Solution Manual For Global Business Today 11th by Hill

Solution Manual for Global Business Today 11th by Hill
Solution Manual for Global Business Today 11th by

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Global Business Today Eleventh Edition Chapter 6
International Trade Theory

Table of Contents
Learning Objectives
Chapter Summary
Chapter Opening Activity
Chapter Outline
Opening Case: “Trade Wars Are Good and Easy to Win”
Introduction
An Overview of Trade Theory
Mercantilism
Absolute Advantage
Comparative Advantage
Heckscher–Ohlin Theory
The Product Life-Cycle Theory
New Trade Theory
National Competitive Advantage: Porter’s Diamond
Focus on Managerial Implications: Location, First-Mover Advantages, and Government

Policy
End-of-Chapter Resources
Critical Thinking and Discussion Questions
globalEDGE™ Research Task
Closing Case: The Trans Pacific Partnership (TPP) Is Dead; Long Live the CPTPP!
Continuous Case Concept
Additional Readings and Sources of Information
Copyright © 2020 by McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-
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Learning Objectives
6-1 Understand why nations trade with each other.
6.2 Summarize the different theories explaining trade flows between nations.
6-3 Recognize why many economists believe that unrestricted free trade between nations will
raise the economic welfare of countries that participate in a free trade system.
6-4 Explain the arguments of those who maintain that government can play a proactive role in
promoting national competitive advantage in certain industries.
6-5 Understand the important implications that international trade theory holds for management
practice.
Chapter Summary
This chapter focuses on the benefits of international trade and introduces several theories that
help explain the patterns of international trade that are observed in practice. The discussion
begins with an explanation of the theory of mercantilism, and then proceeds to discuss the
theories of absolute advantage and comparative advantage. Four additional theories are
discussed, including the Heckscher-Ohlin theory, the product life cycle theory, the new trade
theory, and the theory of national competitive advantage. Each of these theories helps explain
why certain goods are (or should be) made in certain countries. The chapter ends by discussing
the link between the theories of international trade and (1) a firm’s decision about where (in the
world) to locate its various productive activities, (2) the importance of establishing first-mover
advantages, and (3) government trade policies.
Chapter Opening Activity

In groups of four or five, give each group ten minutes to share their ideas about one of the
several theories discussed in this chapter (e.g., mercantilism, absolute advantage, comparative
advantage, Heckscher-Ohlin, product life cycle, new trade, and Porter’s diamond).
Then, ask a student representative from each group to explain their theory using a few main
points. Suggest the group create one or two PowerPoint slides to illustrate or draw a graphic
illustration on the board. This is a way to create some enthusiasm about theories by tackling
them interactively, instead of putting them to sleep with a lecture on trade theories.
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Chapter Outline
“Trade Wars Are Good and Easy to Win”
opening case
Summary
The opening case explores Donald Trump’s perspective on trade and the actions he has taken on
trade while President of the United States. Trump’s isolationist views are in stark contrast to U.S.
trade policy of the past 70 years. Trump appears to be under the impression that trade agreements
are zero-sum games and further that other countries can be bullied into making concessions to
the United States. Trump has boasted that “trade wars are good and easy to win” indicating that
he intends to impose widespread tariffs as part of his effort to make America great again.
Discussion Questions
1. Do you agree with Donald Trump’s assessment that trade wars are good and easy to win? Do
you agree with his approach to trade?
Since winning the election, Donald Trump has moved swiftly to change what he feels are terrible
deals for the United States. He withdrew from the TPP within days of taking office, started the
process of renegotiating NAFTA, and implemented wide-ranging tariffs on steel and aluminum
with promises of more to come if countries fail to respond to his demands. Many students will be
perplexed by Trump’s actions pointing to the wide-ranging evidence that free trade is beneficial
and that trade agreements are a positive-sum game. Other students will support Trump’s tactics
echoing his statements that China and Mexico are taking advantage of the United States. Some
students will have direct experience with job losses related to shifts in manufacturing locations or
cheap imports. These students may support the notion that protectionist moves are important to
protect U.S. jobs. Other students, however, will probably counter their arguments with a
discussion of how trade is important for global economic growth and the need to look at the
overall picture rather than a slice of it.
2. For the last 70 years, the United States has been the leader in promoting a free trade
environment. What role will the United States play under Donald Trump and what does that
mean for the United States going forward?
Since the end of World War II, the United States has been a strong force in pushing the world to
adopt free trade measures. Indeed, until the election of Donald Trump, there was little dispute as
to leadership role of the United States in the global economy. Now, however, there are concerns
that that leadership role could be rapidly deteriorating. Already for example, the remaining 11
countries that were part of the TPP have agreed to a new version of their deal, a version that does
not include the United States. That effort was led by Japan, a country that is now being seen as a
stronger force in the Asia-Pacific region. Many students will probably suggest that the United
States is now at a disadvantage when it comes to writing the rules for important areas in the
future—ecommerce, intellectual property, and so on. Students may also point out that regaining
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its role as a leader in free trade will not be easy, and the United States could be putting its
companies at a long-term competitive disadvantage.
Teaching Tip: To further explore Donald Trump’s views on trade, go to

https://www.newyorker.com/news/our-columnists/what-is-donald-trumps-trade-policy-nobody-
knows.
Teaching Tip: To further explore the role of the United States under Trump, go to
https://www.usatoday.com/story/tech/2018/02/13/bill-gates-warns-china-other-powers-fill-void-
if-u-s-foreign-aid-cuts-could-cede-leadership-china-ot/322177002.
Introduction
A) The long-held belief espoused by the United States and other nations that free trade is a
positive-sum game under which all nations win is under threat from Donald Trump. Trump is
rapidly working to dismantle 70 years of American-led policy to lower trade barriers, believing
that trade is a zero-sum game, where some countries win at the expense of others.
Lecture Note: It is often worth asking students before discussing the theories why countries
trade the products they do. They will frequently, with a little prompting, hit upon many of the
ideas presented in this chapter and consequently relate better to the various theories that are
discussed.
An Overview of Trade Theory

A) 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.
THE BENEFITS OF TRADE

B) The great strength of the theories of Smith, Ricardo, and Hecksher–Ohlin is that they identify
with precision the specific benefits of trade. Common sense suggests that some trade is
beneficial. The theories of Smith, Ricardo, and Hecksher–Ohlin go beyond common sense to
show why it is beneficial for a country to engage in international trade even for products it is able
to produce for itself. The gains arise because international trade allows a country to specialize in
the manufacture and export of products that can be produced most efficiently in that country,
while importing products that can be produced more efficiently in other countries.
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CONNECT
Video Case
EU to Remain Open For International Trade
Summary
This activity explores why nations trade with each other and in particular looks at the European
Union’s trade policy and its efforts to form a free trade agreement with Japan.
Activity
Students are asked to watch a video on the European Union’s trade policy and then respond to
questions about the video.
Class Discussion
Discuss the philosophy of the European Union on trade. Why is the European Union interested in
forming a free trade agreement with Japan?
Did You Know Video Clip

The video clip asks: “Did you know that sugar prices in the United States are much higher than
sugar prices in the rest of the world?”
1. Why are sugar prices in the U.S. nearly double the average world price of sugar?
There are two sugar futures markets―world sugar #11 and U.S. sugar #16. U.S. sugar #16 is
priced much higher than the world sugar prices, often twice as high. Sugar is the same around the
world, and the price difference is due to subsidies and a tariff program that supports U.S. sugar
farmers. It's true that sugar has been produced in the U.S. for over 200 years, but the climate is
not ideal, and it costs more to produce it in the U.S. than in, say, Brazil and India. But U.S. sugar
lobbyists have gotten U.S. sugar farmers a lucrative price for their sugar and limited sugar
imports from other nations. So, U.S. companies pay inflated prices for sugar.
2. Do you agree that U.S. taxpayers should protect U.S. sugar farmers against less expensive
imports?
Students will probably answer no, unless perhaps they are from farming families that may have
experienced the benefits of subsidies. Remind students of earlier discussions about free and fair
trade. Subsidies on U.S. sugar are an example of fair, not free, trade. Subsidies are exceptions to
free trade policies such that certain products produced domestically are protected from foreign
competition by tariffs, quotas, duties, and subsidies. Since many leading sugar producing nations
are emerging markets with lower GDPs and per-capita incomes, a moral argument may be made
against U.S. agricultural subsidies because they create artificial trade barriers that prohibit more
efficient producers from less affluent countries from competing in markets.
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3. Do you agree that U.S. consumers should keep paying twice as much for sugar than people in
other parts of the world?
This is an extension to the second question, and many students will answer no. Since U.S.
companies pay inflated prices for sugar, U.S. consumers are hit twice: once by taxpayer-funded
subsidies that keep sugar prices high, and again by higher consumer product prices that are
passed on to them.
Lecture Note: To extend this discussion, consider the two sugar futures markets:
https://www.thebalance.com/markets-for-us-and-world-sugar-809301.
CONNECT
Video Case
Sugar Prices
Summary
This activity explores sugar prices in the United States as compared to the rest of the world.
Various protectionist prices keep sugar prices in the United States substantially higher than the
rest of the world.
Activity
Students are asked to watch a video on global sugar prices and then respond to questions about
the video.
Class Discussion
Discuss the effects of protectionist prices like those in the U.S. sugar industry. Is it fair to make
everyone pay more in order to protect inefficient producers?
THE PATTERN OF INTERNATIONAL TRADE

C) Some patterns of trade are easy to explain. It is obvious why Saudi Arabia exports oil, Ghana
exports cocoa, and Brazil exports coffee. Yet others are not so obvious or easily explained.
D) New trade theory stresses that in some cases countries specialize in the production and
export of particular products not because of underlying differences in factor endowments, but
because in certain industries the world market can support only a limited number of firms. So a
country’s pattern of trade may be a reflection of the ability of firms in that nation to capture first-
mover advantages.
E) Michael Porter suggested that a country’s factor endowments, as well as domestic demand
and domestic rivalry are important in explaining a nation’s dominance in the production and
export of particular products.
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TRADE THEORY AND GOVERNMENT POLICY

F) While all the trade theories discussed in the text agree that international trade is beneficial to a
country, they lack agreement in their recommendations for government policy. Mercantilism
makes a crude case for government involvement in promoting exports and limiting imports.
Smith, Ricardo, and Heckscher-Ohlin all promote the notion of unrestricted free trade. The
argument for unrestricted free trade is that both import controls and export incentives (such as
subsidies) are self-defeating and result in wasted resources. Yet both the new trade theory and
Porter’s theory of national competitive advantage can be interpreted as justifying some limited
and selective government intervention to support the development of certain export-oriented
industries.
Mercantilism
A) The first theory of international trade emerged in England in the mid-16th century. Referred to
as mercantilism, its principle assertion was that it is in a country’s best interest to maintain a
trade surplus, to export more than it imports. Consistent with this belief, the mercantilist doctrine
advocated government intervention to achieve a surplus in the balance of trade.
Teaching Note: To extend the discussion on mercantilism, visit

https://www.economist.com/free-exchange/2013/08/23/what-was-mercantilism.
B) The flaw of mercantilism was that it viewed trade as a zero-sum game, one in which a gain
by one country results in a loss by another. It was left to Adam Smith and David Ricardo to show
the shortsightedness of this approach and to demonstrate that trade is a positive-sum game.
country FOCUS: Is China Manipulating Its Currency in Pursuit

of a Neo-Mercantilist Policy?
Summary
This feature analyzes claims that China is a neo-mercantilist nation. Exports are largely
responsible for China’s recent rapid economic growth and for decades, the country’s exports
have grown faster than its imports. In 2017, the trade deficit between the United States and China
reached a record $375 billion, prompting renewed criticism that China has been artificially
keeping the value of its currency low, making its exports cheaper. However, this claim is not
supported by the evidence, which shows instead that China’s currency has strengthened relative
to the dollar and that China has actually taken actions to allow the value of its currency to
appreciate.
1. Are the claims that China is manipulating its currency and following a neo-mercantilist policy
valid? Why or why not?
Evidence shows that despite the claims that China has been increasing its exports via an
artificially low yuan, the opposite is actually true. The value of the yuan relative to the dollar
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began rising in 2005 and has continued to rise, albeit slowly, ever since. Indeed, the U.S.
Treasury Department moderated its criticism of China’s foreign exchange policies in 2017,
declining to call the country a currency manipulator.
2. What incentive does China have to open its markets to foreign products? Why might China
resist such a move?
China is under significant pressure from many countries including the United States to open its
markets to foreign goods. Students will probably recognize that if the country does open its
markets, the impressive economic growth the country has been experiencing would probably be
affected. However, students may also note that the country may have to make some changes to
its policies if only to appease other nations and prevent retaliatory trade measures. Already the
country, in response to pressure from the United States, has allowed its currency to appreciate
relative to the dollar.
3. Why does China’s trade surplus with the United States persist despite the country’s efforts to
keep the value of its currency from declining?
Students should recognize that the United States’ trade deficit with China suggests that
Americans consume far more products made in China relative to China’s consumption of
American-made goods. Some students might point out though, that in addition to finished goods,
China also exports unfinished goods, products that are generally produced more cheaply and
efficiently in China than elsewhere. These unfinished goods also contribute to the trade
imbalance between the two countries.
Lecture Note: For more information on China’s currency policy and its interrelationship with
the U.S. economy, go to http://www.bloomberg.com/news/articles/2016-01-14/the-market-
thinks-china-s-currency-policy-drives-u-s-monetary-policy.
Absolute Advantage
A) In 1776, Adam Smith attacked the mercantilist assumption that trade is a zero-sum game,
arguing that countries differ in their ability to produce goods efficiently, and that a country has
an absolute advantage in the production of a product when it is more efficient than any other
country in producing it. According to Smith, countries should specialize in the production of
goods for which they have an absolute advantage and then trade these goods for the goods
produced by other countries.
Comparative Advantage
A) In 1817, David Ricardo took Adam Smith’s theory one step further by exploring what might
happen when one country has an absolute advantage in the production of all goods. Smith’s
theory of absolute advantage suggests that such a country might derive no benefits from
international trade. Ricardo showed that this was not the case. According to Ricardo’s theory of
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comparative advantage, it makes sense for a country to specialize in the production of those
goods that it produces most efficiently and to buy the goods that it produces less efficiently from
other countries, even if this means buying goods from other countries that it could produce more
efficiently itself.
Teaching Tip: For more on the ideas and philosophies of David Ricardo, go to
http://www.econlib.org/library/Enc/bios/Ricardo.html.
THE GAINS FROM TRADE

B) The theory of comparative advantage argues that trade is a positive-sum gain in which all
benefit. It provides a strong rationale for encouraging free trade.
QUALIFICATIONS AND ASSUMPTIONS

C) 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 in which they are most efficient has been shown to be quite valid.
EXTENSIONS OF THE RICARDIAN MODEL

D) The text explores the effects of relaxing the assumptions that resources are mobile between
goods within a country, and that trade does not change a country’s stock of resources or the
efficiency with which those resources are utilized.
Immobile Resources
E) As illustrated by the example in the text, resources do not always move freely from one
economic activity to another.
Diminishing Returns
F) The model of comparative advantage assumes constant returns to specialization (the units
of resources required to produce a good are assumed to remain constant no matter where one is
on a country’s production possibility frontier). However, it is more realistic to assume
diminishing returns to specialization (more units of resources are required to produce each
additional unit).
G) Diminishing returns are more realistic because not all resources are of the same quality, and
because different goods use resources in different proportions. Diminishing returns to
specialization suggest that the gains from specialization will probably be exhausted before
specialization is complete. Still, unrestricted free trade makes sense even if the gains are not as
great as suggested by the constant returns case.
Dynamic Effects and Economic Growth

H) 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
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abroad. Second, free trade might increase the efficiency of resource utilization, and free up
resources for other uses.
Trade, Jobs and Wages: The Samuelson Critique

I) 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,
effectively negating the gains of international trade.
country FOCUS: Moving U.S. White-Collar Jobs Offshore

Summary
This feature goes to the heart of a debate that has been played out many times over the past half
century—the transference of jobs from the United States to lower-wage countries. The difference
now however, is that rather than blue-collar jobs being transferred, the new trend is for white-
collar jobs to move—jobs associated with the knowledge-based economy.
1. Will the United States suffer from the loss of highly skilled and high paying jobs? What does
the transference of white-collar jobs mean to the average American?
This hot issue is a highly sensitive one for many Americans—especially those who have seen
their once secure jobs being shipped offshore. Many students will probably know someone who
has suffered from this very situation, and may claim that companies have lost all loyalty to their
employees and simply become profit seekers. Other students, however, may point that
companies are in business to make a profit and do well for other stakeholders such as investors.
Some students will simply argue that the loss of white-collar jobs is merely a manifestation of
companies viewing the world as a borderless market—where they seek resources wherever they
are cheapest, produce in the optimal location, and sell wherever there is demand.
2. What does the transference of white-collar jobs mean to recipient countries such as India and
the Philippines?
For developing countries like India and the Philippines, the transference of white-collar jobs
from the United States not only generates new jobs, but it also brings new skills and knowledge
that could be vital to the countries as they continue on the path toward greater economic
development. Students should recognize that greater employment levels will of course have the
effect of pushing wages up and creating greater economic prosperity in these nations. This in
turn should be beneficial for American companies as new export markets develop.
3. Why do American companies transfer white-collar jobs to countries like India and the
Philippines?
India offers companies a well-educated workforce that is willing to work for a fraction of what
companies would pay in the United States. By transferring skilled jobs to India or the
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Philippines, American companies increase their global competitiveness and profitability.

Students will probably note that the trend to outsource is likely to continue as companies seek an
edge wherever they can find one. Already, the trend is being seen in new industries such as
healthcare where not only paperwork but even radiology services are now being routinely
outsourced.
Lecture Note: Outsourcing call centers and other white-collar jobs is common in many
industries today; however, it can also be controversial. To extend the discussion of outsourcing
to include this angle, go to http://www.bloomberg.com/news/articles/2016-02-05/uaw-president-
bemoans-work-moving-to-mexico-to-cut-labor-costs.
Lecture Note: To extend the discussion of outsourcing to include Wall Street jobs, go to
https://qz.com/853075/goldman-sachs-and-other-wall-street-banks-moved-thousands-of-jobs-
out-of-the-us-will-trump-go-after-them-too.
Evidence for the Link between Trade and Growth

J) Studies exploring the relationship between trade and economic growth suggest that countries
that adopt a more open stance toward international trade enjoy higher growth rates than those
that close their economies to trade.
Heckscher–Ohlin Theory
A) Heckscher and Ohlin argued that comparative advantage arises from differences in national
factor endowments (land, labor, and capital). As a result, the Heckscher–Ohlin theory predicts
that countries will export goods that make intensive use of those factors that are locally
abundant, while importing goods that make intensive use of factors that are locally scarce.
Teaching Tip: To learn more about Bertil Ohlin, go to

http://www.econlib.org/library/Enc/bios/Ohlin.html.
THE LEONTIEF PARADOX

B) Using the Heckscher–Ohlin theory, Leontief, in 1953, postulated that since the United States
was relatively abundant in capital compared to other nations, the United States 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 discussion of Wassily Leontief is available at

http://www.econlib.org/library/Enc/bios/Leontief.html.
C) Recent research suggests that the Heckscher–Ohlin theory gains predictive power if the
impact of differences in technology on productivity is controlled for.
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The Product Life-Cycle Theory

A) Raymond Vernon initially proposed the product life-cycle theory in the mid-1960s.
According to the theory, as products mature, both the location of sales and the optimal
production location will change affecting the flow and direction of trade.
B) According to Vernon, early in the life cycle of a typical new product, while demand is starting
to grow in the United States, demand in other advanced countries is limited to high-income
groups. The limited initial demand in other advanced countries does not make it worthwhile for
firms in those countries to start producing the new product, but it does necessitate some exports
from the United States to those countries. Over time, however, demand for the new product starts
to grow in other advanced countries. As it does, it becomes beneficial for foreign producers to
begin producing for their home markets. In addition, U.S. firms might set up production facilities
in those advanced countries where demand is growing. Consequently, production within other
advanced countries begins to limit the potential for exports from the United States.
C) As the market in the United States and other advanced nations matures, the product becomes
more standardized, and price becomes the main competitive weapon. One result is that producers
based in advanced countries where labor costs are lower than the United States might now be
able to export to the United States.
D) If cost pressures become intense, the process might not stop there. The cycle by which the
United States lost its advantage to other advanced countries might be repeated once more as
developing countries begin to acquire a production advantage over advanced countries.
E) The consequence of these trends for the pattern of world trade is that the United States (and
other advanced countries) switches from being an exporter of the product to an importer of the
product as production becomes more concentrated in lower-cost foreign locations.
PRODUCT LIFE-CYCLE THEORY IN THE TWENTY-FIRST CENTURY

F) While the product life cycle theory accurately explains what has happened for products like
photocopiers and a number of other high technology products developed in the United States in
the 1960s and 1970s, the increasing globalization and integration of the world economy has
made this theory less valid in today's world. In fact, the product life-cycle as introduced by
Vernon could be considered ethnocentric, as well. As such, this approach may be best suited to
explain the pattern of international trade during the period of American global dominance.
New Trade Theory

A) New trade theory suggests that the ability of firms to realize economies of scale (unit cost
reductions associated with a large scale of output) may help explain international trade patterns.
B) New trade theory makes two important points. First, trade can increase the variety of goods
available to consumers and decrease the average cost of those goods. Second, in industries where
the output necessary to attain economies of scale is significant relative to total world demand,
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only a few companies may be able to survive. Being a first-mover in these industries is
important.
INCREASING PRODUCT VARIETY AND REDUCING COSTS

C) According to new trade theory, with trade a nation may be able to specialize in producing a
narrower range of products than it would in the absence of trade. 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.
ECONOMIES OF SCALE, FIRST-MOVER ADVANTAGES, AND THE PATTERN OF

TRADE
D) A second theme in new trade theory is that 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.
IMPLICATIONS OF NEW TRADE THEORY

E) 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 first-mover firms.
F) New trade theory is at variance with the Heckscher-Ohlin theory, which suggests that a
country will predominate in the export of a product when it is particularly well endowed with
those factors used intensively in its manufacture. New trade theory does not contradict the theory
of comparative advantage, but instead identifies a source of comparative advantage.
G) An obvious and controversial extension of new trade theory is the implication that
governments should consider strategic trade policies. Strategic trade policies would suggest that
governments should nurture and protect firms and industries where first-mover advantages and
economies of scale are likely to be important, as doing so can increase the chance that a firm will
build economies of scale and eventually end up a winner in the global competitive race.
CONNECT
Case Analysis
New Trade Theory and Aircraft Production
Summary
This activity explores new trade theory and how it can explain the success of Boeing and Airbus
in the global aircraft industry. Both companies have benefitted from favorable government
actions.
Activity
Students are asked to read a case on the aircraft industry and then respond to questions about the
video.
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Class Discussion
Discuss new trade theory and the role of government in helping an industry, like the aircraft
industry, be successful. How has government policy shaped other industries?
National Competitive Advantage: Porter’s Diamond

A) Porter’s 1990 study tried to explain why a nation achieves international success in a particular
industry. This study found four broad attributes―factor endowments, demand conditions,
relating and supporting industries, and firm strategy, structure, and rivalry―that promote or
impede the creation of competitive advantage. These are shown as a diamond in Figure 6.5.
Porter argues that firms are most likely to succeed in industries where the diamond is favorable.
FACTOR ENDOWMENTS
B) A nation's position in factors of production such as skilled labor or infrastructure necessary to
compete in a given industry can be critical. These factors can be either basic (natural resources,
climate, location) or advanced (skilled labor, infrastructure, technological know-how). While
either can be important, advanced factors are more likely to lead to competitive advantage.
DEMAND CONDITIONS
C) The nature of home demand for the industry’s product or service influences the development
of capabilities. Sophisticated and demanding customers pressure firms to be competitive.
RELATED AND SUPPORTING INDUSTRIES

D) The presence of supplier and related industries that are internationally competitive in a nation
can spill over and contribute to other industries. Successful industries tend to be grouped in
clusters in countries.
FIRM STRATEGY, STRUCTURE, AND RIVALRY

E) The conditions in the nation governing how companies are created, organized, and managed,
and the nature of domestic rivalry impact firms’ competitiveness. Firms that face strong domestic
competition will be better able to face competitors from other firms.
EVALUATING PORTER’S THEORY

F) 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.
G) The four attributes of the diamond work as a reinforcing system, complementing each other
and in combination creating the conditions appropriate for competitive advantage. To date,
Porter’s theory has not been subjected to detailed empirical testing.
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CONNECT
Click and Drag
Applying Porter’s Model
Summary
This activity focuses on Michael Porter’s Diamond of Competitive Advantage. Using his
Diamond, Porter tries to explain why some countries succeed in trade and others do not.
Activity
Students are asked to match various descriptions with the correct component of Porter’s model.
Class Discussion
Understanding Porter’s model can provide insight into why countries succeed in trade and can
influence trade policy decisions. Discuss the different parts of the model and what they mean.
Then using the model, identify industries that have been successful and why. How could this
shape future trade policy?
CONNECT
Click and Drag
Trade Theories: A Historical Approach
Summary
This activity focuses on the evolution of trade theory beginning with the early mercantilist
approach to modern day new trade theory and Porter’s Diamond of Competitive Advantage.
Activity
Students are asked to match the various trade theories to a timeline.
Class Discussion
Understanding how philosophy on trade has evolved over time allows for a greater
understanding of the current trading environment and countries’ trade policies. Discuss how the
different theories have built on previous works and how the theories have changed as the trading
environment has changed.
FOCUS ON MANAGERIAL IMPLICATIONS

Location, First-Mover Advantages, and Government Policy
A) 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.
Location
B) Underlying most of the theories is the notion that different countries have particular
advantages in different productive activities. Thus, from a profit perspective, it makes sense for a
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firm to disperse its various productive activities to those countries where, according to the theory
of international trade, they can be performed most efficiently.
First-Mover Advantages
C) 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.
Government Policy
D) Because of their pivotal role in international trade, business firms can and do exert a strong
influence on government trade policy. Government policies with respect to free trade or
protecting domestic industries can significantly impact global competitiveness.
E) 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 of surviving and prospering. If such openness is restricted, a business’s long-term
survival will be in greater question.
Teaching Tip: 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.
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End-of-Chapter Resources
Critical Thinking and Discussion Questions
1. Mercantilism is a bankrupt theory that has no place in the modern world. Discuss.
Answer: Mercantilism, in its purest sense, 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 it 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 trading partners. 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. Even so, the election of Donald Trump as U.S. President has brought the
mercantilist philosophy to table as a viable perspective on trade, at least for his supporters.
2. Is free trade fair? Discuss.
Answer: This question is designed to stimulate class discussion. Trade theory 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
a new 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?
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: 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.
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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: Students will probably be divided on this question, and a lively debate should ensue.
For example, 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 every day and do not get government assistance to
find new ones.
5. Reread the Country Focus “Is China Manipulating Its Currency in Pursuit of a Neo-
Mercantilist Policy?”
a. Do you think China is pursuing an economic policy that can be characterized as neo-
mercantilist?
b. What should the United States, and other countries, do about this?
Answer: Many students will probably suggest that on the surface, China does appear to be
following a neo-mercantilist philosophy. China has run a trade surplus for years, prompting
critics to suggest that an artificially low currency is making its exports cheaper in foreign
markets, leading to trade imbalances. Evidence points to the contrary, however. That being said,
students may suggest that China does not maintain open markets and, as a result, effectively
limits imports while encouraging exports—the basic notion of mercantilism. Some students will
support the actions taken by Donald Trump to force China to make trade concessions. Other
students may argue that the tit-for-tat negotiating approach is threatening growth in the global
economy and a better alternative might be to take a bigger role in trade agreements in the region,
like the Trans Pacific Partnership Agreement. Students taking this perspective might argue that
had Donald Trump not withdrawn from the agreement, the United States would have been poised
to take a significant role in dictating the rules of trade in the region and, in the process,
encouraged China to be more open to trade.
6. Reread the Country Focus “Moving U.S. White-Collar Jobs Offshore.”

a. Who benefits from the outsourcing of skilled white-collar jobs to developing nations?
Who are the losers?
b. Will developed nations like the United States suffer from the loss of high-skilled and
high-paying jobs?
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 therefore 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
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these jobs outside the country, the company is able to remain viable, and keep other people
employed.
7. Drawing upon the new trade theory and Porter’s theory of national competitive advantage,
outline the case for government policies that would build national competitive advantage in
biotechnology. What kind of policies would you recommend that the government adopt? Are
these policies at variance with the basic free trade philosophy?
Answer: 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 later added 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
first-mover 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 conducive 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 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.
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: This is a difficult question. Certainly, most students will recognize that these countries
are in dire straits 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
discussion.
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globalEDGE™ Research Task

Use the globalEDGE™ site (globalEDGE.msu.edu) to complete the exercises in the text.
Exercise 1
Search phrase: World Trade Organization International Trade Statistics
Resource Name: World Trade Organization (WTO): International Trade Statistics
Website: https://www.wto.org/english/res_e/statis_e/statis_e.htm
globalEDGE™ Category: Global, Statistical Data Sources, Publications
Additional Info:
There are several ways to get a list of Top 10 exporters and importers in the world from this
website. The easiest is to access the interactive “International Trade and Market Access Data”
tool. You can get a ranking of the countries at the bottom of this tool. The default is for exports,
but there is a drop-down at the top to allow you to switch the data for imports.
Exercise 2
Search phrase: Australian suppliers
Resource Name: Australian Suppliers Directory
Website: https://www.austrade.gov.au/suppliersearch.aspx
globalEDGE™ Category: Company Directories
Additional Info:
A supplier directory developed by the Australian Trade and Investment Commission allows
importers from around the world to search for and identify potential Australian exporters.
The Trans Pacific Partnership (TPP) Is Dead; Long Live the

CPTPP!
closing case
Summary
The closing case explores the Trans Pacific Partnership (TPP), what it entailed, why it fell apart,
and what is replacing it. The TPP, negotiated among 12 countries including the United States,
was a highlight of President Obama’s trade policy. The agreement was designed to reduce trade
barriers and encourage investment among participants. President Trump, however, described the
trade agreement as “a terrible deal” and, in one of his first actions in office, he withdrew the
United States from the deal. Despite the withdrawal of the United States, the remaining
signatories decided to go forward the agreement, renaming it the Comprehensive and Progressive
Trans Pacific Partnership.
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Case Discussion Questions

1. What were the proposed benefits of the TPP?
Free trade agreements like the TPP are generally recognized as positive-sum games bringing
benefits to all countries involved usually in the form of lower tariffs, more choice for consumers,
lower prices, increased jobs, economic growth, and so on. Many companies and experts
supported the TPP as it was expected to provide more business opportunities for companies
located in the United States. For example, under the agreement, agricultural tariffs were to be
reduced in foreign markets, prompting firms such as Cargill to support the deal. Other companies
saw the possibility of being more price competitive in the aerospace and technology industries.
Students may also comment on the non-trade related benefits of creating an atmosphere of
cooperation and common goals among the agreement’s signatories, a sentiment that could carry
into other discussions.
2. What were the potential drawbacks of the U.S. entering the TPP? What would be the
drawbacks to other nations?
Much of the opposition in the United States to the TPP was related to concerns that it could lead
to significant job losses, especially in manufacturing. Labor unions were particularly vocal in
their opposition to the agreement despite the findings by several independent parties that
expected job losses were actually very small. Some companies such as Ford were against the
TPP because it reduced tariffs on imports into the United States. Students may note that as with
any trade agreement like the TPP, there is a certain loss of sovereignty for the nations involved.
The greater interdependency among the signing countries could reduce the potential for future
government intervention.
3. Why do you think that Donald Trump was so adamantly opposed to the TPP?
This question is likely to generate strong and partisan debate. Those who support Donald Trump
will argue that the agreement did not benefit the United States, or at least as not as much as it
benefited the other signatories. Those who are against Donald Trump will probably contend that
this is an example of his lack of understanding of global trade and his focus on “winning” at the
expense of others regardless of whether it makes sense for the United States as a whole. Students
should recall that Donald Trump ran on a campaign of isolationism and an America-first policy.
As part of this, Trump promised to undo the trade deals he and his supporters believe are
responsible for the loss of American manufacturing jobs. Like his supporters, Donald Trump
apparently believes that because the United States already has low trade barriers, it has little to
gain from the agreement, despite the fact that several independent studies have suggested that
under the TPP, the United States would benefit from increased demand for its products.
4. Why do you think the 11 remaining signatories went ahead with a revised deal after the United
States withdrew?
Most students will probably suggest that the basic arguments for forming the TPP are still valid
even without the participation of the United States. The remaining 11 signatories clearly felt that
the benefits of reduced trade barriers and free trade outweighed the drawbacks of the status quo.
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Students may point out that the remaining 11 countries appear to also feel that the agreement
could be better with the participation of the United States as the revised deal has left the window
open for the United States and also post-Brexit Britain to join in the future, again supporting the
idea that free trade is beneficial. Some students may suggest that the notion of being stronger
together may have also played a role in signing the agreement. Trump’s protectionist stance is
likely to be less effective against an alliance of 11 countries than it is against a single country.
5. Is the CPTTP a threat to American economic interests?
The question will probably generate some debate among students. Some will probably suggest
that the CPTPP will indeed threaten American economic interests because there will be an
incentive among its members to trade among themselves rather than with the United States.
Students sharing this perspective may also point out that the United States has lost out on an
opportunity to play a leadership role in shaping the trade and investment environment in the
Asia-Pacific.
6. What is the opportunity cost to the United States of withdrawing from the TPP?
By withdrawing from the TPP, the United States forgoes the opportunity to become a leader in
the Trans Pacific region in areas related to trade, and in the political arena too. Many students
will note that rather than working to expand market access in the Asia-Pacific region for U.S.
companies, by withdrawing from the TPP agreement, Trump is harming companies instead. If
enacted as originally designed, together the TPP countries would have accounted for 36 percent
of the world’s GDP and 26 percent of world trade. Many students will probably suggest that
failing to go forward with the agreement is a significant loss for the global economy as well.
Teaching Tip: For more information on the CPTPP, go to https://www.economist.com/the-

economist-explains/2018/03/12/what-on-earth-is-the-cptpp.
Teaching Tip: To extend the discussion on the new CPTPP and its implications for the United
States, consider https://thehill.com/opinion/finance/383327-return-of-the-tpp-trump-realizing-
trade-deal-aligns-with-goals-on-china and
https://www.forbes.com/sites/alexcapri/2018/04/15/trumps-trade-war-irony-america-loses-by-
not-rejoining-the-tpp/#428046c73e7f.
CONNECT
Geography
Summary
This activity is designed to test the student’s knowledge of geography. Questions related to
chapter material are asked, requiring students to understand the topics and the locations of the
countries involved.
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Activity
Students are asked to respond to a series of question related to the geographic location of several
countries.
Class Discussion
Understanding the geographic location of countries is essential to the understanding of
international business. Ask students to discuss the implications of the geographic locations of the
countries in this exercise on the subject matter.
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Continuous Case Concept

In the last few decades, the auto industry has shifted from one in which a few, large companies
primarily manufactured in their domestic markets and sold in their domestic markets, to one in
which a few large companies serve the world market, manufacturing around the globe to capture
competitive advantages wherever they can.
• Ask students to reflect on the changes in the industry. Why do companies like Toyota and
Nissan have large operations in the U.S. market? Why don’t American companies have a
large presence in Japan?
• Next, consider why BMW and Mercedes have established manufacturing operations in
the U.S. market, while American companies are shifting their production to places like
Mexico. Similarly, reflect on the new agreement between Toyota and Mazda whereby
Mazda will produce cars at its plant in Mexico for Toyota to sell in the United States.
• Finally, ask students to use the theories presented in the chapter to explain the changes in
the industry, and to predict what may occur in the next decade. How will the Chennai
region of India, referred to as the Detroit of India because so many automakers and
suppliers have established operations there, change the industry? What will be the impact
of the new trade agreement between Mexico, Canada, and the United States have on
production? What are the implications of the move toward more electric vehicles by
companies like Volkswagen?
The first two parts of this exercise can be used either at the beginning of a discussion of trade
theory or threaded through the discussion of the material. The last question works well as a way
of applying the theories to a real-world situation and makes a nice conclusion to the discussion of
the theories.
Teaching Tip: Donald Trump’s trade policy is creating a number of challenges for the auto
industry. To learn more, consider https://www.cnbc.com/2018/08/12/auto-industry-caught-in-
the-trade-war-crosshairs.html and https://www.npr.org/2018/08/28/642696473/how-the-auto-
industry-is-reacting-to-the-tentative-u-s-mexico-trade-deal.
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Solution Manual for Global Business Today 11th by Hill
Additional Readings and Sources of Information

How A Trans-Pacific Trade Deal Got Made Without Trump
https://www.forbes.com/sites/stratfor/2018/03/08/how-a-trans-pacific-trade-deal-got-made-
without-trump/#1d84f01a75d7
TPP: What is it and why does it matter?

https://www.bbc.com/news/business-32498715
Everything you need to know about the Trans Pacific Partnership

https://www.washingtonpost.com/news/wonk/wp/2013/12/11/everything-you-need-to-know-
about-the-trans-pacific-partnership/?utm_term=.6b09c6eb1d76
Why Economists Are Worried About International Trade

https://www.nytimes.com/2018/02/16/business/trump-economists-trade-tariffs.html
Trade wars, Trump tariffs and protectionism explained

https://www.bbc.com/news/world-43512098
What Game Theory Says About Trump’s Trade Strategy

https://www.bloomberg.com/view/articles/2018-07-16/what-game-theory-says-about-trump-s-
trade-strategy
The last American “trade war” didn’t work out so great

https://www.cnn.com/2018/03/02/politics/donald-trump-steel-tariffs-q-and-a/index.html
Is free trade always the answer?

https://www.theguardian.com/business/2018/aug/13/is-free-trade-always-the-answer
Decline of U.S. global leadership is not what Americans want

https://www.huffingtonpost.com/entry/decline-of-us-global-leadership-is-not-what-
americans_us_5a5e65d0e4b03ed177016e8f
China’s Export Machine Is Grabbing More of the Global Market

http://www.bloomberg.com/news/articles/2016-09-06/china-export-machine-defying-gravity-
grabs-global-market-share
Japan Joins World Trade Organization Case on China Aircraft Tax

http://www.bloomberg.com/news/articles/2016-01-05/japan-joins-world-trade-organization-case-
on-china-aircraft-tax
World’s Biggest Shipping Firm Warns Against U.S. Protectionism

https://www.bloomberg.com/news/articles/2016-08-14/world-s-biggest-shipping-firm-warns-
against-u-s-protectionism
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International Trade Theory

Chapter Opening Activity

Opening Case: “Trade Wars Are Good and Easy to Win”

An Overview of Trade Theory

The Product Life-Cycle Theory

New Trade Theory

National Competitive Advantage: Porter’s Diamond

Focus on Managerial Implications: Location, First-Mover Advantages, and Government

Critical Thinking and Discussion Questions

globalEDGE™ Research Task

Continuous Case Concept

Additional Readings and Sources of Information

Chapter Opening Activity

Teaching Tip: To further explore Donald Trump’s views on trade, go to

An Overview of Trade Theory

THE BENEFITS OF TRADE

Did You Know Video Clip

THE PATTERN OF INTERNATIONAL TRADE

TRADE THEORY AND GOVERNMENT POLICY

Teaching Note: To extend the discussion on mercantilism, visit

country FOCUS: Is China Manipulating Its Currency in Pursuit

THE GAINS FROM TRADE

QUALIFICATIONS AND ASSUMPTIONS

EXTENSIONS OF THE RICARDIAN MODEL

Dynamic Effects and Economic Growth

Trade, Jobs and Wages: The Samuelson Critique

country FOCUS: Moving U.S. White-Collar Jobs Offshore

Philippines, American companies increase their global competitiveness and profitability.

Evidence for the Link between Trade and Growth

Teaching Tip: To learn more about Bertil Ohlin, go to

THE LEONTIEF PARADOX

Teaching Tip: A more extensive discussion of Wassily Leontief is available at

The Product Life-Cycle Theory

PRODUCT LIFE-CYCLE THEORY IN THE TWENTY-FIRST CENTURY

New Trade Theory

INCREASING PRODUCT VARIETY AND REDUCING COSTS

ECONOMIES OF SCALE, FIRST-MOVER ADVANTAGES, AND THE PATTERN OF

IMPLICATIONS OF NEW TRADE THEORY

National Competitive Advantage: Porter’s Diamond

RELATED AND SUPPORTING INDUSTRIES

FIRM STRATEGY, STRUCTURE, AND RIVALRY

EVALUATING PORTER’S THEORY

FOCUS ON MANAGERIAL IMPLICATIONS

2. Is free trade fair? Discuss.

6. Reread the Country Focus “Moving U.S. White-Collar Jobs Offshore.”

globalEDGE™ Research Task

The Trans Pacific Partnership (TPP) Is Dead; Long Live the

Case Discussion Questions

5. Is the CPTTP a threat to American economic interests?

Teaching Tip: For more information on the CPTPP, go to https://www.economist.com/the-

Continuous Case Concept

Global Business Today Eleventh Edition Chapter 6

Additional Readings and Sources of Information

TPP: What is it and why does it matter?

Everything you need to know about the Trans Pacific Partnership

Why Economists Are Worried About International Trade

Trade wars, Trump tariffs and protectionism explained

What Game Theory Says About Trump’s Trade Strategy

The last American “trade war” didn’t work out so great