile production, and Spain in wine production, Smith
argued that both Britain and Spain could consume more textiles and wine than if each
only produced for their own consumption. Thus trade is a positive sum game.
Slides 5-14-5-17 Comparative Advantage
David Ricardo asked what might happen when one country has an absolute advantage in
the production of all goods. Ricardo’s theory of comparative advantage suggests that
countries should specialize in the production of those goods they produce most efficiently
and buy goods that they produce less efficiently from other countries, even if this means
buying goods from other countries that they could produce more efficiently at home.
Slide 5-18 Qualifications and Assumptions
The simple example of comparative advantage presented in the text makes a number of
assumptions: only two countries and two goods; zero transportation costs; similar prices
and values; resources are mobile between goods within countries, but not across
countries; constant returns to scale; fixed stocks of resources; and no effects on income
distribution within countries. While these are all unrealistic, the general proposition that
countries will produce and export those goods that they are the most efficient at
producing has been shown to be quite valid.
Slides 5-19 Extensions of the Ricardian Model
Diminishing returns to specialization suggest that after some point, the more of a good
that a country produces, the greater will be the units of resources required to produce
each additional item. If crops are grown on increasingly less fertile land, mining is done
on less productive ore, or less skilled personnel need to be hired to perform high skilled
jobs, production per unit of input will decrease. (Diminishing returns implies a PPF
which is convex.) In reality, countries do not specialize entirely, but produce a range of
goods. It is worthwhile to specialize up until that point where the resulting gains from
trade are offset by diminishing returns.
Opening an economy to trade is likely to generate dynamic gains of two types. First,
trade might increase a country's stock of resources as increased supplies become available
from abroad. Secondly, free trade might increase the efficiency of resource utilization,
and free up resources for other uses.
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Teaching Tip: An overview of the ideas and philosophies of David Ricardo, from which
his theory of comparative advantage emerged, is available at
{http://www.econlib.org/library/Enc/bios/Ricardo.html}. Students might also consult
{http://cepa.newschool.edu/het/alphabet.htm} for information on numerous philosophers,
and {http://cepa.newschool.edu/het/profiles/ricardo.htm}for Ricardo specifically.
Slide 5-20 The Samuelson Critique
Samuelson argues that in some cases, the dynamic gains from trade may not be so
beneficial. He argues that the ability to off-shore services jobs that were traditionally not
internationally mobile may have the effect of a mass inward migration into the United
States, where wages fall.
Slide 5-21 Heckscher-Olin Theory
The Heckscher-Ohlin theory predicts that countries will export those goods that make
intensive use of factors of production which are locally abundant, while importing goods
that make intensive use of factors that are locally scarce. It focuses on differences in
relative factor endowments rather than differences in relative productivity.
Teaching Tip: A more complete description of the Heckscher-Ohlin theory is available at
{http://cepa.newschool.edu/het/alphabet.htm}.
Slide 5-23 The Leontief Paradox
Using the Heckscher-Ohlin theory, Leontief, in 1953 postulated that since the U.S. was
relatively abundant in capital compared to other nations, the U.S. would be an exporter of
capital intensive goods and an importer of labor-intensive goods. To his surprise,
however, he found that U.S. exports were less capital intensive than U.S. imports. Since
this result was at variance with the predictions of the theory, it has become known as the
Leontief Paradox.
Teaching Tip: A more extensive description of the Leontief Paradox is available at
{http://cepa.newschool.edu/het/alphabet.htm}.
Slides 5-25-5-28 The Product Life Cycle
Raymond Vernon suggested that as products mature, both the location of sales and the
optimal production location will change, affecting the direction and flow of imports and
exports. Globalization weakens this theory.
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Slide 5-30 New Trade Theory
New trade theory suggests that because of economies of scale and increasing returns to
specialization, in some industries there are likely to be only a few profitable firms. Firms
with first mover advantages will develop economies of scale and create barriers to entry
for other firms.
New trade theory does not contradict the theory of comparative advantage, but instead
identifies a source of comparative advantage.
Slide 5-31 Increasing Product Variety and Reducing Costs
A nation may be able to specialize in producing a narrower range of products than it
would in the absence of trade, yet by buying goods that it does not make from other
countries, each nation can simultaneously increase the variety of goods available to its
consumers and lower the costs of those goods.
Slide 5-32 Economies of Scale, First Mover Advantages, and the Pattern of Trade
The pattern of trade we observe in the world economy may be the result of first mover
advantages (economic and strategic advantages that accrue to early entrants into an
industry) and economies of scale.
Slide 5-33 Implications of New Trade Theory
New trade theory suggests that nations may benefit from trade even when they do not
differ in resource endowments or technology.
The theory also suggests that 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 to produce that
good.
Slides 5-35-5-36 Theory of National Competitive Advantage
Michael Porter hypothesizes that a nation’s competitiveness depends on the capacity of
its industry to innovate and upgrade. Porter's study tried to explain why a nation achieves
international success in a particular industry. This study found four broad attributes that
promote or impede the creation of competitive advantage: factor endowments, demand
conditions, relating and supporting industries, and firm strategy, structure, and rivalry.
These attributes form Porter’s diamond.
Slide 5-37 Factor Endowments
These are the nation’s relative position in factors of production. They are divided into
basic and advanced.
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Chapter 05 - International Trade Theory
Slide 5-38 Demand Conditions
The nature of home demand for the industries product or service influences the
development of capabilities. Sophisticated and demanding customers pressure firms to
be competitive.
Slide 5-39 Related and Supporting Industries
The presence in a nation of supplier industries and related industries that are
internationally competitive can spill over and contribute to other industries.
Slide 5-40 Firm Strategy, Structure and Rivalry
The conditions in the nation governing how companies are created, organized, and
managed, and the nature of domestic rivalry impacts firms' competitiveness.
Firms that face strong domestic competition will be better able to face competitors from
other firms.
Slide 5-41 Evaluating Porter’s Theory
In addition to these four main attributes, government policies and chance can impact any
of the four.
Government policy can affect demand through product standards, influence rivalry
through regulation and antitrust laws, and impact the availability of highly educated
workers and advanced transportation infrastructure.
Slide 5-43 Implications for Managers
There are at least three main implications of the material discussed in this chapter for
international businesses: location implications, first-mover implications, and policy
implications.
Slide 5-44 Location
From a profit perspective, it makes sense for a firm to disperse its various productive
activities to those countries where, according to the theory of international trade, they can
be performed most efficiently.
Being a first mover can have important competitive implications, especially if there are
economies of scale and the global industry will only support a few competitors. Firms
need to be prepared to undertake huge investments and suffer losses for several years in
order to reap the eventual rewards.
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Slide 5-45 First Mover Advantages
Being a first mover can have important competitive implications, especially if there are
economies of scale and the global industry will only support a few competitors.
Firms need to be prepared to undertake huge investments and suffer losses for several
years in order to reap the eventual rewards.
Slide 5-46 Government Policy
One of the most important implications for businesses is that they should work to
encourage governmental policies that support free trade.
If a business is able to get its goods from the best sources worldwide, and compete in the
sale of products into the most competitive markets, it has a good chance to survive and
prosper. If such openness is restricted, a business’s long-term survival will be in greater
question.
Another Perspective: For information about foreign governments and their approaches to
international trade, visit the Electronic Embassy at {http://www.embassy.org/}. This site
provides links to all of the foreign embassies located in Washington D.C.
CRITICAL THINKING AND DISCUSSION QUESTIONS
QUESTION 1: Mercantilism is a bankrupt theory that has no place in the modern world.
Discuss.
ANSWER 1: In its purest sense, mercantilism is a bankrupt theory that has no place in the
modern world. The principle tenant of mercantilism is that a country should maintain a
trade surplus, even if that means that imports are limited by government intervention.
This policy is bankrupt for at least two reasons. First, it is inconsistent with the general
notion of globalization, which is becoming more and more prevalent in the world. A
policy of mercantilism will anger potential trade partners because it will exclude their
goods from free access to the mercantilist country’s markets. Eventually, a country will
find it difficult to export if it imposes oppressive quotas and tariffs on its imports.
Second, mercantilism is bankrupt because it hurts the consumers in the mercantilist
country. By denying its consumers access to either “cheaper” goods from other countries
or more “sophisticated” goods from other countries, the mercantilist country’s ordinary
consumers suffer.
QUESTION 2: Is free trade fair? Discuss.
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Chapter 05 - International Trade Theory
ANSWER 2: This question will probably generate a fair amount of discussion. Trade
theory tells suggests that specialization and free trade benefits all countries. However, a
case can be made in some situations for imposing trade barriers. For example, if a
developing country is trying to establish an industry, trade barriers may be needed in the
short term until the industry can become competitive. While it could be argued that
another country could make the product more efficiently already, is it fair to limit a
country’s ability to develop its industrial base?
QUESTION 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?
ANSWER 3: The theory of comparative advantage suggests that a country should
specialize in producing those goods that it can produce most efficiently, while buying
goods that it can produce relatively less efficiently from other countries. Furthermore,
the theory suggests that opening a country to free trade stimulates economic growth,
which creates dynamic gains from trade. Therefore, it would follow that if low-wage
countries can make certain products more efficiently than high wage countries, the low
wage countries should produce and export those products. While trade barriers may
protect workers and companies, they are a short-term fix at best. Moreover, by protecting
industries, the government is not encouraging companies to become more efficient.
Instead, they are promoting inefficiency. Consumers lose out because they have higher
prices and less choice.
QUESTION 4: What are the potential costs of adopting a free trade regime? Do you think
governments should do anything to reduce these costs? What?
ANSWER 4: Students will probably be divided on this question, and a lively debate
should ensue. For example, certainly, students will probably recognize that by adopting a
free trade regime, jobs will be lost in some industries, however they may not agree on
exactly what should be done about the jobs losses. Some students might suggest that the
government provide retraining programs while others may argue that people lose their
jobs everyday and don’t get government assistance to find new ones.
QUESTION 5: Re-read the Country Focus feature, Is China a Mercantilist Nation?
a) Do you think China is pursuing an economic policy that can be characterized as neomercantilist?
b) What should the United States, and other countries, do about this?
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ANSWER 5:
a) With a trade surplus of $210 billion in 2006, and foreign exchange reserves of $1
trillion, China has been criticized as following a neo-mercantilist policy. For years,
China’s exports have been growing faster than its imports, and some critics suggest that
China is limiting imports through an import substitution policy. Others have argued that
China’s currency is too cheap, which effectively keeps its export prices low.
b) Students will probably suggest that the United States and other countries continue to
put pressure on China to open its markets to imports or risk retaliatory measures. Some
students may also focus on the value of China’s currency and argue that the U.S. needs to
push for a revaluation.
QUESTION 6: Reread the Country Focus on moving white collar jobs offshore.
a) Who benefits from the outsourcing of skilled white collar jobs to developing nations?
Who are the losers?
b) Will developing nations like the United States suffer from the loss of high skilled and
high paying jobs to other countries?
c) Is there a difference between the transference of high paying white collar jobs, such as
computer programming and accounting, to developing nations, and low paying blue
collar jobs? If so, what is the difference, and should government do anything to stop the
flow of white collar jobs out of the country to countries like India?
ANSWER: This question is likely to generate a lively debate. Many students will
suggest that the outward flow of white-collar jobs is indeed a serious issue, one that
should be the focus of government attention. Students taking this perspective are likely
to suggest that white-collar jobs are more important to the nation’s future, and that they
should remain at home. Other students however, may argue that companies cannot afford
to pay the higher wages commanded by white-collar jobs and still remain profitable.
Therefore, the argument might be that by taking these jobs outside the country, the
company is able to remain viable, and keep other people employed.
QUESTION 7: Drawing on the new trade theory and Porter's theory of national
competitive advantage, outline the case for government policies designed to build a
national competitive advantage in biotechnology. What kind of policies would you
recommend the government adopt? Are these policies at variance with the basic free
trade philosophy?
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ANSWER 7: Porter’s theory of national competitive advantage argues that four broad
attributes of a nation shape the environment in which local firms compete, and that these
attributes promote or impede the creation of competitive advantage. These attributes are:
factor endowments, demand conditions, related and supporting industries, and firm
strategy, structure, and rivalry. Porter goes on to argue that firms are most likely to
succeed in industries in which the diamond (which are the four attributes collectively) is
favorable. Porter adds two factors to the list of attributes described above: chance and
government policy. The New Trade theory addresses a separate issue. This theory
argues that due to the presence of substantial scale economies, world demand will support
only a few firms in many industries. Underpinning this argument is the notion of firstmover advantages, which are the economic and strategic advantages that accrue to early
entrants into an industry. One could argue that when the attributes of a nation are
conductive to the production of a product, and when the manufacturers of that product
have experienced some “chance” events that have provided them first-mover advantages,
the governmental policies of that nation should promote the building of national
competitive advantage in that particular area. This could be accomplished through
government R&D grants, policies that favor the industry in capital markets, policies
towards education, the creation of a favorable regulatory atmosphere, tax abatements, and
the like. Ask your students whether they think this policy is at variance with the basic
free trade philosophy. One could argue that it is, because the government intervention is
creating the basis for comparative advantage. Conversely, one could argue that if a
country establishes a comparative advantage in a particular area that is based on a unique
set of attributes (such as Swiss production of watches), world output will be favorably
impacted by letting that country pursue its area of comparative advantage.
QUESTION 8: The world’s 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.
ANSWER 8: This is a difficult question. Certainly, most students will recognize that
these countries are in dire straights and need assistance from richer countries. Most
students will probably be sympathetic to their cause and suggest various aid programs
including education and monetary support to help the countries develop. However,
others may be more cautious and promote the notion that assistance would have to come
in an organized form with multiple nations working together. The question is an
interesting one that should provide students with an eye-opening experience.
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CLOSING CASE: Trade in Information Technology and U.S. Economic Growth
The closing case examines the link between the information technology sector and
economic growth in the United States. In the early 1980s, U.S. information technology
companies shifted production of certain commodity-like components to low cost
producers, and focused on producing only the highest value-added components.
Questions arose as to whether the trend was bad for the U.S. economy. Discussion of the
case can revolve around the following questions:
QUESTION 1: During the 1990s and 2000s computer hardware companies in certain
developed nations progressively moved the production of hardware components offshore,
often outsourcing them to producers in developing nations. What does international trade
theory suggest about the implications of this trend for economic growth in those
developed nations?
ANSWER 1: When production of commodity-like components began to shift from the
U.S. to low cost locations in the early 1980s, many experts were concerned about
potential jobs losses. Research showed however, that while some manufacturing jobs
were indeed lost, the lower costs inputs brought prices down, and actually prompted a
more rapid diffusion of the technology. This in turn, generated greater productivity in the
workplace, and a boom in the computer services and software industries, where many
new jobs were created. According to international trade theory, developing nations also
stood to benefit from the trend as the outsourcing by American companies created new
jobs and greater economic growth in those markets.
QUESTION 2: Is the experience of the United States, as described in this case, consistent
with the predictions of international trade theory?
ANSWER 2: The information technology sector began in the U.S. in the 1960s and
1970s. At the time, all production took place in the U.S., but by the 1980s, producers
were outsourcing production of commodity-like components to low cost labor countries,
while companies in the U.S. focused on producing higher-margin inputs. Many students
will probably note that this trend is consistent with the predictions of international trade
theory in that production of the various components took place where it could occur most
efficiently, and that a products moved through a life cycle. Porter’s diamond is also
useful for explaining the rapid diffusion of information technology.
QUESTION 3: What are the implications of the theory and data for (a) government
policy in advanced nations such as the United States, and (b) the strategy of a firm in the
computer industry, such as Dell or Apple Computer?
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ANSWER 3: New trade theory and Porter’s diamond of competitive advantage suggest
that the success of the U.S. information technology sector is due in part to government
policies. By maintaining policies designed to facilitate growth in the industry, the U.S.
can encourage success. Many students will probably note that for firms like Dell and
Apple Computer the rapid diffusion of the technology intensified demand for innovation,
increased the value of first-mover advantages, and encouraged government lobbying.
INTEGRATING iGLOBES
There are several iGLOBE video clips that can be integrated with the material presented
in this chapter. In particular, you might consider the following:
Title: China Rising Part 1: The Boom
China’s Rising Economy
Abstract: This video examines the economic boom that is transforming China.
Key Concepts: economic growth, investment, trade, globalization, global economy
Notes: China may hold on to its traditional practices of tai chi and calligraphy, but the
country is nothing like what it once was. Instead, China is considered to be the fastest
growing major economy in the world, a country with more than twice as many people as
the U.S. and Europe combined. In cities like Shanghai and Beijing the landscape is
changing virtually overnight. Just twenty years ago, Shanghai boasted a single
skyscraper. Today, thanks in part to crews that work three shifts a day, the city has over
three hundred skyscrapers.
China’s economic boom started in the late 1970s, and since then, the Chinese economy
has doubled every eight years. In contrast, the U.S. economy has doubled only once over
the same time period. Chinese consumers now have ten times the purchasing power they
had just a quarter century ago. If the trend continues, China’s purchasing power will
mirror that of the U.S. in only two decades, and exceed that of the U.S in thirty years.
The growth rate in China’s cities is fueled by the influx of peasants from the countryside.
While some 60 percent of China’s population still farms for a living, that number is
dwindling as 20 million people leave the farm each year in search of a better life in the
city. This large migration leads to new demands for housing adding to the economic
boom.
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With Chinese factory workers earning about $1.25 per hour including benefits,
manufacturing is booming too. China’s total trade now exceeds that of Japan, and comes
in second only to that of the U.S. Perhaps more importantly, China is now moving into
higher-tech exports such as computers. To move all of these exports, Shanghai has its
sights set on becoming the world’s largest port within a few years. Shanghai’s ambitious
plans reflect a general sense of economic energy and optimism in China, an energy and
optimism that manifests itself in the plans of China’s young people to achieve evergreater success.
Discussion Questions:
1. China’s economic boom is extraordinary. What does this boom mean to companies in
other parts of the world? How can companies such as Ford or Microsoft capitalize on
China’s growth? What problems does China’s economic growth create for these
companies?
2. What role does the personal ambition of Chinese citizens play in China’s economic
boom? The U.S. has often been considered the land of opportunity. In your opinion does
the name still fit? Does it apply to China? Why or why not?
3. China’s major cities are receiving an influx of people each year as peasants seek a
better life. Consider the problems associated with this form of migration. How should
the Chinese government respond to the situation?
4. With its red-hot economy, huge population, and movement into higher-tech exports,
China is becoming a force to be reckoned with. What will China’s role be in the global
economy over the next ten years? In twenty years?
INTEGRATING VIDEOS
There are also several longer video clips that can be integrated with the material
presented in this chapter. In particular, you might consider the following:
Title 8: Air War
Summary: It is being called the biggest trade dispute in history. Europe’s Airbus and
America’s Boeing are gearing up for a major face off—the issue, government subsidies.
Boeing is accusing Airbus of unfair trade practices arguing that the investments the
company receives from the European Union are tantamount to subsidies. Airbus has
responded by pointing out that Boeing receives subsidies from the U.S. government.
Both companies have received subsidies for some time, however, only recently, on the
eve of Airbus’s launch of its new mid-sized, fuel- efficient A-350 jet, have they become a
major issue. The new A-350 is a direct competitor to Boeing’s Dreamliner, its most
successful jet in some time.
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The two companies had signed a truce agreement of sorts in 1992. However, at the time
Boeing held a strong advantage over Airbus. Now, with its market share slipping away,
Boeing wants a new deal. The company has stated that the EU practice of fronting the
money for investments in R&D and requiring payment for the loans only if the jet
developed is successful is wrong. The EU for its part, argues that the defense money that
Boeing receives is a subsidy as are the tax breaks it receives from the state of
Washington. Both the U.S. and the EU are approaching the dispute carefully. Neither
side wants to jeopardize their position at the Doha Round, yet because of the nature of the
companies involved, both sides feel committed to the dispute.
Discussion Questions:
1. It is being said that the trade dispute between Boeing and Airbus is the biggest trade
dispute in history. What makes this dispute different from other? Why is it so
important? Is it merely the visibility and size of the companies involved, or is national
pride at stake as well?
2. In 1992, Boeing and Airbus agreed to certain levels of support, but now Boeing is
taking its accusations of Airbus’ wrongdoings to the WTO. Yet, as Airbus pointed out,
Boeing is the recipient of subsidies as well. Does Boeing risk its own welfare in bringing
these accusations to the WTO? Will the WTO truly act as an arbitrator in this dispute or
does the power of the nations involved supersede that of the WTO?
3. What does new trade theory tell us about the situation outlined in the video?
4. The EU and the U.S. have indicated that they want to keep the dispute between Boeing
and Airbus separate from the other issues involving trade liberalization that are currently
under negotiation at the Doha Round. Is it really possible to maintain this distinction?
Why is it so important to keep these issues separate?
globalEDGE™ Exercise Questions
Use the globalEDGE™ site {http://globalEDGE.msu.edu/} to complete the following
exercises:
Exercise 1
The WTO’s International Trade Statistics is an annual report that provides
comprehensive, comparable, and updated statistics on trade in merchandise and
commercial services. This report allows for an assessment of world trade flows by
country, region, and main product or service categories. Using the most recent statistics
available, identify the top five countries that lead in the export and import of
merchandise, respectively.
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Chapter 05 - International Trade Theory
Exercise 2
Food in an integral part of understanding different countries, cultures, and lifestyles. In
fact, your company is interested in importing Australian seafood to the United States. As
part of the initial analysis, you want to identify the strengths of the Australian seafood
industry. One resource you might find useful is the Australian Trade Commission
website. Provide a short description of the current status of Australian seafood exports
by variety, and also a list of the top countries importing Australian seafood.
Answers to Exercise Questions
Exercise 1
The report can be accessed by searching the term “International Trade Statistics” at
{http://globaledge.msu.edu/ResourceDesk/}. The WTO: International Trade Statistics
comes up as the first two sources in this search. As this is a published report that
primarily focuses on statistical data, the resource is found under two globalEDGE
categories: “Research: Statistical Data Sources” and “News and Periodicals:
Publications”. Be sure to check the “Resource Desk only” checkbox of the search
function. Be sure to check the “Resource Desk only” checkbox of the search function on
the globalEDGE website.
Search Phrase: “International Trade Statistics”
Resource Name: WTO: International Trade Statistics
Website: {http://www.wto.org/english/res_e/statis_e/statis_e.htm}
globalEDGE™ Category: “Research: Statistical Data Sources” or “News and Periodicals:
Publications”
Exercise 2
The information requested is related to a specific country’s trade statistics. Therefore, the
quickest way to reach this information would be to browse globalEDGE by country.
Using the drop-down menu on the globalEDGE Resource Desk, we go to the Australia
page located at {http://globaledge.msu.edu/ibrd/CountryIntro.asp?CountryID=155}. We
can look at the selected links on this page, or select “Links” from the left menu to find a
more comprehensive list of sites about Australia. The information is available on a wide
variety of sites. Be sure to check the “Resource Desk only” checkbox of the search
function on the globalEDGE website.
Another option is to use the search phrase “Australian Trade Commission” and choose
the first option. Under “Market Information”, users can search market analysis by country
or industry. Selecting the Seafood industry from the industry option, gives us an
overview on the status of the industry. Be sure to check the “Resource Desk only”
checkbox of the search function.
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Chapter 05 - International Trade Theory
Search Phrase: “Australian Trade Commission”
Resource Name: Australia: Australian Trade Commission
Website: {http://www.austrade.gov.au/}
globalEDGE™ Category: “Research: Government Resources”
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