IB TEST 3: Chapter 7

What are two reasons countries should remain focused on opening markets?

1) Because of high tariff rates on imports of selected goods from developing nations into developed nations 2) Because average tariffs on services remains higher than on industrial goods..

Subsidies can be presented in the form of:

1) Cash Grants 2) Low-Interest Loans 3) Tax Breaks

By lowering production costs, how do subsides help domestic producers?

1) Competing against foreign imports 2) Gaining export markets -An example of this is Agriculture

What were the first two industries targeted by the WTO as part of it's effort to include regulations governing foreign direct investment?

1) Financial Services 2) Global telecommunication

Which groups are negatively impacted when an import tariff is enacted?

1) Foreign Producers 2) Consumers

What are two components of Strategic Trade Policy

1) Governments should intervene to assist firms in overcoming barriers to entry created by foreign firms due to first- mover advantages 2) Governments should subsidize promising domestic firms in emerging industries.

In it's first two decades, the WTO has been successful based on what two reasons?

1) Member countries have faith in the WTO's dispute relation procedures 2) countries involved in formal procedures for trade disputes have adopted WTO recommendations.

Which three industries are more likely to be targeted by antidumping actions?

1) Plastics 2) Metals 3) Chemicals

Local Content Requirements

1) Protect domestic producers 2)Consumers face higher prices

What are two criticisms of the Infant Industry Agreement?

1) Protection of manufacturing from foreign competition does no good unless the protection helps make the industry efficient. 2) Assumes firms are unable to make efficient long-term investments by borrowing money from the domestic or international capital market.

The Revised cases for Free Trade

1) Regulation and Trade War 2) Domestic Policies

What are the economic arguments for intervention?

1) The Infant Industry Arguement 2) Strategic Trade Policy

What are two ways a government uses intervention in trade as a foreign policy instrument?

1) pressure or punish "rogue states" 2) grant preferential trading terms to countries it wants to build relations with

Under the umbrella of GATT, the two sister bodies GATS and TRIPS focus on which two issues

1) services 2) intellectual property

Which groups are positively impacted when an import tariff is enacted?

1)Government 2) Domestic Producers

What are the political arguments for intervention?

1)Protecting jobs and industries 2) Protecting National Security 3)Retaliating 4) Protecting Consumers 5)Furthering Foreign Policy Objectives 6) Protecting Human Rights

An example of an Export Ban is the

1975 ban on US crude oil exports.

Tariff Rate Quota

A direct restriction on the quantity of some good that may be imported into a country.

Export Ban

A policy that partially or entirely restricts the export of a good.

Voluntary Export Restraint (VER):

A quota on the trade imposed from the exporting country's side- instead of the importers.

Local Content Requirement (LCR)

A requirement that some specific fraction of a good can be produced domestically.

Ad Valorem Tariff

A tariff leveled as a proportion of the value of an imported good.

Tariff

A tax levied on imports

Export Tariff

A tax placed on the export of a good

The case for free trade dates to the late 18th century work of

Adam Smith and David Ricardo

The General Agreement on Tariffs and Trade (GATT)

An international treaty that committed signatories to lowering barriers to the free flow of goods across national borders and led to the World Trade Organization.

Why is the government's use of the threat of intervention a risk strategy?

Because a country that is being pressured may not back down and instead may respond to the imposition of punitive tariffs by raising trade barriers of it's own.

Why is protecting consumers a political argument for intervention?

Because governments need to have long regulations to protect it's customers from unsafe products.

Why is protecting human rights a political argument for government intervention?

Because governments sometimes use trade policy to try to improve human rights policies of trading partners (An example of this is the western governments who used trade sanctions against South Africa, as a way of pressuring the nation to stop it's apartheid policies, which were seen as a violation of human rights)

Why don't governments always act in the national interest when they intervene in the economy?

Because politically important interest groups often influence them.

Antidumping Policies

Designed to punish foreign firms that engage in dumping and thus protest domestic producers from unfair foreign competition.

Smoot-Hawley Act:

Enacted in 1930 by the U.S. Congress, this act erected a wall of tariff barriers against imports into the United States.

Quota Rent

Extra profit producers make when supply is artificially limited by an import quota.

Subsidy

Government financial payments/ financial assistance to a domestic producer

Strategic Trade Policy

Government policy aimed at improving the competitive position of a domestic industry and/or domestic firm in the world market.

The case for free trade was first embraced by

Great Britain in 1846, when the British repealed the "Corn Laws'.

intervene to protect interests of politically important groups.

Nations are nominally committed to free trade, but

Infant Industry Argument

New industries in developing countries must be temporarily protected from international competitors to help them reach position where they can compete on world markets with the firms of developed nations.

Specific Tariffs

Tariff leveled as a fixed charge for each unit of good imported.

What does GATT stand for

The General Agreement on Tariffs and Trade

What does the WTO stand for?

The World Trade Organization

Administrative Trade Policies

Typically adopted by government bureacracies that can be used to restrict imports or boost exports.

1) They increase government revenues 2) They force consumers to pay more for certain imports 3) They are pro- producer and anti consumer 4) They reduce overall efficiency of the economy

What are the impact of tariffs?

Import Quota

a direct restriction on the quantity of a good that can be imported into a country

In terms of furthering foreign policy objectives,

a government may grand preferential trade terms to a country with which it wants to build strong relations.

Levied

added onto

The Smoot Hawley Act erected

an enormous wall of trade barriers.

Countervailing Duties

antidumping duties

Certain industries such as defense related ones, are protected because those in favor in protecting them,

argue that semiconductors and other industries serve such an important component of defense products that it would be dangerous to rely primarily on foreign producers for them.

Voluntary Export Restraint's are usually imposed

at the request of the importing country's government

In terms of retaliating, the government uses threat of intervention as a

bargaining tool to help open foreign markets and force trading partners to "play by the rules".

Why is furthering foreign policy objectives a political argument for government intervention?

because governments sometimes use trade policy to support their foreign policy objectives.

Paul Krugman argued that strategic trade policies aimed at establishing domestic firms in a dominant position in a global industry,

boost national income at the expense of other countries.

Brazil Automakers

built the 10th largest auto industry behind tariff barriers and quotas.

Critics say unfair competition

claims overstated for political reasons

Administrative Trade Policies hurt

consumers by limiting choice

The British's major trading partners

did not reciprocate the British policy of unilateral free trade.

The goal of an export tariff is to

discriminate against exporting in order to ensure that there is a sufficient supply of a good within a country.

Trade policy has also been used several times to pressure or punish "rogue states" that

do not abide by international law or norms.

Following the Great Depression, the US

embraced free trade.

The WTO is more successful than GATT because the WTO has

enforcement mechanisms that make it more effective

Today. if a developing country has a potential comparative advantage in a manufacturing industry,

firms in that country should be able to borrow money from the capital markets to finance the required investments.

During the 1980s and early 1990s, the trading system erected by the GATT came under strain of pressures

for greater protectionism increased around the world.

Once Brazil's tariff barriers were removed,

foreign imports soared, and the industry was forced to face up the fact that after 30 years of protection, the Brazilian auto industry was one of the world's most inefficient.

Free trade occurs when

governments do not attempt to restrict what citizens can buy from another country or what the can sell to another country.

In terms of domestic policies,

governments don't always act in the national interest when they intervene in the economy

The Strategic Trade Policy can

help establish antidumping policies that can be used to target competitors subsidies who are selling goods at prices that are below their costs of production.

A government can intervene in an industry by

helping domestic firms overcome the barriers to entry created by foreign firms that have already reaped first mover advantages. *This supports government intervention in international trade.

A tariff rate quota is a

hybrid of a quota and a tariff where a lower tariff is applied to imports within the quota than to those over a quota.

The infant industry argument is only good

if it makes the industry efficient

In response to this challenge to economic orthodoxy, a number of economists-including some of those responsible for the development of the new trade theory such as Paul Krugman- point out that although strategic trade policy looks appealing in theory,

in practice it may be unworkable

The infant industry argument

is protected under the wto

The oldest argument of the infant industry argument

is the one proposed by Alexander Hamilton (1792)

Import Quotas are usually enforced by

issuing import licenses to a group of individuals or firms.

Protecting National Security is a political argument for intervention because

it is considered important to protect certain industries because they are important for national security. An Example of a industry that is important for national security is aerospace, advanced electronics, and semiconductors)

GATT'S tariff reduction was spread

over eight rounds and was very successful

Subsidies encourage

overproduction, inefficiency, and reduced trade

A requirement of a LCR can be expressed in

physical or value terms

Dumping may be the result of predatory behavior because

producers use profits from their home markets to subsidize prices in a foreign market, to drive out competitors out of that market. Once this has been achieved, the producers raise the prices.

Voluntary Export Restraint's can appease

protectionist measures in a country

A country that attempts to use strategic trade policies will probably

provoke retaliation.

The objectives of the corn laws were to

raise government revenues and protect British corn producers.

What was the Smoot-Hawley Act placed to avoid?

rising unemployment by protecting domestic industries and diverting consumer demand away from foreign products.

Dumping

selling goods in a foreign market for less than their cost of production or below the "fair" market value

The Uruguay Round extended trade policy to cover

services

A tax on imports that is levied as a fixed charge per unit of an imported good is called a

specific tariff

Reducing many of the tariffs that are still in existence will lead to

substantial gains in global trade

If the government uses the threat of intervention and it works then,

such a politically motivated rationale for government intervention may liberalize trade and bring with it resulting economic gains.

Support for the Infant Industry Argument comes through

tariffs, import quotas, and subsidies

Subsidy revenues are generated from

taxes

For a Strategic Trade Policy,

the Government can help raise national income when a domestic firm gains first- mover advantages. *This supports government intervention in international trade.

Free Trade refers to

the absence of barriers to the free flow of goods and services between countries.

As with all restrictions on trade, quotas do not benefit

the consumers

If a domestic producer believes that a foreign firm is dumping production into the US market,

the domestic producers can file a petition with the Commerce Department and the International Trade Commission (ITC)

Protectionism measures in the agriculture industry encourage the overproduction of products which are then typically purchased by

the government

The infant industry argument requires government financial assistance (with tariffs, import quotas, and subsidies) if

the manufacturing industry in the developing country is new, until they have grown strong enough to meet international competition.

Protecting jobs and industries is

the most common political reason for government intervention.

Strong economic arguments support unrestricted free trade. While many governments have recognized the value of these arguments,

they have been unwilling to unilaterally lower trade barriers for fear others might not follow suit.

As with tariffs and subsidies, both import quotas and voluntary export restraint's benefit domestic producers in that

they limit import competition.

Paul Krugman concludes that strategic trade policy is almost certain

to be captured by special-interest groups which will distort it to their own ends.

The indirect effect of the regulations that go with the government protecting it's consumers is,

to limit or ban the importation of such products.

In the context of subsidies, domestic producers gain while consumers

typically absorb the costs.

Dumping enables firms to

unload excess production in foreign markets

Ad Valorem Tariffs are based on the

value of a product

GATT (General Agreement on Tariffs and Trade)

was a multilateral agreement whose objective was to liberalize trade by eliminating tariffs, subsidies, import quotas, and the like.