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, Vernon's product life cycle theory, and Knickerbocker's theory of FDI.  Which theory do you think offers the best explanation of the historical pattern of FDI?  Why?

Knickerbocker's 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 U.S., while initially a strong advocate of the agreement, has lessened its support for the FTAA recently.  The question of whether the agreement is good for the U.S. and Canada would likely produce a lively debate.