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Question 1:

One of the oldest debates in international economics focuses on the merits and deficiencies of free trade. The debate was quite spirited in England in the 19th century. At that time, England was an imperial power, with colonies scattered through all corners of the globe. Its trade policy was based on mercantilism. With mercantilism, England would use its colonies to supply it with raw materials, which would be converted into finished goods (through industrial process) back in England, and then the goods would be sold to the colonies. All the colonial powers (France, Portugal, Spain) pursued similar policies.

The early economists of the 19th century argued that England - and the world at large - would be better off abandoning mercantilistic policies and adopting free trade policies, where barriers to trade among countries would be removed. David Ricardo's famous law of comparative advantage even suggested how both national and global output would increase dramatically if countries focused on producing goods where they had a comparative advantage.

Over the years, governments throughout the world have been nervous about implementing free trade policies, largely because they feel compelled to protect national industries that could not withstand the competition that free trade would create. With the global economic crisis of the 1920s and 1930s, government throughout the world pursued strongly protectionist policies. In fact, many experts believe that passage of the Smoot-Hawley tariffs in the United States in 1930 was a major contributor to the onset of global depression.

1. Describe how free trade works (ideally). In the discussion, be sure to address barriers to free trade associated with protectionist policies.

2. What are the principal arguments supporting free trade?

3. What are the principal arguments against free trade?

4. What regimes exist to promote free trade globally?

5. The law of comparative advantage holds that countries should concentrate on producing goods and services where they have a comparative advantage, rather than producing all the things they are good at producing. Since the 1960s, America's comparative advantage has been in high tech products and advanced services.

Because it does not have a comparative advantage in basic manufacturing (although it has always been good at manufacturing), it has ceded manufacturing efforts to developing countries, such as China, India, Taiwan, and Malaysia and has focused on strengthening its high tech and service sectors. The economic crisis of 2008-2009 has caused many thoughtful economists to re-think this long-standing policy. Why are they now beginning to question the US's abandonment of basic manufacturing capabilities?

6. It is generally agreed that China has done everything possible to avoid pursuing free-trade policies. Briefly explain. How do they get away with it?

Question 2:

The economies of countries that depend heavily on international trade often rise or fall in accordance with their currencies' exchange rates, as well as the currency exchange rates of their trading partners. The questions below will enable you to show your understanding of how currency rates are established, how they are incorporated into national economic policies, and how they can help or hurt national economies.

1. How are currency exchange rates established?

2. In the light of your response to question 1, explain what steps a national government (e.g, Japan today) takes to strengthen or weaken the exchange rate of its currency

3. Japan's economic miracle of the 1950s through 1980s was rooted in pursuing an export-driven economy. In the 1970s, the fabled Four Dragons followed the Japanese export-oriented blueprint to spur economic growth (Four Dragons: Taiwan, South Korea, Singapore, Hong Kong). What role was played by the currency exchange rates of these countries to stimulate exports?

4. Recently, a number of studies have concluded that the single greatest source of China's fantastic economic trade performance has been the government's policy to keep the national currency (the Renminbi [RMB], also called the Yuan) artificially cheap. Within China these days, there is a major debate raging among policy makers regarding this policy. A cheap currency is a mixed blessing, and while it can help some national industries, it can hurt others. Explain how a cheap RMB both helps and hurts China's economic prospects.

5. Since World War II, the dollar has served as the backbone of the international monetary system. (Prior to WW II, the English pound sterling served this role.) For the Almighty Dollar to reign in the global financial system, it was important to keep the dollar strong (i.e., relatively high exchange rate in respect to other currencies). Why did the US government pursue a strong dollar policy for so many decades? Since the economic crisis of 2008-2009, the dollar has weakened considerably against other key currencies, yet the Federal Reserve and Treasury Department have not taken steps to strengthen it. Why not?

6. The Euro as a currency was introduced into circulation in the Eurozone in 2002. The idea of the Euro was to establish a single currency for the European Union in order to strengthen the overall economic performance of EU countries. While there are clear advantages to having a single currency (e.g., the US uses the dollar throughout the fifty states), the 2010 financial crisis of the European PIGS (Portugal, Ireland, Greece, and Spain) highlighted the perils of having one currency employed a great diversity of countries. There has even been speculation whether the Euro can survive in the long run. Briefly explain how the economic problems experienced by the PIGS in 2008 through 2010 surfaced significant weaknesses of implementing a one currency policy across Europe.

Textbook - International Business, the Challenges of Globalization (4th Edition), John J. Wild, Kenneth L. Wild and Jerry C. Han, Pearson Education © 2008