The Political Economy of International Trade

The Political Economy of International Trade 7 Learning objectives Identify the policy instruments used by governments to influence international trade flows. Understand why governments sometimes intervene in international trade. Summarize and explain the arguments against strategic trade policy. Describe the developments of the world trading system and the current trade issues. Explain the implications for managers of developments in the world trade system. This chapter focuses on the political systems and tools of trade policy. The major objective of this chapter is to describe how political realities shape the international trading system. With an introduction to tariffs, subsidies, and the development of the world trading system, the chapter describes the evolution of the World Trade Organization and its impact on the global business environment. While in theory many countries adhere to the free trade ideal outlined in Chapter 5, in practice most have been reluctant to engage in unrestricted free trade. The US continues to restrict trade in technological and militarily sensitive products as well as in textiles, sugar, and other basic products in response to domestic political pressures. The opening case explores the battle over tariffs imposed on Chinese tires exported to the United States and whether the tariffs violate trade agreements. The closing case explores the effect of the recent global financial crisis on the volume of world trade as well as the implications of the protectionist measures some countries have taken in an effort to protect jobs and provide a competitive edge for domestic companies. 7-1

OUTLINE OF CHAPTER 7: THE POLITICAL ECONOMY OF INTERNATIONAL TRADE Opening Case: U.S. Tariffs on Tires from China Introduction Instruments of Trade Policy Tariffs Subsidies Import Quotas and Voluntary Export Restraints Local Content Requirements Administrative Policies Antidumping Policies Country Focus: Subsidized Wheat Production in Japan Management Focus: U.S. Magnesium Seeks Protection The Case for Government Intervention Political Arguments for Intervention Economic Arguments for Intervention Country Focus: Trade in Hormone-Treated Beef The Revised Case for Free Trade Retaliation and Trade War Domestic Politics Development of the World Trading System From Smith to the Great Depression 1947 1979: GATT, Trade Liberalization, and Economic Growth/ 1980 1993: Protectionist Trends The Uruguay Round and the World Trade Organization WTO: Experience to Date The Future of the WTO: Unresolved Issues and the Doha Round Country Focus: Estimating the Gains from Trade for America Implications for Managers Trade Barriers and Firm Strategy Policy Implications 7-2

Chapter Summary Critical Thinking and Discussion Questions Closing Case: The Global Financial Crisis CLASSROOM DISCUSSION POINT Ask students whether the United States promotes free trade. Jot their responses on the board. Then try to dig a little deeper by asking why, if the United States promotes free trade, it still maintains some trade barriers (have some current trade barriers in mind such as the $3.4 billion in subsidies U.S. cotton farmers received in 2001). Write the responses of students on the board using the basic arguments for intervention framework presented in the text. Next, ask students similar questions about the European Union (EU dairy farms receive $15 billion a year in subsidies). Another Perspective: The dispute over cotton subsidies was recently settled, but further issues with agricultural subsidies remain. For more information go to {http://www.businessweek.com/bwdaily/dnflash/content/aug2009/db20090831_143603.h tm}. OPENING CASE: The Global Financial Crisis and Protectionism The opening case explores the dispute over tariffs imposed by the United States on tires imported from China. China more than tripled its share of the U.S. market from 2004 to 2008 prompting U.S. steelmakers to lobby for protection. Their efforts were rewarded by the decision to impose a three year tariff. China immediately complained that the policy violated WTO agreements, but ultimately the WTO ruled in favor of the United States. Discussion of the case can revolve around the following questions: 1. Do you agree with the decision to impose tariffs on tires imported from China? What benefits does the new policy bring to the industry in the U.S.? What problems could the tariffs create? Why should firms be concerned? 2. How might the tariffs imposed by the United States actually harm some U.S. companies and workers? What might happen when the tariffs expire? Why should firms be concerned? 3. Discuss the implications of the tariffs for U.S. consumers. What impact do the tariffs have on tires prices for U.S. buyers? 7-3

Another Perspective: To see additional current figures regarding world trade and tariffs, go to the WTO website {http://www.wto.org/english/res_e/statis_e/statis_e.htm}. For additional information on how the WTO views nontariff barriers, go to {http://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm9_e.htm}. LECTURE OUTLINE This lecture outline follows the Power Point Presentation (PPT) provided along with this instructor s manual. The PPT slides include additional notes that can be viewed by clicking on view, then on notes. The following provides a brief overview of each Power Point slide along with teaching tips, and additional perspectives. Slides 7-3 What is the Political Reality of Free Trade? Free trade refers to a situation where a government does not attempt to restrict what its citizens can buy from another country or what they can sell to another country. Slide 7-4-7-10 Instruments of Trade Policy The main instruments of trade policy are: tariffs subsidies import quotas voluntary export restraints local content requirements antidumping policies administrative policies Tariffs are the oldest form of trade policy. The principal objective of most tariffs is to protect domestic producers and employees against foreign competition. Tariffs also raise revenue for the government. Domestic producers gain, because tariffs afford them some protection against foreign competitors by increasing the cost of imported foreign goods. Consumers lose because they must pay more for certain imports. Tariffs reduce the overall efficiency of the world economy. Subsidies take many forms (cash grants, low-interest loans, tax breaks, and government equity participation in domestic firms). By lowering production costs, subsidies help domestic producers in two ways: they help them compete against foreign imports and they help them gain export markets. Subsidy revenues are generated from taxes. Governments typically pay for subsidies by taxing individuals. Therefore, whether subsidies generate national benefits that exceed their national costs is debatable. 7-4

Subsidies encourage overproduction, inefficiency and reduced trade. In practice, many subsidies are not very successful at increasing the international competitiveness of domestic producers. Rather, they tend to protect the inefficient and promote excess production. Quotas and Voluntary Export Restraints (VER) are direct restrictions on the quantity of some good that may be imported into a country. The quota restriction is usually enforced by issuing import licenses to a group of individuals or firms. A VER is a quota on trade imposed by the exporting country, typically at the request of the importing country s government. Local content regulations have been widely used by developing countries to shift their manufacturing base from the simple assembly of products whose parts are manufactured elsewhere into the local manufacture of component parts. They have also been used in developed countries to try to protect local jobs and industry from foreign competition. From the point of view of a domestic producer of parts going into a final product, local content regulations provide protection in the same way an import quota does: by limiting foreign competition. The aggregate economic effects are also the same; domestic producers benefit, but the restrictions on imports raise the prices of imported components. Governments sometimes use informal or administrative policies to restrict imports and boost exports. Administrative trade policies are bureaucratic rules that are designed to make it difficult for imports to enter a country. Another Perspective: Information about U.S. trade is readily available on government sites. Visit {www.business.gov} to access an array of links. You can also review the current U.S. tariffs at the U.S. Office of Tariff Affairs and Trade Agreements at {www.usitc.gov/tata/index.htm}. Dumping is defined as selling goods in a foreign market at below cost of production or at below fair market value. Slide 7-11 The Case for Government Intervention There are two types of arguments for government intervention, political and economic. Slides 7-12-7-16 Political Arguments for Intervention Political arguments for government intervention include: protecting jobs protecting industries deemed important for national security retaliating to unfair foreign competition protecting consumers from dangerous products furthering the goals of foreign policy protecting the human rights of individuals in exporting countries 7-5

The most common political reason for trade restrictions is "protecting jobs and industries." Countries sometimes argue that it is necessary to protect certain industries because they are important for national security. Defense-related industries often get this kind of attention (e.g., aerospace, advanced electronics, semiconductors). Government intervention in trade can be used as part of a "get tough" policy to open foreign markets. Consumer protection can also be an argument for restricting imports. Since different countries do have different health and safety standards, what may be acceptable in one country may be unacceptable in others. Sometimes, governments use trade policy to support their foreign policy objectives. Governments sometimes use trade policy to create pressure for improving the human rights policies of trading partners. For years the most obvious example of this was the annual debate in the United States over whether to grant most favored nation (MFN) status to China. MFN status allows countries to export goods to the United Status under favorable terms. Under MFN rules, the average tariff on Chinese goods imported into the United States is 8 percent. If China s MFN status were rescinded, tariffs would probably rise to about 40 percent. Another Perspective: In the United States, the Bureau of Export Administration enhances the nation's security and its economic prosperity by controlling exports for national security, foreign security, foreign policy, and short supply reasons. To learn more, go to {http://www.bis.doc.gov/} and click on Export Administration regulations. Slide 7-17-7-20 Economic Arguments for Intervention Protecting infant industries and strategic trade policy are the main economic reasons for trade restrictions. The infant industry argument has been considered a legitimate reason for protectionism, especially in developing countries. Many economists criticize this argument: protection of manufacturing from foreign competition does no good unless the protection helps make the industry efficient. Brazil built up the world s 10th largest auto industry behind tariff barriers and quotas. Once those barriers were removed in the late 1980s, however, foreign imports soared and the industry was forced to face up to the fact that after 30 years of protection, the Brazilian industry was one of the most inefficient in the world. Strategic trade policy - where the existence of substantial scale economies suggests that the world market will profitably support only a few firms, and may justify government intervention in industries with possibly large economies of scale. Such intervention 7-6

reduces the competitive effect of existing first-mover advantages held by foreign companies. Revised Case for Free Trade While strategic trade policy identifies conditions where restrictions on trade may provide economic benefits, there are two problems that may make restrictions inappropriate: retaliation and politics. Krugman argues that strategic trade policies aimed at establishing domestic firms in a dominant position in a global industry are beggar-thy-neighbor policies that boost national income at the expense of other countries. Special interest groups may influence governments. Slide 7-21-7-25 Development of the World Trading System How has today s world trade system evolved? Up until the Great Depression of the 1930s, most countries had some degree of protectionism. Great Britain, as a major trading nation, was one of the strongest supporters of free trade. Although the world was already in a depression, in 1930 the United States enacted the Smoot-Hawley tariff, which created significant import tariffs on foreign goods. As other nations took similar steps and the depression deepened, world trade fell further. After WWII, the United States and other nations realized the value of freer trade, and established the General Agreement on Tariffs and Trade (GATT). The approach of GATT (a multilateral agreement to liberalize trade) was to gradually eliminate barriers to trade. Over 100 countries became members of GATT, and worked together to further liberalize trade. Teaching Tip: A full review of GATT, containing an actual copy of the agreement, is available at {http://www.ciesin.org/tg/pi/trade/gatt.html}. Calls for protectionism were motivated by 3 factors: 1. Japan s success in such industries as automobiles and semiconductors coupled with the sense that Japanese markets were closed to imports and foreign investment by administrative trade barriers. 2. The world s largest economy, the United States, was plagued by a persistent deficit. The loss of market share to foreign competitors in industries such as automobiles, machine tools, semiconductors, steel, and textiles, and the resulting unemployment gave rise to renewed demands in the U.S. Congress for protection against imports. 7-7

3. Many countries found ways to get around GATT regulations. The Uruguay Round wrote the rules governing: -the protection of intellectual property rights -the reduction of agricultural subsidies -the strengthening of GATT s monitoring and enforcement mechanisms Slides 7-26-7--27The Future of the WTO: Unresolved Issues and the Doha Round In addition to the impasse at the meetings over agricultural subsidies, the Seattle round was a lightning rod for a diverse collection of organizations from environmentalists and human rights groups to labor unions that opposed free trade. All these organizations argued that the WTO is an undemocratic institution that was usurping the national sovereignty of member states and making decisions of great importance behind closed doors. They took advantage of the Seattle meetings to voice their opposition. The Doha Round had several initiatives: Cutting tariffs on industrial goods and services. In 2000, for example, the average tariff rates on non-agricultural products were 4.4% for Canada, 4.5% for the European Union, 4.0% for Japan, and 4.7% for the United States. On agricultural products, however, the average tariffs rates were 22.9% for Canada, 17.3% for the European Union, 18.2% for Japan, and 11% for the United States. Phasing-out subsidies. Subsidies introduce significant distortions into the production of agricultural products. The net effect is to raise prices to consumers, reduce the volume of agricultural trade, and encourage the overproduction of products that are heavily subsidized (with the government typically buying up the surplus). Reducing antidumping laws. WTO rules allow countries to impose antidumping duties on foreign goods that are being sold cheaper than at home, or below their cost of production, when domestic producers can show that they are being harmed. WTO on intellectual property should allow for health protection in poorer nations. Rich countries have to comply with the rules within a year. Poor countries, in which such protection generally was much weaker, have five years grace, and the very poorest have ten years. Another Perspective: To see current issues at the WTO, go to {http://www.wto.org} and click on News. In addition, consider {http://www.businessweek.com/news/2011-05- 20/doha-talks-on-trade-face-unbridgeable-gaps-apec-ministers-say.html}. Slides 7-28-7-29 Implications for Managers Managers need to consider how trade barriers affect the strategy of the firm and the implications of government policy on the firm. Trade barriers are a constraint upon a firm s ability to disperse its productive activities. 7-8

International firms have an incentive to lobby for free trade, and keep protectionist pressures from causing them to have to change strategy. CRITICAL THINKING AND DISCUSSION QUESTIONS QUESTION 1: Do you think that governments should consider human rights when granting preferential trading rights to countries? What are the arguments for and against taking such a position? ANSWER 1: China is frequently cited as a violator of human rights, and can form the basis for a discussion of this question. While the answer to the first question clearly is a matter of personal opinion, in stating their opinions, students should consider the following points. Trade with the U.S. is very important to China, as China views the U.S. as an important market. The U.S. is also an important source of certain products. Thus, the U.S. has some leverage with trade when trying to influence China s human rights policies. For this policy to have much effect, however, other nations important to China must adopt similar policies. Otherwise China will simply choose to work with other countries, and U.S. consumers and producers may be more negatively impacted than the Chinese. Another concern with tying MFN status to human rights is that denying MFN may make the human rights situation worse rather than better. By engaging in trade, the income levels in China will increase, and with greater wealth the people will be able to demand and receive better treatment. QUESTION 2: Whose interests should be the paramount concern of government trade policy - the interests of producers (businesses and their employees) or those of consumers? ANSWER 2: 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. 7-9

QUESTION 3: 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? ANSWER 3: According to the textbook, businesses should urge governments to target technologies that may be important in the future and use subsidies to support development work aimed at commercializing those technologies. Government should provide export subsidies until the domestic firms have established first mover advantages in the world market. Government support may also be justified if it can help domestic firms overcome the first-mover advantages enjoyed by foreign competitors and emerge as viable competitors in the world market. In this case, a combination of home market protection and export-promoting subsidies may be called for. QUESTION 4: You are an employee of an U.S. firm that produces personal computers in Thailand and then exports them to the U.S. 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 that time were Malaysia and Hong Kong. The U.S. government decides to impose punitive 100% 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 do you think your firm should respond? What does this tell you about the use of targeted trade barriers? ANSWER 4: As long as the manufacturing requirements have not changed significantly, looking at Malaysia or Hong Kong again for production would appear obvious. When the U.S. government introduces a specific ad valorem tariff on Thai computer imports, it forces manufacturers to get around these restraints by developing other strategies, including looking at other locations. Another approach would be to produce the computers in sections and then assemble them in the U.S., depending on the legislation. Or continue manufacture in Thailand and assemble them in Malaysia or Hong Kong. Such targeted trade barriers can often be easily circumvented. Targeted trade barriers, like most forms of government intervention, are usually ineffective. QUESTION 5: Reread the Management Focus feature on U.S. Magnesium Seeks Protection. Who gains most from the anti-dumping duties levied by the United States on imports of magnesium from China and Russia? Who are the losers? Are these duties in the best national interests of the United States? ANSWER 5: Many students will probably argue that the only clear winners from the antidumping duties imposed by the United States on magnesium imports from China and Russia are the employees and investors of U.S. Magnesium. Some students may suggest that the duties will also open the door to magnesium producers in other countries that could also sell in the United States. Students will probably note that Russian and Chinese magnesium producers will surely be negatively affected by the duties, as will companies like the automakers that were able to benefit from the cheap magnesium they sold. 7-10

Students may be divided on the issue of whether the duties are in the best national interests of the United States. Many students will probably argue that the duties will mean higher prices for American consumers, but some students may argue that the United States is simply seeking a more equitable trading relationship with China and Russia. CLOSING CASE: The Global Financial Crisis and Protectionism Summary The closing case describes the changes in the volume of world trade and levels of protectionism that have occurred in the wake of the recent global recession. After the financial crisis that began in the United States in 2008 and then spread to other countries around the world, the volume of world trade fell prompting countries to impose various protectionist policies. As the global economy began to recover, some of these policies were retracted, however there is concern that many protectionist measures are still in place. Discussion of this case can revolve around the following questions: QUESTION 1: Why do you think calls for protectionism are greater during sharp economic contractions than boom periods? ANSWER 1: Sharp economic contractions are of course directly linked to slowdowns in demand forcing companies to adopt new strategies. One such strategy may be to lobby for protection from imports. Another action may be to lay off workers. In an effort to protect their jobs, unionized workers may also lobby their governments for protection from foreign competition. QUESTION 2: Despite the sharp economic contraction during 2008-2009, the increase in protectionist measures was fairly modest. Why do you think this was the case? ANSWER 2: Thanks to the greater number of trade agreements in place today as well as WTO rules, many countries found they had limited options when they tried to respond to the recent global recession. In the past, countries had more freedom to implement protectionist policies like tariffs designed to help domestic companies remain competitive and protect domestic jobs. Now however, countries must be more creative with their efforts or risk violating trade agreements. During the recent economic slump, some countries focused on bureaucratic changes that effectively limited imports while other countries provided subsidies to give domestic companies a competitive edge over global competitors. 7-11

QUESTION 3: During 2008-2009 many developed nations gave subsidies to their automobile producers. How might this have distorted international trade? Was this a reasonable thing to do given the circumstances? ANSWER 3: The 2008-200 financial crisis prompted many countries including the United States to provide subsidies to automakers. While the assistance helped companies remain in business and protected jobs, it also created an artificial environment for them and may have prompted some companies to shift production from more efficient locations to less efficient plants in order to qualify for greater subsidies. Students may be divided on whether the subsidies were beneficial. Some students will probably point out that the subsidies helped companies preserve jobs and in doing so, introduced a level of stability during a very precarious time. Other students however, may wonder what will happen when the subsidies end and whether in fact the policies simply prolonged the hard decisions that must ultimately be made. QUESTION 4: What might occur if renewed economic slowdown triggered a wave of protectionist measures around the world? Would protectionism protect jobs, or would it make things worse? ANSWER 4: In mid-2011, the global economy was still unstable, and the threat of a double-dip recession was very real. Many students will probably suggest that if the economy fails to fully recover, many companies will continue to face low demand and because of the protection they received in the past, may still be unprepared to deal with it and once again lobby for further protection. However, some students may point out that many governments are now facing their own financial challenges and may be less willing to help. Other students may wonder whether governments may focus on bureaucratic policies as a means of helping companies in the future rather than on subsidies. In the end, most students will probably agree that while protectionist measures can protect jobs in the short-run, companies must ultimately become more efficient, and countries must support industries that will be sustainable in the long-run. QUESTION 5: The volume of world trade rebounded sharply in 2010 on the back of a fairly modest growth rate in the world economy. What does this tell you about the nature of international production in today s global economy? What does this tell you about the vulnerability of the world economy to any future trade wars? ANSWER 5: Most students will probably recognize that today s economy is truly global in nature. A modest increase in demand can result in a substantial increase in the volume of world trade thanks to the global nature of production where parts for products may come from a number of countries and assembly may take place anywhere in the world. Students should recognize that because global production is now the norm in so many industries, the world economy is far more vulnerable to future trade wars than it was in the past. 7-12

Another Perspective: The problems in the Euro Zone countries are now threatening the economic recovery in the United States, and may impact trade levels. To learn more, go to {http://www.businessweek.com/news/2011-10-25/collyns-says-euro-area-crisis-aserious-risk-to-recovery.html}. Another Perspective: There are several iglobes dealing with the issues in this case. Consider After Bailout For Irish, Questions Linger Over Portugal, Spain and Europe Struggles for Consensus on Economic Recovery. INTEGRATING iglobes There are several iglobe video clips that can be integrated with the material presented in this chapter. In particular, you might consider the following: Title: Europe s Deadly E.Coli Outbreak a Wake-Up Call Over Global Food Distribution Run Time: 8:17 Abstract: This video explores the global challenges associated with resolving the problems associated with a recent E.coli outbreak in Germany and the implications of today s international food system for consumers and producers. Key Concepts: globalization, European Union, protectionism, exports, global distribution, political economy, trade policy, global economy, globalization of production Notes: Europe, and in particular Germany, is still unsure of exactly what caused a deadly E.coli outbreak that sickened or killed some 2,000 people in June. In fact, government officials were struggling to explain what had happened and why it was not possible to contain the disaster much sooner. The most likely explanation for the devastation appeared to involve ingredients in a salad, but whether tomatoes, cucumbers, or lettuce were the problem was anyone s guess. This apparent confusion has drawn criticism from the public and from government officials in other countries, particularly those in the European Union. Now, amid accusations and finger-pointing some countries have put limits on agricultural imports from certain countries. What is perhaps most worrisome about the situation though, is that it is still unclear exactly what carried the deadly bacterium nor how to trace it back to the real source, whether it is a farm or processing center or some other stop in the global food distribution system. The outbreak highlights some of the challenges of today s global food system. Today, in an effort to meet the demand for a diverse range of products as well as for products that are out of season locally, an international food system has emerged in which ingredients 7-13

and products are sourced around the world. In addition, the processes used to produce and distribute the products from farm to market are likely to differ greatly by country. And, unlike many other types of problems, all countries, developed or still developing, are equally susceptible to outbreaks like the one that is currently devastating Germany. Moreover, it seems that governments are ill-prepared to handle crises like the one in Germany. According to William Marter, an expert on food borne illness cases, the United States, for example, is completely unprepared to handle the type of outbreak that has brought so much grief for Germany. Still, with customers demanding more choice at the grocery store, the globalization of the food system is likely to continue. There are some efforts to develop agencies or organizations to oversee the process, but so far, there has been little agreement on exactly what form should such an organization should take, what its responsibilities would be, or what the standards it establishes should look like. The crisis in Germany has brought renewed attention to the situation however, and it is hoped that this new awareness will result in further breakthroughs that reduce the likelihood for another deadly outbreak related to food borne bacteria as well as a new mechanism for containing one should it happen. Discussion Questions: 1. Discuss the global nature of today s food industry. What has contributed to its internationalization? What unique challenges does the internationalization of the industry create? 2. What are the implications of policy decisions to limit food imports from countries that are in the midst of food borne crises? Is this type of decision in fact simply thinly veiled protectionism? 3. Reflect on the opportunities provided by a global food industry for small farmers. Discuss the importance of these opportunities for economic growth in developing countries. 4. Can an international organization be established to govern the safety of the global food industry? Is such an organization needed? Why? 7-14

INTEGRATING VIDEOS There are also several longer video clips that can be integrated with the material presented in this chapter. In particular, you might consider the following from International Business DVD Volume 6: Title: Morocco Solar Power Learning Objectives The purpose of this video is to help you: Explain Porter s theory of competitive advantage and how it pertains to Morocco. Explore the relationship between environmental sustainability and economic development for Morocco. Understand how strategic trade policy can help a country gain a competitive advantage and recognize the importance of first mover advantages. Discuss the effect of exports on a country s balance of payments. Key Words Comparative advantage Levels of economic and social development Strategic trade policy Exports Competitive advantage First mover advantage Environmental sustainability Synopsis Near the village of Ain Beni Mathar in Morocco, a new energy plant was recently launched. The plant produces solar energy using a unique combination of two types of technology that integrate a solar field with natural gas based power. Morocco hopes that this new plant will be just the first step in its goal to replace existing energy sources with clean sources. Morocco is committed to reducing its dependency on foreign sources of energy, and also wants to protect the environment. It is expected that the Beni Mathar plant will help the North African country achieve those goals by producing a more environmentally friendly, safer energy. The environmentally friendly aspects of the plant are significant. The Beni Mathar plant should produce some 3.5 terawatt hours of energy per year, enough to power a million homes. At the same time, because the plant integrates thermal solar technology, it avoids allowing some 33,000 tons of CO 2 emissions every year. Moreover, because the plant uses dry cooling technology, water consumption is also minimized, allowing for a savings of 80 percent per year. The new solar energy plant is also expected to bring additional benefits. Morocco s king believes that it will bring social and economic development to the country s eastern 7-15

region. Already, workers in the plant have learned new skills that they can use at other companies. In addition, as part of the plant s social dimension, a new school has been built in the village along with a new mosque, and roads have been constructed. Expectations are also high that this plant will be followed by additional ones and that eventually the kingdom will not only produce enough power for its own country, but enough for parts of Europe as well. Discussion Questions 1. Using Michael Porter s theory of competitive advantage, discuss the factors of production that are contributing to Morocco s success in the production of solar energy. What makes the country uniquely positioned to produce solar power? 2. Discuss the notion of strategic trade policy. How does the concept apply to Morocco s efforts to become a leader in the production of solar power? How is Morocco leading the global effort to develop renewable sustainable sources of energy? 3. Why are first mover advantages important in the solar power industry? What disadvantages do you see in being a first mover? What are the implications of being a leader in the production of solar power? 4. Explain the significance of solar energy to Morocco. How can it help the country achieve greater social and economic development? INCORPORATING globaledge EXERCISES Use the globaledge site {http://globaledge.msu.edu/} to complete the following exercises: Exercise 1 The European subsidiary of your company is considering exporting its products to Egypt. Yet, management s current knowledge of this country s trade policies and barriers is limited. Before your company s management decides to export, a more detailed analysis of the political and economic conditions in Egypt is required. In fact, you have heard that the Market Access Database may be a good place to start. Begin your search and identify Egypt s current import policies with respect to fundamental issues such as tariffs and restrictions. Prepare an executive summary of your findings. Exercise 2 The number of member nations of the World Trade Organization (WTO) has increased considerably in recent years. As a global international organization, some non-member countries have observer status in the WTO. Such status requires accession negotiations to begin within five years of attaining this preliminary position. Identify the current total number of WTO members. Also, prepare a list of current observer countries. Do you notice anything in particular about the countries that have observer status? 7-16

Answers to Exercise Questions Exercise 1 The database can be accessed by searching the term Market Access Database at http://globaledge.msu.edu/resourcedesk/. The Market Access Database is the only source from this search. Once at the source s webpage, click on the trade barriers database link to search all current trade barriers for Egypt. As this is a multi-country data source that primarily focuses on statistical data, the resource is found under the globaledge category Research: Multi-Country. Be sure to click on the Resource Desk link to search this area of the globaledge website. Search Phrase: Market Access Database Resource Name: Market Access Database Website: http://mkaccdb.eu.int/mkaccdb2/indexpubli.htm globaledge Category: Research: Multi-Country Exercise 2 The World Trade Organization s website can be accessed by searching the term global international organization at http://globaledge.msu.edu/resourcedesk/. The link to the WTO (www.wto.org) is found under the globaledge category Research: Organizations. On this website, the list of members and observers can be found under the The WTO link, located at the top of the page. Be sure to click on the Resource Desk link to search this area of the globaledge website. Search Phrase: Global International Organization Resource Name: World Trade Organization (WTO) Website: http://www.wto.org globaledge Category: Research: Organizations 7-17