6.2) Whose interests should be the paramount
concern of government trade policy - the interests of producers (businesses and
their employees) or those of consumers?
The long run interests of
consumers should be the primary concern of governments, based on a utilitarian
approach (the most good). Unfortunately
consumers, each of whom may be negatively impacted by only a few dollars, are
less motivated and effective lobbyists than are a few producers who may have a
great deal at stake. While in some
instances it may be argued that domestic consumers will be better off if
world-class domestic producers are nurtured and allowed to gain first mover
advantages in international markets, it is doubtful that the government will be
better than international capital markets at "picking winners", and
will more likely pick the firms with the greatest political clout. While employees may well lose jobs if there
are more efficient foreign competitors, some would argue that this is the
nature of competition, and that the role of government should be to help these
employees get jobs where they can be efficiently employed rather than to
protect them from reality in inefficient firms.
7.2) Compare and contrast these explanations of FDI: internalization theory,
suggests that firms imitate other firms in oligopolistic industries, and will
"follow the leader" in undertaking FDI in certain countries, as sort
of strategic defensive moves. This
theory does not explain why the first firm undertakes FDI, and why it chooses
to do this rather than to export or license.
The product life cycle theory suggests that firms invest in foreign
countries when demand in that country will support local production or when
cost pressures make it necessary to locate production in low cost
locations. While this theory does
explain why some FDI takes place, it also does not explain why FDI is preferred
over licensing or exporting. The market
imperfections explanation more directly confronts these issues, and explains
why FDI may be preferable to other alternatives for expanding business
activities. It identifies the importance
and difficulty of transferring know-how and describes some of the impediments
to exporting. By explaining better
exactly why a firm may undertake FDI, the market imperfections model is
probably the best explanation of the historical pattern of horizontal FDI.
8.2) What are the economic and political arguments for regional economic integration? Given these arguments, why don't we see more integration in the world economy?
The economic case for
regional integration is straightforward.
As we saw in Chapter 5, unrestricted free trade allows countries to
specialize in the production of goods and services that they can produce most
efficiently. If this happens as the
result of economic integration within a geographic region, the net effect is
greater prosperity for the nations of the region. From a more philosophical perspective,
regional economic integration can be seen as an attempt to achieve additional
gains from the free flow of trade and investment between countries beyond those
attainable under international agreements such as the WTO. The political case for integration is also
compelling. Linking neighboring
economies and making them increasingly dependent on each other creates
incentives for political cooperation between neighboring states. Also, the potential for violent conflict
between the states is reduced. In
addition, by grouping their economies together, the countries can enhance their
political weight in the world. Despite
the strong economic and political arguments for integration, it has never been
easy to achieve (on a meaningful level).
There are two main reasons for this.
First, although economic integration benefits the majority, it has its
costs. While a set of nations as a whole
may benefit significantly from a regional free trade agreement, certain groups
may loose. The second impediment to
integration arises from concerns over national sovereignty.
8.8) Would the establishment of a Free Trade Area of the America’s (FTAA) in 2005 be good for the two most advanced economies in the hemisphere, the United States and Canada? How might the establishment of FTAA impact the strategy on North American firms?
In 1994, a Free Trade of the
Americas (FTAA) was proposed. If the
agreement comes about, it would effectively create a free trade area of nearly
800 million people responsible for more than $12 trillion in GDP in 2003. However, the