Student Exam # COURSE EXAMINATION UNIVERSITY OF CALIFORNIA SCHOOL OF LAW. International Trade Professor Guzman

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1 Student Exam # COURSE EXAMINATION UNIVERSITY OF CALIFORNIA SCHOOL OF LAW International Trade Professor Guzman Spring 2010 Time Allowed: 8 hours 1. This is an open book exam; you may use any materials you wish, with the exception of internet resources. 2. Each student must complete the exam without assistance from any other person. 3. The exam includes 10 Multiple Choice problems and 1 Essay Question with 2 parts. The Multiple Choice portion of the exam is worth 20% of your final grade. Part I of the Essay Question is worth 70%. Part II of the Essay Question is worth 10%. 4. The exam includes 7 pages, including this cover page. Please be sure that your exam includes all pages. 5. Exam answers cannot be longer than 3000 words total. Please indicate the number of words in your exam (as determined by the word count feature on your word processor) on the front of your answer sheet. Exams longer than 3000 words will be penalized and material beyond the 3000 word limit will not be credited. 6. Where necessary, please indicate any factual assumptions you make in answering the questions. 7. Please double-space your exam answer. Page 1 of 7

2 Special Notes: 1) Unless otherwise indicated you may assume that all countries listed are members of the WTO. 2) To prevent panic, I remind you that we have not covered the TRIPs Agreement, and you are not responsible for it. Multiple Choice Questions 10 Questions 1. China is able to make 50 million toys per year if that is the only product it makes. Alternatively it can make 25 million shirts a year, if that is the only product it makes. It can also make some of each. Mexico can make 90 million toys a year if that is the only product it makes. Alternatively it can make 30 million shirts a year, if that is the only product it makes. It can also make some of each. China and Mexico are the only countries in the world, and the only products made are toys and shirts. a) China has comparative advantage in shirts and Mexico has a comparative advantage in toys. b) Mexico has a comparative advantage in shirts and China has a comparative advantage in toys. c) China has a comparative advantage in both shirts and toys. d) Mexico has a comparative advantage in both shirts and toys. 2. When a complaining party wins a dispute at the WTO, it is legally entitled to: a) Compensation for the harm suffered by its industries b) An end to the violative conduct c) Both (a) and (b) d) Neither (a) nor (b) 3. The United States has a tariff binding of 15% on watches. The American tariff schedule specifies a tariff of 12% on these items. All imported watches are required to pay a tariff of 12% upon entry into the United States and in addition, must pay a timekeeping tax, in the amount of 13% of the value of the imported watches. The revenues from the timekeeping tax are used to maintain the official United States Time Clock. The total charges imposed at the border, then, are equal to 25% of the value of the watches. Is this a violation of WTO rules? a) Yes, because the United States cannot charge more than 15%. b) Yes, because the United States cannot charge more than 12%. c) Yes, unless domestically produced watches also must pay a timekeeping tax of at least 13%. d) Yes, unless domestically produced watches also must pay a timekeeping tax of at least 10%. Page 2 of 7

3 4. India and Britain are negotiating a preferential trading agreement. India currently imposes a tariff of 15% on imported laptop computers. Under the proposed agreement India would impose a tariff of 20% on laptops. a) This agreement is legal as long as the countries are entering into a customs union that is valid in all other respects. b) This agreement might be legal (depending on other information) if the parties are entering into a customs union that is valid in all other respects. c) This agreement is legal as long as the trading agreement is (in all other respects) a valid free trade agreement or customs union. d) This agreement may be legal (depending on other information) as long as the trading agreement is (in all other respects) a valid free trade agreement or customs union. e) This agreement is illegal regardless of whether it is a free trade agreement or a customs union. 5. Europe produces Champagne and sells it all over the world. The following table indicates the price of the Champagne in various places: Europe $ 15 United States $ 18 Australia $12 Chile $ 9 Based on this information, which of the above countries is likely to have a valid complaint that it can pursue through the DSU? a) Chile b) Australia and Chile c) Australia, Chile, and the United States d) None of the above 6. Consider the following claims about the MFN requirement: 1) It hurts small, poor countries because it excludes them from the benefits of trade negotiations. 2) It helps small, poor countries because it allows them to enjoy greater access to markets than they would otherwise achieve. 3) It facilitates negotiation because every state knows that it will get more if it participates. 4) It undermines negotiation because it gives states an incentive to sit back and let others negotiate. Page 3 of 7

4 Which of the above are fair statements? a) (1) and (3) b) (2) and (4) c) (1) and (4) d) (2) and (3) 7. Australia is one of the world s leading producers of competitive swimwear. In particular, they make some of the world s highest quality racing swimsuits for both men and women. They used to make other swimsuits, but long ago stopped doing so because they were unable to compete. All swimwear is allowed to enter Australia without tariffs with the exception of recreational swimwear, which includes, for example, two-piece women s bathing suits, men s trunk-style bathing suit (as opposed to men s racing-style suits), and so on. Recreational swimwear must pay a domestic sales tax of 20%. There is no comparable tax on competitive swimwear. China exports both recreational and competitive swimwear to Australia. Which of the following must be true if China has a valid complaint under WTO law? a) The two types of swimwear are like products. b) China can demonstrate that the tax was adopted with an intent to protect the Australian bathing suit industry. c) Australia s tariff bindings on recreational swimwear are less than 20%. d) The products are directly competitive or substitutable. 8. Brazil offers a tax credit to firms that demonstrate a commitment to the use of Brazilian inputs by using at least 50% Brazilian products in their production. a) This is a violation of WTO rules and Brazil s trading partners can impose CVDs in response. b) This is not a violation of WTO rules because it is not specific. Brazil s trading partners, however, can impose CVDs in response. c) This is not a violation of WTO rules because it does not qualify as a subsidy. Furthermore, Brazil s trading partners cannot impose CVDs in response. d) This is a violation of WTO rules, but Brazil s trading partners must go through the dispute settlement process rather than imposing CVDs. 9. Faced with a steel industry in decline, the United States has decided to impose a safeguard measure. Which of the following is true? a) The U.S. is permitted to do so if domestic production has fallen enough in recent years, regardless of what has happened to imports. b) The U.S. is permitted to do if the method used to protect the U.S. steel industry is tariffs rather than a non-tariff barrier. c) The U.S. is permitted to do so but must limit the safeguard measure to those countries whose steel is causing injury. Steel imports that have not caused or threatened injury must be exempted. Page 4 of 7

5 d) The U.S. is permitted to do so even if domestic production is up, as long as imports have increased by even more. 10. The Secretariat of the International Plant Protection Convention has developed guidelines stating that Tulip Blight represents a threat to tulip health and growth. According to the Secretariat, because Tulip Blight can spread from one tulip bulb to another, countries that have no Tulip Blight should refrain from importing tulip bulbs. Malaysia, a country that has never had an instance of Tulip Blight, appointed a commission to study the matter. The commission has submitted its report and Malaysia is considering various alternative actions. Which of the following actions would be WTO legal? a) Ban importation of tulip bulbs without carrying out a further risk assessment. b) Ban importation of cut tulips and tulip bulbs with reference to the commission report stating that cut tulips from bulbs afflicted with Tulip Blight remain fresh only half as long as cut tulips from bulbs without blight. c) Ban importation of tulip bulbs and cut tulips from Europe, which has experienced tulip blight, but not from the Philippines, which has never had Tulip Blight. d) Ban importation of tulip bulbs and cut tulips with reference to statements in the commission report that Blight in tulips can be transmitted from cut tulips to tulip bulbs. Page 5 of 7

6 Essay Question -- PDA Wars Part I In the spring of 2010 the American company, McIntyre, introduced its new product, the MyTablet. This new device is a combination of the successful itouch device (produced by Apple) and an e-book reader. It allows the user to use MyCal (McIntyre s popular calendar program); keep contacts; access the internet; purchase, download, and read electronic books from the McIntyre bookstore; save dozens of movies on the device and watch them at leisure; play games; and so on. The dimensions of the device are 8.5 inched by 11 inches. The MyTablet is manufactured in the United States and exported around the world. The first few months of sales have been tremendous. All around the world people have purchased MyTablets as fast as they have been delivered. Suppose that starting in the fall of 2010, a successful Korean company called Daetoo began selling a PDA (personal digital assistant) called the Axis. The Axis includes the following functions: calendar, contacts, Internet access, and games. It can also read ebooks, but to download them you must connect the Axis to a computer, and you cannot buy from the McIntyre store. The Axis can play movies, but does not have enough storage capacity to hold full-length movies. The first 9 months of Axis sales have been very good. It has secured a significant share of the Korean market and, even more important for Daetoo, has made impressive strides outside of Korea. At present, the Korean market represents 50% of sales, but Daetoo s plan is for aggressive growth internationally so that within two years they hope international sales are at least 80% of their total sales. There is much speculation in the Korean media about the impact of the MyTablet on sales of the Axis. Optimists point out that Axis sales remain robust and, indeed, have actually increased since the MyTablet s release. They also point out that the MyTablet is more expensive than the Axis. Pessimists respond that it is only a matter of time before the MyTablet takes over the market and that the price will surely come down soon. Distressed by the release of the MyTablet, Daetoo petitioned the Korean government for protection. The government responded with the Digital Assistant Copyright Act (DACA). The DACA contains three main provisions. First, it imposes an internal tax of 50% on large PDAs with capacity to store full-length movies. This category includes the MyTablet but not the Axis (in fact, the MyTablet is currently the only product on the market that falls into this category). The tax is collected when the product crosses the border. Under its tariff bindings, Korea is required to let personal electronic devices (the tariff classification category into which both MyTablet and the Axis fall) into the country duty-free. Second, the funds from the internal tax are to be spent by the government on an advertising campaign promoting the foreign sale of Korean PDAs that include an e-book reader. In practice, this means promotion of the Axis because it is the only such product produced in Korea. Page 6 of 7

7 Third, the DACA requires that all PDAs able to store full-length movies be equipped with antipiracy software that prevents the user from downloading movies from unauthorized websites. This software is not normally on the MyTablet, but you can assume that it is very easy for McIntyre to include it with MyTablets destined for Korea. Korea explains that this measure is aimed at reducing the high rate at which computer users in Korea violate copyright law by downloading movies for free. American movie studios have been trying, without success, to get Korea (and others) to adopt a similar rule for laptops and desktops. We know this is not everything these studios would like us to do, but it is a start, the Korean government has explained. The United States has vigorously protested the Korean measure. It is considering a response, which might include a complaint with the WTO s DSU. The trade authorities of the United States have asked you to present an analysis of the relationship between DACA and WTO law, including possible WTO-legal responses from the United States. Part II Now imagine that you work for the Korean government (everything else about the above question remains unchanged). Korea has negotiated with the United States and decided to repeal the DACA to avoid harming the trading relationship between the U.S. and Korea. Nevertheless, they would like to do what they can, consistent with their WTO obligations, to assist Daetoo and the Axis. They have asked you for options. You should explain the relationship between anything you suggest and WTO rules, and if you make more than one suggestion, indicate which one you recommend. END OF EXAM! ENJOY YOUR SUMMER! Page 7 of 7

1.5 The General Agreement on Tariffs and Trade (GATT)

1.5 The General Agreement on Tariffs and Trade (GATT) LEARNING OBJECTIVES 1. Learn the basic principles underpinning the GATT. 2. Identify the special provisions and allowable exceptions to the basic principles