Question

Your business provides CDs for free to customers who pay for the English courses that you offer in Mexico. You consider the idea of mass production of the CDs in the U.S., so that you can sell (export) them to distributors or to retail stores throughout Mexico. You would price the CDs in dollars when exporting them. The CDs are not as effective without the teaching, but can be useful to individuals who want to learn the basics of the English language.

a. If you pursue this idea, explain how the factors that affect international trade flows (identified in Chapter 2) could affect the Mexican demand for your CDs. Which of these factors would likely have the largest impact on the Mexican demand for your CDs? What other factors would affect the Mexican demand for the CDs?

b. If you believe the Mexican government would impose a tariff on the CDs exported to Mexico, how could you still execute this business idea at a relatively low cost while avoiding the tariff? Describe any disadvantages of this idea that would avoid the tariff.

Answer 1

Requirement 1

The feature that affects international trade flows and may possibly disturb the Mexican demand for my CDs the most is the exchange rate activities in the country as the value of Mexico's currency is the one that can make the change between a high demand or low demand for the CDs. If the Mexican peso escalates its worth against the dollar, my business will profit from that by selling more CDs, but if it falls, then it could decline the demand of my CDs in the country. Another influence that can upset the demand of my CDs is the inflation in Mexico; Mexican customers will be more stimulated to purchase my CDs than to buy the ones local opponents offer because a high local inflation causes prices to increase for local competitors. Mexico's income level is a third factor that must be taken into consideration because it regulates the aptitude of Mexican consumers to spend money. If national income increases, the CDs demands will increase.Lastly, the demand for my CDs can also be affected by government policies like restrictions or more taxes on imports. I believe additional factor that can affect the demand of my CDs is the concentration of the competition in the local market; local competitors could use low cost policies in order to create and sell their CDs, and that could affect my own approach.

Requirement 2

I could still implement the idea at a comparatively low cost and evade the tariff at the same time by associating with a local firm through a certifying agreement, that way my CDs could be created and established by the Mexican firm while I provide the conditions and the originals. My subsidiary in Mexico could make the deal or find a different way to produce the CDs in Mexican soil in order to evade the tariff. One drawback of this idea is that I will be wide-open to risks that could weaken the demand for the CDs. I would have to price the CDs in pesos, so all the profits I make from them will be unprotected to exchange rate risks because profits must be remitted to me in the United States.