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Chapter 06 - The Political Econom y of International Trade
Chapter 06 The Political Economy of International Trade True / False Questions
1. (p. 206) A situation where a goernment does not attempt to restrict what its citi!ens can "u y from another country or what they can sell to another country is #nown as free trade. TRUE
Difficulty: Easy
$. (p. 207) Tariffs Tariffs are unam"iguously pro-consumer and anti-producer. FA!E
Difficulty: Medium
%. (p. 207) E&port tariffs are far less common than import tariffs. TRUE
Difficulty: Medium
'. (p. 207) (pecific tariffs are leied as a proportion of the alue alue of the imported good. FA!E
Difficulty: Medium
). (p. 208) *y lowering production costs+ su"sidies help domestic do mestic producers compete against foreign imports and gain e&port mar#ets. TRUE
Difficulty: Medium
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Chapter 06 - The Political Econom y of International Trade
6. (p. 209) ,nder a tariff rate uota+ a higher tariff rate is applied to imports within the uota than those oer the uota. FA!E
Difficulty: Medium
. (p. 210) A common hy"rid of a uota and a rent is #nown as a uota uo ta rent. FA!E
Difficulty: Easy
/. (p. 211) ,nli#e other trade policies+ local content regulations tend to "enefit consumers and not producers. FA!E
Difficulty: Medium
. (p. 211) euirements that some specific fraction of a good "e produced domestically are #nown as local content reuirements. TRUE
Difficulty: Easy
10. (p. 211) *ureaucratic rules designed to ma#e it difficult for imports to enter a country are local content reuirements. FA!E
Difficulty: Easy
6-$
Chapter 06 - The Political Econom y of International Trade
11. (p. 211) A company that sells its product in a foreign mar#et "elow the co st of production may "e accused of dumping. TRUE
Difficulty: Easy
1$. (p. 212) Antidumping polices are designed to punish firms that are engaged in dumping. TRUE
Difficulty: Easy
1%. (p. 213) Antidumping policies ary drastically from country to country. FA!E
Difficulty: Easy
1'. (p. 214) The ,.(. goernment has used the threat of punitie trade sanctions to try to get the Chinese goernment to enforce its intellectual property laws. TRUE
Difficulty: Medium
1). (p. 214) 2any goernments hae long had regulations to protect consumers from unsafe products. TRUE
Difficulty: Easy
6-%
Chapter 06 - The Political Econom y of International Trade
16. (p. 216) The 3elms-*urton Act of 16 was aimed at foreign companies that were undermining ,.(. trade sanctions against 4i"ya and Iran. FA!E
Difficulty: Medium
1. (p. 217) The infant industry argument is the latest argument for goernment interention in trade. FA!E
Difficulty: Medium
1/. (p. 218) (trategic trade policy suggests that a goernment should use su"sidies to support promising firms that are actie in newly emerging industries. TRUE
Difficulty: Medium
1. (p. 218) 5ATT has not recogni!ed the infant industry argument as a legitimate reason for protectionism. FA!E
Difficulty: Medium
$0. (p. 219) rugman has suggested that trade policy designed to retaliate against another country7s trade policy would hurt the citi!ens of "oth countries. TRUE
Difficulty: Had
6-'
Chapter 06 - The Political Econom y of International Trade
$1. (p. 220) 5oernments do not always act in the national interest when they interene in the economy8 politically important interest groups often influence them. TRUE
Difficulty: Medium
$$. (p. 221) The (moot-3awley Act raised tariff "arriers in the hope of protecting 9o"s and dierting consumer demand away from foreign products. TRUE
Difficulty: Medium
$%. (p. 222) A #ey goal of the 1/6 ,ruguay ound was to e&tend 5ATT to coer trade in serices. TRUE
Difficulty: Medium
$'. (p. 222) :uring the 1/0s and early 10s+ the world trading system erected "y the 5ATT gained momentum as protectionist demands generally decreased across the world. FA!E
Difficulty: Easy
$). (p. 223) The ;orld Trade
Difficulty: Medium
6-)
Chapter 06 - The Political Econom y of International Trade
$6. (p. 223) The ;T< does not hae the power to impose trade sanctions. FA!E
Difficulty: Medium
$. (p. 224) To date+ the ;T<7s policing efforts hae "een a ma9or failure. FA!E
Difficulty: Medium
$/. (p. 22!) A #ey issue in the 2illennium ound of the ;T< was to reduce "arriers to cross "order trade in agricultural products. TRUE
Difficulty: Medium
$. (p. 226) 3uman rights actiists see ;T< rules as outlawing the a"ility of nations to stop imports from countries where child la"or is used or wor#ing conditions are ha!ardous. TRUE
Difficulty: Medium
%0. (p. 226) The ;T< has the a"ility to force any mem"er nation to ta#e an action to which it is opposed. FA!E
Difficulty: Medium
6-6
Chapter 06 - The Political Econom y of International Trade
%1. (p. 227) The ma9ority of antidumping actions are concentrated in 9ust a few industries. TRUE
Difficulty: Medium
%$. (p. 227) ;T< rules do not allow countries to impose antidumping duties on foreign goods that are "eing sold cheaper than at home or "elow their cost of production+ een when domestic producers can show that they are "eing harmed. FA!E
Difficulty: Medium
%%. (p. 228) Tariff rates on agricultural products are generally much lower than tariff rates on manufactured products or serices. FA!E
Difficulty: Medium
%'. (p. 228) =ree trade in agriculture could 9ump-start economic growth among the world7s poorer nations and alleiate glo"al poerty. TRUE
Difficulty: Medium
%). (p. 229) The TIP( regulations o"lige ;T< mem"ers to grant and enforce patents lasting at least $0 years and copyrights lasting )0 years. TRUE
Difficulty: Easy
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Chapter 06 - The Political Econom y of International Trade
%6. (p. 229) Inadeuate protections for intellectual property reduce the incentie for innoation. TRUE
Difficulty: Easy
%. (p. 230) Tariffs on industrial goods remain higher than tariffs on serices. FA!E
Difficulty: Medium
%/. (p. 233) Tariff "arriers lower the costs of e&porting products to a country. FA!E
Difficulty: Easy
%. (p. 233) The threat of antidumping action limits the a"ility of a firm to use aggressie pricing to gain mar#et share in a country. TRUE
Difficulty: Medium
'0. (p. 233) To conform to local content regulations+ a firm may hae to locate more production actiities in a gien mar#et than it would otherwise. TRUE
Difficulty: Medium
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Chapter 06 - The Political Econom y of International Trade
"ultiple Choice Questions
'1. (p. 206) =ree trade A# efers to a situation in which a goernment does not attempt to restrict what its citi!ens can "uy from or sell to another country *. educes the oerall efficiency of the world economy. C. :escri"es the range of policy instruments that goernments use to interene in international trade :. Is a goernment payment to a domestic producer
Difficulty: Easy
'$. (p. 206) ;hich of the following is not one of the main instruments of trade policy> A. Tariffs $# Credit portfolios C. 4ocal content reuirements :. Administratie policies
Difficulty: Medium
'%. (p. 207) In recent decades+ tariff "arriers hae "een ????? while non tariff "arriers hae "een ?????. A# =alling+ rising *. ising+ falling C. 4eeling+ rising :. =alling+ leeling
Difficulty: Medium
6-
Chapter 06 - The Political Econom y of International Trade
''. (p. 207) (pecific tariffs are A. 4eied as a proportion of the alue of the imported good $# 4eied as a fi&ed charge for each unit of a good imported C. In the form of manufacturing or production reuirements of goods. :. 5oernment payment to domestic producers
Difficulty: Medium
'). (p. 207) This is leied as a proportion of the alue of the imported good. A. (pecial tariff *. Ad alorem tariff C. Tariff uota %# (pecific tariff
Difficulty: Medium
'6. (p. 207) Tariffs do not "enefit A. Consumers $# :omestic producers C. 5oernments :. :omestic firms
Difficulty: Medium
'. (p. 207) All of the following are true of tariffs+ e&cept A# They reduce the reenue for the goernment *. They can "e leied as a proportion of the alue of the imported good C. They can "e leied as a fi&ed charge for each unit of a good imported :. They impose significant costs on domestic consumers
Difficulty: Had
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Chapter 06 - The Political Econom y of International Trade
'/. (p. 208) *y lowering production costs+ ????? help domestic producers compete against foreign imports. A. Tariffs *. :uties C. @uotas %# (u"sidies
Difficulty: Medium
'. (p. 208) ;hich of the following o"serations pertaining to goernment su"sidies is incorrect> A. They must "e paid for+ typically "y ta&ing indiiduals and corporations *. They mainly "enefit domestic producers+ whose international competitieness is increased C. ;hether they generate national "enefits that e&ceed their national costs is de"ata"le %# They help foreign producers gain a competitie adantage oer domestic producers
Difficulty: Medium
)0. (p. 208) (u"sidies hae "een critici!ed for all of the following reasons e&cept A. They allow inefficient farmers stay in "usiness *. They encourage to oerproduce heaily su"sidi!ed agricultural products C. They encourage countries to produce products that could "e grown more cheaply elsewhere and imported %# They increase international trade in agricultural products
Difficulty: Had
)1. (p. 208) According to the ????? policy+ su"sidies can help a firm achiee a first-moer adantage in an emerging industry. A# (trategic trade *. Antidumping C. Tariff uota :. =ree trade
Difficulty: Had
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Chapter 06 - The Political Econom y of International Trade
)$. (p. 208) This is a direct restriction on the uantity of some good that may "e imported into a country. A. (pecific tariff $# Import uota C. (u"sidy :. Ad alorem tariff
Difficulty: Easy
)%. (p. 208"209) In the ,nited (tates only firms allowed to import cheese are certain trading companies+ each of which is allocated the right to import a ma&imum num"er of pounds of cheese each year. Identify the trade restriction "eing imposed "y the ,.(. here. A# Import uota *. (u"sidy C. Ad alorem tariff :. (pecific tariff
Difficulty: Had
)'. (p. 209) A common hy"rid of a uota and a tariff is #nown as a A. @uota rent *. oluntary e&port restraint C. Ad alorem tariff %# Tariff rate uota
Difficulty: Easy
)). (p. 210) A uota on trade imposed "y the e&porting country+ typically at the reuest of the importing country7s goernment is referred to as aBn A# oluntary e&port restraint *. (pecific tariff uota C. Trade reconciliation :. Ad alorem tariff
Difficulty: Easy
6-1$
Chapter 06 - The Political Econom y of International Trade
)6. (p. 210) A uota rent is A. A uota on trade imposed "y the e&porting country *. 4eied as a fi&ed charge for each unit of a good imported C. 4eied as a proportion of the alue of the imported good %# The e&tra profit producers ma#e when supply is artificially limited "y an import uota
Difficulty: Easy
). (p. 210) =oreign producers typically agree to oluntary e&port restrictions "ecause A. Their manufacturing capacity is limited *. They can diert their e&ports to other countries and charge more for their products C# They fear far more damaging punitie tariffs or import uotas might follow if they do not :. They are reuired to "y the ;orld Trade
Difficulty: Medium
)/. (p. 210) ;hich of the following statements concerning a oluntary e&port restraint is not true> A. It "enefits domestic producers "y limiting import competition $# In most cases+ it "enefits consumers. C. It raises the domestic price of an imported good :. It is a ariant of the import uota
Difficulty: Medium
). (p. 211) These are reuirements that some specific fraction of a good "e produced domestically. A. Import uotas $# oluntary e&port restraints C. 4ocal content reuirements :. Antidumping duties
Difficulty: Easy
6-1%
Chapter 06 - The Political Econom y of International Trade
60. (p. 211) The ????? specifies that goernment agencies must gie preference to American products when putting contracts for euipment out to "id unless the foreign products hae a significant price adantage. A# *uy America Act *. Anti-:umping Act C. 3elms-*urton Act :. :7Amato Act
Difficulty: Medium
61. (p. 211) Administratie trade policies are A. euirements that some specific fraction of a good "e produced domestically *. @uotas on trade imposed "y the e&porting country C# *ureaucratic rules designed to ma#e it difficult for imports to enter a country :. :esigned to punish foreign firms that engage in dumping
Difficulty: Easy
6$. (p. 211"212) ;hich of the following is ariously defined as selling goods in a foreign mar#et at "elow their costs of production or as selling goods in a foreign mar#et at "elow their DfairD mar#et alue> A. E&port restraint $# :umping C. 4ocal content reuirement :. Ad alorem
Difficulty: Easy
6%. (p. 212) Antidumping duties are often called A. (pecial circumstance duties *. Positie duties C. etroactie duties %# Counterailing duties
Difficulty: Easy
6-1'
Chapter 06 - The Political Econom y of International Trade
6'. (p. 214) The ,.(. goernment using the threat of punitie trade sanctions to try to get the Chinese goernment to enforce its intellectual property laws is an e&le of goernment interention "ased on A. 3uman rights protection *. ational security C. Consumer protection %# etaliation
Difficulty: Medium
6). (p. 216) If a goernment grants preferential trade terms to a country it wants to "uild strong relations with+ the goernment is employing a policy A.
Difficulty: Medium
66. (p. 216) This act allows Americans to sue foreign firms that use property in Cu"a confiscated from them after the 1) reolution. A. *uy America Act *. Anti-:umping Act C# 3elms-*urton Act :. :7Amato Act
Difficulty: Had
6. (p. 218) According to the ????? argument+ goernments should temporarily support new industries until they hae grown strong enough to meet international competition. A. etaliatory action *. 3uman rights C# Infant industry :. Anti-dumping
Difficulty: Easy
6-1)
Chapter 06 - The Political Econom y of International Trade
6/. (p. 218) ????? suggests that a goernment should use su"sidies to support promising firms that are actie in newly emerging industries. A. The infant industry argument $# (trategic trade policy C. etaliation policy :. The national security argument
Difficulty: Medium
6. (p. 219) ????? argues that a strategic trade policy aimed at esta"lishing domestic firms in a dominant position in a glo"al industry is a "eggar-thy-neigh"or policy that "oosts national income at the e&pense of other countries. A. :aid icardo *. Adam (mith C. 2ichael Porter %# Paul rugman
Difficulty: Had
0. (p. 220) The E,7s Common Agricultural Policy is an e&le of a ta& policy designed to A. *enefit consumers *. *enefit ta&payers C# *enefit special interest politics :. *enefit free trade in a deeloped country
Difficulty: Had
1. (p. 221) Economic pro"lems during the 5reat :epression were compounded in 1%0 when the ,.(. Congress passed the ?????+ aimed at aoiding rising unemployment "y protecting domestic industries and dierting consumer demand away from foreign products. A# (mootF3awley Act *. AntiF:umping Act C. 3elmsF*urton Act :. :7Amato Act
Difficulty: Had
6-16
Chapter 06 - The Political Econom y of International Trade
$. (p. 222) ;hich of the following is not a reason for the pressure for greater protectionism that occurred during the 1/0s and early 10s> A# The growing ,.(. trade surplus with Gapan strained the world trading system *. Gapanese economic success strained the world trading system C. The persistent trade deficit in the ,.(. strained the world trading system :. 2any countries found ways to get around 5ATT regulations
Difficulty: Had
%. (p. 222) In the 1/6 ,ruguay ound+ 5ATT mem"ers sought to write rules for promoting all of the following e&cept A. Intellectual property protection $# Agricultural su"sidies C. 5ATT7s monitoring and enforcement mechanisms :. 5ATT rules to coer trade in serices
Difficulty: Medium
'. (p. 223) ,ntil 1)+ 5ATT rules applied to all of the following+ e&cept A. 2anufactured goods $# (erices C. Te&tiles :. Agricultural products
Difficulty: Medium
). (p. 223) According to the 1/6 ,ruguay ound ????? was to "e created to implement the 5ATT agreement. A# ;orld Trade
Difficulty: Medium
6-1
Chapter 06 - The Political Econom y of International Trade
6. (p. 224) After the ,ruguay ound of 5ATT e&tended glo"al trading rules to coer trade in serices+ the first two industries targeted for reform "y the ;T< were A. Te&tiles and technology $# Telecommunications and financial serices C. Automoties and aerospace :. Agriculture and consulting serices
Difficulty: Medium
. (p. 22!) The 2illennium ound ended in 1 with A. A successful record on agricultural products *. A new agenda for the ne&t round focusing on financial serices C# o agreement on the reduction of "arriers to cross-"order trade in agricultural products and trade and inestment in serices :. A decision to aoid =:I
Difficulty: Medium
/. (p. 226) ;hich of the following is not a reason why ;T< is "eing critici!ed "y those opposing free trade> A. Its trade laws allow imports from low-wage countries and result in a loss of 9o "s in highwage countries *. Its rules outlawing the a"ility of nations to stop imports from countries where wor#ing conditions are ha!ardous C. The aderse impact that some of its rulings hae had on enironmental policies %# Its lac# of a"ility to force any mem"er nation to ta#e an action to which it is opposed.
Difficulty: Medium
6-1/
Chapter 06 - The Political Econom y of International Trade
. (p. 227) ????? has occurred when foreign goods are "eing sold cheaper than at home or "elow their cost of production. A. 2ar#et saturation *. Price elasticity C. Production efficiency %# :umping
Difficulty: Medium
/0. (p. 228) The ;T< argues that "y remoing all tariff "arriers and su"sidies to agriculture all of the following would occur+ e&cept A. The oerall leel of trade would increase $# There would "e oerproduction of products that are heaily su"sidi!ed C. Prices would fall for consumers :. 5lo"al economic growth would rise
Difficulty: Had
/1. (p. 229) The TIP( regulations esta"lished at the 1) ,ruguay ound A# Esta"lished regulations on patents and copyrights *. (et a new leel of agriculture su"sidies C.
Difficulty: Medium
/$. (p. 229) TIP( regulations o"lige ;T< mem"ers to all of the following e&cept A. 5rant and enforce patents lasting at least $0 years. *. 5rant and enforce copyrights lasting )0 years. C# Comply with the rules within ) years in the case of rich countries :. Comply with the rules within 10 years in the case of the poorest countries
Difficulty: Medium
6-1
Chapter 06 - The Political Econom y of International Trade
/%. (p. 230) ????? are the highest rate that can "e charged+ which is often+ "ut not always+ the rate that is charged. A. Ad alorem tariff rates *. Tariff rents C. (pecific tariff rates %# *ound tariff rates
Difficulty: Medium
/'. (p. 233) Identify the incorrect statement pertaining to trade "arriers. A. They raise the costs of e&porting products to a country $# They may put a firm at a competitie adantage to indigenous competitors C. They may limit a firm7s a"ility to sere a country from locations outside of that country :. To conform to local content regulations+ a firm may hae to locate more production actiities in a gien mar#et than it would otherwise
Difficulty: Had
Essay Questions
/). (p. 207) :iscuss the different types of tariff "arriers. Consider the "eneficiaries of tariff "arriers and the losers. There are two types of tariffs+ specific tariffs that are leied as a fi&ed charge for each unit of a good imported and ad alorem tariffs that are leied as a proportion of the alue of the imported product. The goernment gains from tariffs in the form of increased reenues. :omestic producers also "enefit from the protection against foreign competition. Consumers lose "ecause they must pay more for products that hae "een affected "y tariffs.
Difficulty: Medium
6-$0
Chapter 06 - The Political Econom y of International Trade
/6. (p. 208) :iscuss the different types of su"sidies. 3ow do su"sidies help domestic producers> (u"sidies are essentially a goernment payment to a producer. There are many forms of su"sidies including cash grants+ low-interest loans+ ta& "rea#s and goernment e uity participation in domestic firms. (u"sidies "enefit domestic producers in two waysH they help them compete against low-cost foreign imports and they help them gain e&port mar#ets.
Difficulty: Medium
/. (p. 208"210) Compare and contrast import uotas and oluntary e&port restraints. An import uota is a direct restriction on the uantity of some good that may "e imported into a country. The restriction is normally enforced "y issuing import licenses to a group of indiiduals or firms. In contrast+ a oluntary e&port restraint BE is a uota imposed " y the e&porting country+ typically at the reuest of the importing country7s goernment. =oreign producers agree to Es "ecause they fear more damaging punitie tariffs or import uotas might follow if they do not. *oth import uotas and Es "enefit domestic producers+ "ut hurt consumers through higher prices.
Difficulty: Medium
//. (p. 210) ;hat is a uota rent> Proide an e&le of how an import uota affects price. The e&tra profit that producers ma#e when supply is artificially limited "y an import uota is referred to as a uota rent. If a domestic industry lac#s the capacity to meet demand+ an import uota can raise prices for "oth the domestically produced and the imported good. (tudents will pro"a"ly use the e&le of the ,.(. sugar industry when discussing the uestion.
Difficulty: Medium
6-$1
Chapter 06 - The Political Econom y of International Trade
/. (p. 211) :iscuss the *uy America Act and its connection with local content reuirements. The *uy America Act specifies that goernment agencies must gie preference to American products when putting contracts for euipment out to "id unless the foreign products hae a significant price adantage. The law specifies a product as "eing American if )1 percent of the materials "y alue are produced domestically. This amounts to a local content reuirement that calls for a specific fraction of a good to "e produced locally.
Difficulty: Had
0. (p. 211) E&plain how goernments use administratie trade policies to "oost e&ports and restrict imports. Proide an e&le of an administratie trade policy. Administratie trade policies are "ureaucratic rules that are almost always deli"erately designed to restrict the flow of a particular import into a country. The Gapanese are considered masters of this trade "arrier. (tudents will pro"a"ly use the e&le of tulip "ul"s when discussing this uestion. The etherlands e&ports tulip "ul"s to almost eery country of the world e&cept Gapan. The reason is that Gapanese customs inspectors insist on chec#ing eery tulip "ul" "y cutting it ertically down the middle+ which in effect ruins the "ul".
Difficulty: Medium
1. (p. 211"212) ;hat is dumping> 3ow do goernments respond to charges of dumping> :umping is defined as selling goods in a foreign mar#et at "elow their costs of production or as selling goods in a foreign mar#et at "elow their DfairD mar#et alue. Antidumping policies are designed to punish foreign firms that engage in dumping. If a firm is found to "e dumping+ counterailing duties may "e imposed. These duties can "e fairly su"stantial and stay in place for up to fie years.
Difficulty: Medium
6-$$
Chapter 06 - The Political Econom y of International Trade
$. (p. 212) E&plain the notion of predatory "ehaior with regard to dumping. A firm that is dumping is selling its product in a foreign mar#et at "elow their costs of production or as selling goods in a foreign mar#et at "elow their DfairD mar#et alue. :umping may "e the result of predatory "ehaior with producers using su"stantial profits from their home mar#ets to su"sidi!e profits from their home mar#ets to su"sidi!e prices in a foreign mar#et with a goal of driing indigenous competitors out of that mar#et.
Difficulty: Medium
%. (p. 212"17) ;hat are the political reasons for goernments to interene in mar#ets> There are a num"er of political reasons why goernments interene in mar#ets. The most common reason for interention is to protect 9o"s and industries. 5oernments may also interene to protect national security+ to threaten punitie retaliatory actions+ to protect consumers or to protect human rights and to further foreign policy o"9ecties.
Difficulty: Medium
'. (p. 217"19) :iscuss the economic reasons for goernment interention in mar#ets. The economic reasons for goernment interaction hae undergone a renaissance in recent times as more economists support economic reasons for interention. The oldest argument for interention is the infant industry argument. (trategic trade policy is the other main reason gien for economic goernment interention in mar#ets.
Difficulty: Medium
6-
%$ Chapter 06 - The Political Econom y of International Trade
). (p. 217"218) :iscuss the infant industry argument for interention in mar#ets. ;hat is 5ATT7s position on the argument> Ale&ander 3amilton proposed the infant industry argument for interention in mar#ets in 1$. According to this argument+ many deeloping countries hae a potential comparatie adantage in manufacturing+ "ut new manufacturing industries cannot initially compete with esta"lished industries in deeloped countries. To allow manufacturing to get a toehold+ the argument is that goernments should temporarily support new industries until they hae grown strong enough to meet international competitors. 5ATT has recogni!ed the infant industry argument as a legitimate reason for protectionism.
Difficulty: Medium
6. (p. 218"219) ;hat is strategic trade policy> Proide an e&le. (trategic trade policy suggests that in industries where the e&istence of su"stantial scale economies implies that the world will profita"ly support only a few firms+ countries may predominate in the e&port of certain products simply "ecause they had firms that were a"le to capture first-moer adantages. *oeing7s dominance in the aerospace industry has "een attri"uted to these types of factors. According to strategic trade policy+ a goernment can help raise national incomes if it can ensure that the firms that gain first-moer adantages in such industries are domestic rather foreign. =urther the theory argues that it might pay go ernments to interene in an industry if it helps domestic firms oercome the "arriers to entry created "y foreign firms that hae already reaped first-moer adantages.
Difficulty: Medium
6-$'
Chapter 06 - The Political Econom y of International Trade
. (p. 219) ;hat is Paul rugman7s position on strategic trade policy> Paul rugman suggests that strategic trade policy aimed at esta"lishing do mestic firms in a dominant position in a glo"al industry is a "eggar-thy-neigh"or policy that "oosts national income at the e&pense of other countries. Conseuently+ a country that uses this type of policy will pro"a"ly draw retaliatory action. The resulting trade war would leae "oth countries worse off than if a free trade approach had "een implemented to start. rugman suggests that to aoid the disruptions a trade war would create+ countries should instead help esta"lish the rules of the game that minimi!e the use of trade-distorting su"sidies.
Difficulty: Had
/. (p. 221) :iscuss the esta"lishment of 5ATT. ;hat was 5ATT7s o"9ectie> The 5ATT was a multilateral agreement whose o"9ectie was to li"erali!e trade "y eliminating tariffs+ su"sidies+ import uotas and other trade "arriers. 5ATT was esta"lished in 1' with 1 mem"ers. 2em"ership increased to more than 1$0 nations "y the time it was superseded "y the ;T<. ,nder 5ATT+ tariff reduction was spread oer eight rounds. The last round+ the ,ruguay ound resulted in the esta"lishment of the ;T< which+ among other things too# oer the role of 5ATT in the glo"al economy.
Difficulty: Medium
. (p. 222) ;hat happened to 5ATT during the 1/0s and early 10s> :uring the 1/0s and early 10s+ the world trading system esta"lished "y 5ATT came under significant strain as pressures for greater protectionism mounted around the world. Three issues in particular were important. =irst+ the economic success of Gapan strained the world trading system. (econd+ the world7s trading system was further strained "y the persistent trade deficit in the world7s largest economy+ the ,nited (tates. =inally+ many countries found ways to get around 5ATT regulations.
Difficulty: Had
6-$)
Chapter 06 - The Political Econom y of International Trade
100. (p. 223"224) ;hat has "een the e&perience of the ;T< to date> ;hat does the future loo# li#e for the organi!ation> *y $00)+ the ;T< had 1'/ mem"ers with more in the application process. The ;T< has remained at the forefront of efforts to promote free trade. (o far+ it appears that its policing and enforcement mechanisms are haing a positie effect. Countries are using the ;T< to settle trade disputes+ which represents an important ote of confidence in the organi!ation7s dispute resolution procedures. (o far+ the users of the system hae included "oth deeloped and deeloping countries+ which is also a promising deelopment. In addition+ some powerful deeloped countries+ including the ,nited (tates+ hae "een willing to accept ;T< rulings that hae gone against them+ which attest to the organi!ation7s legitimacy.
Difficulty: Medium
101. (p. 227) ;hat are the central issues facing the ;T< at the present time> =our issues at the top of the agenda for the ;T< are the increase in antidumping policies+ the high leel of protectionism in agriculture+ the lac# of strong protection for intellectual property rights in many nations and continued high tariff rates on nonagricultural goods and serices in many nations. These issues were a #ey focus at the :oha ound which "egan in $001.
Difficulty: Medium
10$. (p. 228) ;hy are tariff rates on agricultural products generally higher than tariff rates on manufactured products or serices> Tariff rates on agricultural products are typically higher than tariffs on manufactured products. 3igh tariff rates on agricultural products were designed to protect domestic agriculture and traditional farming communities from foreign competition. I2= estimates indicate that remoing the tariffs and su"sidies could raise glo"al economic welfare "y 1$/ "illion annually.
Difficulty: Medium
6-$6
Chapter 06 - The Political Econom y of International Trade
10%. (p. 231"232) :iscuss the :oha ound of trade tal#s> The :oha ound "egan in $001. Its agenda focused on cutting tariffs on industrial goods and serices+ phasing out su"sidies to agricultural producers+ reducing "arriers to cross-"order inestment and limiting the use of antidumping laws. The agenda agreed upon at :oha should "e seen as a game plan for negotiations oer the ne&t few years.
Difficulty: Medium
10'. (p. 233) E&plain how trade "arriers affect a firm7s strategy. There are four main ways trade "arriers affect a firm7s strategy. =irst+ tariffs raise the cost of e&porting+ putting the firm at a competitie disadantage. (econd+ uotas may limit a firm7s a"ility to sere a country from outside of that country. Third+ to conform to local content regulations+ a firm may hae to locate more production actiities in a gien mar#et than it would otherwise. =inally+ the threat of antidumping actions limits the firm7s a"ility to use aggressie pricing to gain mar#et share in a country.