International Business by Charles W.L.

Hill
CHAPTER 6
International Trade Theory

CHAPTER 7
Government Policy and International Trade

1)Q. Do you think governments should consider human rights when granting
preferential trading rights to countries? What are the arguments for and against
taking such a position?

Ans.
Yes, governments should indeed consider human rights when granting preferential
trading rights to countries. Here are the arguments for and against this position:

Arguments For Considering Human Rights:

1. Ethical Responsibility: Prioritizing human rights aligns with ethical

principles. By linking trade benefits to respect for human rights,
governments can encourage positive behavior.

2. Incentive for Reform: Preferential trade agreements (PTAs) that tie

compliance with human rights standards to market benefits can incentivize
countries to improve their practices. PTAs with hard standards (coercive
mechanisms) are more effective in influencing compliance than softer
human rights agreements (HRAs) that lack such mechanisms.

3. Global Reputation: Countries that uphold human rights are viewed more
favorably on the global stage. Considering human rights in trade decisions
enhances a nation’s reputation.

Arguments Against Considering Human Rights:

1. National Interests: Opponents argue that a country’s own needs and

economic interests should take precedence over human rights concerns.
They prioritize economic gains over ethical considerations.
 2. Complexity: Balancing human rights and trade can be challenging. Some
argue that trade negotiations should focus solely on economic factors
without complicating matters by considering human rights.

3. Pragmatism: Critics claim that emphasizing human rights may hinder

diplomatic relations and economic cooperation. They advocate for a
pragmatic approach that prioritizes practical benefits.

In summary, while considering human rights in trade decisions is essential for

ethical reasons, opponents emphasize national interests and pragmatism as valid
counterarguments2. Ensuring robust monitoring systems and accountability
mechanisms can help strike a balance between trade benefits and human rights

Gemini’s answer:
Yes, there are strong arguments to be made on both sides of this issue.

Arguments for considering human rights

 Promotes ethical trade: By considering human rights, governments can

ensure they are not supporting countries with poor human rights records.
Trade can be a powerful tool for development, but it shouldn't come at the
expense of basic human rights.
 Improves global well-being: Better human rights can lead to a more stable
and prosperous world for all. When people are treated fairly and have their
basic needs met, they are more likely to be productive members of society.
This can lead to economic growth and reduced conflict.
 Leverages economic power for good: Trade agreements can be a tool to
encourage positive change in human rights practices. By conditioning
preferential trade on human rights improvements, governments can
incentivize countries to make progress in this area.

Arguments against considering human rights

 May hinder economic growth: Strict human rights standards could limit
trade opportunities, especially for developing countries. These countries may
need to make significant changes to their labor practices or environmental
regulations in order to qualify for preferential trade agreements.
 Difficulty in enforcement: It can be challenging to objectively assess and
enforce human rights standards in other countries. There is a risk that human
 rights considerations could be used as a protectionist tool, rather than a
genuine effort to improve human rights.
 Potential for hypocrisy: Wealthy countries may be accused of applying
double standards. They may be more willing to overlook human rights
abuses in countries that are important trading partners.

Ultimately, the decision of whether or not to consider human rights when granting
preferential trading rights is a complex one. There are valid arguments on both
sides. However, it is important to be aware of the potential impact of trade
agreements on human rights, and to take steps to mitigate any negative effects.

2)Q. Whose interests should be the paramount concern of government

trade policy: the interests of producers (businesses and their employees)
or those of consumers?
Ans. The question of whether government trade policy should prioritize producers
(businesses and their employees) or consumers is a complex and debated issue.
Let’s explore both perspectives:

1. Producers’ Interests:

o Advocates for Producers: Some argue that trade policies should

prioritize domestic producers. Here are their key points:

 Job Preservation: Protecting domestic industries helps

maintain jobs and economic stability.

 National Security: A strong domestic production base is

essential for national security, especially for critical goods.

 Fair Competition: Trade policies can address unfair practices

by foreign competitors (e.g., dumping, subsidies).

o Critics of Producers’ Interests:

 Consumer Costs: Protectionist policies can lead to higher

prices for consumers due to reduced competition.

 Inefficiency: Shielding inefficient industries may hinder overall

economic growth.
  Global Cooperation: An open trade system fosters cooperation
and peace among nations.

2. Consumers’ Interests:

o Advocates for Consumers:

 Lower Prices: Prioritizing consumer interests means promoting

free trade, which often leads to lower prices for goods.

 Choice and Variety: Consumers benefit from access to a wider

range of products.

 Economic Efficiency: Free trade encourages specialization and

efficient allocation of resources.

o Critics of Consumers’ Interests:

 Job Displacement: Liberal trade policies can lead to job losses

in certain industries.

 Income Inequality: Benefits of free trade may not be evenly

distributed.

 Short-Term Pain: Transition to open markets can be

challenging for some workers.

Ultimately, finding a balance between these interests is crucial. Many countries

adopt a mixed approach, considering both producers and consumers while crafting
trade policies. The goal is to achieve economic growth, job creation, and consumer
welfare.

Gemini’s answer:
There's no easy answer to this question as both producers and consumers play vital roles in the
economy. Here's a breakdown of the arguments for each:

Consumers:

 Lower Prices: Trade can expose domestic producers to foreign competition, potentially
driving down prices for consumers through access to cheaper goods.
  Wider Variety: Trade allows consumers access to a wider range of products and
services, potentially leading to greater choice and innovation.
 Increased Efficiency: Competition from imports can incentivize domestic producers to
become more efficient, ultimately benefiting consumers.

Producers:

 Job Creation: Protectionist policies, like tariffs, can shield domestic producers from
foreign competition, potentially preserving jobs in those industries.
 Strategic Industries: Governments might prioritize protecting industries deemed
strategically important, even if it means higher prices for consumers.
 Fair Competition: Some argue for trade policies that ensure a level playing field for
domestic producers, addressing issues like unfair labor practices or environmental
regulations in other countries.

Finding a Balance

Most governments try to strike a balance between these two interests. Here are some approaches:

 Free Trade Agreements: These agreements aim to reduce trade barriers between
countries, generally benefiting both producers and consumers with increased access to
markets and potentially lower prices.
 Targeted Policies: Governments might offer specific support to struggling industries
while promoting open trade in others.
 Consumer Protection: Trade policies might include regulations ensuring product safety
and quality, benefiting consumers.

Ultimately, the best approach depends on the specific goals of the government. They might
prioritize economic growth, job creation, or a combination of factors. There's also a growing
focus on environmental and social sustainability in trade policies, which can impact both
producers and consumers.

3)Q. Given the arguments relating to the new trade theory and strategic trade
policy, what kind of trade policy should business be pressuring government to
adopt?

Ans. Businesses should consider advocating for strategic trade policies based
on the arguments from the new trade theory. Here’s why:

1. New Trade Theory:

o Economies of Scale: Industries with increasing returns to scale (e.g.,

technology, aerospace) benefit from larger production volumes.
 o First-Mover Advantage: Early entrants gain a competitive edge due
to learning effects and network externalities.

o Trade Patterns: New trade theory explains intra-industry trade

(similar products) driven by differentiated goods.

2. Strategic Trade Policy:

o Government Intervention: Businesses can pressure governments to

adopt strategic policies, such as subsidies or export promotion.

o Targeted Industries: Identify key sectors (e.g., high-tech, R&D-

intensive) where strategic support can enhance competitiveness.

o Game Theory: Strategic policies can create a competitive advantage

by influencing global market outcomes.

o Coordination: Businesses and governments collaborate to maximize

national welfare and global influence.

In summary, businesses should advocate for policies that strategically support

specific industries, leveraging insights from new trade theory.

Gemini’s answer:
Based on the arguments of new trade theory and strategic trade policy, businesses would likely
lobby governments for trade policies that achieve the following:

1. Promote Economies of Scale:

 Trade Agreements: Businesses in industries with economies of scale would favor trade
agreements that expand their market access. This allows them to produce at higher
volumes, driving down costs and increasing competitiveness.
 Government Support for Exports: Subsidies or other programs that help businesses
become more competitive in international markets could be attractive, particularly for
breaking into new markets.

2. Encourage Innovation and R&D:

 Government Funding: Support for research and development (R&D) can be crucial for
businesses in industries with high innovation, like technology or pharmaceuticals. This
helps them achieve a "first mover advantage" and potentially dominate the global market.
  Protection of Intellectual Property: Strong intellectual property (IP) laws would be
important to ensure businesses can reap the rewards of their innovations and avoid
foreign competitors copying their ideas.

3. Target Strategic Industries:

 Government Intervention: Businesses in strategic industries, like aerospace or national

defense, might advocate for government intervention to ensure their success. This could
involve measures like tariffs on competing imports or limitations on foreign investment.

Important Caveats:

 Competition Concerns: Businesses should be mindful of advocating for policies that

create monopolies or stifle competition in the long run. This could ultimately hurt
consumers and hinder innovation.
 Global Cooperation: Strategic trade policies employed by multiple countries can lead to
trade wars and harm the global economy. Businesses might advocate for international
cooperation on trade policies to avoid such situations.

In conclusion, businesses informed by new trade theory and strategic trade policy would
likely push for trade policies that expand markets, promote innovation, and potentially
offer support to strategic industries, all while keeping an eye on maintaining healthy
competition.

4)Q. You are an employee of a U.S. firm that produces personal computers in
Thailand and then exports them to the United States and other countries for sale.
The personal computers were originally produced in Thailand to take advantage of
relatively low labor costs and a skilled workforce. Other possible locations
considered at the time were Malaysia and Hong Kong. The U.S. government
decides to impose punitive 100 percent ad valorem tariffs on imports of computers
from Thailand to punish the country for administrative trade barriers that restrict
U.S. exports to Thailand. How should your firm respond? What does this tell you
about the use of targeted trade barriers?

Ans. Your firm should consider the following responses to the imposed
tariffs:

1. Adjust Production Location:

o Evaluate relocating production to other countries (e.g., Malaysia or

Hong Kong) to avoid the punitive tariffs.
 o Consider factors like labor costs, skilled workforce, and proximity to
target markets.

2. Diversify Export Markets:

o Reduce dependence on the U.S. market by expanding sales to other

countries.

o Explore markets where the punitive tariffs do not apply.

3. Negotiate with the U.S. Government:

o Engage in dialogue with U.S. authorities to address concerns about

administrative trade barriers.

o Advocate for fair treatment and seek exemptions or reductions in

tariffs.

4. Supply Chain Optimization:

o Optimize supply chains to minimize the impact of tariffs.

o Source components from countries not affected by punitive tariffs.

What this tells us about targeted trade barriers:

 Targeted trade barriers can be used strategically by governments to influence

behavior.

 In this case, the U.S. government is using tariffs to pressure Thailand to

remove its trade barriers.

 Businesses must adapt to such policy changes and explore alternative

strategies.

Gemini’s answer:
This situation presents a significant challenge for your firm due to the 100% tariff imposed by
the U.S. government on Thai-produced computers. Here are some ways your firm can respond:

Short-term Responses:
  Negotiate with the U.S. government: The company could lobby the U.S. government
alongside other affected businesses to highlight the negative impact of the tariffs on
American consumers and jobs. This might involve demonstrating how the tariff increases
production costs and reduces competitiveness.
 Absorb some of the cost: The firm could choose to absorb a portion of the tariff cost to
maintain competitive pricing for U.S. consumers. However, this would significantly eat
into profits.
 Raise prices for U.S. consumers: The firm could pass on the entire tariff cost to U.S.
customers, leading to higher prices. This might decrease demand and sales.

Long-term Responses:

 Shift production to another country: The company could consider moving production
to another Southeast Asian country like Malaysia or Vietnam, which were originally
considered. This would avoid the tariff but involve significant costs in setting up new
operations.
 Source components elsewhere: The firm might explore sourcing some components from
outside Thailand to potentially reduce the overall tariff impact. This strategy would
require evaluating logistics and potential quality changes.
 Invest in automation: The company could invest in automation within the Thai factory
to reduce reliance on labor, potentially making the higher Thai labor costs less impactful
compared to the tariff.

What this tells us about targeted trade barriers:

This situation highlights both potential benefits and drawbacks of targeted trade barriers:

 Punishing Unfair Practices: The U.S. government aims to pressure Thailand to change
its trade practices by harming a specific Thai industry (computer manufacturing) heavily
reliant on U.S. exports.
 Unintended Consequences: The tariff punishes American consumers and the U.S. firm
in this case. Higher prices for U.S. consumers and potential job losses at the U.S. firm
due to lower sales are unintended consequences.
 Disruption of Supply Chains: The situation disrupts your firm's supply chain, forcing
them to consider significant changes and potentially impacting overall efficiency.

In conclusion, targeted trade barriers can be a blunt instrument with potential for collateral
damage. Businesses caught in such situations must adapt and explore various options to
minimize the negative impact.

5)Q. Reread the Management Focus, “Huawei Export Ban Hits U.S. Firms.” Is the
U.S. justified in banning U.S. companies, or foreign semiconductor makers that
use American-made production technology, from doing business with Huawei?
What are the possible long-term implications of this policy? Who might benefit?
Who might lose? What policy stance would you recommend the Biden
Administration adopt with regard to this export ban?

Ans. The U.S. government’s ban on U.S. companies and foreign

semiconductor makers from doing business with Huawei is a contentious issue.
Let’s explore the implications and potential beneficiaries and losers:

1. Justification for the Ban:

o National Security Concerns: The ban stems from concerns that

Huawei could use its technology for espionage or cyberattacks.

o Strategic Competition: The U.S. aims to limit China’s technological

influence and protect its own interests.

2. Long-Term Implications:

o Global Supply Chain Disruptions: The ban affects semiconductor

supply chains, impacting both Huawei and suppliers.

o Innovation Shift: Huawei may invest more in domestic R&D or

collaborate with non-U.S. partners.

o Market Dynamics: Competitors (e.g., Samsung, Apple) could gain

market share.

3. Beneficiaries:

o Non-U.S. Semiconductor Firms: They can fill the gap left by U.S.
suppliers.

o Competing Tech Companies: Reduced Huawei presence benefits

rivals.

4. Losers:

o Huawei: Faces challenges in sourcing critical components.

o U.S. Suppliers: Lost business opportunities.

o Consumers: Limited choice and potential price increases.

 5. Policy Recommendation for the Biden Administration:

o Balanced Approach: Consider national security while minimizing

disruptions.

o Case-by-Case Evaluation: Assess licenses based on specific

technologies and risks.

o Collaboration: Engage with allies to create consistent policies.

In summary, a nuanced approach that safeguards security without stifling

innovation is crucial.

Gemini’s answer:
The Huawei Export Ban: A Multi-faceted Issue
The U.S. export ban on Huawei is a complex issue with arguments for and against it. Here's a
breakdown:

Arguments for the Ban:

 National Security Concerns: The U.S. government alleges that Huawei equipment
could be used for espionage by the Chinese government. This is a major concern,
especially for 5G infrastructure which is critical for national security.
 Protecting U.S. Tech Advantage: The ban aims to limit China's access to advanced U.S.
technology, potentially slowing down their technological advancement and maintaining a
U.S. edge.

Arguments Against the Ban:

 Hurts U.S. Companies: The ban restricts business opportunities for U.S. chipmakers
who rely on Huawei as a major customer. As seen in the article, this can lead to
significant revenue loss.
 Stifles Innovation: The ban hinders global collaboration in technological development,
potentially slowing down overall innovation in the tech sector.
 Potential for Trade War: This policy could escalate tensions with China, leading to a
broader trade war that harms both economies.

Long-Term Implications:

 Chinese Self-Sufficiency: China might invest heavily in developing its own

semiconductor industry, reducing reliance on U.S. technology in the long run.
  Disrupted Supply Chains: The ban disrupts global supply chains for tech components,
leading to potential shortages and price hikes.
 Geopolitical Tensions: The policy could exacerbate tensions between the U.S. and
China, impacting global political stability.

Who Benefits?

 Non-U.S. Chipmakers: Companies like Samsung or TSMC could benefit from increased
market share as Huawei seeks alternatives to U.S. chips.
 Chinese Domestic Tech Industry: The ban could incentivize China to invest more in
domestic chip development, potentially creating a stronger competitor in the long run.

Who Loses?

 U.S. Chipmakers: They lose a major customer and revenue stream.

 U.S. Consumers: The ban could lead to higher prices for tech products due to supply
chain disruptions.
 Global Innovation: Overall technological advancement could slow down due to reduced
collaboration.

Policy Recommendation:

The Biden administration should consider a more nuanced approach:

 Focus on Specific Security Risks: Instead of a blanket ban, identify specific equipment
or technologies that pose real security risks and target restrictions on those.
 Engage with Allies: Work with allies to develop a coordinated approach to address
security concerns with Huawei without crippling global supply chains.
 Invest in U.S. Tech Development: Increase government funding for research and
development in the semiconductor industry to maintain a U.S. technological edge in the
long run.

This approach could mitigate the negative economic impacts on U.S. companies while still
addressing national security concerns. It's crucial to find a balance between security and
economic prosperity in the complex world of technological competition.