Solution Manual For Global 4 4th Edition Mike Peng

Solution Manual for GLOBAL 4, 4th Edition, Mike Peng
Solution Manual for GLOBAL 4, 4th Edition, Mike

Peng
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Chapter 5: Trading Internationally
Chapter 5
Trading Internationally
Learning Objectives
After studying this chapter, students will be able to accomplish the following objectives:
1. Use the resource-based and institution-based views to explain why nations trade.
2. Identify and define the classical and modern theories of international trade.
3. Explain the importance of political realities governing international trade.
4. Identify factors that should be considered when your firm participates in international
trade.
Chapter Overview
Chapter 5, Trading Internationally, begins by defining exports, imports, merchandise (goods)

trade, and service trade. The chapter then explores resource- and institution-based explanations
of why nations trade, leading into a discussion of six major theories of international trade:
mercantilism, absolute advantage, comparative advantage, product life cycle, strategic trade, and
the national competitive advantage of industries. This discussion covers more than 300 years of
research, debate, and international policy in just a few sections, so it is very important to read
carefully. The chapter provides four points to keep in mind as you evaluate the six theories of
international trade. Then the discussion turns from theoretical trade to the realities of trade in the
real world. Although many theories idealize free trade, certain tariff and nontariff barriers cannot
be avoided in the current international climate. The chapter concludes with leading economic and
political arguments against free trade, further expanding on the complexities of international
trade today.
Opening Case Discussion Guide
Why Are Exports So Competitive?
The rise of China as the leading exporter has been widely reported (see Closing Case). Yet, what
has been little reported by the media is that the United States has also rocketed ahead of
Germany and become the world’s second largest merchandise (goods) exporter. Don’t forget:
The United States accomplished such enviable export success during the very difficult aftermath
of the Great Recession, in which every nation was eager to export its way out of recession. On
top of the Great Recession, one can add more recent troubles such as the Japanese earthquake,
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2
the euro zone crisis, the Middle East turmoil, the Russian sanctions, the Ebola crisis, the Chinese
slow down, and Brexit. To make a long story short, first, US exports have to deliver value.
Second, US exports also have to be rare and hard to imitate. There is no shortage of global rivals
tearing apart US products and trying to reverse engineer them. Finally, US exporters have to
organize themselves in a more productive and efficient manner relative to their global rivals.
While the products themselves have to be competitive, Uncle Sam also helps. At least ten federal
agencies offer export assistance: Departments of Commerce, State, Treasury, Energy, and
Agriculture as well as the Office of US Trade Representative (USTR), Export-Import Bank (Ex-
Im Bank), US Agency for International Development (USAID), Overseas Private Investment
Corporation (OPIC), and Small Business Administration (SBA). Going beyond routine export
assistance, new initiatives focus on negotiating free trade agreements (FTAs). FTAs typically
reduce trade barriers to US exports and create a more stable and transparent trading environment.
In this regard, the Trump administration’s actions to withdraw from the Trans-Pacific
Partnership (TPP), a massive FTA negotiated among 12 member countries over seven years, and
to renegotiate NAFTA are likely to be counterproductive. In addition to formal institutions,
informal norms and values also play a role behind US exports. While some gurus write about the
decline of US influence, the informal norms of consuming and appreciating US products seem to
proliferate overseas.
Lesson Plan for Lecture
Brief Outline and Suggested PowerPoint Slides
Learning Objectives PowerPoint Slides

Learning Objectives Overview 2: Learning Objectives
LO1 3–4: Important Terms Related to Trade

Use the resource-based and institution- 5: Need for International Trade
based views to explain why nations trade.
LO2 6: Theories of International Trade -

Identify and define the classical and Mercantilism
modern theories of international trade. 7: Theories of International Trade -
Absolute Advantage
8: Exhibit 5.3: Absolute Advantage
9: Exhibit 5.4: Absolute Advantage
10–12: Theories of International Trade -
Comparative Advantage
13: Exhibit 5.5: Comparative Advantage
3
14: Exhibit 5.6: Comparative Advantage

Product Life Cycle
Strategic Trade
19–20: Exhibit 5.8: Entering the Very
Large, Super Jumbo Market?
21: Theories of International Trade -
National Competitive Advantage of
Industries
22: Exhibit 5.9: National Competitive
Advantage of Industries: The Porter
Diamond
23: Evaluation of Classical Theories of
International Trade
LO3 24: Realities of International Trade: Tariff

Explain the importance of political realities Barriers
governing international trade. 25: Realities of International Trade: Non-
Tariff Barriers
26: Economic Arguments Against Free
Trade
27: Political Arguments Against Free Trade
LO4 28: Factors that Determine the Success and

Identify factors that should be considered Failure of Firms’ Exports
when your firm participates in international 29: Exhibit 5.12: Implications for Action
trade.
Key Terms 30–33: Key Terms
Summary 34: Summary
Chapter Outline
LO1: Use the resource-based and institution-based views to explain why nations trade.
1. Key Concepts
4
International trade is far more complex than domestic trade. So why do nations go through
the trouble of trading internationally? Without getting into details, one can safely say that
there must be economic gains from trade. More importantly, such gains must be shared by
both sides. Otherwise, there would be no willing exporters and importers. In other words,
international trade is a win-win deal. According to the resource-based view, there are
economic gains from international trade because some firms in one nation generate exports
that are valuable, unique, and hard to imitate that firms and consumers from other nations
find it beneficial to import. According to the institution-based view, different rules
governing trade are designed to determine how such gains are shared (or not shared).
2. Key Terms
• Balance of trade: The country-level trade surplus or deficit

• Export: To sell abroad
• Import: To buy from abroad
• Merchandise (goods) trade: Tangible products being bought and sold
• Service trade: Intangible services being bought and sold
• Trade deficit: An economic condition in which a nation imports more than it exports
• Trade surplus: An economic condition in which a nation exports more than it imports
3. Discussion Exercise
To succeed in international trade, it is crucial to know what to sell and how to sell a product
or service. For example, a company that specializes in pork-based products would likely not
find a willing trade partner in Muslim countries where the consumption of pork is outlawed.
The cable news outlet CNBC is an example of international trade done well. The network
offers a source of journalism that is unique to particular regions throughout the world. In
addition to the U.S. broadcast, CNBC offers local channels that focus on the business issues
that are pertinent to each region in the local language. At most times, the only similarity
between the various iterations of CNBC is the aesthetics, i.e., the network logo and the set
design. Through this approach, CNBC has created an increasing level of awareness of its
brand throughout the world and has established a reliable source of revenue within an
industry that is in the midst of a revolution thanks to digital media.
Based on this case, what is an effective way of developing a sense of where and how to sell
your products? Given the variety of strategies that may be needed to reach multiple markets,
how will you decide which market is worth entering and which is not? Are there instances in
which you think that successful international trade can occur by emphasizing American
values and norms?
5
LO2: Identify and define the classical and modern theories of international trade.
1. Key Concepts
Theories of international trade provide one of the oldest, richest, and most influential bodies
of economic literature. This section introduces six major theories of international trade: (1)
mercantilism, (2) absolute advantage, (3) comparative advantage, (4) product life cycle, (5)
strategic trade, and (6) national competitive advantage of industries. The first three are often
regarded as classical trade theories, and the last three are viewed as modern trade theories.
Overall, classical and modern theories have significantly contributed to today’s ever
deepening trade links around the world.
2. Key Terms
• Absolute advantage: The economic advantage one nation enjoys because it can
produce a good or service more efficiently than anyone else
• Comparative advantage: The relative (not absolute) advantage in one economic
activity that one nation enjoys in comparison with other nations
• Factor endowment: The extent to which different countries possess various factors of
production such as labor, land, and technology
• Factor endowment theory (or Heckscher–Ohlin theory): A theory that suggests that
nations will develop comparative advantages based on their locally abundant factors
• First-mover advantage: Advantage that first entrants enjoy and do not share with late
entrants
• Free trade: The idea that free market forces should determine the buying and selling
of goods and services with little or no government intervention
• Mercantilism: A theory that holds that the wealth of the world (measured in gold and
silver) is fixed and that a nation that exports more than it imports will enjoy the net
inflows of gold and silver and become richer
• Opportunity cost: The cost of pursuing one activity at the expense of another activity
• Product life cycle theory: A theory that suggests that patterns of trade change over
time as production shifts and as the product moves from new to maturing to
standardized stages
• Protectionism: The idea that governments should actively protect domestic industries
from imports and vigorously promote exports
• Resource mobility: The assumption that a resource used in producing a product in one
industry can be shifted and put to use in another industry
• Strategic trade policy: Economic policy that provides companies a strategic
advantage through government subsidies
• Strategic trade theory: A theory that suggests that strategic intervention by
6
governments in certain industries can enhance their odds for international success
• Theory of absolute advantage: A theory that suggests that under free trade, each
nation gains by specializing in economic activities in which it is the most efficient
producer
• Theory of comparative advantage: A theory that suggests that a nation gains by
specializing in production of one good in which it has comparative advantage
• Theory of national competitive advantage of industries (or diamond theory): A
theory that suggests that the competitive advantage of certain industries in different
nations depends on four aspects that form a “diamond” shape when diagrammed
The theory of strategic trade states that strategic intervention by governments in certain
industries can enhance their odds for international success. In 2008, the U.S. government
enacted strong interventionist measures in the auto industry. In December 2008, the U.S.
government enacted a bailout package of $13.4 billion for General Motors (GM) and
Chrysler. The following summer, the U.S. government purchased a majority stake of GM for
$50 billion. It also obtained a minority stake in Chrysler for $6.6 billion while also
facilitating its reorganization and sale to the Italian automaker Fiat.
The questions for discussion are as follows: Was this level of government intervention worth
the cost? Would the American auto industry have been better served if GM and Chrysler
were allowed to go out of business? What about the public interest? Would you want the
federal government to take such drastic measures in your firm?
LO3: Explain the importance of political realities governing international trade.
1. Key Concepts
Although most theories support free trade, plenty of trade barriers exist. While some trade
barriers are being dismantled, many will remain. The two broad types of trade barriers are as
follows: tariff barriers and non-tariff barriers. A tariff barrier is a means of discouraging
imports by placing a tariff (tax) on imported goods. A nontariff barrier (NTB) discourages
imports using means other than tariffs on imported goods. Overall, trade barriers reduce or
eliminate international trade. While certain domestic industries and firms benefit, the entire
country—or at least a majority of its customers—tends to suffer. Given these well-known
negative aspects, why do people make arguments against free trade? Two prominent
economic arguments against free trade are (1) the need to protect domestic industries and (2)
the need to shield infant industries. Political arguments against free trade are based on
advancing a nation’s political, social, and environmental agenda regardless of possible
7
economic gains from trade. These arguments include national security, consumer protection,
foreign policy, and environmental and social responsibility.
2. Key Terms
• Administrative policy: A bureaucratic rule that makes it harder to import foreign

goods
• Antidumping duty: A cost levied on imports that have been “dumped,” or sold below
cost, to unfairly drive domestic firms out of business
• Deadweight cost: Net losses that occur in an economy as the result of tariffs
• Import quota: A restriction on the quantity of goods brought into a country
• Import tariff: A tax imposed on imports
• Local content requirement: A rule that stipulates that a certain proportion of the
value of a good must originate from the domestic market
• Nontariff barriers (NTB): A means of discouraging imports using means other than
taxes on imported goods
• Subsidy: A government payment to domestic firms
• Tariff barriers: A means of discouraging imports by placing a tariff (tax) on imported
goods
• Trade embargo: Politically motivated trade sanctions against foreign countries to
signal displeasure
• Voluntary export restraint (VER): An international agreement that shows that an
exporting country voluntarily agrees to restrict its exports
The intertwined nature of politics, economics, and international trade was on full display in
the trade dispute between the United States and China that occurred in 2009. In fulfillment
of a campaign promise to restrict imports that hurt American workers, the then President
Barack Obama approved a 35 percent tariff on Chinese tires. In response, the Chinese
government announced that they would launch an investigation into whether the United
States was “dumping” (selling below cost) chicken and auto parts in China, a move that
many experts believe would have led to the increase in tariffs by the Chinese.
What are the costs and benefits of the U.S. tire tariff? What are the costs and benefits of
China’s response? In your opinion, does the potential of saving some jobs in the
manufacturing industry outweigh the risk of angering the largest trading partner of the
United States?
LO4: Identify factors that should be considered when your firm participates in
8
international trade.
1. Key Concepts
In international trade, a savvy manager’s first job is to leverage the comparative advantage
of world-class locations. Second, comparative advantage is not fixed. Managers need to
constantly monitor and nurture the current comparative advantage of a location and take
advantage of new promising locations. Third, managers need to be politically savvy if they
appreciate the gains from trade. But they often fail to realize that free trade is not free—it
requires constant efforts to demonstrate and advance the gains from such trade.
Debate: Ethical Dilemma
Should Canada Diversify Its Trade?
1. Key Concepts
Canada has the 11th largest economy (measured by nominal GDP) or the 14th largest
(measured by PPP) in the world. The bilateral trading relationship between Canada and the
United States is the world’s largest, with approximately $600 billion in volume. While
enjoying a $32 billion surplus in trading with the United States, Canadians have been
frustrated by the occasional disputes, such as salmon runs, magazine content, softwood
lumber, and food labeling. Recently, Canadians are alarmed that the Trump administration
has sought to renegotiate NAFTA, with a threat to ultimately dismantle it.
While thanks to geography, Canada and the United States will always trade a lot, one
solution Canadians have sought is to diversify their trading relationship away from too much
reliance on the United States. They have focused on two areas. The first is to cultivate trade
ties with major Asian economies, such as China and Japan. The second area is to negotiate
more free trade agreements (FTAs) beyond NAFTA. Canada has FTAs with Chile,
Colombia, Costa Rica, Israel, Jordan, and Panama. While Canada is negotiating with a
number of other countries, one of the major breakthroughs is the Comprehensive Economic
and Trade Agreement (CETA) with the European Union (EU) announced in 2013. CETA is
likely to boost the Canada-EU bilateral trade by 23 percent, thus reducing Canada’s reliance
on the United States whose share has decreased but still remained dominant.
Closing Case Discussion Guide
The China Trade Debate
9
Since 2011, China has dethroned Germany to become the world’s champion merchandise
(goods) exporter. Substantiating free trade theories’ claim that international trade is a win-win
game, active trading has not only made China richer, but also made its trading partners richer.
Since 2001, US exports to China soared by 500 percent, doubling the growth of US exports to
the rest of the world. Overall, US–China trade supports approximately 2.6 million US jobs and
adds 1.2 percent to US GDP (Exhibit 5.13). However, not all is rosy. The US trade deficit with
China has provoked an enormous debate (Exhibit 5.14). Despite enviable export success, the
United States, due to its extraordinary appetite for imports, runs the world’s largest merchandise
trade deficit. In 2015, it reached a $760 billion (5 percent of GDP). The lion’s share, $334 billion
(1.9 percent of GDP), was contributed by merchandise trade deficit with China.
Armed with classical theories, free traders argue that this is not a grave concern. They argue that
the United States and China mutually benefit by developing a deeper division of labor based on
comparative advantage. The real US trade deficit with China is often overstated, because
substantial value of Chinese exports is imported. If the value of such imported components is
subtracted from China’s exports, then the US trade deficit with China would be reduced in half,
to less than 1 percent of US GDP—about the same as the US trade deficit with the EU.
Quantitatively, such a level is manageable.
Critics strongly disagree. They argue that international trade is about competition—about
markets, jobs, and incomes. Economic Armageddon between the top two economies in the world
with a 45 percent tariff on all Chinese imports could shave off 13 percent from China’s exports
and 1.4 percent of its GDP growth. But the United States could hardly hope to do better, and the
poorest Americans would be the hardest hit.
Video Case
Watch “New Ventures” by John Stewart of McKinsey and Company
1. Stewart discusses how difficult it may be to successfully get into a new venture or industry.
Why are there such difficulties?
There are differences in the resources and capabilities required in different industries.
Simply because one has what is needed to succeed in one industry does not mean that one
will have what is needed in another.
2. Explain the connection between shifting into a new venture and the considerations of cost,
time, quality, and function.
Each industry may have its unique requirements and tradeoffs in each of those four areas. A
10
firm or individual with experience in a given industry may not have developed the
capabilities to deal with those tradeoffs in a different industry.
3. Stewart discusses a friend who worked for an oil company. The friend began in oil
exploration, then moved into petrochemicals, and finally into plastics. Each type of business
had different demands upon that friend and required major adjustments. Do you think that
entire countries have a similar problem in terms of having an absolute or comparative
advantage in various industries? Why or why not? To what extent could that be used to
support the concept of comparative advantage?
Students may have varying responses to this question. The answer is not as important as the
thought put into the response, particularly as it demonstrates an understanding of absolute
and comparative advantage.
4. Stewart pointed out that there are many instances of firms that have failed in new ventures.
Why? Governments often seek to develop new industries to compete in global trade. Do his
comments suggest anything they may keep in mind?
Just as a firm’s expertise in a given industry might not enable it to be successful in an

industry requiring a different expertise. Over time, an entire nation may have developed
capabilities that could be valuable in a certain industry or industries but not in all industries.
Additional Discussion Material

(From Prep Cards)
Critical Discussion Questions
1. Is the government of your country practicing free trade, protectionism, or something else?
Why?
Students’ answers will vary.
2. On Ethics: As a foreign policy tool, trade embargoes are meant to discourage foreign
governments. Examples include US embargoes against Cuba, Iraq (until 2003), and North
Korea. But embargoes also cause a great deal of misery among the population of the affected
countries (such as shortage of medicine and food). Are embargoes ethical?
Students’ answers will vary. However, the students should address the following points in
their answers: It should be noted that embargoes are only one instrument of coercive power
in international relations. Another instrument involves the use of military force. The
11
question might be asked as to which is less likely to cause misery. Sometimes, military
power may be targeted at those who are directly involved with an enemy’s leadership and
forces. In contrast, economic coercion tends to affect everyone—with the possible exception
of those controlling the enemy’s government.
3. On Ethics: While the nation as a whole may gain from free trade, there is no doubt that
certain regions, industries, firms, and individuals may lose their jobs and livelihood due to
foreign competition. How can the rest of the nation help the unfortunate ones cope with the
impact of international trade?
Students’ answers will vary.
Review Questions
1. Why do nations trade? Why do some people argue that this question may be a bit
misleading?
Nations trade because of the economic gains obtained from it. Such gains must be shared by
both sides; otherwise, there would be no willing exporters and importers. It is misleading to
say that nations trade. A more accurate expression would be as follows: Firms from different
nations trade. Unless different governments directly buy and sell from each other (such as
arms sales), the majority of trade is conducted by firms that pay little attention to country-
level ramifications.
2. Summarize the three classical theories of international trade.
The three classical theories of international trade are given below.

• Mercantilism: This is a theory that holds that the wealth of the world (measured in
gold and silver) is fixed and that a nation that exports more than it imports will enjoy
the net inflows of gold and silver and become richer.
• Absolute advantage: This is the economic advantage one nation enjoys because it can
produce a good or service more efficiently than anyone else.
• Comparative advantage: This is the relative (not absolute) advantage in one economic
activity that one nation enjoys in comparison with other nations.
3. Compare and contrast the three modern theories of international trade.
The three modern theories of international trade are given below.

• The product life cycle theory: This is a theory that suggests that patterns of trade
change over time as production shifts and as the product moves from new to maturing
Solution Manual for GLOBAL 4, 4th Edition, Mike Peng
12
to standardized stages.
• The strategic trade theory: This is a theory that suggests that strategic intervention by
governments in certain industries can enhance their odds for international success.
• The theory of national competitive advantage of industries (or diamond theory): This
is a theory that suggests that the competitive advantage of certain industries in
different nations depends on four aspects that form a “diamond” shape when
diagrammed.
4. What are the major political and economic arguments against free trade? How do
complementary assets and social complexity influence a firm’s organization?
Two prominent economic arguments against free trade are (1) the need to protect domestic
industries and (2) the need to shield infant industries. Political arguments against free trade
are based on advancing a nation’s political, social, and environmental agenda regardless of
possible economic gains from trade. These arguments include national security, consumer
protection, foreign policy, and environmental and social responsibility. First, national
security concerns are often invoked to protect defense-related industries. Second, consumer
protection has frequently been used as an argument for nations to erect trade barriers. Third,
trade intervention is often used to meet foreign policy objectives. Finally, environmental and
social responsibility can be used as political arguments to initiate trade intervention against
certain countries.
The answer to the second part of the question is based on students’ opinions, and they will
vary.
5. Are theories of international trade still valid given the new realities of world trade?
The old debate between mercantilism and free trade still exists, particularly in the area of
trade deficits. Armed with classical theories, free traders argue that trade deficit is not a
grave concern. They argue that the United States and its trading partners mutually benefit by
developing a deeper division of labor based on comparative advantage. Critics strongly
disagree. They argue that international trade is about competition—about markets, jobs, and
incomes as much as it is about merchandise.
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Solution Manual for GLOBAL 4, 4th Edition, Mike Peng

Solution Manual for GLOBAL 4, 4th Edition, Mike

To download the complete and accurate content document, go to:

Visit TestBankBell.com to get complete for all chapters

Chapter 5, Trading Internationally, begins by defining exports, imports, merchandise (goods)

Opening Case Discussion Guide

Why Are Exports So Competitive?

Lesson Plan for Lecture

Brief Outline and Suggested PowerPoint Slides

Learning Objectives PowerPoint Slides

LO1 3–4: Important Terms Related to Trade

LO2 6: Theories of International Trade -

14: Exhibit 5.6: Comparative Advantage

LO3 24: Realities of International Trade: Tariff

LO4 28: Factors that Determine the Success and

Key Terms 30–33: Key Terms

Summary 34: Summary

• Balance of trade: The country-level trade surplus or deficit

LO3: Explain the importance of political realities governing international trade.

• Administrative policy: A bureaucratic rule that makes it harder to import foreign

Debate: Ethical Dilemma

Should Canada Diversify Its Trade?

Closing Case Discussion Guide

The China Trade Debate

Watch “New Ventures” by John Stewart of McKinsey and Company

Just as a firm’s expertise in a given industry might not enable it to be successful in an

Additional Discussion Material

Critical Discussion Questions

Students’ answers will vary.

Students’ answers will vary.

2. Summarize the three classical theories of international trade.

The three classical theories of international trade are given below.

3. Compare and contrast the three modern theories of international trade.

The three modern theories of international trade are given below.

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