2. Specific tariffs are levied as a proportion of the value of the imported good.

Transcription

1 Chapter 07 The Political Economy of International Trade True / False Questions 1. Tariffs are unambiguously pro-consumer and anti-producer. True False 2. Specific tariffs are levied as a proportion of the value of the imported good. True False 3. Export tariffs are far less common than import tariffs. True False 4. A subsidy helps domestic producers to compete against foreign imports. True False

2 5. Under a tariff rate quota, a higher tariff rate is applied to imports within the quota than those over the quota. True False 6. A common hybrid of a quota and a rent is known as a quota rent. True False 7. Unlike other trade policies, local content regulations tend to benefit consumers and not producers. True False 8. 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 disadvantage. True False 9. Bureaucratic rules designed to make it difficult for imports to enter a country are called local content requirements. True False

3 10. Local content regulations provide protection for a domestic producer of parts by limiting foreign competition. True False 11. A company that sells its product in a foreign market below the cost of production may be accused of dumping. True False 12. Antidumping policies are designed to punish foreign firms that are engaged in dumping. True False 13. Antidumping policies vary drastically from country to country. True False 14. Protecting industries deemed important for national security, and retaliating against unfair foreign competition are economic arguments for intervention. True False

4 15. The Helms-Burton Act of 1996 was aimed at foreign companies that were undermining U.S. trade sanctions against Libya and Iran. True False 16. According to the infant industry argument, many developing countries have a potential comparative advantage in manufacturing, but new manufacturing industries cannot initially compete with established industries in developed countries. True False 17. The infant industry argument is the latest argument for government intervention in trade. True False 18. Strategic trade policy suggests that a government should use subsidies to support promising firms that are active in newly emerging industries. True False 19. GATT has not recognized the infant industry argument as a legitimate reason for protectionism. True False

5 20. Krugman has suggested that trade policy designed to retaliate against another country's trade policy would hurt the citizens of both countries. True False 21. Governments do not always act in the national interest when they intervene in the economy; politically important interest groups often influence them. True False 22. The Smoot-Hawley Act raised tariff barriers in the hope of protecting jobs and diverting consumer demand away from foreign products. True False 23. The Great Depression had roots in the failure of the world economy to mount a sustained economic recovery after the end of World War I in True False 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. True False

6 25. A key goal of the 1986 Uruguay Round was to extend GATT to cover trade in commodities. True False 26. The World Trade Organization was created as part of the Uruguay Round. True False 27. The WTO does not have the power to impose trade sanctions. True False 28. A key issue in the "millennium round" of the WTO was to increase barriers to cross-border trade in agricultural products. True False 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. True False

7 30. The WTO has the ability to force any member nation to take an action to which it is opposed. True False 31. One issue at the forefront of the current agenda of the WTO is the increase in tariff rates on nonagricultural goods and services in many nations. True False 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. True False 33. Antidumping actions are concentrated in certain sectors of the economy such as basic metal industries, chemicals, plastics, and machinery and electrical equipment. True False 34. Free trade in agriculture could jump-start economic growth among the world's poorer nations and alleviate global poverty. True False

8 35. The TRIPS regulations oblige WTO members to grant and enforce patents lasting at least 20 years and copyrights lasting 50 years. True False 36. Inadequate protections for intellectual property reduce the incentive for innovation. True False 37. Tariffs on industrial goods remain higher than tariffs on services. True False 38. Tariff barriers lower the costs of exporting products to a country. True False 39. The threat of antidumping action limits the ability of a firm to use aggressive pricing to gain market share in a country. True False 40. To conform to local content regulations, a firm may have to locate more production activities in a given market than it would otherwise. True False

9 Multiple Choice Questions 41. 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 42. Specific tariffs are: A. levied as a proportion of the value of the imported good. B. government payment to domestic producers. C. in the form of manufacturing or production requirements of goods. D. levied as a fixed charge for each unit of a good imported.

10 43. Tariffs do not benefit: A. consumers. B. domestic producers. C. governments. D. domestic firms. 44. Import tariffs: A. reduce the price of foreign goods. B. create efficient utilization of resources. C. reduce the overall efficiency of the world economy. D. are unambiguously pro-consumer and anti-producer. 45. By lowering production costs, help domestic producers compete against foreign imports. A. subsidies B. duties C. quotas D. tariffs

11 46. Which of the following observations about subsidies is true? A. Government subsidies must be paid for, typically by taxing individuals and corporations. B. Subsidies are used to reduce exports from a sector, often for political reasons. C. Whether subsidies generate national benefits that exceed their national costs is debatable. D. Subsidies help foreign producers gain a competitive advantage over domestic producers. 47. Which of the following is a consequence of subsidies? A. Subsidies make domestic producers vulnerable to foreign competition. B. Subsidies lead to lowered production. C. Subsidies protect inefficient domestic producers. D. Subsidies produce revenue for the government. 48. 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

12 49. is a direct restriction on the quantity of some good that may be imported into a country. A. Import tariff B. Import quota C. Import subsidy D. Ad valorem tariff 50. A common hybrid of a quota and a tariff is known as a(n): A. import tariff quota. B. voluntary export restraint. C. ad valorem tariff. D. tariff rate quota. 51. is a quota on trade imposed by the exporting country, typically at the request of the importing country's government. A. Voluntary export restraint B. Specific tariff quota C. Trade reconciliation D. Ad valorem tariff

13 52. The Japanese government was pressurized by the U.S. government to place limits on the number of vehicles exported to the United States by Japanese automobile producers in This is an example of: A. tariff rate quota. B. specific tariffs. C. voluntary export restraint. D. ad valorem tariff. 53. Tariff rate quotas are common in agriculture, where their goal is to: A. reduce the use of synthetic fertilizers. B. limit imports over quota. C. increase agricultural imports. D. increase foreign competition. 54. 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.

14 55. 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. 56. Which of the following statements concerning a voluntary export restraint is NOT true? 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. 57. According to, some specific fraction of a good must be produced domestically. A. import quotas B. voluntary export restraints C. local content requirements D. antidumping duties

15 58. According to the Buy America Act, if a company wishes to win a contract from a U.S. government agency to provide some equipment, it must ensure that at least 51 percent of the product by value is manufactured in the United States. This is an example of: A. antidumping duties. B. voluntary export restraints. C. import quotas. D. local content requirements. 59. Local content regulations: A. protect domestic producers by limiting foreign competition. B. lower the prices of imported components. C. tend to benefit consumers and not producers. D. encourage outsourcing of production units. 60. 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.

16 61. The Netherlands exported tulip bulbs to almost every country in the world except Japan. This was because in Japan, customs inspectors insisted on checking every tulip bulb by cutting it vertically down the middle. This is an example of which of the following trade barriers? A. Export restraint B. Administrative trade policies C. Local content requirement D. Ad valorem 62. 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

17 63. In 1997, two South Korean manufacturers of semiconductors, LG Semicon and Hyundai Electronics, were accused of selling dynamic random access memory chips (DRAMs) in the U.S. market at below their costs of production. It was alleged that the firms were trying to unload their excess production in the United States. This is an example of: A. ad valorem tariff. B. subsidy. C. dumping. D. import quota. 64. 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. This is an example of government intervention based on: A. human rights protection. B. national security. C. consumer protection. D. retaliation.

18 65. Which of the following acts allows Americans to sue foreign firms that use property in Cuba confiscated from them after the 1959 revolution? A. D'Amato Act B. Smoot-Hawley Act C. Helms-Burton Act D. Antidumping Act 66. 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. antidumping

19 67. The infant industry argument is criticized because it relies on an assumption that: A. new manufacturing industries in developing nations can initially compete with established industries in developed countries. B. selling goods in a foreign market at below their "fair" market value is legally and ethically justified. C. the domestic industry in a developing nation lacks the capacity to meet demand. D. firms are unable to make efficient long-term investments by borrowing money from the domestic or international capital market. 68. According to the strategic trade policy argument: A. government intervention is not required because firms can borrow money from the capital markets to finance the required investments. B. selling goods in a foreign market at below their "fair" market value is legally and ethically justified. C. government support can help domestic firms overcome the first-mover advantages enjoyed by foreign competitors. D. a government should use subsidies to support promising firms that are active in old, established industries.

20 69. 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. Antidumping Act C. Helms-Burton Act D. D'Amato Act 70. The Smoot-Hawley Act aimed at: A. diverting consumer demand toward foreign products. B. promoting unrestricted free trade. C. limiting global warming. D. avoiding rising unemployment.

21 71. Which of the following is a reason for the pressure for greater protectionism that occurred during the 1980s and early 1990s? A. The U.S. Congress erected an enormous wall of tariff barriers. B. Japanese economic failure strained the world trading system. C. The persistent trade surplus in the United States strained the world trading system. D. Many countries found ways to get around GATT regulations. 72. Until 1995, GATT rules applied to all of the following EXCEPT: A. manufactured goods. B. services. C. textiles. D. agricultural products. 73. According to the 1986 Uruguay Round, the was to be created to implement the GATT agreement. A. World Trade Organization B. International Monetary Fund C. United Nations D. World Bank

22 74. 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. 75. 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 and investment. D. a decision to avoid FDI. 76. The WTO argues that removing tariff barriers and subsidies in the agricultural sector could: A. protect domestic agriculture in developed nations. B. lower the overall level of agricultural trade. C. restrict global economic growth. D. lower prices to consumers.

23 77. 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. 78. 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 five years in the case of rich countries. D. comply with the rules within 10 years in the case of the poorest countries. 79. 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

24 80. Identify the INCORRECT statement about 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 81. Compare and contrast import quotas and voluntary export restraints.

25 82. What is a quota rent? Provide an example of how an import quota affects price. 83. Discuss the Buy America Act and its connection with local content requirements. 84. Explain how governments use administrative trade policies to boost exports and restrict imports. Provide an example of an administrative trade policy.

26 85. What is dumping? How do governments respond to charges of dumping? 86. Explain the notion of predatory behavior with regard to dumping. 87. What are the political reasons for governments to intervene in markets?

27 88. Discuss the economic reasons for government intervention in markets. 89. Discuss the infant industry argument for intervention in markets. What is GATT's position on the argument? 90. What is strategic trade policy? Provide an example.

28 91. What is Paul Krugman's position on strategic trade policy? 92. Discuss the establishment of GATT. What was GATT's objective? 93. What happened to GATT during the 1980s and early 1990s?

29 94. What has been the experience of the WTO to date? What does the future look like for the organization? 95. What are the central issues facing the WTO at the present time?

30 96. Why are tariff rates on agricultural products generally higher than tariff rates on manufactured products or services? 97. What is the TRIPS agreement? Why was it established? 98. Discuss the Doha Round of trade talks.

31 99. Explain how trade barriers affect a firm's strategy What are the drawbacks of government intervention?

32 Chapter 07 The Political Economy of International Trade Answer Key True / False Questions 1. Tariffs are unambiguously pro-consumer and anti-producer. FALSE Tariffs are generally pro-producer and anti-consumer. While they protect producers from foreign competitors, this restriction of supply also raises domestic prices. Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy

33 2. Specific tariffs are levied as a proportion of the value of the imported good. FALSE Tariffs fall into two categories. Specific tariffs are levied as a fixed charge for each unit of a good imported. Ad valorem tariffs are levied as a proportion of the value of the imported good. Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy 3. Export tariffs are far less common than import tariffs. TRUE Export tariffs are far less common than import tariffs. Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy

34 4. A subsidy helps domestic producers to compete against foreign imports. TRUE A subsidy is a government payment to a domestic producer. By lowering production costs, subsidies help domestic producers in two ways: (1) competing against foreign imports and (2) gaining export markets. Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy 5. Under a tariff rate quota, a higher tariff rate is applied to imports within the quota than those over the quota. FALSE Under a tariff rate quota, a lower tariff rate is applied to imports within the quota than those over the quota. Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy

35 6. A common hybrid of a quota and a rent is known as a quota rent. FALSE The extra profit that producers make when supply is artificially limited by an import quota is referred to as a quota rent. Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy 7. Unlike other trade policies, local content regulations tend to benefit consumers and not producers. FALSE Local content regulations provide protection for a domestic producer of parts in the same way an import quota does: by limiting foreign competition. As with all trade policies, local content regulations tend to benefit producers and not consumers. Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy

36 8. 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 disadvantage. FALSE A little-known law in the United States, 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. Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy 9. Bureaucratic rules designed to make it difficult for imports to enter a country are called local content requirements. FALSE A local content requirement is a requirement that some specific fraction of a good be produced domestically. Administrative trade policies are bureaucratic rules designed to make it difficult for imports to enter a country. Learning Objective: Identify the policy instruments used by governments to influence international trade flows.

37 Topic: Instruments of Trade Policy 10. Local content regulations provide protection for a domestic producer of parts by limiting foreign competition. TRUE Local content regulations provide protection for a domestic producer of parts in the same way an import quota does: by limiting foreign competition. The aggregate economic effects are also the same; domestic producers benefit, but the restrictions on imports raise the prices of imported components. Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy 11. A company that sells its product in a foreign market below the cost of production may be accused of dumping. TRUE In the context of international trade, dumping 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.

38 Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy 12. Antidumping policies are designed to punish foreign firms that are engaged in dumping. TRUE Antidumping policies are designed to punish foreign firms that engage in dumping. The ultimate objective is to protect domestic producers from unfair foreign competition. Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy 13. Antidumping policies vary drastically from country to country. FALSE Although antidumping policies vary somewhat from country to country, the majority are similar to those used in the United States. Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy

39 14. Protecting industries deemed important for national security, and retaliating against unfair foreign competition are economic arguments for intervention. FALSE Political arguments for government intervention cover a range of issues, including preserving jobs, protecting industries deemed important for national security, retaliating against unfair foreign competition, protecting consumers from "dangerous" products, furthering the goals of foreign policy, and advancing the human rights of individuals in exporting countries. Learning Objective: Understand why governments sometimes intervene in international trade. Topic: The Case for Government Intervention 15. The Helms-Burton Act of 1996 was aimed at foreign companies that were undermining U.S. trade sanctions against Libya and Iran. FALSE In 1996 the U.S. Congress passed the Helms-Burton Act. This act allows Americans to sue foreign firms that use property in Cuba confiscated from them after the 1959 revolution. Learning Objective: Understand why governments sometimes intervene in international trade.

40 Topic: The Case for Government Intervention 16. According to the infant industry argument, many developing countries have a potential comparative advantage in manufacturing, but new manufacturing industries cannot initially compete with established industries in developed countries. TRUE The infant industry argument is by far the oldest economic argument for government intervention. 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. Learning Objective: Understand why governments sometimes intervene in international trade. Topic: The Case for Government Intervention

41 17. The infant industry argument is the latest argument for government intervention in trade. FALSE The infant industry argument is by far the oldest economic argument for government intervention. Alexander Hamilton proposed it in Learning Objective: Understand why governments sometimes intervene in international trade. Topic: The Case for Government Intervention 18. Strategic trade policy suggests that a government should use subsidies to support promising firms that are active in newly emerging industries. TRUE It is argued that by appropriate actions, a government can help raise national income if it can somehow ensure that the firm or firms that gain first-mover advantages in an industry are domestic rather than foreign enterprises. Thus, according to the strategic trade policy argument, a government should use subsidies to support promising firms that are active in newly emerging industries. Learning Objective: Understand why governments sometimes intervene in international trade.

42 Topic: The Case for Government Intervention 19. GATT has not recognized the infant industry argument as a legitimate reason for protectionism. FALSE The infant industry argument has had substantial appeal for the governments of developing nations during the past 50 years, and the GATT has recognized the infant industry argument as a legitimate reason for protectionism. Learning Objective: Understand why governments sometimes intervene in international trade. Topic: The Case for Government Intervention

43 20. Krugman has suggested that trade policy designed to retaliate against another country's trade policy would hurt the citizens of both countries. TRUE Krugman 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. In many cases, the resulting trade war between two or more interventionist governments will leave all countries involved worse off than if a hands-off approach had been adopted in the first place. Blooms: Understand Difficulty: 2 Medium Learning Objective: Summarize and explain the arguments against strategic trade policy. Topic: The Revised Case for Free Trade 21. Governments do not always act in the national interest when they intervene in the economy; politically important interest groups often influence them. TRUE Governments do not always act in the national interest when they intervene in the economy; politically important interest groups often influence them. Learning Objective: Summarize and explain the arguments against strategic trade policy.

44 Topic: The Revised Case for Free Trade 22. The Smoot-Hawley Act raised tariff barriers in the hope of protecting jobs and diverting consumer demand away from foreign products. TRUE Aimed at avoiding rising unemployment by protecting domestic industries and diverting consumer demand away from foreign products, the Smoot-Hawley Act erected an enormous wall of tariff barriers. Blooms: Understand Difficulty: 2 Medium Learning Objective: Describe the development of the world trading system and the current trade issues. Topic: Development of the World Trading System 23. The Great Depression had roots in the failure of the world economy to mount a sustained economic recovery after the end of World War I in TRUE By the 1930s, the British attempt to stimulate free trade was buried under the economic rubble of the Great Depression. The Great Depression had roots in the failure of the world economy to mount a sustained economic recovery after the end of World War I in Things got worse in 1929 with the U.S. stock market collapse and the subsequent run on the U.S. banking system.

45 Learning Objective: Describe the development of the world trading system and the current trade issues. Topic: Development of the World Trading System 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. FALSE During the 1980s and early 1990s, the world trading system erected by the GATT came under strain as pressures for greater protectionism increased around the world. Learning Objective: Describe the development of the world trading system and the current trade issues. Topic: Development of the World Trading System

46 25. A key goal of the 1986 Uruguay Round was to extend GATT to cover trade in commodities. FALSE In the Uruguay Round, member countries sought to extend GATT rules to cover trade in services. They also sought to write rules governing the protection of intellectual property, to reduce agricultural subsidies, and to strengthen the GATT's monitoring and enforcement mechanisms. Learning Objective: Describe the development of the world trading system and the current trade issues. Topic: Development of the World Trading System 26. The World Trade Organization was created as part of the Uruguay Round. TRUE The Uruguay Round dragged on for seven years before an agreement was reached December 15, It went into effect July 1, The World Trade Organization was created to implement the GATT agreement. Learning Objective: Describe the development of the world trading system and the current trade issues. Topic: Development of the World Trading System

47 27. The WTO does not have the power to impose trade sanctions. FALSE Arbitration panel reports on trade disputes between member countries are automatically adopted by the WTO. Countries that have been found by the arbitration panel to violate GATT rules may appeal to a permanent appellate body, but its verdict is binding. If offenders fail to comply with the recommendations of the arbitration panel, trading partners have the right to compensation or, in the last resort, to impose trade sanctions. Learning Objective: Describe the development of the world trading system and the current trade issues. Topic: Development of the World Trading System 28. A key issue in the "millennium round" of the WTO was to increase barriers to cross-border trade in agricultural products. FALSE At the end of November 1999, representatives from the WTO's member states met in Seattle, Washington. The goal of the meeting was to launch a new round of talks dubbed "the millennium round" aimed at further reducing barriers to cross-border trade and investment. Blooms: Understand

48 Difficulty: 2 Medium Learning Objective: Describe the development of the world trading system and the current trade issues. Topic: Development of the World Trading System 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. TRUE 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. Blooms: Understand Difficulty: 2 Medium Learning Objective: Describe the development of the world trading system and the current trade issues. Topic: Development of the World Trading System

49 30. The WTO has the ability to force any member nation to take an action to which it is opposed. FALSE The WTO lacks the ability to force any member nation to take an action to which it is opposed. The WTO can allow member nations to impose retaliatory tariffs on countries that do not abide by WTO rules, but that is the limit of its power. Learning Objective: Describe the development of the world trading system and the current trade issues. Topic: Development of the World Trading System 31. One issue at the forefront of the current agenda of the WTO is the increase in tariff rates on nonagricultural goods and services in many nations. TRUE Four issues at the forefront of the current agenda of 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. Learning Objective: Describe the development of the world trading system and the current trade issues.

50 Topic: Development of the World Trading System 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. FALSE WTO rules allow countries to impose antidumping duties on foreign goods that are being sold cheaper than at home, or below their cost of production, when domestic producers can show that they are being harmed. Learning Objective: Describe the development of the world trading system and the current trade issues. Topic: Development of the World Trading System

51 33. Antidumping actions are concentrated in certain sectors of the economy such as basic metal industries, chemicals, plastics, and machinery and electrical equipment. TRUE Antidumping actions seem to be concentrated in certain sectors of the economy such as basic metal industries (e.g., aluminum and steel), chemicals, plastics, and machinery and electrical equipment. These four sectors since 1995 have been characterized by periods of intense competition and excess productive capacity, which have led to low prices and profits (or losses) for firms in those industries. Learning Objective: Describe the development of the world trading system and the current trade issues. Topic: Development of the World Trading System

52 34. Free trade in agriculture could jump-start economic growth among the world's poorer nations and alleviate global poverty. TRUE Developing nations have been pushing hard for reforms that would allow their producers greater access to the protected markets of the developed nations. Free trade in agriculture could help to jump-start economic growth among the world's poorer nations and alleviate global poverty. Learning Objective: Describe the development of the world trading system and the current trade issues. Topic: Development of the World Trading System 35. The TRIPS regulations oblige WTO members to grant and enforce patents lasting at least 20 years and copyrights lasting 50 years. TRUE The TRIPS regulations oblige WTO members to grant and enforce patents lasting at least 20 years and copyrights lasting 50 years. Rich countries had to comply with the rules within a year. Poor countries, in which such protection generally was much weaker, had five years' grace, and the very poorest had 10 years.

53 Learning Objective: Describe the development of the world trading system and the current trade issues. Topic: Development of the World Trading System 36. Inadequate protections for intellectual property reduce the incentive for innovation. TRUE Inadequate protections for intellectual property reduce the incentive for innovation. Because innovation is a central engine of economic growth and rising living standards, the argument has been that a multilateral agreement is needed to protect intellectual property. Learning Objective: Describe the development of the world trading system and the current trade issues. Topic: Development of the World Trading System

54 37. Tariffs on industrial goods remain higher than tariffs on services. FALSE Tariffs on services remain higher than on industrial goods. The average tariff on business and financial services imported into the United States, for example, is 8.2 percent, into the EU it is 8.5 percent, and into Japan it is 19.7 percent. Given the rising value of cross-border trade in services, reducing these figures can be expected to yield substantial gains. Learning Objective: Describe the development of the world trading system and the current trade issues. Topic: Development of the World Trading System 38. Tariff barriers lower the costs of exporting products to a country. FALSE Trade barriers constrain a firm's ability to disperse its productive activities in such a manner. Tariff barriers raise the costs of exporting products to a country (or of exporting partly finished products between countries). Learning Objective: Explain the implications for managers of developments in the world trading system. Topic: Implication for Managers

55 39. The threat of antidumping action limits the ability of a firm to use aggressive pricing to gain market share in a country. TRUE The threat of antidumping action limits the ability of a firm to use aggressive pricing to gain market share in a country. Firms in a country also can make strategic use of antidumping measures to limit aggressive competition from low-cost foreign producers. Learning Objective: Explain the implications for managers of developments in the world trading system. Topic: Implication for Managers 40. To conform to local content regulations, a firm may have to locate more production activities in a given market than it would otherwise. TRUE To conform to local content regulations, a firm may have to locate more production activities in a given market than it would otherwise. Again, from the firm's perspective, the consequence might be to raise costs above the level that could be achieved if each production activity was dispersed to the optimal location for that activity.

56 Learning Objective: Explain the implications for managers of developments in the world trading system. Topic: Implication for Managers Multiple Choice Questions 41. 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 Trade policy uses seven main instruments: tariffs, subsidies, import quotas, voluntary export restraints, local content requirements, administrative policies, and antidumping duties. Tariffs are the oldest and simplest instrument of trade policy. Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy

57 42. Specific tariffs are: A. levied as a proportion of the value of the imported good. B. government payment to domestic producers. C. in the form of manufacturing or production requirements of goods. D. levied as a fixed charge for each unit of a good imported. Specific tariffs are levied as a fixed charge for each unit of a good imported (for example, $3 per barrel of oil). Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy

58 43. Tariffs do not benefit: A. consumers. B. domestic producers. C. governments. D. domestic firms. The important thing to understand about an import tariff is who suffers and who gains. The government gains, because the tariff increases government revenues. Domestic producers gain, because the tariff affords them some protection against foreign competitors by increasing the cost of imported foreign goods. Consumers lose because they must pay more for certain imports. Blooms: Understand Difficulty: 2 Medium Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy

59 44. Import tariffs: A. reduce the price of foreign goods. B. create efficient utilization of resources. C. reduce the overall efficiency of the world economy. D. are unambiguously pro-consumer and anti-producer. Import tariffs reduce the overall efficiency of the world economy. They reduce efficiency because a protective tariff encourages domestic firms to produce products at home that, in theory, could be produced more efficiently abroad. The consequence is an inefficient utilization of resources. Blooms: Understand Difficulty: 2 Medium Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy

60 45. By lowering production costs, help domestic producers compete against foreign imports. A. subsidies B. duties C. quotas D. tariffs By lowering production costs, subsidies help domestic producers in two ways: (1) competing against foreign imports and (2) gaining export markets. Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy

61 46. Which of the following observations about subsidies is true? A. Government subsidies must be paid for, typically by taxing individuals and corporations. B. Subsidies are used to reduce exports from a sector, often for political reasons. C. Whether subsidies generate national benefits that exceed their national costs is debatable. D. Subsidies help foreign producers gain a competitive advantage over domestic producers. A subsidy is a government payment to a domestic producer. Government subsidies must be paid for, typically by taxing individuals and corporations. Blooms: Understand Difficulty: 2 Medium Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy

62 47. Which of the following is a consequence of subsidies? A. Subsidies make domestic producers vulnerable to foreign competition. B. Subsidies lead to lowered production. C. Subsidies protect inefficient domestic producers. D. Subsidies produce revenue for the government. In practice, many subsidies are not that successful at increasing the international competitiveness of domestic producers. Rather, they tend to protect the inefficient and promote excess production. Blooms: Understand Difficulty: 2 Medium Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy

63 48. 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 Advocates of strategic trade policy favor subsidies to help domestic firms achieve a dominant position in those industries in which economies of scale are important and the world market is not large enough to profitably support more than a few firms. According to this argument, subsidies can help a firm achieve a first-mover advantage in an emerging industry. Blooms: Understand Difficulty: 2 Medium Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy

64 49. is a direct restriction on the quantity of some good that may be imported into a country. A. Import tariff B. Import quota C. Import subsidy D. Ad valorem tariff An import quota is a direct restriction on the quantity of some good that may be imported into a country. The restriction is usually enforced by issuing import licenses to a group of individuals or firms. Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy

65 50. A common hybrid of a quota and a tariff is known as a(n): A. import tariff quota. B. voluntary export restraint. C. ad valorem tariff. D. tariff rate quota. A common hybrid of a quota and a tariff is known as a tariff rate quota. Under a tariff rate quota, a lower tariff rate is applied to imports within the quota than those over the quota. Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy

66 51. is a quota on trade imposed by the exporting country, typically at the request of the importing country's government. A. Voluntary export restraint B. Specific tariff quota C. Trade reconciliation D. Ad valorem tariff A voluntary export restraint (VER) is a quota on trade imposed by the exporting country, typically at the request of the importing country's government. Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy

67 52. The Japanese government was pressurized by the U.S. government to place limits on the number of vehicles exported to the United States by Japanese automobile producers in This is an example of: A. tariff rate quota. B. specific tariffs. C. voluntary export restraint. D. ad valorem tariff. A voluntary export restraint (VER) is a quota on trade imposed by the exporting country, typically at the request of the importing country's government. One of the most famous historical examples is the limitation on auto exports to the United States enforced by Japanese automobile producers in Blooms: Understand Difficulty: 2 Medium Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy

68 53. Tariff rate quotas are common in agriculture, where their goal is to: A. reduce the use of synthetic fertilizers. B. limit imports over quota. C. increase agricultural imports. D. increase foreign competition. Under a tariff rate quota, a lower tariff rate is applied to imports within the quota than those over the quota. Tariff rate quotas are common in agriculture, where their goal is to limit imports over quota. Blooms: Understand Difficulty: 2 Medium Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy

69 54. 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. The extra profit that producers make when supply is artificially limited by an import quota is referred to as a quota rent. Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy

70 55. 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. Foreign producers agree to VERs because they fear more damaging punitive tariffs or import quotas might follow if they do not. Agreeing to a VER is seen as a way to make the best of a bad situation by appeasing protectionist pressures in a country. Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy

71 56. Which of the following statements concerning a voluntary export restraint is NOT true? 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. As with all restrictions on trade, quotas do not benefit consumers. An import quota or VER always raises the domestic price of an imported good. When imports are limited to a low percentage of the market by a quota or VER, the price is bid up for that limited foreign supply. Blooms: Understand Difficulty: 2 Medium Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy

72 57. According to, some specific fraction of a good must be produced domestically. A. import quotas B. voluntary export restraints C. local content requirements D. antidumping duties A local content requirement is a requirement that some specific fraction of a good be produced domestically. The requirement can be expressed either in physical terms or in value terms. Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy

73 58. According to the Buy America Act, if a company wishes to win a contract from a U.S. government agency to provide some equipment, it must ensure that at least 51 percent of the product by value is manufactured in the United States. This is an example of: A. antidumping duties. B. voluntary export restraints. C. import quotas. D. 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 "American" if 51 percent of the materials by value are produced domestically. This amounts to a local content requirement. Learning Objective: Identify the policy instruments used by governments to influence international trade flows. Topic: Instruments of Trade Policy