Trade Policy Tools

ch6
Student: ___________________________________________________________________________
1.
When governments intervene in international trade, they often do so by restricting domestic production and exports, while adopting policies that promote imports of goods and services into their nation. True False
2.
Tariffs are unambiguously pro-consumer and anti-producer. True False
3.
Export tariffs are far less common than import tariffs. True False
4.
Specific tariffs are levied as a proportion of the value of the imported good. True False
5.
By lowering production costs, subsidies help domestic producers compete against foreign imports and gain export markets. True False
6.
Under a tariff rate quota, a higher tariff rate is applied to imports within the quota than those over the quota. True False
7.
A common hybrid of a quota and a rent is known as a quota rent. True False
8.
Unlike other trade policies, local content regulations tend to benefit consumers and not producers. True False
9.
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
10. Bureaucratic rules designed to make it difficult for imports to enter a country are local content requirements. 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 polices are designed to punish firms that are engaged in dumping. True False
13. Antidumping policies vary drastically from country to country. True False
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. True False
15. Many governments have long had regulations to protect consumers from unsafe products. True False
16. The Helms-Burton Act of 1996 was aimed at foreign companies that were undermining U.S. trade sanctions against Libya and Iran. 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
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. A key goal of the 1986 Uruguay Round was to extend GATT to cover trade in services. 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
25. The World Trade Organization was created as part of the Uruguay Round. True False
26. The WTO does not have the power to impose trade sanctions. True False
27. To date, the WTO's policing efforts have been a major failure. True False
28. A key issue in the "millennium round" of the WTO was to reduce 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
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 continued high 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. Tariff rates on agricultural products are generally much lower than tariff rates on manufactured products or services. True False
34. Free trade in agriculture could jump-start economic growth among the world's poorer nations and alleviate global poverty. True False
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
41. Which of the following is not one of the main instruments of trade policy? A. B. C. D. Tariffs Credit portfolios Local content requirements Administrative policies
42. Specific tariffs are: A. B. C. D. levied as a proportion of the value of the imported good. levied as a fixed charge for each unit of a good imported. in the form of manufacturing or production requirements of goods. government payment to domestic producers.
43. Tariffs do not benefit: A. B. C. D. consumers. domestic producers. governments. domestic firms.
44. Import tariffs: A. B. C. D. reduce the price of foreign goods. reduce the overall efficiency of the world economy. create efficient utilization of resources. are unambiguously pro-consumer and anti-producer.
45. All of the following are true of tariffs except: A. B. C. D. they reduce the revenue for the government. they can be levied as a proportion of the value of the imported good. they can be levied as a fixed charge for each unit of a good imported. they impose significant costs on domestic consumers.
46. By lowering production costs, _____ help domestic producers compete against foreign imports. A. B. C. D. tariffs duties quotas subsidies
47. Which of the following observations about subsidies is false? A. B. C. D. Government subsidies must be paid for, typically by taxing individuals and corporations. They mainly benefit domestic producers, whose international competitiveness is increased. Whether they generate national benefits that exceed their national costs is debatable. They help foreign producers gain a competitive advantage over domestic producers.
48. Agricultural subsidies have been criticized for all of the following reasons except: A. they allow inefficient farmers stay in business. B. they discourage countries to overproduce heavily subsidized agricultural products. C. they encourage countries to produce products that could be grown more cheaply elsewhere and imported. D. they reduce international trade in agricultural products. 49. According to the _____ policy, subsidies can help a firm achieve a first-mover advantage in an emerging industry. A. B. C. D. strategic trade antidumping tariff quota free trade
50. This is a direct restriction on the quantity of some good that may be imported into a country. A. B. C. D. Specific tariff Import quota Subsidy Ad valorem tariff
51. In the United States, the 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 United States. A. B. C. D. Import quota Subsidy Ad valorem tariff Specific tariff
52. A common hybrid of a quota and a tariff is known as a(n): A. B. C. D. quota rent. voluntary export restraint. ad valorem tariff. tariff rate quota.
53. 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. B. C. D. voluntary export restraint. specific tariff quota. trade reconciliation. ad valorem tariff.
54. A quota rent is: A. B. C. D. a quota on trade imposed by the exporting country. levied as a fixed charge for each unit of a good imported. levied as a proportion of the value of the imported good. the extra profit producers make when supply is artificially limited by an import quota.
55. Foreign producers typically agree to voluntary export restrictions because: A. B. C. D. their manufacturing capacity is limited. they can divert their exports to other countries and charge more for their products. they fear far more damaging punitive tariffs or import quotas might follow if they do not. they are required to by the World Trade Organization.
56. Which of the following statements concerning a voluntary export restraint is false? A. B. C. D. It benefits domestic producers by limiting import competition In most cases, it benefits consumers It raises the domestic price of an imported good It is a variant of the import quota
57. These are requirements that some specific fraction of a good be produced domestically. A. B. C. D. Import quotas Voluntary export restraints Local content requirements Antidumping duties
58. 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. B. C. D. Buy America Act Anti-Dumping Act Helms-Burton Act D'Amato Act
59. Administrative trade policies are: A. B. C. D. requirements that some specific fraction of a good be produced domestically. quotas on trade imposed by the exporting country. bureaucratic rules designed to make it difficult for imports to enter a country. designed to punish foreign firms that engage in dumping.
60. 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. B. C. D. Export restraint Dumping Local content requirement Ad valorem
61. Antidumping duties are often called: A. B. C. D. special circumstance duties. positive duties. retroactive duties. countervailing duties.
62. 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. B. C. D. human rights protection. national security. consumer protection. retaliation.
63. If a government grants preferential trade terms to a country it wants to build strong relations with, the government is employing a policy: A. B. C. D. of retaliation. of human rights protection. to protect national security. to further foreign policy objectives.
64. This act allows Americans to sue foreign firms that use property in Cuba confiscated from them after the 1959 revolution. A. B. C. D. The Buy America Act The Anti-Dumping Act The Helms-Burton Act The D'Amato Act
65. According to the _____ argument, governments should temporarily support new industries until they have grown strong enough to meet international competition. A. B. C. D. retaliatory action human rights infant industry anti-dumping
66. _____ suggests that a government should use subsidies to support promising firms that are active in newly emerging industries. A. B. C. D. The infant industry argument Strategic trade policy Retaliation policy The national security argument
67. The EU's Common Agricultural Policy is an example of a tax policy designed to benefit: A. B. C. D. consumers. taxpayers. special-interest politics. free trade in developed countries.
68. 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. B. C. D. Smoot-Hawley Act Anti-Dumping Act Helms-Burton Act D'Amato Act
69. Which of the following is not a reason for the pressure for greater protectionism that occurred during the 1980s and early 1990s? A. B. C. D. The growing U.S. trade surplus with Japan strained the world trading system. Japanese economic success strained the world trading system. The persistent trade deficit in the United States strained the world trading system. Many countries found ways to get around GATT regulations.
70. In the 1986 Uruguay Round, GATT members sought to write rules for promoting all of the following except: A. B. C. D. intellectual property protection. agricultural subsidies. GATT's monitoring and enforcement mechanisms. GATT rules to cover trade in services.
71. Until 1995, GATT rules applied to all of the following except: A. B. C. D. manufactured goods. services. textiles. agricultural products.
72. According to the 1986 Uruguay Round, the _____ was to be created to implement the GATT agreement. A. B. C. D. World Trade Organization International Monetary Fund United Nations World Bank
73. 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. B. C. D. textiles and technology. telecommunications and financial services. automotives and aerospace. agriculture and consulting services.
74. The "millennium round" ended in 1999 with: A. B. C. D. a successful record on agricultural products. a new agenda for the next round focusing on financial services. no agreement on the reduction of barriers to cross-border trade and investment. a decision to avoid FDI.
75. 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. 76. The WTO argues that by removing all tariff barriers and subsidies to agriculture, all of the following would occur except: A. B. C. D. the overall level of trade would increase. there would be overproduction of products that are heavily subsidized. prices would fall for consumers. global economic growth would rise.
77. The TRIPS regulations established at the 1995 Uruguay Round: A. B. C. D. established regulations on patents and copyrights. set a new level of agriculture subsidies. organized OECD countries to eliminate tariffs on textiles. established new tariff levels on technology.
78. TRIPS regulations oblige WTO members to all of the following except: A. B. C. D. grant and enforce patents lasting at least 20 years. grant and enforce copyrights lasting 50 years. comply with the rules within five years in the case of rich countries. 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. B. C. D. Ad valorem tariff rates Tariff rents Specific tariff rates Bound tariff rates
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. 81. Discuss the different types of tariff barriers. Consider the beneficiaries of tariff barriers and the losers.
82. Discuss the different types of subsidies. How do subsidies help domestic producers?
83. Compare and contrast import quotas and voluntary export restraints.
84. What is a quota rent? Provide an example of how an import quota affects price.
85. Discuss the Buy America Act and its connection with local content requirements.
86. Explain how governments use administrative trade policies to boost exports and restrict imports. Provide an example of an administrative trade policy.
87. What is dumping? How do governments respond to charges of dumping?
88. Explain the notion of predatory behavior with regard to dumping.
89. What are the political reasons for governments to intervene in markets?
90. Discuss the economic reasons for government intervention in markets.
91. Discuss the infant industry argument for intervention in markets. What is GATT's position on the argument?
92. What is strategic trade policy? Provide an example.
93. What is Paul Krugman's position on strategic trade policy?
94. Discuss the establishment of GATT. What was GATT's objective?
95. What happened to GATT during the 1980s and early 1990s?
96. What has been the experience of the WTO to date? What does the future look like for the organization?
97. What are the central issues facing the WTO at the present time?
98. Discuss the Doha Round of trade talks.
99. Why are tariff rates on agricultural products generally higher than tariff rates on manufactured products or services?
100.Explain how trade barriers affect a firm's strategy.
ch6 Key
1.
(p. 198)
When governments intervene in international trade, they often do so by restricting domestic production and exports, while adopting policies that promote imports of goods and services into their nation. FALSE
AACSB: Domestic and Global Economic Environments Blooms: Knowledge Difficulty: Medium Hill - Chapter 06 #1 Learning Objective: 06-1
2.
(p. 199)
Tariffs are unambiguously pro-consumer and anti-producer. FALSE

AACSB: Analytic Skills Blooms: Comprehension Difficulty: Medium Hill - Chapter 06 #2 Learning Objective: 06-1
3.
(p. 199)
Export tariffs are far less common than import tariffs. TRUE
AACSB: Analytic Skills Blooms: Knowledge Difficulty: Medium Hill - Chapter 06 #3 Learning Objective: 06-1
4.
(p. 199)
Specific tariffs are levied as a proportion of the value of the imported good. FALSE
5.
(p. 200)
By lowering production costs, subsidies help domestic producers compete against foreign imports and gain export markets. TRUE
6.
(p. 201202)
Under a tariff rate quota, a higher tariff rate is applied to imports within the quota than those over the quota. FALSE
7.
(p. 202)
A common hybrid of a quota and a rent is known as a quota rent. FALSE

AACSB: Analytic Skills Blooms: Knowledge Difficulty: Easy Hill - Chapter 06 #7 Learning Objective: 06-1
8.
(p. 203)
Unlike other trade policies, local content regulations tend to benefit consumers and not producers. FALSE
9.
(p. 203)
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
AACSB: Ethical/Legal Responsibilities Blooms: Knowledge Difficulty: Medium Hill - Chapter 06 #9 Learning Objective: 06-1
10.
(p. 203)
Bureaucratic rules designed to make it difficult for imports to enter a country are local content requirements. FALSE
11.
(p. 204)
A company that sells its product in a foreign market below the cost of production may be accused of dumping. TRUE
12.
(p. 205)
Antidumping polices are designed to punish firms that are engaged in dumping. TRUE
13.
(p. 205)
Antidumping policies vary drastically from country to country. FALSE

14.
(p. 206)
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. TRUE
15.
(p. 206)
Many governments have long had regulations to protect consumers from unsafe products. TRUE
AACSB: Ethical/Legal Responsibilities Blooms: Knowledge Difficulty: Easy Hill - Chapter 06 #15 Learning Objective: 06-2
16.
(p. 208)
The Helms-Burton Act of 1996 was aimed at foreign companies that were undermining U.S. trade sanctions against Libya and Iran. FALSE
17.
(p. 209)
The infant industry argument is the latest argument for government intervention in trade. FALSE
18.
(p. 210)
Strategic trade policy suggests that a government should use subsidies to support promising firms that are active in newly emerging industries. TRUE
19.
(p. 210)
GATT has not recognized the infant industry argument as a legitimate reason for protectionism. FALSE
AACSB: Reflective Thinking Skills Blooms: Knowledge Difficulty: Medium Hill - Chapter 06 #19 Learning Objective: 06-2
20.
(p. 211)
Krugman has suggested that trade policy designed to retaliate against another country's trade policy would hurt the citizens of both countries. TRUE
21.
(p. 211)
Governments do not always act in the national interest when they intervene in the economy; politically important interest groups often influence them. TRUE
22.
(p. 213)
The Smoot-Hawley Act raised tariff barriers in the hope of protecting jobs and diverting consumer demand away from foreign products. TRUE
23.
(p. 214)
A key goal of the 1986 Uruguay Round was to extend GATT to cover trade in services. TRUE
24.
(p. 213)
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
AACSB: Reflective Thinking Skills Blooms: Knowledge Difficulty: Easy Hill - Chapter 06 #24 Learning Objective: 06-4
25.
(p. 214)
The World Trade Organization was created as part of the Uruguay Round. TRUE
26.
(p. 215)
The WTO does not have the power to impose trade sanctions. FALSE
27.
(p. 215)
To date, the WTO's policing efforts have been a major failure. FALSE
28.
(p. 216)
A key issue in the "millennium round" of the WTO was to reduce barriers to cross-border trade in agricultural products. TRUE
29.
(p. 217)
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
AACSB: Reflective Thinking Skills Blooms: Comprehension Difficulty: Medium Hill - Chapter 06 #29 Learning Objective: 06-4
30.
(p. 217)
The WTO has the ability to force any member nation to take an action to which it is opposed. FALSE
31.
(p. 218)
One issue at the forefront of the current agenda of the WTO is the increase in continued high tariff rates on nonagricultural goods and services in many nations. FALSE
32.
(p. 218)
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
AACSB: Domestic and Global Economic Environments Blooms: Comprehension Difficulty: Medium Hill - Chapter 06 #32 Learning Objective: 06-4
33.
(p. 219)
Tariff rates on agricultural products are generally much lower than tariff rates on manufactured products or services. FALSE
34.
(p. 220)
Free trade in agriculture could jump-start economic growth among the world's poorer nations and alleviate global poverty. TRUE
35.
(p. 220)
The TRIPS regulations oblige WTO members to grant and enforce patents lasting at least 20 years and copyrights lasting 50 years. TRUE
36.
(p. 220)
Inadequate protections for intellectual property reduce the incentive for innovation. TRUE
37.
(p. 221)
Tariffs on industrial goods remain higher than tariffs on services. FALSE

38.
(p. 224)
Tariff barriers lower the costs of exporting products to a country. FALSE

39.
(p. 224)
The threat of antidumping action limits the ability of a firm to use aggressive pricing to gain market share in a country. TRUE
40.
(p. 224)
To conform to local content regulations, a firm may have to locate more production activities in a given market than it would otherwise. TRUE
41.
(p. 198)
Which of the following is not one of the main instruments of trade policy? A. B. C. D. Tariffs Credit portfolios Local content requirements Administrative policies
Trade policy uses seven main instruments: tariffs, subsidies, import quotas, voluntary export restraints, local content requirements, administrative policies, and antidumping duties.
42.
(p. 199)
Specific tariffs are: A. B. C. D. levied as a proportion of the value of the imported good. levied as a fixed charge for each unit of a good imported. in the form of manufacturing or production requirements of goods. government payment to domestic producers.
Specific tariffs are levied as a fixed charge for each unit of a good imported (for example, $3 per barrel of oil).
43.
(p. 199)
Tariffs do not benefit: A. B. C. D. consumers. domestic producers. governments. domestic firms.
Tariffs are unambiguously pro-producer and anticonsumer.

44.
(p. 199)
Import tariffs: A. B. C. D. reduce the price of foreign goods. reduce the overall efficiency of the world economy. create efficient utilization of resources. 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.
45.
(p. 199)
All of the following are true of tariffs except: A. B. C. D. they reduce the revenue for the government. they can be levied as a proportion of the value of the imported good. they can be levied as a fixed charge for each unit of a good imported. they impose significant costs on domestic consumers.
Tariffs produce revenue for the government.

AACSB: Reflective Thinking Skills Blooms: Comprehension Difficulty: Hard Hill - Chapter 06 #45 Learning Objective: 06-1
46.
(p. 200)
By lowering production costs, _____ help domestic producers compete against foreign imports. A. B. C. D. tariffs duties quotas subsidies
By lowering production costs, subsidies help domestic producers in two areas: (1) competing against foreign imports and (2) gaining export markets.
47.
(p. 200)
Which of the following observations about subsidies is false? A. B. C. D. Government subsidies must be paid for, typically by taxing individuals and corporations. They mainly benefit domestic producers, whose international competitiveness is increased. Whether they generate national benefits that exceed their national costs is debatable. They help foreign producers gain a competitive advantage over domestic producers.
By lowering production costs, subsidies help domestic producers in two areas: (1) competing against foreign imports and (2) gaining export markets.
AACSB: Domestic and Global Economic Environments Blooms: Comprehension Difficulty: Medium Hill - Chapter 06 #47 Learning Objective: 06-1
48.
(p. 200)
Agricultural subsidies have been criticized for all of the following reasons except: A. they allow inefficient farmers stay in business. B. they discourage countries to overproduce heavily subsidized agricultural products. C. they encourage countries to produce products that could be grown more cheaply elsewhere and imported. D. they reduce international trade in agricultural products. Agricultural subsidies encourage countries to overproduce heavily subsidized agricultural products.
49.
(p. 200)
According to the _____ policy, subsidies can help a firm achieve a first-mover advantage in an emerging industry. A. B. C. D. strategic trade antidumping tariff quota 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.
50.
(p. 201)
This is a direct restriction on the quantity of some good that may be imported into a country. A. B. C. D. Specific tariff Import quota Subsidy 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.
51.
(p. 201)
In the United States, the 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 United States. A. B. C. D. Import quota Subsidy Ad valorem tariff Specific 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.
AACSB: Analytic Skills Blooms: Application Difficulty: Medium Hill - Chapter 06 #51 Learning Objective: 06-1
52.
(p. 201)
A common hybrid of a quota and a tariff is known as a(n): A. B. C. D. quota rent. voluntary export restraint. ad valorem tariff. tariff rate quota.
Under a tariff rate quota, a lower tariff rate is applied to imports within the quota than those over the quota.
53.
(p. 202)
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. B. C. D. voluntary export restraint. specific tariff quota. trade reconciliation. ad valorem tariff.
A variant on the import quota is the voluntary export restraint. Agreeing to a VER is seen as a way to make the best of a bad situation by appeasing protectionist pressures in a country.
54.
(p. 202)
A quota rent is: A. B. C. D. a quota on trade imposed by the exporting country. levied as a fixed charge for each unit of a good imported. levied as a proportion of the value of the imported good. 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.
55.
(p. 202)
Foreign producers typically agree to voluntary export restrictions because: A. B. C. D. their manufacturing capacity is limited. they can divert their exports to other countries and charge more for their products. they fear far more damaging punitive tariffs or import quotas might follow if they do not. 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.
56.
(p. 202)
Which of the following statements concerning a voluntary export restraint is false? A. B. C. D. It benefits domestic producers by limiting import competition In most cases, it benefits consumers It raises the domestic price of an imported good It is a variant of the import quota
As with all restrictions on trade, quotas do not benefit consumers.

57.
(p. 203)
These are requirements that some specific fraction of a good be produced domestically. A. B. C. D. Import quotas Voluntary export restraints Local content requirements 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.
58.
(p. 203)
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. B. C. D. Buy America Act Anti-Dumping Act Helms-Burton Act D'Amato Act
The law specifies a product as "American" if 51 percent of the materials by value are produced domestically.
59.
(p. 203)
Administrative trade policies are: A. B. C. D. requirements that some specific fraction of a good be produced domestically. quotas on trade imposed by the exporting country. bureaucratic rules designed to make it difficult for imports to enter a country. designed to punish foreign firms that engage in dumping.
Administrative trade policies are bureaucratic rules designed to make it difficult for imports to enter a country.
60.
(p. 204)
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. B. C. D. Export restraint Dumping Local content requirement Ad valorem
Dumping is viewed as a method by which firms unload excess production in foreign markets.
61.
(p. 205)
Antidumping duties are often called: A. B. C. D. special circumstance duties. positive duties. retroactive duties. countervailing duties.
If a domestic producer believes that a foreign firm is dumping production in the U.S. market, it can file a petition with two government agencies, the Commerce Department and the International Trade Commission. If a complaint has merit, the Commerce Department may impose antidumping duties (often called countervailing duties) on the offending foreign imports.
62.
(p. 206)
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. B. C. D. human rights protection. national security. consumer protection. retaliation.
Some argue that governments should use the threat to intervene in trade policy as a bargaining tool to help open foreign markets and force trading partners to "play by the rules of the game." 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.
63.
(p. 207)
If a government grants preferential trade terms to a country it wants to build strong relations with, the government is employing a policy: A. B. C. D. of retaliation. of human rights protection. to protect national security. to further foreign policy objectives.
Governments sometimes use trade policy to support their foreign policy objectives. A government may grant preferential trade terms to a country with which it wants to build strong relations.
64.
(p. 208)
This act allows Americans to sue foreign firms that use property in Cuba confiscated from them after the 1959 revolution. A. B. C. D. The Buy America Act The Anti-Dumping Act The Helms-Burton Act The D'Amato Act
In an attempt to further tighten the screws on Cuba, 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.
65.
(p. 209)
According to the _____ argument, governments should temporarily support new industries until they have grown strong enough to meet international competition. A. B. C. D. retaliatory action human rights infant industry anti-dumping
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. 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 competition.
66.
(p. 210)
_____ suggests that a government should use subsidies to support promising firms that are active in newly emerging industries. A. B. C. D. The infant industry argument Strategic trade policy Retaliation policy The national security argument
According to the strategic trade policy, 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.
67.
(p. 211212)
The EU's Common Agricultural Policy is an example of a tax policy designed to benefit: A. B. C. D. consumers. taxpayers. special-interest politics. free trade in developed countries.
Governments do not always act in the national interest when they intervene in the economy; politically important interest groups often influence them. The European Union's support for the Common Agricultural Policy, which arose because of the political power of French and German farmers, is an example.
AACSB: Analytic Skills Blooms: Knowledge Difficulty: Hard Hill - Chapter 06 #67 Learning Objective: 06-3
68.
(p. 213)
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. B. C. D. Smoot-Hawley Act Anti-Dumping Act Helms-Burton Act D'Amato Act
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.
AACSB: Ethical/Legal Responsibilities Blooms: Knowledge Difficulty: Hard Hill - Chapter 06 #68 Learning Objective: 06-4
69.
(p. 214)
Which of the following is not a reason for the pressure for greater protectionism that occurred during the 1980s and early 1990s? A. B. C. D. The growing U.S. trade surplus with Japan strained the world trading system. Japanese economic success strained the world trading system. The persistent trade deficit in the United States strained the world trading system. Many countries found ways to get around GATT regulations.
The world trading system was strained by the persistent trade deficit in the world's largest economy, the United States. From a political perspective, the matter was worsened in 1992 by the $45 billion U.S. trade deficit with Japan, a country perceived as not playing by the rules.
70.
(p. 214)
In the 1986 Uruguay Round, GATT members sought to write rules for promoting all of the following except: A. B. C. D. intellectual property protection. agricultural subsidies. GATT's monitoring and enforcement mechanisms. GATT rules to cover trade in services.
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.
71.
(p. 214)
Until 1995, GATT rules applied to all of the following except: A. B. C. D. manufactured goods. services. textiles. agricultural products.
Until the Uruguay Round, GATT rules had applied only to trade in manufactured goods and commodities. In the Uruguay Round, member countries sought to extend GATT rules to cover trade in services.
72.
(p. 214)
According to the 1986 Uruguay Round, the _____ was to be created to implement the GATT agreement. A. B. C. D. World Trade Organization International Monetary Fund United Nations World Bank
The Uruguay Round contained the provision that the World Trade Organization was to be created to implement the GATT agreement.
73.
(p. 216)
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. B. C. D. textiles and technology. telecommunications and financial services. automotives and aerospace. agriculture and consulting services.
The WTO was encouraged to extend its reach to encompass regulations governing foreign direct investment, something the GATT had never done. Two of the first industries targeted for reform were the global telecommunication and financial services industries.
74.
(p. 216)
The "millennium round" ended in 1999 with: A. B. C. D. a successful record on agricultural products. a new agenda for the next round focusing on financial services. no agreement on the reduction of barriers to cross-border trade and investment. a decision to avoid FDI.
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 talksdubbed "the millennium round"aimed at further reducing barriers to cross-border trade and investment. The talks ended December 3, 1999, without reaching any agreement.
75.
(p. 217)
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. Supporters of the WTO and free trade have repeatedly pointed out that the WTO lacks the ability to force any member nation to take an action to which it is opposed.
76.
(p. 220)
The WTO argues that by removing all tariff barriers and subsidies to agriculture, all of the following would occur except: A. B. C. D. the overall level of trade would increase. there would be overproduction of products that are heavily subsidized. prices would fall for consumers. global economic growth would rise.
The net effect of the combination of high tariff barriers and significant subsidies is to raise prices to consumers, reduce the volume of agricultural trade, and encourage the overproduction of products that are heavily subsidized. Because global trade in agriculture currently amounts to 10.5 percent of total merchandized trade, the WTO argues that removing tariff barriers and subsidies could boost the overall level of trade, lower prices to consumers, and raise global economic growth by freeing consumption and investment resources for more productive uses.
77.
(p. 220)
The TRIPS regulations established at the 1995 Uruguay Round: A. B. C. D. established regulations on patents and copyrights. set a new level of agriculture subsidies. organized OECD countries to eliminate tariffs on textiles. established new tariff levels on technology.
The TRIPS regulations oblige WTO members to grant and enforce patents lasting at least 20 years and copyrights lasting 50 years.
78.
(p. 220)
TRIPS regulations oblige WTO members to all of the following except: A. B. C. D. grant and enforce patents lasting at least 20 years. grant and enforce copyrights lasting 50 years. comply with the rules within five years in the case of rich countries. comply with the rules within 10 years in the case of the poorest countries.
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.
79.
(p. 221)
_____ are the highest rate that can be charged, which is often, but not always, the rate that is charged. A. B. C. D. Ad valorem tariff rates Tariff rents Specific tariff rates Bound tariff rates
While average tariffs are low, high tariff rates persist on certain imports into developed nations, which limit market access and economic growth. For example, Australia and South Korea, both OECD countries, still have bound tariff rates of 15.1 percent and 24.6 percent, respectively, on imports of transportation equipment.
80.
(p. 224)
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. Tariff barriers raise the costs of exporting products to a country. This may put the firm at a competitive disadvantage to indigenous competitors in that country.
81.
(p. 199)
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.
82.
(p. 200)
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.
83.
(p. 201202)
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.
84.
(p. 202203)
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.
85.
(p. 203)
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.
AACSB: Ethical/Legal Responsibilities Blooms: Comprehension Difficulty: Hard Hill - Chapter 06 #85 Learning Objective: 06-1
86.
(p. 203)
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.
87.
(p. 204205)
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.
88.
(p. 204205)
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 is 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 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.
89.
(p. 205)
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.
90.
(p. 208210)
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.
91.
(p. 209210)
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.
92.
(p. 210)
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.
93.
(p. 211)
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.
94.
(p. 213214)
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.
95.
(p. 213214)
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.
AACSB: Analytic Skills Blooms: Knowledge Difficulty: Hard Hill - Chapter 06 #95 Learning Objective: 06-4
96.
(p. 215218)
What has been the experience of the WTO to date? What does the future look like for the organization? By 2009, the WTO had 153 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.
97.
(p. 218)
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 and were still ongoing as of 2009.
98.
(p. 218223)
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.
99.
(p. 219220)
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.
100.
(p. 224)
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.
ch6 Summary
Category AACSB: Analytic Skills AACSB: Domestic and Global Economic Environments AACSB: Ethical/Legal Responsibilities AACSB: Reflective Thinking Skills Blooms: Application Blooms: Comprehension Blooms: Knowledge Difficulty: Easy Difficulty: Hard Difficulty: Medium Hill - Chapter 06 Learning Objective: 06-1 Learning Objective: 06-2 Learning Objective: 06-3 Learning Objective: 06-4 # of Questions 61 5 11 23 5 27 68 19 10 71 100 42 15 4 39

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ch6

Tariffs are unambiguously pro-consumer and anti-producer. True False

87. What is dumping? How do governments respond to charges of dumping?

88. Explain the notion of predatory behavior with regard to dumping.

90. Discuss the economic reasons for government intervention in markets.

92. What is strategic trade policy? Provide an example.

93. What is Paul Krugman's position on strategic trade policy?

94. Discuss the establishment of GATT. What was GATT's objective?

98. Discuss the Doha Round of trade talks.

100.Explain how trade barriers affect a firm's strategy.

Tariffs are unambiguously pro-consumer and anti-producer. FALSE

A common hybrid of a quota and a rent is known as a quota rent. FALSE

Antidumping policies vary drastically from country to country. FALSE

Tariffs on industrial goods remain higher than tariffs on services. FALSE

Tariff barriers lower the costs of exporting products to a country. FALSE

Tariffs do not benefit: A. B. C. D. consumers. domestic producers. governments. domestic firms.

Tariffs are unambiguously pro-producer and anticonsumer.

Tariffs produce revenue for the government.

As with all restrictions on trade, quotas do not benefit consumers.

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