The production cost of products P, Q, and R in the three countries are as follows:
Country Product P Product Q Product R
X 110 130 250
Y 130 80 200
Z 80 60 320
Assuming there are no costs in transporting the goods across these three countries, the following table illustrates which country’s product will be the most price competitive in each market:
Host country Product P Product Q Product R
X Locally produced product Imported from country Z Locally produced product
Y Imported from country Z Locally produced product Locally produced product
Z Locally produced product Locally produced product Imported from country Y
Now country X and Y form a regional trade agreement named XYRTA. Countries within XYRTA do not charge a tax on imported products from the member countries, but charge a 50% tax on imported products from the countries outside the XYRTA (non-member countries).
Country Z continues to charge 50% tax on imported products.
Explain what is trade creation and trade diversion, and illustrate trade creation and trade diversion that take place as a result of establishing XYRTA. Based on this scenario, critically discuss the following statement: ‘Trade creation is good, but trade diversion is bad’.
The automobile manufacturer is now evaluating whether to establish a joint venture in China or License the technology to a firm in China. In this context, compare and contrast the following two entry modes:
a) Establishing a joint venture with a local firm in China
b) Licensing the technology to a firm in China