Chapter 5Trading Internationally

TRUE/FALSE 1. The theory of mercantilism viewed international trade as a win-win game. ANS: F OBJ: 5.2 PTS: 1 DIF: Easy REF: p. 129 NAT: AACSB: Tier 1 Analytic; Tier 2 Environmental Influence

2. Trade deficit occurs when a nation exports more than it imports. ANS: F OBJ: 5.2 PTS: 1 DIF: Easy REF: p. 128 NAT: AACSB: Tier 1 Analytic; Tier 2 Environmental Influence

3. Whether a country has a trade surplus or deficit leads to the country's balance of trade. ANS: T OBJ: 5.2 fluence PTS: 1 DIF: Easy REF: p. 128 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental In-

4. Mercantilism suggests that self-sufficiency is the best for a country. ANS: T OBJ: 5.2 fluence PTS: 1 DIF: Easy REF: p. 129 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental In-

5. The theory of absolute advantage was advocated by French statesman Jean Baptist Colbert. ANS: F OBJ: 5.2 fluence PTS: 1 DIF: Easy REF: p. 130 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental In-

6. The theory of absolute advantage espouses that the economic advantage one nation enjoys is superior to another nation. ANS: T OBJ: 5.2 fluence PTS: 1 DIF: Easy REF: p. 130 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental In-

7. The theory of comparative advantage states that even if a country does not have absolute advantage in production, the country can still profitably specialize if the country is relatively more efficient. ANS: T OBJ: 5.2 PTS: 1 DIF: Moderate REF: p. 132 NAT: AACSB: Tier 1 Analytic; Tier 2 Environmental Influence

8. A country has a comparative advantage when that country can be more efficient than any other country in the production of any good or service. ANS: F PTS: 1 DIF: Moderate REF: p. 132

OBJ: 5.2

NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy

9. Absolute and comparative advantages come from economic differences. ANS: F OBJ: 5.2 PTS: 1 DIF: Moderate REF: p. 132 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy

10. Mercantilism is the direct intellectual ancestor of modern-day protectionism. ANS: T OBJ: 5.2 PTS: 1 DIF: Easy REF: p. 129 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy

11. Adam Smith proposed the theory of comparative advantage. ANS: F OBJ: 5.2 PTS: 1 DIF: Moderate REF: p. 132 NAT: AACSB: Tier 1 Communication; Tier 2 Strategy

12. Opportunity cost refers to the cost of pursuing one activity at the expense of another activity, given the alternatives. ANS: T OBJ: 5.2 PTS: 1 DIF: Moderate REF: p. 132 NAT: AACSB: Tier 1 Communication; Tier 2 Strategy

13. Factor endowment theory is a proposition that nations will develop comparative advantage based on their locally abundant factors. ANS: T OBJ: 5.2 PTS: 1 DIF: Moderate REF: p. 134 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy

14. Mercantilism, absolute advantage, and comparative advantage are examples of modern theories. ANS: F OBJ: 5.2 PTS: 1 DIF: Easy REF: p. 135 NAT: AACSB: Tier 1 Communication; Tier 2 Strategy

15. Product life cycle theory was developed by American economist Raymond Vernon in 1966. ANS: T OBJ: 5.2 PTS: 1 DIF: Moderate REF: p. 136 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy

16. Product life cycle theory is the first dynamic theory to account for changes in the patterns of trade over time. ANS: T OBJ: 5.2 PTS: 1 DIF: Moderate REF: p. 136 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy

17. Strategic trade is the first theory to incorporate dynamic changes in patterns of trade. ANS: F OBJ: 5.2 PTS: 1 DIF: Difficult REF: p. 136 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

18. Strategic trade theory suggests that strategic intervention by governments in certain industries can improve the odds for international success. ANS: T OBJ: 5.2 PTS: 1 DIF: Moderate REF: p. 136 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy

19. First-mover advantages are enjoyed by first entrants and not shared with late entrants. ANS: T OBJ: 5.2 PTS: 1 DIF: Moderate REF: p. 136 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy

20. National competitive advantage of industries is the most recent, most complex, and most realistic among various theories. ANS: T OBJ: 5.2 PTS: 1 DIF: Moderate REF: p. 139 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy

21. According to absolute advantage theory, by specializing and trading, each nation produces more and consumes more. ANS: T OBJ: 5.2 fluence PTS: 1 DIF: Moderate REF: p. 141 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental In-

22. Based on the mercantilism theory, the wealth of all trading nations and the world increases. ANS: F OBJ: 5.2 PTS: 1 DIF: Moderate REF: p. 141 NAT: AACSB: Tier 1 Analytic; Tier 2 Environmental Influence

23. Factor endowments, domestic demand, firm strategy, structure and rivalry, and related and supporting industries are aspects of strategic trade theory. ANS: F OBJ: 5.2 PTS: 1 DIF: Moderate REF: p. 141 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy

24. Government payments to domestic firms to produce a competitive advantage are subsidies. ANS: T OBJ: 5.2 PTS: 1 DIF: Moderate REF: p. 145 NAT: AACSB: Tier 1 Analytic; Tier 2 Operations Management

25. Administrative policy is a superficial policy to show that exporting countries voluntarily agree to restrict their exports. ANS: F OBJ: 5.3 PTS: 1 DIF: Moderate REF: p. 146 NAT: AACSB: Tier 1 Communication; Tier 2 Strategy

26. Bureaucratic rules that make it harder to import foreign goods are defined as administrative policies. ANS: T PTS: 1 DIF: Moderate REF: p. 146

OBJ: 5.3

NAT: AACSB: Tier 1 Communication; Tier 2 Strategy

27. Import quota is a type of nontariff barriers. ANS: T OBJ: 5.3 PTS: 1 DIF: Moderate REF: p. 146 NAT: AACSB: Tier 1 Communication; Tier 2 Strategy

28. Foreign policy objectives are often sought through trade intervention. ANS: T OBJ: 5.3 PTS: 1 DIF: Moderate REF: p. 148 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy

29. Trade embargo is politically motivated trade sanction against foreign countries to signal displeasure. ANS: T OBJ: 5.3 PTS: 1 DIF: Moderate REF: p. 148 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy

30. Political arguments against free trade state infant industry can not be protected under free trade. ANS: T OBJ: 5.3 PTS: 1 DIF: Easy REF: p. 147 NAT: AACSB: Tier 1 Analytic; Tier 2 Environmental Influence

31. The United States runs a trade deficit with all its major trading partners-Canada, the EU, Japan, and Mexico. ANS: T OBJ: 5.4 PTS: 1 DIF: Moderate REF: p. 149 NAT: AACSB: Tier 1 Analytic; Tier 2 Environmental Influence

32. Classical theorists and their modern-day disciples argue that the United States and India trade by tapping into each other's comparative advantages. ANS: T OBJ: 5.4 PTS: 1 DIF: Moderate REF: p. 149 NAT: AACSB: Tier 1 Analytic; Tier 2 Environmental Influence

33. Indian innovation can reduce the price of US software exports and curtail the wage of the US IT worker. ANS: T OBJ: 5.4 PTS: 1 DIF: Moderate REF: p. 149 NAT: AACSB: Tier 1 Analytic; Tier 2 Environmental Influence

34. Managers should monitor and nurture current comparative advantages of certain locations and take advantage of new locations. ANS: T OBJ: 5.4 PTS: 1 DIF: Easy REF: p. 151 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

35. Managers need not be politically active to appreciate the gains from trade. ANS: F OBJ: 5.4 fluence PTS: 1 DIF: Easy REF: p. 152 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental In-

MULTIPLE CHOICE 1. ____ occurs when a nation imports more than it exports. a. Trade deficit b. Trade surplus c. Balance of trade d. Trade embargo ANS: A OBJ: 5.1 PTS: 1 DIF: Difficult REF: p. 128 NAT: AACSB: Tier 1 Diversity; Tier 2 Strategy

2. The aggregation of importing and exporting by both sides leads to a: a. Balance of trade b. Trade surplus or deficit c. Different nation's trade d. Both a balance of trade and a trade surplus or deficit ANS: D OBJ: 5.1 PTS: 1 DIF: Moderate REF: p. 128 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy

3. Although the American movies are the best in the world, ____ limit the market share of American movies to protect their domestic movies. a. Canada b. France c. South Korea d. All of these answers ANS: D OBJ: 5.1 PTS: 1 DIF: Moderate REF: p. 129 NAT: AACSB: Tier 1 Diversity; Tier 2 Environmental Influence

4. Widely practiced during the 1960s and 1700s, ____ viewed international trade as a zero-sum game. a. Protectionism b. Theory of mercantilism c. Classical trade theories d. Free trade ANS: B OBJ: 5.2 PTS: 1 DIF: Moderate REF: p. 129 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy

5. The idea that governments should actively protect domestic industries from imports and vigorously promote exports represents: a. Theory of absolute advantage b. Theory of mercantilism c. Protectionism d. Modern trade theories ANS: C OBJ: 5.2 PTS: 1 DIF: Moderate REF: p. 129 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

6. The theory of absolute advantage is: a. b. c.

d.

The idea that free market forces should determine how much to trade with little government intervention. The economic advantage one nation enjoys that is absolutely superior to other nations. The idea that governments should actively protect domestic industries from imports and vigorously promote exports. The belief that held that the wealth of the world was fixed and that a nation that exported more and imported less would enjoy the net inflows of gold and silver and thus become richer.

ANS: B OBJ: 5.2

PTS: 1 DIF: Difficult REF: p. 130 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

7. The relative advantage in one economic activity that one nation enjoys in comparison with other nations is known as: a. Theory of comparative advantage b. Theory of absolute advantage c. Free-trade advantage d. Theory of nations advantage ANS: A OBJ: 5.2 PTS: 1 DIF: Moderate REF: p. 132 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy

8. British economist ____ developed a theory of absolute advantage. a. Adam Smith b. David Ricardo c. Michael Porter d. Bertil Ohlin ANS: A OBJ: 5.2 PTS: 1 DIF: Difficult REF: p. 132 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

9. The classical theory/ies ____ have evolved over approximately 300 to 400 years, up to the beginning of the 20th century. a. Mercantilism b. Absolute advantage c. Competitive advantage d. All of these answers ANS: D OBJ: 5.2 PTS: 1 DIF: Moderate REF: p. 135 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy

10. American economist Raymond Vernon divided the world into: a. Lead innovation nations b. Other developed nations

c. d. ANS: D OBJ: 5.2

Developing nations All of these answers PTS: 1 DIF: Easy REF: p. 136 NAT: AACSB: Tier 1 Communication; Tier 2 Strategy

11. An economic theory that accounts for changes in the patterns of trade over time is known as: a. Strategic trade theory b. First-mover advantage theory c. Product life cycle theory d. Strategic trade policy ANS: C OBJ: 5.2 PTS: 1 DIF: Moderate REF: p. 136 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy

12. The factor endowment theory is identified as: a. Theory that suggests that strategic intervention by governments in certain industries can enhance their odds for international success. b. Economic theory that accounts for changes in the patterns of trade over time. c. Proposition that nations will develop comparative advantage based on their locally abundant factors. d. Theory that the competitive advantage of certain industries in different nations depends on four aspects that form a "diamond." ANS: C OBJ: 5.2 PTS: 1 DIF: Difficult REF: p. 134 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

13. ____ is the extent to which different countries possess various factors of production such as labor, land, and technology. a. Absolute advantage b. Comparative advantage c. Factor endowment d. Product lifecycle ANS: C OBJ: 5.2 PTS: 1 DIF: Difficult REF: p. 134 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

14. The policy to assist strategic advantage is known as: a. Strategic trade policy b. "Diamond" policy c. Heckscher-Ohlin policy d. Free trade policy ANS: A OBJ: 5.2 PTS: 1 DIF: Easy REF: p. 138 NAT: AACSB: Tier 1 Communication; Tier 2 Strategy

15. Factor endowments were noted by: a. b. c. d. ANS: B OBJ: 5.2

Michael Porter Heckscher-Ohlin Adam Smith Raymond Vernon

PTS: 1 DIF: Difficult REF: p. 134 NAT: AACSB: Tier 1 Communication; Tier 2 Strategy

16. The national competitive advantage of industries depends on: a. Country factor endowments and firm strategy, structure, and rivalry b. Domestic demand conditions c. Related and supporting industries d. All of these answers ANS: D OBJ: 5.2 PTS: 1 DIF: Moderate REF: p. 139 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy

17. The birth of modern economics and the forerunner of the free trade movement are strengths and influences of: a. Absolute advantage b. Comparative advantage c. National competitive advantage d. Mercantilism ANS: A OBJ: 5.2 PTS: 1 DIF: Difficult REF: p. 141 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

18. Which of the following is a classical theory? a. Product life cycle b. National competitive advantage c. Strategic trade d. Absolute advantage ANS: D OBJ: 5.2 PTS: 1 DIF: Moderate REF: p. 135 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy

19. Which of the following is the first theory to incorporate dynamic changes in patterns of trade: a. Strategic trade b. Mercantilism c. Product life cycle d. Absolute advantage ANS: C OBJ: 5.2 PTS: 1 DIF: Difficult REF: p. 135 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy

20. Which of the following is the strength of a comparative advantage? a. It defeats mercantilism, at least intellectually. b. It provides direct policy advice.

c. d. ANS: C OBJ: 5.2

It explains patterns of trade based on factor endowments. It positively incorporates the role of governments in trade. PTS: 1 DIF: Difficult REF: p. 137 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

21. ____ are government payments to domestic firms. a. Tariffs b. Subsidies c. Quotas d. Trade embargoes ANS: B OBJ: 5.2 PTS: 1 DIF: Difficult REF: p. 138 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

22. Which of the factors is not in the Porter's diamond model? a. Country factor endowments b. Related and supporting industries c. Domestic demand conditions d. Foreign demand conditions ANS: D OBJ: 5.2 PTS: 1 DIF: Difficult REF: p. 139 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

23. As a major tariff barrier, a(an) ____ is a tax imposed on imports. a. Import tariff b. Export tariff c. Deadweight costs d. NTBs ANS: A OBJ: 5.3 ment PTS: 1 DIF: Easy REF: p. 141 NAT: AACSB: Tier 1 Communication; Tier 2 Operations Manage-

24. Which of the theories assumes perfect resource mobility? a. Absolute advantage theory b. Comparative advantage theory c. Mercantilism theory d. All of these answers ANS: D OBJ: 5.3 ment PTS: 1 DIF: Easy REF: p. 143 NAT: AACSB: Tier 1 Communication; Tier 2 Operations Manage-

25. Deadweight costs are net losses that occur when ____ are imposed. a. Import tariffs b. Import quotas c. Voluntary export restraints d. Local content requirements ANS: A PTS: 1 DIF: Difficult REF: p. 143

OBJ: 5.2

NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

26. ____ discourages imports by placing taxes on imported goods. a. Nontariff barrier b. Tariff barrier c. Import quota d. Antidumping duty ANS: B OBJ: 5.3 PTS: 1 DIF: Moderate REF: p. 145 NAT: AACSB: Tier 1 Communication; Tier 2 Group Dynamics Subsidies, import quotas Export restraints, local content requirements Administrative policies, antidumping duties All of these answers

27. NTBs (nontariff barriers) include: a. b. c. d. ANS: D OBJ: 5.3

PTS: 1 DIF: Moderate REF: p. 146 NAT: AACSB: Tier 1 Communication; Tier 2 Group Dynamics Tariff barriers Nontariff barriers Voluntary export restraints Antidumping duty

28. Import quota is a kind of: a. b. c. d. ANS: B OBJ: 5.3

PTS: 1 DIF: Moderate REF: p. 146 NAT: AACSB: Tier 1 Communication; Tier 2 Group Dynamics

29. A superficial policy to show that exporting countries voluntarily agree to restricts their exports is known as: a. Voluntary export restraints b. Local content requirements c. Administrative policies d. Antidumping duties ANS: A OBJ: 5.3 PTS: 1 DIF: Easy REF: p. 146 NAT: AACSB: Tier 1 Analytic; Tier 2 Operations Management

30. ____ are rules stipulating that a certain proportion of the value of the goods made in one country must originate from that country. a. Voluntary export restraints b. Local content requirements c. Import quotas d. Tariffs ANS: B OBJ: 5.3 PTS: 1 DIF: Easy REF: p. 146 NAT: AACSB: Tier 1 Analytic; Tier 2 Operations Management

31. ____ are restrictions on the quantity of imports for specific periods of time. a. Export restraints

b. c. d. ANS: B OBJ: 5.3

Import quotas Local content requirements Antidumping duties PTS: 1 DIF: Moderate REF: p. 146 NAT: AACSB: Tier 1 Communication; Tier 2 Strategy

32. Political arguments against free trade's ability to advance a nation's political, social, and environmental agenda, regardless of possible economic gains from trade, include: a. National security and consumer perception b. Foreign policy and environmental and social responsibility c. Foreign policy and national security d. National security, consumer perception, foreign policy, and environmental and social responsibility ANS: D OBJ: 5.3 PTS: 1 DIF: Moderate REF: p. 147 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

33. Young domestic firms that need government protection are in the: a. Infant industry b. Mature industry c. Standard industry d. Declining industry ANS: A OBJ: 5.3 PTS: 1 DIF: Moderate REF: p. 147 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

34. One of the ____ is about service trade and high skill jobs in high technology such as IT. a. The classical theories versus new realities debate b. The trade deficit versus trade surplus debate c. Trade embargoes d. The infant industry argument ANS: A OBJ: 5.4 PTS: 1 DIF: Moderate REF: p. 149 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy

35. What determines the success and failure of a firm's exports around the globe? a. Discovering and leveraging the comparative advantage of world-class locations b. Monitoring and nurturing the current comparative advantage of certain locations combined with taking advantage of new locations c. Being politically active to demonstrate, safeguard, and advance the

d. ANS: D OBJ: 5.5 ESSAY

gains from international trade All of these answers PTS: 1 DIF: Difficult REF: p. 152 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy

1. Discuss the characteristics of the modern theories of international trade. ANS: Product life cycle theory is an economic theory that accounts for changes in the patterns of trade over time. Comparative advantage first resides in the lead innovation nation, which exports to other nations. Production migrates to other advanced nations and then developing nations in different product life cycle stages. This theory is the first theory to incorporate dynamic changes in patterns of trade. Its weakness is that the United States may not always be the lead innovation nation. Strategic trade theory suggests that strategic intervention by governments in certain industries can enhance their odds for international success. Strategic intervention by governments may help domestic firms reap first-mover advantages in certain industries. First-mover firms, aided by governments, may have better odds at winning internationally. Strategic trade theory provides direct policy advice, is more realistic, and positively incorporates the role of governments in trade. The theory of national competitive advantage of industries is that the competitive advantage of certain industries in different nations depends on four aspects that form a "diamond." The four aspects are: 1) factor endowments, 2) domestic demand, 3) firm strategy, structure, and rivalry, and 4) related and supporting industries. This theory is the most recent, most complex, and most realistic among various theories. The weakness is the theory has not been comprehensively tested, and that overseas demand may stimulate the competitiveness of certain industries. PTS: 1 DIF: Difficult REF: p. 143 NAT: AACSB: Tier 1 Communication; Tier 2 Strategy OBJ: 5.2

2. Compare and contrast absolute advantage and comparative advantage trade theories. ANS: The economic advantage one nation enjoys that is absolutely superior to other nations summarizes the theory of absolute advantage. Nations should specialize in economic activities in which they have an absolute advantage and trade with others. By specializing and trading, each nation produces more and consumes more. Therefore, the wealth of trading nations and the world overall increases. Its strengths are in being the birth of modern economics, serving as the forerunner of the free trade movement, and defeating mercantilism, at least intellectually. The weakness of the theory is that when one nation is inferior to another, the theory is unable to provide any advice, and when there are many nations, it may be difficult to find an absolute advantage. To compensate, the theory of relative advantage us that there may be one economic activity that one nation can enjoy in comparison with other nations. Nations should specialize in economic activities in

which they have a comparative advantage and trade with others. This theory's strengths are that it offers more realistic guidance to nations interested in trade but having no absolute advantage and explains patterns of trade based on factor endowments. PTS: 1 DIF: Moderate REF: p. 141 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy OBJ: 5.2

3. Discuss the national competitive advantage of industries. ANS: This theory focuses on why certain industries within a nation are competitive internationally. Porter argues that the competitive advantage of certain industries in different nations depends on four aspects that form a "diamond." First, he starts with factor endowments, which refer to the natural and human resource repertoires noted by Heckscher-Ohlin theory. Second, tough domestic demand propels firms to scale new heights. Third, domestic firm strategy, structure, and rivalry in one industry play a huge role in its international success or failure. Finally, related and supporting industries provide the foundation upon which key industries can excel. It is the most recent, complex, and most realistic among various theories. As a multilevel theory, it directly connects research on firms, industries, and nations. The theory weaknesses are that it has not been comprehensively tested and that overseas demand may stimulate the competitiveness of certain industries. PTS: 1 DIF: Moderate REF: p. 139 NAT: AACSB: Tier 1 Communication; Tier 2 Strategy OBJ: 5.2

4. Identify the strengths and influences of the classical theories of international trade. ANS: Mercantilism is a forerunner of modern-day protectionism, which is the idea that governments should actively protect domestic industries from imports and vigorously promote exports. Absolute advantage is identified as the birth of modern economics, a forerunner of the fee trade movement, which defeats mercantilism, at least intellectually. Comparative advantage gives guidance that is more realistic to nations interested in trade but having no absolute advantage. This theory explains patents of trade based on factor endowments. PTS: 1 DIF: Easy REF: p. 129-134 OBJ: 5.2 NAT: AACSB: Tier 1 Communication; Tier 2 Strategy 5. Define three Non-Tariff Barriers and explain their implications. ANS: Answers will vary. Non-tariff barriers include subsidies, import quotas, export restraints, local content requirements, administrative policies, and antidumping duties. Subsidies are government payments to domestic firms to produce competitive advantage. Import quotes are restrictions on the quantity of imports for specific period. Import quotes are worse than tariffs because with tariffs, foreign goods can still be imported if tariffs are paid. Voluntary export restraints were developed to show that

on the surface, exporting countries voluntarily agree to restrict their exports. Local content requirements require a certain proportion of the value of the goods made in one country to originate from that country. Administrative policies refer to bureaucratic rules that make it harder to import foreign goods. Antidumping duties are costs levied on imports that have been "dumped" (selling below costs to "unfairly" drive domestic firms out of business). Trade barriers reduce or eliminate international trade. PTS: 1 DIF: Moderate REF: p. 145-146 OBJ: 5.3 NAT: AACSB: Tier 1 Communication; Tier 2 Strategy 6. Discuss the political arguments against free trade. ANS: Political arguments include national security, consumer protection, foreign policy, and environmental and social responsibility. National security is often invoked to protect defense -related industries. Many nations fear that if they rely on arms imports, their national security may be compromised if there are political or diplomatic disagreements between them and the arms-producing nation. Consumer protection has frequently been used as an argument for nations to erect trade barriers. Foreign policy objectives are often sought through trade intervention. Trade embargoes are politically motivated trade sanctions against foreign countries to signal displeasure. Environmental and social responsibility can be used as political arguments to initiate trade intervention against certain countries. PTS: 1 DIF: Moderate REF: p. 147-148 OBJ: 5.3 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy 7. What determines the success and failure of a firm's exports around the globe? ANS: The success of a firm's exports around the globe is determined by discovering and leveraging comparative advantages of world-class locations. Managers needs to constantly monitor and nurture the current comparative advantage of certain locations and take advantage of new locations. The manager who fails to realize the departure of comparative advantage from certain locations is likely to fall behind. Managers need to be politically active to demonstrate, safeguard, and advance the gains from international trade. They often fail to realize that free trade is not free; it requires constant efforts and sacrifices to demonstrate and advance the gains from such trade. PTS: 1 DIF: Moderate REF: p. 152 OBJ: 5.5 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Strategy 8. Discuss the economic arguments against free trade. ANS: There are two prominent economic arguments against free trade: (1) the need to protect domestic industries and (2) the need to shield infant industries. The oldest and most frequently used economic argument against free trade is the urge to protect domestic industries, firms, and jobs from allegedly "unfair" foreign competitionin short, protectionism. Critics against free trade argue that

Young domestic firms need government protection. Otherwise, they stand no chance of surviving and will be crushed by mature foreign rivals. It is thus imperative that governments level the playing field by assisting infant industries. While this argument is sometimes legitimate, governments and firms have a tendency to abuse it. Some protected infant industries may never grow up and continue to request subsidies. PTS: 1 DIF: Moderate REF: p. 146-147 OBJ: 5.3 NAT: AACSB: Tier 1 Analytic; Tier 2 Strategy