Ch06 The Political Economy of International Trade.docx

The Political Economy of International Trade     1. 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 is known as free trade.    2. Tariffs are unambiguously pro-consumer and anti-producer.    3. Export tariffs are far less common than import tariffs.    4. Specific tariffs are levied as a proportion of the value of the imported good.    5. By lowering production costs, subsidies help domestic producers compete against foreign imports and gain export markets.    6. Under a tariff rate quota, a higher tariff rate is applied to imports within the quota than those over the quota.    7. A common hybrid of a quota and a rent is known as a quota rent.    8. Unlike other trade policies, local content regulations tend to benefit consumers and not producers.    9. Requirements that some specific fraction of a good be produced domestically are known as local content requirements.    10. Bureaucratic rules designed to make it difficult for imports to enter a country are local content requirements.    11. A company that sells its product in a foreign market below the cost of production may be accused of dumping.    12. Antidumping polices are designed to punish firms that are engaged in dumping.    13. Antidumping policies vary drastically from country to country.    14. The U.S. government has used the threat of punitive trade sanctions to try to get the Chinese government to enforce its intellectual property laws.    15. Many governments have long had regulations to protect consumers from unsafe products.    16. The Helms-Burton Act of 1996 was aimed at foreign companies that were undermining U.S. trade sanctions against Libya and Iran.    17. The infant industry argument is the latest argument for government intervention in trade.    18. Strategic trade policy suggests that a government should use subsidies to support promising firms that are active in newly emerging industries.    19. GATT has not recognized the infant industry argument as a legitimate reason for protectionism.    20. Krugman has suggested that trade policy designed to retaliate against another country's trade policy would hurt the citizens of both countries.    21. Governments do not always act in the national interest when they intervene in the economy; politically important interest groups often influence them.    22. The Smoot-Hawley Act raised tariff barriers in the hope of protecting jobs and diverting consumer demand away from foreign products.    23. A key goal of the 1986 Uruguay Round was to extend GATT to cover trade in services.    24. During the 1980s and early 1990s, the world trading system erected by the GATT gained momentum as protectionist demands generally decreased across the world.    25. The World Trade Organization was created as part of the Uruguay Round.    26. The WTO does not have the power to impose trade sanctions.    27. To date, the WTO's policing efforts have been a major failure.    28. A key issue in the Millennium Round of the WTO was to reduce barriers to cross-border trade in agricultural products.    29. Human rights activists see WTO rules as outlawing the ability of nations to stop imports from countries where child labor is used or working conditions are hazardous.    30. The WTO has the ability to force any member nation to take an action to which it is opposed.    31. The majority of antidumping actions are concentrated in just a few industries.    32. WTO rules do not allow countries to impose antidumping duties on foreign goods that are being sold cheaper than at home or below their cost of production, even when domestic producers can show that they are being harmed.    33. Tariff rates on agricultural products are generally much lower than tariff rates on manufactured products or services.    34. Free trade in agriculture could jump-start economic growth among the world's poorer nations and alleviate global poverty.    35. The TRIPS regulations oblige WTO members to grant and enforce patents lasting at least 20 years and copyrights lasting 50 years.    36. Inadequate protections for intellectual property reduce the incentive for innovation.    37. Tariffs on industrial goods remain higher than tariffs on services.    38. Tariff barriers lower the costs of exporting products to a country.    39. The threat of antidumping action limits the ability of a firm to use aggressive pricing to gain market share in a country.    40. To conform to local content regulations, a firm may have to locate more production activities in a given market than it would otherwise.      Multiple Choice Questions   41. Free trade  A. Refers to a situation in which a government does not attempt to restrict what its citizens can buy from or sell to another country B. Reduces the overall efficiency of the world economy. C. Describes the range of policy instruments that governments use to intervene in international trade D. Is a government payment to a domestic producer   42. Which of the following is not one of the main instruments of trade policy?  A. Tariffs B. Credit portfolios C. Local content requirements D. Administrative policies   43. In recent decades, tariff barriers have been _____ while non tariff barriers have been _____.  A. Falling, rising B. Rising, falling C. Leveling, rising D. Falling, leveling   44. Specific tariffs are  A. Levied as a proportion of the value of the imported good B. Levied as a fixed charge for each unit of a good imported C. In the form of manufacturing or production requirements of goods. D. Government payment to domestic producers   45. This is levied as a proportion of the value of the imported good.  A. Special tariff B. Ad valorem tariff C. Tariff quota D. Specific tariff   46. Tariffs do not benefit  A. Consumers B. Domestic producers C. Governments D. Domestic firms   47. All of the following are of tariffs, except  A. They reduce the revenue for the government B. They can be levied as a proportion of the value of the imported good C. They can be levied as a fixed charge for each unit of a good imported D. They impose significant costs on domestic consumers   48. By lowering production costs, _____ help domestic producers compete against foreign imports.  A. Tariffs B. Duties C. Quotas D. Subsidies   49. Which of the following observations pertaining to government subsidies is incorrect?  A. They must be paid for, typically by taxing individuals and corporations B. They mainly benefit domestic producers, whose international competitiveness is increased C. Whether they generate national benefits that exceed their national costs is debatable D. They help foreign producers gain a competitive advantage over domestic producers   50. Subsidies have been criticized for all of the following reasons except  A. They allow inefficient farmers stay in business B. They encourage to overproduce heavily subsidized agricultural products C. They encourage countries to produce products that could be grown more cheaply elsewhere and imported D. They increase international trade in agricultural products   51. According to the _____ policy, subsidies can help a firm achieve a first-mover advantage in an emerging industry.  A. Strategic trade B. Antidumping C. Tariff quota D. Free trade   52. This is a direct restriction on the quantity of some good that may be imported into a country.  A. Specific tariff B. Import quota C. Subsidy D. Ad valorem tariff   53. In the United States only firms allowed to import cheese are certain trading companies, each of which is allocated the right to import a maximum number of pounds of cheese each year. Identify the trade restriction being imposed by the U.S. here.  A. Import quota B. Subsidy C. Ad valorem tariff D. Specific tariff   54. A common hybrid of a quota and a tariff is known as a  A. Quota rent B. Voluntary export restraint C. Ad valorem tariff D. Tariff rate quota   55. A quota on trade imposed by the exporting country, typically at the request of the importing country's government is referred to as a(n)  A. Voluntary export restraint B. Specific tariff quota C. Trade reconciliation D. Ad valorem tariff   56. A quota rent is  A. A quota on trade imposed by the exporting country B. Levied as a fixed charge for each unit of a good imported C. Levied as a proportion of the value of the imported good D. The extra profit producers make when supply is artificially limited by an import quota   57. Foreign producers typically agree to voluntary export restrictions because  A. Their manufacturing capacity is limited B. They can divert their exports to other countries and charge more for their products C. They fear far more damaging punitive tariffs or import quotas might follow if they do not D. They are required to by the World Trade Organization   58. Which of the following statements concerning a voluntary export restraint is not ?  A. It benefits domestic producers by limiting import competition B. In most cases, it benefits consumers. C. It raises the domestic price of an imported good D. It is a variant of the import quota   59. These are requirements that some specific fraction of a good be produced domestically.  A. Import quotas B. Voluntary export restraints C. Local content requirements D. Antidumping duties   60. The _____ specifies that government agencies must give preference to American products when putting contracts for equipment out to bid unless the foreign products have a significant price advantage.  A. Buy America Act B. Anti-Dumping Act C. Helms-Burton Act D. D'Amato Act   61. Administrative trade policies are  A. Requirements that some specific fraction of a good be produced domestically B. Quotas on trade imposed by the exporting country C. Bureaucratic rules designed to make it difficult for imports to enter a country D. Designed to punish foreign firms that engage in dumping   62. Which of the following is variously defined as selling goods in a foreign market at below their costs of production or as selling goods in a foreign market at below their "fair" market value?  A. Export restraint B. Dumping C. Local content requirement D. Ad valorem   63. Antidumping duties are often called  A. Special circumstance duties B. Positive duties C. Retroactive duties D. Countervailing duties   64. The U.S. government using the threat of punitive trade sanctions to try to get the Chinese government to enforce its intellectual property laws is an example of government intervention based on  A. Human rights protection B. National security C. Consumer protection D. Retaliation   65. If a government grants preferential trade terms to a country it wants to build strong relations with, the government is employing a policy  A. Of retaliation B. Of human rights protection C. To protect national security D. To further foreign policy objectives   66. This act allows Americans to sue foreign firms that use property in Cuba confiscated from them after the 1959 revolution.  A. Buy America Act B. Anti-Dumping Act C. Helms-Burton Act D. D'Amato Act   67. According to the _____ argument, governments should temporarily support new industries until they have grown strong enough to meet international competition.  A. Retaliatory action B. Human rights C. Infant industry D. Anti-dumping   68. _____ suggests that a government should use subsidies to support promising firms that are active in newly emerging industries.  A. The infant industry argument B. Strategic trade policy C. Retaliation policy D. The national security argument   69. _____ argues that a strategic trade policy aimed at establishing domestic firms in a dominant position in a global industry is a beggar-thy-neighbor policy that boosts national income at the expense of other countries.  A. David Ricardo B. Adam Smith C. Michael Porter D. Paul Krugman   70. The EU's Common Agricultural Policy is an example of a tax policy designed to  A. Benefit consumers B. Benefit taxpayers C. Benefit special interest politics D. Benefit free trade in a developed country   71. Economic problems during the Great Depression were compounded in 1930 when the U.S. Congress passed the _____, aimed at avoiding rising unemployment by protecting domestic industries and diverting consumer demand away from foreign products.  A. Smoot–Hawley Act B. Anti–Dumping Act C. Helms–Burton Act D. D'Amato Act   72. Which of the following is not a reason for the pressure for greater protectionism that occurred during the 1980s and early 1990s?  A. The growing U.S. trade surplus with Japan strained the world trading system B. Japanese economic success strained the world trading system C. The persistent trade deficit in the U.S. strained the world trading system D. Many countries found ways to get around GATT regulations   73. In the 1986 Uruguay Round, GATT members sought to write rules for promoting all of the following except  A. Intellectual property protection B. Agricultural subsidies C. GATT's monitoring and enforcement mechanisms D. GATT rules to cover trade in services   74. Until 1995, GATT rules applied to all of the following, except  A. Manufactured goods B. Services C. Textiles D. Agricultural products   75. According to the 1986 Uruguay Round _____ was to be created to implement the GATT agreement.  A. World Trade Organization B. International Monetary fund C. United Nations D. World Bank   76. After the Uruguay Round of GATT extended global trading rules to cover trade in services, the first two industries targeted for reform by the WTO were  A. Textiles and technology B. Telecommunications and financial services C. Automotives and aerospace D. Agriculture and consulting services   77. The Millennium Round ended in 1999 with  A. A successful record on agricultural products B. A new agenda for the next round focusing on financial services C. No agreement on the reduction of barriers to cross-border trade in agricultural products and trade and investment in services D. A decision to avoid FDI   78. Which of the following is not a reason why WTO is being criticized by those opposing free trade?  A. Its trade laws allow imports from low-wage countries and result in a loss of jobs in high-wage countries B. Its rules outlawing the ability of nations to stop imports from countries where working conditions are hazardous C. The adverse impact that some of its rulings have had on environmental policies D. Its lack of ability to force any member nation to take an action to which it is opposed.   79. _____ has occurred when foreign goods are being sold cheaper than at home or below their cost of production.  A. Market saturation B. Price elasticity C. Production efficiency D. Dumping   80. The WTO argues that by removing all tariff barriers and subsidies to agriculture all of the following would occur, except  A. The overall level of trade would increase B. There would be overproduction of products that are heavily subsidized C. Prices would fall for consumers D. Global economic growth would rise   81. The TRIPS regulations established at the 1995 Uruguay Round  A. Established regulations on patents and copyrights B. Set a new level of agriculture subsidies C. Organized OECD countries to eliminate tariffs on textiles D. Established new tariff levels on technology   82. TRIPS regulations oblige WTO members to all of the following except  A. Grant and enforce patents lasting at least 20 years. B. Grant and enforce copyrights lasting 50 years. C. Comply with the rules within 5 years in the case of rich countries D. Comply with the rules within 10 years in the case of the poorest countries   83. _____ are the highest rate that can be charged, which is often, but not always, the rate that is charged.  A. Ad valorem tariff rates B. Tariff rents C. Specific tariff rates D. Bound tariff rates   84. Identify the incorrect statement pertaining to trade barriers.  A. They raise the costs of exporting products to a country B. They may put a firm at a competitive advantage to indigenous competitors C. They may limit a firm's ability to serve a country from locations outside of that country D. To conform to local content regulations, a firm may have to locate more production activities in a given market than it would otherwise     Essay Questions   85. Discuss the different types of tariff barriers. Consider the beneficiaries of tariff barriers and the losers.  There are two types of tariffs, specific tariffs that are levied as a fixed charge for each unit of a good imported and ad valorem tariffs that are levied as a proportion of the value of the imported product. The government gains from tariffs in the form of increased revenues. Domestic producers also benefit from the protection against foreign competition. Consumers lose because they must pay more for products that have been affected by tariffs.   86. Discuss the different types of subsidies. How do subsidies help domestic producers?  Subsidies are essentially a government payment to a producer. There are many forms of subsidies including cash grants, low-interest loans, tax breaks and government equity participation in domestic firms. Subsidies benefit domestic producers in two ways: they help them compete against low-cost foreign imports and they help them gain export markets.   87. Compare and contrast import quotas and voluntary export restraints.  An import quota is a direct restriction on the quantity of some good that may be imported into a country. The restriction is normally enforced by issuing import licenses to a group of individuals or firms. In contrast, a voluntary export restraint (VER) is a quota imposed by the exporting country, typically at the request of the importing country's government. Foreign producers agree to VERs because they fear more damaging punitive tariffs or import quotas might follow if they do not. Both import quotas and VERs benefit domestic producers, but hurt consumers through higher prices.   88. What is a quota rent? Provide an example of how an import quota affects price.  The extra profit that producers make when supply is artificially limited by an import quota is referred to as a quota rent. If a domestic industry lacks the capacity to meet demand, an import quota can raise prices for both the domestically produced and the imported good. Students will probably use the example of the U.S. sugar industry when discussing the question.   89. Discuss the Buy America Act and its connection with local content requirements.  The Buy America Act specifies that government agencies must give preference to American products when putting contracts for equipment out to bid unless the foreign products have a significant price advantage. The law specifies a product as being American if 51 percent of the materials by value are produced domestically. This amounts to a local content requirement that calls for a specific fraction of a good to be produced locally.   90. Explain how governments use administrative trade policies to boost exports and restrict imports. Provide an example of an administrative trade policy.  Administrative trade policies are bureaucratic rules that are almost always deliberately designed to restrict the flow of a particular import into a country. The Japanese are considered masters of this trade barrier. Students will probably use the example of tulip bulbs when discussing this question. The Netherlands exports tulip bulbs to almost every country of the world except Japan. The reason is that Japanese customs inspectors insist on checking every tulip bulb by cutting it vertically down the middle, which in effect ruins the bulb.   91. What is dumping? How do governments respond to charges of dumping?  Dumping is defined as selling goods in a foreign market at below their costs of production or as selling goods in a foreign market at below their "fair" market value. Antidumping policies are designed to punish foreign firms that engage in dumping. If a firm is found to be dumping, countervailing duties may be imposed. These duties can be fairly substantial and stay in place for up to five years.   92. Explain the notion of predatory behavior with regard to dumping.  A firm that is dumping is selling its product in a foreign market at below their costs of production or as selling goods in a foreign market at below their "fair" market value. Dumping may be the result of predatory behavior with producers using substantial profits from their home markets to subsidize profits from their home markets to subsidize prices in a foreign market with a goal of driving indigenous competitors out of that market. Once the firm achieves its goal, the company will raise prices and earn substantial profits.   93. What are the political reasons for governments to intervene in markets?  There are a number of political reasons why governments intervene in markets. The most common reason for intervention is to protect jobs and industries. Governments may also intervene to protect national security, to threaten punitive retaliatory actions, to protect consumers or to protect human rights and to further foreign policy objectives.   94. Discuss the economic reasons for government intervention in markets.  The economic reasons for government interaction have undergone a renaissance in recent times as more economists support economic reasons for intervention. The oldest argument for intervention is the infant industry argument. Strategic trade policy is the other main reason given for economic government intervention in markets.   95. Discuss the infant industry argument for intervention in markets. What is GATT's position on the argument?  Alexander Hamilton proposed the infant industry argument for intervention in markets in 1792. According to this argument, many developing countries have a potential comparative advantage in manufacturing, but new manufacturing industries cannot initially compete with established industries in developed countries. To allow manufacturing to get a toehold, the argument is that governments should temporarily support new industries until they have grown strong enough to meet international competitors. GATT has recognized the infant industry argument as a legitimate reason for protectionism.   96. What is strategic trade policy? Provide an example.  Strategic trade policy suggests that in industries where the existence of substantial scale economies implies that the world will profitably support only a few firms, countries may predominate in the export of certain products simply because they had firms that were able to capture first-mover advantages. Boeing's dominance in the aerospace industry has been attributed to these types of factors. According to strategic trade policy, a government can help raise national incomes if it can ensure that the firms that gain first-mover advantages in such industries are domestic rather foreign. Further the theory argues that it might pay governments to intervene in an industry if it helps domestic firms overcome the barriers to entry created by foreign firms that have already reaped first-mover advantages.   97. What is Paul Krugman's position on strategic trade policy?  Paul Krugman suggests that strategic trade policy aimed at establishing domestic firms in a dominant position in a global industry is a beggar-thy-neighbor policy that boosts national income at the expense of other countries. Consequently, a country that uses this type of policy will probably draw retaliatory action. The resulting trade war would leave both countries worse off than if a free trade approach had been implemented to start. Krugman suggests that to avoid the disruptions a trade war would create, countries should instead help establish the rules of the game that minimize the use of trade-distorting subsidies.   98. Discuss the establishment of GATT. What was GATT's objective?  The GATT was a multilateral agreement whose objective was to liberalize trade by eliminating tariffs, subsidies, import quotas and other trade barriers. GATT was established in 1947 with 19 members. Membership increased to more than 120 nations by the time it was superseded by the WTO. Under GATT, tariff reduction was spread over eight rounds. The last round, the Uruguay Round resulted in the establishment of the WTO which, among other things took over the role of GATT in the global economy.   99. What happened to GATT during the 1980s and early 1990s?  During the 1980s and early 1990s, the world trading system established by GATT came under significant strain as pressures for greater protectionism mounted around the world. Three issues in particular were important. First, the economic success of Japan strained the world trading system. Second, the world's trading system was further strained by the persistent trade deficit in the world's largest economy, the United States. Finally, many countries found ways to get around GATT regulations.   100. What has been the experience of the WTO to date? What does the future look like for the organization?  By 2005, the WTO had 148 members with more in the application process. The WTO has remained at the forefront of efforts to promote free trade. So far, it appears that its policing and enforcement mechanisms are having a positive effect. Countries are using the WTO to settle trade disputes, which represents an important vote of confidence in the organization's dispute resolution procedures. So far, the users of the system have included both developed and developing countries, which is also a promising development. In addition, some powerful developed countries, including the United States, have been willing to accept WTO rulings that have gone against them, which attest to the organization's legitimacy.   101. What are the central issues facing the WTO at the present time?  Four issues at the top of the agenda for the WTO are the increase in antidumping policies, the high level of protectionism in agriculture, the lack of strong protection for intellectual property rights in many nations and continued high tariff rates on nonagricultural goods and services in many nations. These issues were a key focus at the Doha Round which began in 2001.   102. Why are tariff rates on agricultural products generally higher than tariff rates on manufactured products or services?  Tariff rates on agricultural products are typically higher than tariffs on manufactured products. High tariff rates on agricultural products were designed to protect domestic agriculture and traditional farming communities from foreign competition. IMF estimates indicate that removing the tariffs and subsidies could raise global economic welfare by $128 billion annually.   103. Discuss the Doha Round of trade talks?  The Doha Round began in 2001. Its agenda focused on cutting tariffs on industrial goods and services, phasing out subsidies to agricultural producers, reducing barriers to cross-border investment and limiting the use of antidumping laws. The agenda agreed upon at Doha should be seen as a game plan for negotiations over the next few years.   104. Explain how trade barriers affect a firm's strategy.  There are four main ways trade barriers affect a firm's strategy. First, tariffs raise the cost of exporting, putting the firm at a competitive disadvantage. Second, quotas may limit a firm's ability to serve a country from outside of that country. Third, to conform to local content regulations, a firm may have to locate more production activities in a given market than it would otherwise. Finally, the threat of antidumping actions limits the firm's ability to use aggressive pricing to gain market share in a country.