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.
