Chapter 7 Questions
Import tariffs protect domestic producers against foreign competitors.
By lowering production costs, subsidies help foreign competitors gain export markets.
In recent decades, a fall in subsidies, quotas, and voluntary export restraints has been accompanied by a rise in tariff barriers.
Specific tariffs are levied as a proportion of the value of the imported good.
Government intervention in international trade can take the form of reducing restrictions on imports and encouraging foreign direct investment.
Political arguments for government intervention are usually concerned with protecting consumer interests within the country.
Governments can protect consumers from unsafe products by issuing a limit or a ban on such products.
Some countries argue that government intervention to protect certain domestic industries can compromise national security.
The main gains from subsidies accrue to importers, whose international competitiveness is increased as a result of these subsidies.
Both import quotas and voluntary export restraints (VERs) benefit domestic producers by limiting import competition.
The Buy America Act specifies that government agencies must give preference to American products when putting contracts for equipment out for bid unless the foreign products have a significant advantage.
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.
Paul Krugman asserts that a strategic trade policy is almost certain to be captured by special-interest groups within the economy, who will distort it to their own needs.
The strategic trade policy arguments of the new trade theorists suggest an economic justification for government intervention in international trade and this justification challenges the rationale for unrestricted free trade.
Free trade as a government policy was first officially embraced by Germany in 1846, when the Bundestag repealed the Corn Laws.
The Smoot-Hawley Act aimed to liberalize trade by eliminating tariffs, subsidies, and import quotas.
Pressures for greater protectionism increased around the world during the 1980s and early 1990s due to the strain caused by the persistent trade deficit in the world's largest economy, Japan.
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. There were several reasons for the rise in such pressures during the 1980s. For instance, the world trading system was strained by the persistent trade deficit in the world's largest economy, the United States.
One of the reasons for the trend toward greater protectionism was that many countries found ways to get around GATT regulations.
Governments of developed nations are setting an example by unilaterally lowering their trade barriers.
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.
The threat of antidumping action enhances the ability of a firm to use aggressive pricing to gain market share in a country.
Government intervention can be self-defeating because it tends to protect the inefficient rather than help firms become efficient global competitors.
Which of the following is a trade policy instrument that the GATT and WTO have been most successful in limiting? A. Local content requirements B. Tariffs C. Subsidies D. Voluntary export restraints E. Import quotas
Which of the following groups benefits the most from the imposition of tariffs? A. Domestic producers B. Consumers C. Exporters and importers D. Foreign producers E. International bodies such as WTO
A. Domestic producers
A charge of 15-20% was levied by the government of Cadmia on the value of automobile accessories imported from a neighboring country. This increased the price of those imported car accessories for the consumers in Cadmia. Which of the following instruments of trade policy is being used by the government of Cadmia? A. Local content tariff B. Ad valorem tariff C. Subsidies D. Import quotas E. Antidumping duties
B. Ad valorem tariff
Which of the following identifies an attribute of tariffs? A. Tariffs reduce the price of foreign goods for domestic consumers. B. Tariffs reduce the overall efficiency of the world economy. C. Tariffs increase exports from a sector. D. Tariffs increase foreign competition for domestic producers. E. Tariffs increase efficient utilization of resources.
B. Tariffs reduce the overall efficiency of the world market
Which of the following is most likely to be an objective of export tariffs? A. Abiding by the rules enforced by the WTO B. Curbing the competition offered by foreign firms to domestic firms C. Reducing exports from a sector, often for political reasons D. Maintaining a positive trade deficit E. Increasing the flow of capital in the international market
C. Reducing exports from a sector, often for political reasons
By lowering production costs, subsidies help domestic producers to: A. gain export markets. B. meet import quotas. C. meet voluntary export restraints. D. meet the local content requirement. E. compete in the domestic market against local producers.
A. gain export markets
Which of the following groups would benefit the most from receiving subsidies? A. Governments B. International organizations such as the WTO C. Domestic producers D. Importers E. Foreign competitors
C. Domestic producers
Which of the following statements is true about import quotas? A. Import quotas benefit domestic producers by limiting import competition. B. Import quotas always lower the prices for domestically produced goods. C. Higher tariff rates are usually applied to imports within the quota than those over the quota. D. Import quotas benefit consumers by decreasing the domestic price of an imported good. E. Import quotas help foreign producers gain a competitive advantage.
A. Import quotas benefit domestic producers by limiting import competition.
Which of the following is the term for when a lower tariff rate is applied to imports within the quota than those over the quota? A. Tariff rate quota B. Voluntary import restraint C. Import duty D. Quota rent E. Import quota
A. Tariff rate quota
Which of the following refers to a quota on trade imposed by the exporting country, typically at the request of the importing country's government? A. Tariff rate quota B. Quota rent C. Voluntary export restraint (VER) D. Quota share E. Export embargo
C. Voluntary export restraint (VER)
The extra profit that producers make when supply is artificially limited by an import quota is referred to as a: A. net profit. B. quota rent. C. trade surplus. D. profit margin. E. quota share.
B. quota rent
Which of the following requires that some specific fraction of a good must be produced domestically? A. International allocation requirement B. Local content requirement C. Specific quota requirement D. Ad valorem portion requirement E. Domestic sales requirement
B. Local content requirement
Which of the following specifies that U.S. government agencies must give preference to U.S. products when putting contracts for equipment out to bid unless the foreign products have a significant price advantage? A. Export Administration Act B. Helms-Burton Act C. Hawley-Burton Act D. Buy America Act E. Volcker Rule
D. Buy America Act
Which of the following are bureaucratic rules designed to make it difficult for imports to enter a country? A. Voluntary export restraints B. Consumer regulations C. Subsidies D. Administrative trade policies E. Public sector regulations
D. Administrative trade policies
If Argonia exports vast quantities of cheap toys to Cadmia, selling them at below their costs of production, it would constitute: A. monopolism. B. dumping. C. offshoring. D. nearshoring. E. subsidizing.
Which of the following best indicates the motive for foreign firms to engage in dumping? A. Unloading excess production in foreign markets B. Cutting labor costs to reduce the costs of production C. Providing a wider range of products for consumers in foreign markets D. Meeting the voluntary export requirements imposed on it E. Obtaining subsidies from the importing country
A. Unloading excess production in foreign markets
Which of the following is the most common political argument for government intervention in international trade? A. Decreasing the prices of products in the domestic market B. Promoting strategic trade policy C. Protecting jobs and industries from unfair foreign competition D. Improving efficiency of domestic labor E. Protecting human rights
C. Protecting jobs and industries from unfair foreign competition
Why is retaliation by government intervention a risky strategy? A. It encourages dumping by foreign companies. B. It could result in increased tariff barriers by the country that is being pressured. C. It may expose certain industries that are important for national security to foreign competition. D. It allows firms to sell goods in the foreign market at below their fair market value. E. It makes it difficult for domestic firms to make any investments by borrowing money from the domestic capital market.
B. It could result in increased tariff barriers by the country that is being pressured.
Many developing countries have a potential comparative advantage in manufacturing, but new manufacturing industries cannot initially compete with well-established industries in developed countries, according to: A. economic development argument. B. comparative advantage theory. C. national security argument. D. infant industry argument. E. mixed economy theory.
D. infant industry argumment
One of the main reasons why many economists remain critical of the infant industry argument is its reliance on the assumption that: A. protection of manufacturing from foreign competition is harmful. B. absolute advantage cannot sustain productivity of an industry. C. foreign firms too come under the definition of infant industry when they newly enter a foreign market. D. firms are unable to make efficient long-term investments by borrowing money from the domestic or international capital markets. E. foreign competition will eventually cause domestic firms to improve the quality of their products.
D. firms are unable to make efficient long-term investments by borrowing money from the domestic or international capital markets
A government should use subsidies to support promising firms that are active in newly emerging industries, according to: A. strategic trade policy. B. public policy. C. absolute advantage. D. product life-cycle. E. industrialization.
A. strategic trade policy
According to Krugman, which of the following best indicates the dangers of a strategic trade policy? A. Decrease in subsidies B. Decrease in protectionism C. Occurrence of a trade war D. Huge financial debts for the countries involved E. Occurrence of a global recession
C. Occurrence of a trade war
The Smoot-Hawley Act had a damaging effect on: A. the balance-of-payment of the United States. B. cash flow in the domestic economy of the United States. C. prices of natural resources in the United States. D. employment abroad. E. accrued liabilities of the United States.
D. employment abroad
Which of the following best explains the reason for the rise in protectionist pressures around the world during the 1980s? A. The strict GATT bureaucracy in Geneva controlling trade regulations B. The opening up of international markets to cheap products from China C. The fall of the Soviet Union D. The persistent trade deficit in the world's largest economy, the United States E. The economic failure of Japan which hampered the global economy
D. The persistent trade deficit in the world's largest economy, the United States
Bilateral voluntary export restraints, or VERs, circumvented GATT agreements, because: A. these nations withdrew their membership to the GATT. B. the member nations had ceased to recognize GATT as a regulatory body for international trade. C. VERs were not a recognized trade barrier under the GATT constitution. D. neither the importing country nor the exporting country complained to the GATT bureaucracy for it to take action. E. member nations erected a wall of tariff barriers.
D. neither the importing country nor the exporting country complained to the GATT bureaucracy for it to take action
The United States accused Libya and Iran of supporting terrorist action and building weapons of mass destruction. The U.S. government, therefore, imposed trade sanctions against the two countries. Which of the following political arguments does this exemplify? A. Retaliation and trade war B. Furthering foreign policy objectives C. Strategic trade policy D. Corporate security E. Protecting infant industries
B. Furthering foreign policy objectives
Which of the following indicates the difference between GATT and WTO? A. WTO has strict time limits unlike GATT. B. WTO operates on the basis of consensus unlike GATT. C. GATT gives trading partners the right to compensation or, in the last resort, to impose (commensurate) trade sanctions unlike WTO. D. GATT's verdict is binding unlike that of WTO's. E. WTO allows member-countries to block adoption of arbitration reports unlike GATT.
A. WTO has strict time limits unlike GATT