CHAPTER 2
The Evolution of International Business
Chapter Outline

Introduction

Benefits of Trade and Foreign Direct Investment

Major Theories of International Trade
o Wealth Accumulation as a Basis for Trade Theory: Mercantilism
o Specialization as a Basis for Trade Theory: Absolute and Comparative Advantage
o Theory of Absolute Advantage
o Theory of Comparative Advantage
o Factor Endowments as a Basis for Trade Theory: Heckscher-Ohlin and Factor Price
Equilibrium
o Porter’s “Diamond” Model of national Competitive Advantage
o Factor Conditions
o Demand Conditions
o Related and Supporting Industries
o Firm Strategy, Structure, and Rivalry

The Practice of Trade Policy
o Tariffs, Preferential Duties, and Most Favored Nation Status
o Nontariff Barriers

Current Practice of “Managed” Trade
o Socio-Economic Rationale
o Countertrade
o Export Cartels
o Infant Industry Argument
o Questionable Labor Practices and Environmental Considerations
o Health and Safety
o Geo-Political Rationale
o National Security
o Strategic Industries
o Embargoes
Teaching Objectives
After covering this chapter, the student should be able to:

Briefly explain why trade and foreign investment are good for society as a whole.

Describe the major international trade theories and how they operate.

Evaluate trade policy, the main instruments of trade policy, and their impact on business,
consumers, and governments.

Explain the rationale behind a country’s choice of managing trade.
COMPREHENSIVE LECTURE OUTLINE
I.
Introduction. Business has become increasingly international in nature and has been
accelerated by low cost of communications technology. This chapter discusses is the role of
international business and how it developed.
CLASS ACTIVITY: Use the Cultural Perspective case as an opportunity to allow students to
explore the impact of international trade and investment on economies of China and India.
Exhibit 2.1 • World’s Ten Largest Economies
II.
Benefits of Trade and Foreign Direct Investment. Trade is the earliest and simplest
form of international business. Exhibit 2.2 • World Trade Patterns.
It benefits consumers by providing:

A greater choice in the availability of goods and services

Lower prices

Higher living standards

New jobs in export and import sectors of the economy
At the same time it has a negative impact on economies due to disruptive change such as:

Outsourcing of jobs

Stagnant wages

Lower of sluggish standard of living in globally uncompetitive industries
Foreign Direct Investment (FDI) brings funds and business culture from abroad, creates new
jobs, introduces innovative technologies, and enhances the skills of domestic workers. Emerging
countries tend to attract sizeable amounts of FDI. Exhibit 2.3 • Net Inflows of Foreign Direct
Investment by region and Industrialization.
DISCUSSION STARTER: REALITY CHECK 1.
Visit the retail store where you purchase everyday necessities and pick out ten items that you
regularly use. Now, look at the labels and find out how many of them come from abroad. Can
you imagine what your life would be like if we did not have international trade?
III.
Major Theories of International Trade. No single nation in the world is capable of
producing all the goods and services it needs. Neither does any nation have the required
resources. Therefore, nations of the world need to trade. Theories of international trade provide
an appreciation for the progress made in understanding how trade works. They also present a
rationale why restriction to trade should be minimized.

Wealth Accumulation as a Basis for Trade Theory: Mercantilism.
Mercantilism is a theory of international trade that supports the premise that a
nation could only gain from trade if it had a trade surplus.
o It’s an oldest trade theory. Mercantilists believed that for a nation to
become wealthy, the nation had to export as much as possible, and the
value of exports should exceed those of imports, which are viewed as a
cost.
o If every trading nation decided to increase its exports, the surplus of
exported goods in the world market would depress prices and decrease
earnings of exporting countries.

Specialization as a Basis for Trade Theory: Absolute and Comparative
Advantage. Adam Smith argued and proved that free trade without restrictions
would increase the wealth of nations.
o Absolute Advantage exists when one country can produce a good more
efficiently than another.
o Theory of comparative advantage is a refinement of Adam Smith’s
theory and is attributed to David Ricardo. It claims that a country should
produce the commodity in which it has the greatest advantage. Resources
in the countries are scarce, and countries must choose to produce
goods/services that most efficient use of their scarce resources. When all
countries follow this approach, resources can be used most efficiently, and
the total output and standard of living of the world can be increased.

Factor Endowments as a Basis for Trade Theory: Hecksher-Ohlin and
Factor Price Equalization.
o Eli Hackscher and Bertil Ohlin showed that nations primarily export goods
and services that intensely use their abundant factors of production.
o The Heckscher-Ohlin (H-O) Theory attributes the comparative
advantage of a nation to its factor endowments. The key assumptions for
the H-O theory to work are:

Perfect competition

Perfect immobility of factors of production
o Factor price equalization theory states that when factors are allowed to
move freely among trading nations, efficiency increases, and leads to
superior allocation of production of goods and services among countries.

Porter’s “Diamond” Model of National Competitive Advantage. In 1990
American economist Michael Porter found that trade theories broadly explained
the basis upon which countries exported certain goods. Porter looked more closely
at the theory of firm and industry specifics to identify characteristics that made
firms and industries in countries “winners” or “losers” in international trade.
Porter explains is hybrid model in terms of a “diamond” that consists of four
groups of company-specific and country-specific characteristics.
o Factor Conditions. Porter’s model looks more closely at the quality of the
factor endowments described in Hecksher-Ohlin theory.
o Demand Conditions. Porter stresses the importance of domestic demand
for goods and services. When domestic demand is high, domestic
competition will intensify and lead to lower prices and sophisticated new
products.
o Related and supporting industries. The presence of supporting
industries and companies in a country will always be important for its
competitive advantage.
o The final set of characteristics relate to firm strategy, structure, and
rivalry.
According to Porter’s model, the success or comparative advantage of a nation at
the global stage would crucially depend upon the interaction of the four groups of
characteristics. Porter also identified two other critical variables outside the
diamond that play an important role in the competitiveness of nations: chance and
government.
DISCUSSION STARTER: REALITY CHECK 2.
Have you witnessed any changes in international business activity in your hometown over the
past five years? Which of the above discussed theories can you attribute to that business
development?
IV.
The Practice of Trade Policy. Despite the benefits of the free trade individuals, firms,
and lobby groups pressure governments to impose barriers to imports or subsidize exports of
goods and services. Their efforts re aimed at saving good-paying jobs and preventing increased
competition in their industries at home. Trade policy refers to all government actions that seek
to alter the free flow of merchandize or services between countries.

Tariffs, Preferential Duties, and Most Favored Nation Status. Tariffs are taxes on
imports. They generate revenues for governments. Tariffs come in two forms:
o Specific tariff – an import tax that assigns a fixed dollar amount per physical
unit.
o Ad valorem tariff – an import levied as a constant percentage of the monetary
value of one unit of the imported good.

Preferential duties refer to low tariff rates applied to specific imports coming from
certain countries. Under this system, the same good imported from a country outside of
preferred group will be subject to higher tariff. For example, in the Generalized System
of Preferences, a large number of developed countries have agreed to permit duty-free
imports of a selected list of products that originate from specific developing countries.

Some countries interfere with the free flow of exports by enforcing export subsidies, or
export taxes, meant to encourage or discourage exports.

General Agreement on Tariffs and Trade (GATT) was established in 1948 by 22
member countries, who committed to lower approximately 45,000 tariff rates within rules
laid down by that organization.

GATT was renamed World Trade Organization (WTO) in 1995, which now sets rules
of trade among nations on a near-global basis. The WTO’s objective is to extend tariff
reduction to agriculture, services and settle trade disputes among member countries. By
2011, 135 (?) nations had become members of the WTO.

Under the most favored nation (MFN) principle, any tariff concession granted by one
member to any other country will automatically be extended to all other WTO member
countries.
ECONOMIC PERSPECTIVES: Predatory Trade Practices: A Game of Chicken? Use the
Economic Perspectives case as an opportunity to discuss the impact of predatory trade practices
on national economies and the role of the government in resolving trade disputes between
countries.
Suggestion: You could ask them to do this case as individuals or in teams as a class activity.
Have the students read the case presented in the text and answer the questions at the end of the
case.
Questions:
1. Is China practicing fair trade? Explain in detail what China is trying to achieve, and the
implications on the result for the rest of the world. Answer: China is not practicing fair
trade. The value of Chinese currency is kept artificially low. Since their currency is not
market-determined, it provides unfair competitive advantage for all Chinese exporters. In
addition, cheap credit, subsidized land, low cost energy, and controlled wages enhance
China’s competitiveness compared to the countries that use market mechanisms in
determining prices of their currencies and factors of production.
2. Why did the U.S. impose a “sliding-scale” tariff on China’s tires? And why only for a
three-year period? What should the U.S. do if China were to impose a 50 percent tariff
on American chicken feet? Answer: Sliding-scale tariff on tires imported from China to
give time to the U.S. manufacturers to restructure and increase their efficiency. Three-
year period presumably will be sufficient to achieve this goal. Chinese tire exports have
caused market disruption in the U.S. tire manufacturing industry. China’s share of the
U.S. tire market increased from 3% to 11% over the 4 year period and has led to plant
closing and redundancies. If China were to impose a 50% tariff on American chicken
feet, the U.S. should initiate an investigation with the WTO.

Nontariff Barriers. Since 1948 GATT and later WTO managed to significantly lower
tariffs. During that period countries have resorted to various forms of non-tariff barriers
such as quality and environmental standards to restrict trade.

Import quotas or quantitative restrictions (QR) limit the amount of products that can
be imported into a country. They are generally worse than import tariffs because when
quota is reached, that particular product can no longer be imported.

Voluntary export restraint (VER) occurs when an efficient exporting nation agrees to
temporarily limit exports of a product to another country to allow competitors in the
importing country to become more efficient.

Domestic content provisions are another form of non-tariff barrier. Countries may
require that a certain percentage of the value of import be domestically sourced.
DISCUSSION STARTER: REALITY CHECK 3.
Visit your local foreign car dealer and find out what type of tariff or non-tariff barriers they
face when importing cars from abroad. If tariffs are imposed on imported cars, find out
whether it is ad-valorem or specific, and for how much.
Current Practice of “Managed” Trade. Global trade cannot be completely based upon
V.
the economics of free trade, but encompasses a response to geo-political and socio-economic
factors. Managed trade refers to agreements between countries that aim to achieve certain trade
outcomes for the countries involved.

Socio-Economic Rationale. Socio-economics explores the relative negative impact of
free trade upon society’s welfare, as well as government policy measures that are
implemented to minimize the negative outcomes to society. Several forms of managed
trade are part of this category:
o Countertrade. In countertrade an exporter of goods or services commits to
import goods or services of corresponding value. The terms of export and import
exchange are predetermined through negotiations. Countertrade can be inefficient.
Countries participate in countertrade especially when they do not have adequate
amounts of foreign currencies to pay for imports.
o Export Cartels. Several developing countries depend upon non-renewable
natural resources for economic growth. Since business cycles cause fluctuations
in export volume and prices, some of these countries form export cartels to
control prices and export revenues . For export cartels to be successful, all cartel
members must agree not to cheat on the agreement, substitutes for the good in
question must not exist, and demand for a particular product must be relatively
inelastic.
o Infant Industry Argument. At times when a country gets a “late start” in a
particular industry where it has a potential to become a world class competitor,
short-term protection is justified. Infant industry argument implies that economies
of scale and the comparative advantage of an industry can only be exploited by
providing temporary protection. During this period, the firm or industry will strive
to become globally competitive.
o Questionable Labor Practices and Environmental Considerations. Developed
countries often resort to managed trade for reasons of unethical labor practices
and violation of basic human rights. Developed countries may restrict imports
from developing countries that implement such policies.
o Health and Safety. Every country has the right to protect the health and physical
safety of its citizens from contaminated imports.
ETHICAL PERSPECTIVES: Stabilizing Sierra Leone’s Devastated Economy. Use the
Ethical Perspectives case as an opportunity to discuss the socio-economic impact of banning the
trade of “blood diamonds” on the economies of West African countries.
Questions:
1. Who are the various stakeholders who have benefited from the socio-economic move
away from the sale of “blood diamonds” to legal commercial diamond operations in
Sierra Leone? Answer: Profit-sharing arrangements implemented in the diamond mines
will benefit the local population, as soon as the mines will become profitable. Small-time
miners will have to pay 3 % tax on their diamond sales, while .75% of the tax will be
returned to the local government to develop social infrastructure. These measures are
intended to benefit local community and bring peace and stability to the region.
2. Evaluate the impact of Koidu Holding’s corporate social responsibility practices in
Sierra Leone. Answer: Koidu Holding’s practices are socially responsible. They bring
economic prosperity and political stability to the region.

Geo-Political Rationale. The geo-political objective is to sacrifice some economic
efficiency for the greater good of the country in terms of national security, protection of
critical industries, and international commerce.
o National Security. For national security reasons, U.S. exports of certain types of
high-technology defense equipment are generally restricted to allies and friendly
countries. Because the need to receive government approval prevents the affected
firms from openly competing and increasing sales, these firms receive special
treatment and protection.
o Strategic Industries. Some countries provide protection to strategic industries
that have a significant employment impact on certain sectors of an economy.
o Embargoes. When trade sanctions are imposed upon a country for political
reasons, an embargo is in force, and trade will be restricted with that country.
Embargoes, which may not be universally enforced, are meant to punish a country
for perceived unacceptable international behavior.
DISCUSSION STARTER: REALITY CHECK 4.
Boeing is the single largest exporter for the United States, yet it is restricted from exporting
sensitive military equipment to all countries. What specific restrictions does the U.S.
government impose upon defense contractors such as Boeing?
Assignments
End-of-Chapter Discussion Questions
1. How would you make a convincing case that open trade in goods and
services as well as free flow of foreign direct investment will enhance the
well-being of (a) consumers, (b) producers, and (c) the government of
countries? Give specific examples to prove your position. Answer: free
trade and investment results in more competition in the market and leads to
greater amount of choice in the availability of goods and services, lower
prices, higher living standards for consumers, higher tax revenues for
governments, and technological and skill transfer to producers.
2. What trade theories support the recent rise of China and India on the global
stage? Explain your views in detail. Answer: Theory of comparative
advantage and H-O theory suggest that China and India possess abundant
supply of skilled human resources. They have a comparative advantage in
labor-intensive industries. The difference between China and India lies in the
English language, historically predominant in India. Knowledge of English
allowed India workers to specialize in providing services to Englishspeaking countries, while Chinese had to focus on manufacturing.
3. Some believe there is a disconnect between trade theory and trade policy.
What rationale could the United States use to support its trade policies? Give
specific examples. Answer: Employment and environmental law and
employee health and safety legislation are very stringent in the U.S. To
compete with the countries that have lower standards in these areas, the U.S.
has to manage international trade in the way that levels playing field and
allows American companies that follow ethical and legal standards of the
ILO to compete with their counterparts from the developing countries, where
such regulations are not enforced or are missing.
4. When would a country such as France use socio-economic rather than geopolitical reasons to support its trade policy? Can you provide some
examples? Answer: Socio-economics focuses on the impact free trade has
on society’s welfare, while geo-political rationale argues in favor of
sacrificing economic efficiency for the purpose of achieving a country’s
political goals. Therefore, a developed country such as France will be more
likely to use socio-economic reasons to support its trade policy when the
issue concerns well-being of French consumers and workers.
Mini-Case Synopsis and Questions
The ideology of economic nationalism seeks to implement trade policies that help
to keep jobs and investment at home. Such protectionism may violate international
trade rules, and retaliation from other countries may follow.
Questions:
1. Is economic nationalism justified? No. Although in the short run economic
nationalism can help keep jobs at home, in the long run it leads to loss of
international competitiveness, curtails international business activity and
makes the country inefficient.
2. Is the Smoot-Hawley plan better or worse than “Buy American”? “Buy
Spanish”? Or “British jobs for British workers”? Explain fully. The recent
attempts at protectionism differ from Smoot-Hawley act in form, but not is
substance. Smoot-Hawley bill raised import tariffs, while this time the focus
is on inserting nontariff barriers. “Buy American” provision in the American
Recovery and Reinvestment Act of 2009 was matched by similar policies of
other countries, which have resulted in downward trend in international
trade, hurting all exporters and economies.
Point/Counterpoint, Interpreting Global Business News, and Portfolio Projects
Students’ answers to these assignments will vary widely. Their writing should
reflect an understanding of the chapter’s basic concepts, thorough research, and
logic and critical thinking skills.
INSTRUCTOR'S NOTES FOR VIDEO
CASES
Title:
RT :
Topic Key:
Dubai, Inc.
4:56
Managed trade Practices, SWOT analysis, VRIO framework, Resources,
Capabilities, Value Chain, Theories of international trade
The narrator opens the video with a view of Dubai and indicating that no matter how many
articles you read or pictures you see they can’t quite capture the enormity and energy of Dubai. It
is a physical manifestation of Arab oil wells set in concrete, glass, and steel. A place so rich and
ambitious, it is changing the geography of the world-a business center, transportation hub, and
tourist destination; a 21st century city at the crossroads of a new world. Skyscrapers rise in
clusters, man-made islands rise from the sea, and neighborhoods with 100s of office buildings
and apartments rise from the sand. It’s all the vision of one man, Sheikh Mohammed bin Rashid
Al Maktoum. As the narrator travels with Maktoum, he says that their view was nothing in year
2000—it was desert. He shows the narrator a strange building, which is one of the world’s
tallest, an indoor ski slope where outside it may be 120 degrees but inside it feels like the Alps.
The video continues with Maktoum looking on at the Dubai World Cup, casing the fastest horses
in the world that are running for the world’s largest purse. Dubai also has the largest and most
luxurious hotel in the world--Burj Al Arab. The cheapest room is $2,000 per night. In the
interview with Maktoum, he notes that we wants everything to be the biggest, the tallest and if
you can have it in Europe why can’t we have it here. Maktoum also confirms that he does things
in a hurry because he wants his people to have a better life now, to go to the highest school now,
and to have good health care now. Sultan Ahmed bin Sulayem says that Maktoum looks at what
Dubai needs, what is missing in Dubai and when he sees something missing he says we are going
to do it.
Seven years ago, Maktoum decided that what Dubai needed was more oceanfront projects and
beaches for all these tourists that were going to come. Dubai only had 60 miles of coastline so he
ordered Sultan to create more. Sultan gave Maktoum a proposal to which he inquired how many
beaches will it provide and Sultan indicated 7. Maktoum said why not 70? Sultan says it’s not
about what you are able but what you can do. Maktoum gave the order to start building and
Sultan had to make the land when all he was given was water. Business consultants told them the
project was unfeasible but with no environmental regulations to stop him, Sultan begin digging
100 cubic yards of sand from the Persian Gulf along with 7 million tons of rock to form a manmad island in the shape of a quall. It more than doubled the coastline of Dubai and created
waterfront condos and homes for 150,000 people and 35 hotels. In the interview, Maktoum
confirmed that most people would not have done this when they were told it was a terrible idea
but not us.
The Palm Island Project sold out within a week. Sultan says that houses that initially went for 1
million are being resold by the original investor and real estate speculators for 5 times that. A
month after the official opening, Palm Island seeming like a ghost town to the narrator. Sultan
say people are just starting to move in. While it’s not clear when the actual owners will start
moving in, most of the property was bought as 2nd and 3rd homes by wealthy Arabs, Russians,
and Europeans to be used a few months a year, as real estate investments, or as a way to move
money offshore to a safe haven. But this has not stopped the building. More offshore
developments are underway including a chain of 300 man-made islands some of which will be
partially shaped and situated to resemble a map of the world which is what the project is called—
The World. Dubai is said to be strong but too many believe Dubai has the feel of a speculative
bubble which could easily burst.
Also check out http://www.dubaitrade.ae/
Suggested Discussion Questions and Answers





Based upon Dubai’s resources, capabilities, and competencies pursuits, what seems to be
their trade theory? Explain.
o Dubai’s Resources and capabilities: (1) Ambitious, Energetic, Forward-looking,
confident, and strong leadership, (2) Willing followers, (3) Abundance of
financial backing from Arab oil fields, (4) Business centers, (5) Transportation
hub, (6) Tourist destination
o Dubai’s Competencies: Creating non-existent land, Creating futuristic structures
(buildings), Creating industry (oil, tourism, and real estate)
o While the specific trade theory may be questionable, Dubai’s competencies have
provided them an absolute advantage in those areas. Also, Dubai leadership wants
to go beyond everyone else which could lend itself to the absolute advantage trade
theory. It could be argued that Dubai is very much after wealth accumulation but
in the video they are not after exchange of merchandise.
Based upon your answer to question 1, what strengths, weaknesses, opportunities, and
threats exist for Dubai?
o Strengths: Leadership, Finances
o Weaknesses: Skilled labor
o Opportunities: Unlimited land expansion in other countries
o Threats: Economic decline, Environmental constraints from possible new land
and building wipe outs.
How is trade opportunity created from Dubai’s resources and capabilities?
o As a transportation hub, Dubai is set for distribution of goods and services. A
business center which, in turn, can be used to manage their trade processes.
Dubai’s financial resources are quite vast to initiate any start up in the trading
process as well.
What would make industries winners or losers in a country like Dubai?
o Winners: Support the leadership regime, Having wealth and financial resources,
Having skilled labor
o Losers: Those that walk contrary to the institutional structure, Having the inability
to strategically fit and internalize within the government initiatives.
What managed trade practices would you expect as a result of Dubai’s futuristic success?
o Text: Managed trade refers to agreements, sometimes temporary, between
countries that aim at achieving certain trade outcomes for countries involved.
o Given Dubai’s independent and financial oil support approach to futuristic
success, you might see such managed trade practices as export cartels (to protect
rich resources), health safety (to protect citizens from developed land demise, and
national security (for the support of allies)
INSTRUCTOR'S NOTES FOR VIDEO
CASES
Title:
RT :
Topic Key:
Cuba Economy
4:43
International trade theories, Comparative advantage, Trade policies
It is one of the bittersweet ironies of Cuba but this country makes a mint from an unabashed
luxury but where else would you find a place turned into a factory. The narrator toured what used
to be the lavish home of a sugar cane barron. After the revolution, the CIA tried to blow up his
cigars and Fidel Castro turned the place into a secret factory for his own personal consumption or
so they told us. With a view of the factory workers rolling the world’s most exclusive cigar
brand, Cohiba, they are rolled here before shipping them to Tokyo, Hong Kong and London.
None of this has diminished the revolutionary rhetoric. The Cuban flag graces the tools and
pictures of Chevis and other smokers are ambiguous. Here, even the security guard is allowed to
smoke on the job and not just any old cigar. The security guard says he only smokes Cohiba—
the tobacco is simply the best. The loyalty to the regime is prized here. Of course you might say
it’s non-negotiable as it is everywhere in Cuba. The narrator uncovers some disgruntlements by
asking a worker if it bothers her that these cigars are worth a fortune.
Cigars aren’t the only thing that’s schizophrenic about Cuba’s economy. There’s the official
socialist economy prized in local pesos which provides free education, healthcare, and food,
housing, and utilities at a very low cost. Sounds fabulous except that it’s plagued by shortages,
cues, and ration cards that link to the dust of history. Then, there is the rampant black market
flourishing out of sight but never out of mind and the tourist economy priced hard currency of 2
million or so as foreigners visit each year.
This is full of the promise of growth if it weren’t for the thing that every ill in Cuba is officially
blamed on—The American Trade Embargo. As old as the vintage cars that are its most prized by
product, its impacts are subtle. Looking out over Cuba is the woman in charge of Cuba’s
troubled relations with American. Laughingly she admits she learned her English in Russia in the
glory days of communism. In President Obama she says she sees a change of tone and reduction
in rhetoric but very little action. She says she doesn’t believe Cuba blames everything on the
embargo but the embargo is a real obstacle for Cuba’s development for the economic and social
development of Cuba. To those who say we do not want the embargo to be lifted because we
would be deprived of an argument we use—We tell them—Lift the embargo and let’s have a
look. Those that can’t fill Cuba’s stomachs or swimming pools say the regime has been dabbling
in the free market.
With a view of a model farm outside Cuba, which grows the kinds of fruits and vegetables
Cuban’s could only dream of receiving. Farmers don’t actually own the land but it is leased to
them for their use and is the key to their profit. The man in charge couldn’t refrain from boasting
that he was prepared to work the land and get the opportunity to earn 4 times as much as a
professional in the city. It’s a radical thought which is why the farm has to cloak itself in
revolutionary zeal with a freshly painted mural of Fidel Castro and the shrine that houses both
the father of the revolution, and the farm employees of the month.
While this may be the green of Cuba’s fledgling free market economy, it is founded in the
rhetoric of the revolution with rivals to match. This is only a very small part of the overall
economic landscape. In parts of Cuba, young children steel onions not for sport but for necessity.
Any doubts about how tough life in Cuba can be, you can just visit this grocery shop. There’s no
bread and the sign says and the video shows birds nibbling for crumbs. When the bread does
arrive, the delivery van is a horse drawn carriage. Local kids play baseball, the national
obsession, but with bottle tops. Cuba is getting poorer not richer and despite dipping its toes
quickly into the waters of political debate, politics, too, is couched in a time warp.
Also check out http://www.globalsecurity.org/military/world/cuba/economy.htm
Suggested Discussion Questions and Answers




Would Cuba benefit from operating as a free market economy? Why or why not?
o According to the video, Cuba could benefit from operating as a free market
economy both for economic and social development. If Cuba had better trading
relationships and a democracy they would be able to improve their own resource
and capabilities which, in turn, would produce economic profitability and
prosperity. The people would have the freedom to develop innovation that could
be fueled in the Cuban economy. Also, a free market economy, would allow
individuals in poverty areas to rise above their rather instilled standard because
they would be able to take their own resources and become independently
wealthy.
Could the US benefit from lifting the embargo on Cuba?
o Text: Trade embargos are trade sanctions imposed on a country for political
reasons, and trade is basically restricted with that country.
o US benefit: The US could benefit, in terms of trade, by lifting the embargo on
Cuba. More trade for the US and Cuba could lead to the economic growth of both
countries. Greater choices of goods and services, lower prices, and higher living
standards could exist for both countries. However, if the cost (threat to national
security and loss of reputation for democracy) of lifting the embargo on Cuba is
greater than the benefit, the embargo should remain affect. The US could make
absolute and comparative advantage analysis to determine the real economic
benefit.
Is a comparative advantage possible between Cuba and the US?
o Comparative advantage is defined as the relative (not absolute) advantage in one
economic activity that one nation enjoys in comparison with other nations.
o Comparative advantage: Using information from the video, while Cuba is
productive in cigars and the US productive in fruits and vegetables, a comparative
advantage could exist with the US reducing its production of cigars in favor of
importing cigars from Cuba and Cuba could forego fruits and vegetable
production in favor of imports of such from the US.
What impact does the embargo have on Cuba?

o According to the video, the embargo has economic and social impacts on Cuba.
Is Cuba trapped in multiple trade theories?
o Given the revolutionary rhetoric and shrines to communism rule and its potential
beyond the US embargo, Cuba does appear to be trapped in multiple trade
theories—classical and modern day. Cuba, being one of self-sufficiency, holds to
the mercantilism theory (the direct intellectual ancestor of modern-day
protectionism) which is the idea that governments should actively protect
domestic industries from imports and vigorously promote exports. At the same
time, Cuba wishes upon and hopes for future trade relative to the specialization
theory where they believe, now, that patterns of trade can change and they can be
a developing nation. An argument could also be made for absolute and
comparative advantage theories has Cuba is less than a free market economy and
additional trade opportunities might allow for comparative advantage.