Critical Thinking
Cases 619
4. Russia is largely dependent on oil exports to drive
its economy forward. Given the sharp fall in global
oil prices that occurred in 2014 and 2015, what im-
pact do you think this will have on FDI into Russia?
5. Volkswagen has signaled that it is going to stay the
course in Russia, despite current political and eco-
nomic headwinds. Why do you think it made this de-
cision? What are the pros and cons of this decision?
In your opinion, is it the correct decision?
Case Discussion Questions
1. What factors underlay the decision by Volkswagen
to invest directly in automobile production in Russia?
Why was FDI preferable to exporting from existing
factories in Germany?
2. Which theory (or theories) of FDI best explain
Volkswagen’s FDI in Russia?
3. How do you think FDI by foreign automobile compa-
nies might benefit the Russian economy? Is there any
potential downside to Russia from this inflow of FDI?
When the North America Free Trade Agreement
(NAFTA) went into effect in December 1992 and tar-
iffs on imported tomatoes were dropped, U.S. tomato
producers in Florida feared that they would lose busi-
ness to lower-cost producers in Mexico. So they lobbied
the government to set a minimum f loor price for toma-
toes imported from Mexico. The idea was to stop Mexican
producers from cutting prices below the f loor to gain
share in the U.S. market. In 1996, the United States
and Mexico agreed on a basic f loor price of 21.69 cents
a pound.
At the time, both sides declared themselves to be
happy with the deal. As it turns out, the deal didn’t offer
much protection for U.S. tomato growers. In 1992, the
year before NAFTA was passed, Mexican producers ex-
ported 800 million pounds of tomatoes to the United
States. By 2011, they were exporting 2.8 billion pounds
of tomatoes, an increase of 3.5-fold. The value of Mexican
tomato exports almost tripled over the same period, to
$2 billion. In contrast, tomato production in Florida has
fallen by 41 percent since NAFTA went into effect. Flor-
ida growers complained that they could not compete
against low wages and lax environmental oversight in
Mexico. They also alleged that Mexican growers were
dumping tomatoes in the U.S. market at below the cost
of production, with the goal of driving U.S. producers
out of business.
In 2012, Florida growers petitioned the U.S. Depart-
ment of Commerce to scrap the 1996 minimum price
agreement, which would then free them up to file an anti-
dumping case against Mexican producers. In September
2012, the Commerce Department announced a prelimi-
nary decision to scrap the agreement. At first glance, it
looked as if the Florida growers were going to get their
way. It soon became apparent, however, that the situation
was more complex than appeared at first glance. More
than 370 business and trade groups in the United States—
from small family-run importers to meat and vegetable
producers and Wal-Mart Stores—wrote or signed letters to
the Commerce Department in favor of continuing the
1996 agreement.
Among the letter writers was Kevin Ahern, the CEO
of Ahern Agribusiness in San Diego. His company sells
about $20 million a year in tomato seeds and trans-
plants to Mexican farmers. In a letter sent to The New
York Times, Ahern noted that “yes, Mexico produces
their tomatoes on average at a lower cost than Florida;
that’s what we call competitive advantage.” Without the
agreement Ahern claimed that his business would suf-
fer. Another U.S. company, NatureSweet Ltd., grows
cherry and grape tomatoes under 1,200 acres of green-
houses in Mexico for the American market. It employs
5,000 people, although all but 100 work in Mexico. The
CEO, Bryant Ambelang, said that his company couldn’t
survive without NAFTA. In his view, Mexican-grown
tomatoes were more competitive because of lower labor
costs, good weather, and more than a decade of invest-
ment in greenhouse technology. In a similar vein, Scott
DeFife, a representative of the U.S. National Restau-
rant Association, stated, “people want tomato-based
dishes all the time. . . . You plan over the course of the
year where you are going to get your supply in the win-
ter, spring, fall.” Without tomatoes from Mexico, a win-
ter freeze in Florida, for example, would send prices
shooting up, he said.
Faced with a potential backlash from U.S. importers,
and from U.S. producers with interests in Mexico, the
Commerce Department pulled back from its initial con-
clusion that the agreement should be scrapped. Instead,
in early 2013, it reached an agreement with Mexican grow-
ers to raise the minimum floor price from 21.69 cents a
pound to 31 cents a pound. The new agreement also es-
tablished even higher prices for specialty tomatoes and
tomatoes grown in controlled environments. This was
clearly aimed at Mexican growers, who have invested bil-
lions to grow tomatoes in greenhouses. Florida tomatoes
are largely picked green and treated with gas to change
their color.
The NAFTA Tomato Wars
620 Part 7 Cases
3. Who benefits from the importation of tomatoes
grown in Mexico? Who suffers?
4. Do you think that Mexican producers were dumping
tomatoes in the United States?
5. Was the Commerce Department right to establish
a new minimum floor price rather than scrap the
agreement and file an antidumping suit? Who
would have benefited from an antidumping suit
against Mexican tomato producers? Who would
have suffered?
6. What do you think will be the impact of the new
higher floor price? Who benefits from the higher
floor price? Who suffers?
7. What do you think is the optimal government policy
response here? Explain your answer.
Sources
E. Malkin, “Mexico Finds Unlikely Allies in Trade Fight,” The
New York Times, December 25, 2012, p. B1; S. Strom, “United
States and Mexico Reach Tomato Deal, Averting a Trade War,”
The New York Times, February 3, 2013; J. Margolis, “NAFTA
20 Years After: Florida’s Tomato Growers Struggling,” The
World, December 1, 2012.
Case Discussion Questions
1. Was the establishment of a minimum floor price for
tomatoes consistent with the free trade principles
enshrined in the NAFTA agreement?
2. Why, despite the establishment of a minimum floor
price, have imports from Mexico grown over the years?
For the Japanese carmaker Subaru, a sharp fall in the
value of the yen against the U.S. dollar has turned a
problem—the lack of U.S. production—into an unexpected
sales boom. Subaru, which is a niche player in the global
auto industry, has long bucked the trend among its
Japanese rivals of establishing significant manufacturing
facilities in the North American market. Instead, the
company has chosen to concentrate most of its manufac-
turing in Japan in order to achieve economies of scale at
its home plants, exporting its production to the United
States. Subaru still makes 80 percent of its vehicles at
home, compared with 21 percent for Honda.
Back in 2012, this strategy was viewed as something
of a liability. In those days, 1 U.S. dollar bought only
80 Japanese yen. The strong yen meant that Subaru cars
were being priced out of the U.S. market. Japanese com-
panies like Honda and Toyota, which had substantial pro-
duction in the United States, gained business at Subaru’s
expense. But from 2012 onward, with Japan mired in re-
cession and consumer prices falling, the country’s central
bank repeatedly cut interest rates in an attempt to stimu-
late the economy. As interest rates fell in Japan, investors
moved money out of the country, selling yen and buying
the U.S. dollar. They used those dollars to invest in U.S.
stocks and bonds, where they anticipated a greater return.
As a consequence, the price of yen in terms of dollars fell.
By December 2015, 1 dollar bought 120 yen, representing
a 50 percent fall in the value of the yen against the U.S.
dollar since 2012.
For Subaru, the depreciation in the value of the yen
has given it a pricing advantage and driven a sales boom.
Demand for Subaru cars in the United States has been
so strong that the automaker has been struggling to keep
up. The profits of Subaru’s parent company, Fuji Heavy
Industries, have surged. In February 2015, Fuji an-
nounced that it would earn record operating profits of
around ¥410 billion ($3.5 billion U.S.) for the financial
year ending March 2015. Subaru’s profit margin has in-
creased to 14.4 percent, compared with 5.6 percent for
Honda, a company that is heavily dependent on U.S.
production. The good times continued in 2015, with
Subaru posting record profits in the quarter ending
December 31, 2015.
Despite its current pricing advantage, Subaru is mov-
ing to increase its U.S. production. It plans to expand its
sole plant in the United States, in Indiana, by March
2017, with a goal of making 310,000 a year, up from
200,000 currently. When asked why it is doing this, Suba-
ru’s management notes that the yen will not stay weak
against the dollar forever, and it is wise to expand local
production as a hedge against future increases in the
value of the yen. Indeed, when the Bank of Japan decided
to set a key interest rate below zero in early February
2016, the yen started to appreciate against the U.S. dollar,
presumably on expectations that negative interest rates
would finally help stimulate Japan’s sluggish economy. By
late March 2016, the yen had appreciated against the dol-
lar and was trading at $1 = ¥112.
Sources
Chang-Ran Kim, “Subaru-Maker, Fuji Heavy Lifts Profit View
on Rosy US Sales, Weak Yen,” Reuters, February 3, 2015; Yoko
Kubota, “Why Subaru’s Profit Is Surging,” The Wall Street Jour-
nal, November 14, 2014; Doron Levin, “Subaru Profit Soaring
on Weaker Yen,” Market Watch, November 15, 2014; Y. Kubato,
“Weaker Yen Drives Subaru Maker’s Profit Higher,” The Wall
Street Journal, February 4, 2016.
Subaru’s Sales Boom Thanks to the Weaker Yen
College of Administrative and Financial Sciences
Assignment 2
Deadline: 14/11/2019 @ 23:59
Course Name:
Student’s Name:
Course Code:
Student’s ID Number:
Semester: I
CRN:
Academic Year: 1440/1441 H
For Instructor’s Use only
Instructor’s Name:
Students’ Grade: Marks Obtained/Out of
Level of Marks: High/Middle/Low
Instructions – PLEASE READ THEM CAREFULLY
· The Assignment must be submitted on Blackboard (WORD format only) via allocated folder.
· Assignments submitted through email will not be accepted.
· Students are advised to make their work clear and well presented, marks may be reduced for poor presentation. This includes filling your information on the cover page.
· Students must mention question number clearly in their answer.
· Late submission will NOT be accepted.
· Avoid plagiarism, the work should be in your own words, copying from students or other resources without proper referencing will result in ZERO marks. No exceptions.
· All answered must be typed using Times New Roman (size 12, double-spaced) font. No pictures containing text will be accepted and will be considered plagiarism).
· Submissions without this cover page will NOT be accepted.
Assignment Regulation:
· All students are encouraged to use their own word.
· Assignment -2 should be submitted on or before the end of Week-11 in Black Board only.
· This assignment is an individual assignment.
· Citing of references is also necessary.
Assignment Structure:
A.No
Type
Marks
Assignment-2
Critical Thinking
5
Total
5
Learning Outcomes:
· Identify the major components of international business management (Lo 1.2)
· Discuss the reasons for and methods of governments’ intervention in trade (Lo 1.7)
· Identify and evaluate the significant trade agreements affecting global commerce (Lo 1.8)
· Carry out effective self-evaluation through discussing economic systems in the international business context (Lo. 3.6)
Critical Thinking
Read the Management Focus on, “NAFTA’s Tomato Wars,” available in your e-book (page no. 620), and answer the following questions:
Assignment Question(s): (Marks: 5)
1. Was the establishment of a minimum floor price for tomatoes consistent with the free trade principles enshrined in the NAFTA agreement?
2. Why, despite the establishment of a minimum floor price, have imports from Mexico grown over the years?
3. Who benefits from the importation of tomatoes grown in Mexico? Who suffers?
4. Do you think that Mexican producers were dumping tomatoes in the United States?
5. Was the Commerce Department right to establish a new minimum floor price rather than scrap the agreement and file an antidumping suit? Who would have benefited from an antidumping suit against Mexican tomato producers? Who would have suffered?
6. What do you think will be the impact of the new higher floor price? Who benefits from the higher floor price? Who suffers?
7. What do you think is the optimal government policy response here? Explain your answer.
Answer:
1.
2.
3.
4.
5.
6.
7.
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