International Business 14th Edition

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 CHAPTER SEVEN
GOVERNMENTAL INFLUENCE ON TRADE

OBJECTIVES
• To explain the rationales for governmental policies that enhance and restrict trade
• To show the effects of pressure groups on trade policies
• To describe the potential and actual effects of governmental intervention on the free
flow of trade
• To illustrate the major means by which trade is restricted and regulated
• To demonstrate the business uncertainties and business opportunities created by
governmental trade policies

CHAPTER OVERVIEW
A government’s political objectives are sometimes at odds with its economic proposals to
improve a nation’s market efficiency and international competitiveness. Chapter Seven
begins by discussing the reasons why and the ways in which governments intervene in
the international trade process. It then examines the economic and the noneconomic
effects of those actions upon participants in that process. Finally, the chapter considers
the principle instruments of trade control, including both tariffs and nontariff barriers, and
concludes with a discussion of ways in which firms can deal with adverse trading
conditions both at home and abroad.

CHAPTER OUTLINE
OPENING CASE: A CATFISH BY ANY OTHER NAME…? [See Map 7.1.]
This case is a great example of attempts to protect a national industry against
international competition. Catfish are farmed in the southern U.S. and Vietnam. The
Vietnamese production has some competitive advantages including a more conducive
climate, lower governmental restrictions, and lower labor rates. So even with
transportation costs, Vietnam exports catfish to the U.S. The U.S. catfish growers fought
back using a variety of means. They tried to limit the use of the name catfish and
petitioned for increased taxes on imported fish and even tried to bring into question the
safety of overseas fish. The U.S. producers have not been successful in limited imports
and have even been caught up by their own efforts. A key point is that trade between
nations cannot be viewed just by one industry. Vietnam is the third largest export market
for U.S. beef. So, if we successfully limit the imports of catfish, will Vietnam retaliate
by limiting beef imports?

TEACHING TIPS: Have students visit the Web site of the WTO (www.wto.org)
and review the current disputes found on that site. Have students report back

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 what they have found and discuss their opinions. Carefully review the
PowerPoint slides for Chapter Seven.

I. INTRODUCTION
In principle, no country permits a totally unregulated flow of goods and services
across its borders. Likewise, governments may choose to enable the global
competitiveness of their own domestic firms. Protectionism refers to those
government restrictions and incentives that are specifically designed to help a
county’s domestic firms compete with foreign competitors at home and abroad. The
rationale for such policies can be economic or noneconomic in nature. Whenever
governments choose to impede the flow of imports and/or encourage the flow of
exports, they simultaneously provide direct and/or indirect subsidies for their
domestic firms.

II. CONFLICTING RESULTS OF TRADE POLICIES

While governments intervene in trade in order to attain economic, social, and/or
political objectives, they also pursue political rationality when they do so. Officials
enact those trade policies they feel will best protect their nations and citizens—and
perhaps their personal political longevity. However, aiding struggling constituencies
without penalizing those who are well off is often impossible.
A. The Role of Stakeholders
Proposals for trade regulation reform often spark fierce debate among
competing parties, also known as stakeholders.
1. The Role of Consumers. Consumers generally purchase products with
little thought as to where the product was produced. Import barrier costs are
often spread out so that the effect is not noticed by the consumer.

III. ECONOMIC RATIONALES FOR GOVERNMENTAL INTERVENTION

Governmental intervention in the trade process may be either economic or
noneconomic in nature. [See Table 7.1.]
A. Fighting Unemployment
Displaced workers often do not find jobs that provide comparable compensation.
Often unemployment benefits must be spent on living expenses instead of job
skill training for a new job.
1. What’s Wrong with Full Employment as an Economic Objective?
Persistent unemployment pushes many groups to call for protectionism; one
of the most effective is organized labor. By limiting imports, local jobs are
retained as firms and consumers are forced to purchase domestically
produced goods and services. However, unless the protectionist country is
relatively small, such measures usually do little to limit unemployment. On
the other hand, they may result in a decline in export-related jobs because of
(i) price increases for components or (ii) lower incomes abroad. Further,
such measures are likely to lead to retaliation unless either the protectionist
or the affected country is relatively small. Thus, governments must
carefully balance the costs of higher prices with the costs of unemployment
and the displaced production that would result from freer trade when

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 enacting such measures. Protectionism may also increase the prospect of
retaliation.
B. Protecting “Infant Industries”
First presented by Alexander Hamilton in 1792, the infant-industry argument
holds that a government should temporarily shield emerging industries in which
the country may ultimately possess a comparative advantage from international
competition until its firms are able to effectively compete in world markets.
1. Underlying Assumptions. The infant-industry argument presumes that
the initial output costs for a small-scale industry in a given country may be
so high as to make its output noncompetitive in world markets. Eventual
competitiveness will result from movement along the learning curve plus the
efficiency gains from achieving the economies of large-scale production.
2. Risks in Designating Industries. Although it’s reasonable to expect
production costs to decrease over time, there is a risk that costs will never
fall enough to create internationally competitive products. Two basic
problems associated with this argument are the assumptions that (i)
governments can in fact identify those industries that have a high probability
of success and (ii) firms within those industries should receive government
assistance. Infant-industry protection requires some segment of the
economy (typically local consumers) to incur the initial higher cost of
inefficient local production. Ultimately, the validity of the argument rests
on the expectation that the future benefits of an internationally competitive
industry will exceed the costs of the associated protectionist measures.
C. Developing an Industrial Base
Many of today’s emerging economies emulate historical practices and use
protectionism to spur local industrialization. They operate under the
assumptions outlined below.
1. Surplus Workers. The industrialization argument purports that the
development of national industrial output (and hence economic growth)
should be supported, even though domestic prices may not be competitive
on the world market. Surplus workers can more easily be used to increase
manufacturing output than agricultural output. Shifting people out of
agriculture, however, can create at least two problems: 1) when moving to
urban areas they leave behind the safety net of their extended families and
rely on the social services in the cities, and 2) improved agriculture
practices may be a better means of achieving economic success.
2. Investment Inflows. Import restrictions encourage foreign direct
investment by foreign firms that want to avoid the loss of a lucrative or
potential market. FDI inflows in turn lead to increased local employment,
an attractive outcome for policy makers.
3. Diversification. Price variations can wreak havoc on economies that rely
on just a few commodities for job creation and export earnings. Contrary to
expectations, however, unless a country’s industrial base is truly expanded,
a move into manufacturing may simply shift that dependence from a
reliance on the basic commodities to the downstream manufactured goods
produced from them.

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 4. Growth in Manufactured Goods. Terms of trade refers to the
quantity of imports that a given quantity of a country’s exports can buy.
Many emerging nations have experienced declining terms of trade because
the demand for and prices of raw materials and agricultural commodities
have not risen as fast as the demand for and prices of finished goods. In
addition, changes in technology have reduced the need for many raw
materials. Cost savings realized from manufactured products go mainly to
higher profits and wages, thus fueling the industrialization process.
5. Import Substitution and Export-Led Development. Import
substitution represents an economic development strategy that relies on the
stimulation of domestic production for local consumption by erecting
barriers to imported goods. If the protected industries do not become
globally competitive, however, local customers will continually be
penalized by high prices or higher taxes. On the other hand, export-led
development encourages economic development by harnessing a country-
specific advantage (e.g., low labor costs) and building a vibrant
manufacturing sector through the stimulation of exports. In reality, when
effectively crafted, import substitution policies eventually lead to the
possibility of export promotion as well.
6. Nation Building. The industrialization process helps countries build
infrastructure, advance rural development, and boost the skills of the
workforce.
D. Economic Relationships with Other Countries
Countries track their own performance as compared to other nations to
determine whether to impose trade restrictions as a means of improving their
competitive positions. The four primary motivations for doing so are outlined
below.
1. Balance-of-Trade Adjustments. The trade account (the current
account) is a major part of the balance of payments for most countries. If
balance-of-payments difficulties persist, a government may restrict imports
and/or encourage exports in order to balance its trade account. It has two
options that affect its competitive position broadly: (i) depreciate or devalue
its currency, an action that makes all of its products cheaper in relation to
foreign products, or (ii) rely on fiscal and monetary policy to bring about
lower price increases in general than those in other countries.
2. Comparable Access or “Fairness.” The comparable access
argument promotes the idea that a country’s firms are entitled to the same
access to foreign markets as foreign firms have to its market. Economic
theory reasons that producers operating in industries where increased
production leads to economies of scale but which lack equal access to
foreign competitors’ markets will struggle to become cost-competitive.
However, restricting trade, even on the grounds of “fairness,” may lead to
higher prices for domestic customers. There are at least two reasons for
rejecting the idea of fairness. First, tit-for-tat market access can lead to
restrictions that may deny one's own consumers lower prices. And second,
governments would find it impractical to negotiate and monitor separate

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 agreements for each of the many thousands of different products and
services that might be traded.
3. Restrictions as a Bargaining Tool. Import restrictions may be levied
as a means to try to persuade other countries to lower their import barriers.
The danger, however, is that each country will, in turn, retaliate by
escalating its own restrictions. To successfully use restrictions as a
bargaining tool requires that they be (i) believable and (ii) important to the
targeted parties.
4. Price-Control Objectives. Countries may withhold products from
international markets in an effort to raise world prices and thus improve
export earnings and/or favor domestic customers. (Organization of
Petroleum Exporting Companies [OPEC] is a case in point.) The practice
of pricing exports below cost, or below their home-country prices, i.e.,
below their “fair market value,” is known as dumping. Most countries
prohibit imports of “dumped” products, but enforcement usually occurs
only if the product disrupts domestic production. The optimum-tariff
theory claims that a foreign producer will lower its prices if the destination
country places a tariff on its products. So long as the foreign producer
reduces its price by any amount, some shift in revenue goes to the importing
country, and the tariff is deemed an optimum one.

IV. NONECONOMIC RATIONALES FOR GOVERMENT INTERVENTION

Governments may choose to intervene in the trade process for noneconomic reasons
such as the maintenance of essential industries, the prevention of shipments to
unfriendly nations, the maintenance or extension of spheres of influences, and/or the
protection of national identity.
A. Maintaining Essential Industries
The essential industry argument states that a government applies restrictions
to protect essential domestic industries during peacetime so that the country is
not dependent on foreign sources of supply during war. Protecting an inefficient
industry, however, will lead to higher costs and possibly political consequences
as well.
B. Promoting Acceptable Practices Abroad
Groups concerned about security use national defense arguments to prevent the
export, even to friendly countries, of strategic goods that might fall into the
hands of potential enemies or that might be in short supply domestically. Trade
controls on non-defense goods may also be used as a foreign policy weapon to
try to prevent another country from meetings its political objectives. However,
retaliation often renders such protectionist measures ineffective.

POINT—COUNTERPOINT:
Should Governments Impose Trade Sanctions?

POINT: Many argue that although not all trade sanctions are successful, many have at
least been influential in achieving their objectives. Further, when a nation breaks an
international agreement and/or acts in unacceptable ways, punitive actions such as

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removing diplomatic recognition, boycotting events, or eliminating foreign aid or loans
may be ineffective without the addition of trade sanctions.

COUNTERPOINT: Others argue against the use of sanctions on the grounds that they
are ineffective. Further, even if sanctions are successful at weakening the targeted
countries’ economies, the costs are borne not by government officials, but by innocent
people. Finally, it appears that governments sometimes impose sanctions based on just a
single issue, rather than on a country’s overall record, which is really counterproductive.

C. Maintaining or Extending Spheres of Influence

To maintain their spheres of influence, governments may give aid and credits to
and encourage imports from countries that join a political alliance or vote a
preferred way within international bodies. Further, trade restrictions may coerce
governments to take certain political actions or punish firms whose governments
do not comply.
D. Preserving National Identity
Countries are partially held together though a unifying sense of cultural and
national distinctiveness. To sustain this collective identity, governments may
limit the presence of foreign products in certain sectors. Consumers still seek
out the best products and services for the least price.

V. INSTRUMENTS OF TRADE CONTROL

Governments use many rationales and seek a range of outcomes when they try to
influence the international trade process. The choice of instrument(s) is crucial
because each type of control may incite different responses from both domestic and
foreign groups. While some instruments directly limit the amount that can be traded,
others indirectly affect the amount traded by directly influencing prices, i.e., while
tariff barriers directly affect prices and subsequently the quantity demanded,
nontariff barriers may directly affect price and/or quantity.
A. Tariffs
A tariff (also called a duty) is a tax levied on (internationally) traded products.
Export tariffs are levied by the country of origin on exported products; a
transit tariff is levied by a country through which goods pass en route to their
final destination; import tariffs are levied by the country of destination on
imported products. A tariff increases the delivered price of a product, and, at the
higher price, the quantity demanded will be less.
1. Import Tariffs. Unless they are optimum tariffs, import tariffs raise the
price of imported goods by placing a tax on them that is not placed on
domestic goods, thereby giving domestically produced goods a relative price
advantage. Tariffs may also serve as a major source of revenue in
developing countries. A specific duty is a tariff that is assessed on a per unit
basis; an ad valorem tariff is assessed as a percentage of the value of an
item. If both a specific duty and an ad valorem tariff are assessed on the

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 same product, it is known as a compound duty. A tariff controversy
concerns the treatment of manufactured exports to industrialized nations.
While raw materials frequently enter industrial countries tariff-free, when an
ad valorem tariff is applied to manufactured goods, it is generally applied to
the total value of the product. Critics argue that the effective tariff on the
manufactured portion, i.e., the value-added portion, is higher than the
published tariff.
B. Nontariff Barriers: Direct Price Influences
Nontariff barriers (NTBs) represent administrative regulations, policies, and
procedures, i.e., quantitative and qualitative barriers that directly or indirectly
impede international trade.
1. Subsidies. Subsidies consist of direct or indirect financial assistance
from governments to their domestic firms to help them overcome market
imperfections and thus make them more competitive in the marketplace.
Recently we have seen government intervention shoring up floundering
companies and industries. One of the most popular forms of government
subsidy can be seen in the agriculture industry. From the standpoint of
market efficiency, subsidies are more justifiable than tariffs because they
seek to overcome, rather than create, market imperfections. However, many
international frictions result from disagreements about the definition of a
subsidy.
2. Aid and Loans. Governments may give aid and loans to other countries
but require that the recipient spend the funds in the donor country; this is
known as tied aid or tied loans. In this way some donor products that
might otherwise be noncompetitive may find limited international markets.
However, there is growing skepticism about the value of tied aid because it
can slow down the development of local suppliers in developing countries
and shield suppliers in the donor countries from competition.
3. Customs Valuation. Because of the temptation to declare a low invoice
price in order to pay a lower ad valorem tariff, it is sometimes difficult to
determine the true value of traded products. Due to the many different
products traded and the differences being minute in some cases, it is easy to
misclassify a product and receive a lower tariff. First, customs officials
should use the declared invoice price. If there is none, or if the authenticity
of the value is in doubt, then customs agents may assess the shipment on the
basis of the value of identical (preferable) or similar (acceptable) goods
arriving at about the same time. Further, because countries often impose
different import barriers on products sourced from different countries,
customs officials must also determine a product’s true origin.
4. Other Direct Price Influences. Other means that countries may use to
affect prices include establishing special fees for consular and customs
clearance and documentation, requirements that customs deposits be made
in advance of shipment, and minimum price levels at which products can be
sold after they receive customs clearance.
C. Nontariff Barriers: Quantity Controls

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Governments use a variety of nontariff barriers to directly affect the quantity of
imports and exports. When the quantity of imports is limited, the resulting shift
in the supply curve means that the equilibrium price will then be higher.
1. Quotas. A quota represents a numerical limit on the quantity of a product
that may be imported or exported in a given period of time. (Because of the
increase in the equilibrium price, quotas may increase per unit revenues for
firms that participate in the market.) Voluntary export restraints (VERs)
are negotiated limitations of exports from one country to another and, as in
the case of a quota, may result in higher prices to customers. An embargo
represents an outright ban on imports from or exports to a particular
country.
2. “Buy Local” Legislation. Buy local legislation represents laws that are
intended to favor the purchase of domestically sourced products over
imported products, particularly with respect to government procurement.
Local content requirements, i.e., costs incurred within the local country
(usually measured as a percentage of total costs), fall within this category.
3. Standards and Labels. The professed purpose of standards is to protect
the safety or health of the domestic population. However, countries may
also devise classification, labeling, and testing standards that facilitate the
sale of domestic products but obstruct the sale of foreign-sourced products.
4. Specific Permission Requirements. An import (or export) license
requires that firms secure permission from government authorities before
conducting trade transactions. Such procedures directly restrict trade when
permission is denied and indirectly restrict trade because of the cost, time,
and uncertainty involved in the process. A foreign exchange control
requires an importer of a given product to apply to a government agency to
secure the foreign currency to pay for the product.
5. Administrative Delays. Intentional administrative delays create
uncertainty and increase the cost of carrying inventory. However,
competitive pressures can motivate countries to improve inefficient
administrative systems.
6. Reciprocal Requirements. Governments may require that foreign
suppliers accept products in lieu of money. Offsets and countertrade (see
Chapter 13) are reciprocal requirements that are made between countries
with ample access to foreign currency that want to secure jobs or
technology as part of the transaction.
7. Restrictions on Services. Countries restrict trade in services such as
transportation, insurance, advertising, consulting, and banking for reasons
of essentiality, not-for-profit services, standards, and immigration.
a. Essentiality. Countries consider certain services industries to be
essential because they serve strategic purposes or provide social
assistance to citizens. Private companies of any sort may be prohibited,
and in other cases, price controls may be imposed by the government;
government-owned operations are often subsidized.

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 b. Not-for-Profit Services. Mail, education, and hospital health
services are often not-for-profit services and governments may
preclude foreign firms from competing in these areas.
c. Standards. Governments may limit foreign entry into particular
service professions in order to assure that practitioners are qualified.
Licensing standards vary by country and extend to a wide variety of
occupations. Prerequisites for taking certification examinations may be
lengthy.
d. Immigration. Government regulations often require that an
organization, whether domestic or foreign, demonstrate that the skills
needed for a particular job are not available locally before hiring a
foreigner.

VI. DEALING WITH GOVERNMENTAL TRADE INFLUENCES

Although there are risks and costs associated with each option, firms can deal with
trade restrictions by (a) moving operations to a lower-cost country, (b) concentrating
on market niches that attract less international competition, (c) adopting internal
innovations that lead to greater efficiency or superior products, or (d) trying to get
government protection.
A. Tactics for Dealing with Import Competition When the options of
moving operations abroad, concentrating on niches, and innovation fail or are not
practical, companies may turn to the government to restrict imports or open
export markets.
1. Convincing Decision Makers. Companies may want to find
government officials who are supportive of their case. Generally Congress is
sensitive to the employment effects of trade, especially in their jurisdictions.
2. Involving the Industry and Stakeholders. There is strength in
numbers and companies may want to join forces within the industry to gain
more political clout. Outside groups such as activists and the general public
may be of help in promoting the case for favorable trade policies for the
firm.
3. Preparing for Changes in the Competitive Environment.
Companies can take different approaches to deal with changes in the
international competition environment. Frequently these different
approaches are based on their strategies and abilities.

LOOKING TO THE FUTURE: Dynamics and Complexity

Each time countries negotiate a trading agreement, new optimum production locations
emerge. Further, the international regulatory situation is in many ways becoming more
complex. While some groups and firms are pushing for freer trade, others clamor for
greater protection. Thus, it is likely that as barriers come down for some products in
some countries, they will go up for other products in other countries. Those who see
themselves as losers are not apt to accept their losses without a struggle. Support for
their positions may be garnered from alliances that cross national borders, as well as
within domestic countries, as economic positions continue to affect politics, and vice
versa.

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 CLOSING CASE: U.S.-Cuban Trade: When Does a Cold War Strategy
Become a Cold War Relic? [See Fig. 7.3.]

Able to weather a variety of political leaders, economic events, and historical eras, the
U.S. embargo of Cuba is the longest and harshest embargo by one state against another in
modern history. Following Castro’s overthrow of the Batista government in 1959 and
threats to incite revolutions elsewhere in Latin America, the United States canceled its
trade agreement to buy Cuban sugar. Then, following a series of increasingly hostile
events, the United States severed diplomatic relations and initiated a full trade embargo in
1962. Trade between the United States and Cuba stopped. Spurred by the collapse of
communism more than thirty years later, Congress passed the Cuban Democracy Act in
1992 and the Helms-Burton Act in 1996, both of which tightened the noose for firms that
attempted to do business with a Castro government. It was not until 2000 that Congress
passed an act which allowed for limited exports of U.S. agricultural, food and medical
products; Cuba quickly became the twenty-first largest agricultural market for U.S.
exports. Over time, sympathy for the U.S. role in Cuba has dwindled. Although many
countries had initially supported the embargo, by 2001 some 150 nations had normal
trade relations with Cuba. Further, the U.S. public has become increasingly divided on
the usefulness of the embargo. While many people feel that repealing the embargo would
help many U.S. industries and firms, others maintain that Cuban market opportunities are
extremely limited. Others feel that the Cuban embargo is an unfortunate cold war relic
and question the politics of U.S. policy. Recent events have seen the U.S. rescinding
earlier restrictions and opening up lines for improved communications.

Questions
1. Should the United States seek to tighten its economic grip on Cuba? If so, why?
From a practical standpoint, most would argue that without the cooperation of the
rest of the world, there is little left that the United States can do. Further, given that
China is now a member of the World Trade Organization (WTO) and nations like
Vietnam are trading with the United States, the Cuban embargo gives the appearance
of cold war relic that is no longer relevant in today’s world. However, given the
consensus that Cuba consistently violates human rights, the continuance of U.S.
trade sanctions against Cuba is consistent with U.S. policy. In addition, Cuba’s
expropriation of American property without compensation is internationally
recognized as unacceptable behavior; thus, retaliation can be seen as an appropriate
response. Finally, there is the continuing argument that if the Cuban economy can
be further weakened, the Castro brothers may at last be overthrown. (LO: 1,
Learning Outcome: To explain the rationales for governmental policies that enhance
and restrict trade, AACSB: Analytical Skills)

2. Should the United States normalize business relations with Cuba? If so, should the
United States stipulate any conditions?

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 There are both political and economic reasons for normalizing relations with Cuba.
Cuba has long-since ceased to be a military threat, and there is hope that closer
political relations with the United States (and the rest of the free world) will lead to
greater democracy in Cuba. Further, Cuban trade sanctions are far tougher than
those levied by the United States against Iran, Iraq, Libya, and North Korea.
Economically, it is argued that because of the posture of the U.S. government, U.S.
firms are losing out on opportunities to sell their products in Cuba to competitors
from other countries. However, it is not likely that Cuba would trade with the United
States as aggressively as in the past, even if it were possible. While progress in the
area of human rights may be slow, experience in other countries suggests that
imposing some human rights conditions may be effective in the long run. In
addition, the U.S. government may wish to facilitate the return to Cuba of U.S.
companies whose properties were expropriated, even though any remaining assets
are likely in a state of serious disrepair. (LO: 2, Learning Outcome: To show the
effects of pressure groups on trade policies, AACSB: Dynamics of the Global
Economy)

3. Assume you are Cuba’s leader. What kind of trade relationship with the United
States would be in your best interest? What type would you be willing to accept?
Raul Castro would logically want a trade relationship that would permit him to save
face politically while contributing to the economic development of the economy.
Initial overtures from the U.S. government could help bolster his political position
and thus would possibly be welcomed as a way to begin negotiations. Economic
development assistance could come in the form of direct aid and, possibly, foreign
direct investment, although there surely would be substantial controls on either form.
(LO: 3, Learning Outcome: To describe the potential and actual effects of
governmental intervention on the free flow of trade, AACSB: Dynamics of the
Global Economy)

4. How does the structure and relationships of the U.S. political system influence the
existence and specification of the trade embargo?
The structure and relationships of the American political system serve to reinforce
the existence and specification of the Cuban trade embargo. Pro-embargo supporters
relentlessly lobby the U.S. Congress and presidential administration to tighten the
embargo in order to spur the collapse of Cuban communism. Although recently
diminished, the pro-embargo viewpoint is supported by key people in key positions
throughout the government. (LO: 3, To describe the potential and actual effects of
governmental intervention on the free flow of trade, AACSB: Dynamics of the
Global Economy)

ADDITIONAL EXERCISES: Government Intervention in Trade

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Exercise 7.1. As a result of the many rounds of the General Agreement on Tariffs
and Trade (GATT) and other trade negotiations, both tariff and nontariff barriers
have been significantly reduced on a worldwide basis. However, given recent shifts
in productive assets and employment from many industrialized countries to emerging
economies such as India and China, cries for protectionist measures can be heard
from many quarters. Ask students to debate the possibility that governments in
industrialized countries will once again implement some form of protectionist
measures in order to protect their markets and industries. Do the students expect that
such measures would be in the form of tariffs or nontariff barriers? (LO: 1, Learning
Outcome: To explain the rationales for governmental policies that enhance and
restrict trade, AACSB: Analytical Skills)

Exercise 7.2. From a global perspective one can observe excess capacity in the
steel, automobile, and commercial airline industries in both industrialized and
emerging nations. Ask students to discuss the logic of this from the standpoints of
the Infant-Industry and the Industrialization Arguments. Then ask them to debate
whether each of the arguments should be applied only in the case of emerging
economies, or in the case of all countries. (LO: 5, Learning Outcome: To
demonstrate business uncertainties and business opportunities created by
governmental trade policies, AACSB: Dynamics of the Global Economy)

Exercise 7.3. Ask students to debate the issue of stakeholders in government trade
policy, i.e., whose interests should be of paramount concern—producers, consumers,
or the government. Can sanctions by a single nation against another be truly
effective, or must it be a multilateral, if not a unilateral, action? (LO: 3, Learning
Outcome: To describe the potential and actual effects of governmental intervention
of the free flow of trade, AACSB: Analytical Skills)

Exercise 7.4. Former U.S. Secretary of State Lawrence Eagleburger claims that
instead of an embargo, a more effective way to bring democracy to Cuba and other
repressive nations would be to increase their exposure to the United States and other
industrialized nations through trade and travel. Others claim, however, that
governments that choose to violate human rights, expropriate private property, etc.
must not be economically rewarded. Ask students to discuss the tension that
frequently accompanies the use of economic means to achieve political ends. (LO:
4, Learning Outcome: To illustrate the business uncertainties and business
opportunities created by governmental trade policies)

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