Exam 3: Chapter 6-7

infant industry argument

-Alexander Hamilton -many developing countries have a potential comparative advantage in manufacturing, but new manufacturing industries cannot initially compete with established industries in developed countries

theory of comparative advantage

-David Ricardo -it makes sense for a country to specialize in the production of those goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries

Theory of national competitive advantage

-Michael Porter -attempts to explain why particular nations achieve international success in particular industries

Product life-cycle theory

-Raymond Vernon -early in their life cycle, most new products are produced in and exported from the country in which they were developed

Tariffs are

-a tax levied on imports/exports -the oldest and simplest instrument of trade policy -instrument that the GATT and WTO have been the most successful in limiting

countervailing duties

-antidumping duties - if a complaint has merit, the Commerce Department may impose this on the offending foreign imports

basic factors v. advanced factors

-basic factors: natural resources, climate, location, demographics -advanced factors: communication infrastructure, sophisticated and skilled labor, research facilities, technological know-how

firms typically set up production facilities in foreign countries to

-facilitate cost-efficient production -overcome tariff barriers -conform to local content regulations -reduce threat of trade barriers in the future

economic arguments for intervention

-infant industry argument -strategic trade policy

Porter's attributes of a nation that shape the environment

1) factor endowments 2) demand conditions 3) related and supporting industries 4) firm strategy, structure, and rivalry

2 of the first industries targeted for reform

1) global telecommunication 2) financial services

subsidies help domestic producers in two ways:

1. Competing against foreign imports 2. Gaining export markets

strategic trade policy

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

political arguments for intervention

Cover a range of issues including - protecting jobs - protecting industries deemed important for national security - retaliating against unfair foreign competition - protecting consumers from "dangerous" products - furthering the goals of foreign policy - protecting the human rights of individuals in exporting countries.

New trade theory

In some cases countries specialize in the production and export of particular products not because of underlying differences in factor endowments, but because in certain industries the world market can support only a limited number of firms.

What theory suggests that nations may benefit from trade even when they do not differ in resource endowments or technology?

New trade theory

which of the following, enacted by the U.S. Congress erected a wall of tariff barriers against imports into the U.S.

Smoot-Hawley Act

Which of the following was NOT contained in the Uruguay Round

Tariffs were to be imposed on more that 40% of manufactured goods

Leontief Paradox

US exports are less capital intensive than US imports.

Paul Krugman characterizes the strategic trade policy as being

a boost to national income at the expense of other countries

import quota

a direct restriction on the quantity of some goof that may be imported into a country

zero-sum game

a gain by one country results in a loss by another

subsidy

a government payment to domestic producer (cash grants, low-interest loans, tax breaks, gov. equity participation)

tariff rate quota

a lower tariff rate is applied to imports within the quota than those over the quota

export ban

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

Voluntary Export Restraint (VER)

a quota on trade imposed by the exporting country, typically at the request of the importing country's government

Local Content Requirement (LCR)

a requirement that some specific fraction of a good be produced domestically

Free trade

a situation in which a government does not attempt to influence through quotas or duties what its citizens can buy from another country or what they can produce and sell in another country

Uruguay Round

a trade agreement to dramatically lower trade barriers worldwide; created the World Trade Organization

positive-sum game

all countries can benefit

over time the U.S. switches from being an exported of the product to

an importer of the product as production becomes concentrated in lower-cost foreign locations

high cost of U.S. labor gave U.S. firms

an incentive to develop cost-saving process innovations

administrative trade policies

bureaucratic rules designed to make it difficult for imports to enter a country

which of the following is a policy implication of Porter's theory of national competitive advantage?

businesses should urge government to increase investment in education, infrastructure, and basic research

specific tariffs

charged as a fixed charge for each unit of a good imported

ad valorem tariffs

charged as a proportion of the value of the imported good

Heckscher-Ohlin theory predicts that

countries will export those goods that make intensive use of factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce

which of the following is NOT included in the Doha agenda of the WTO

creating an institution to enforce intellectual property rights

foreign producers agree to ______ imposed by an exporting country because they fear more damaging punitive tariffs or import quotas might follow if they do not

voluntary export restraints

Paul Samuelson's critique looks at

what happens when a rich country enters into a free trade agreement with a poor country

at what stage of the product-life-cycle theory does production within other advanced countries begin to limit the potential for exports from the U.S.

when the U.S. firms set up production units in the advanced nations to meet rapidly growing demand

the theory of comparative advantage suggests that

trade is a positive-sum game in which all countries realize economic gains

Economies of scale

unit cost reductions associated with a large scale of output

Vernon argued that early in the life cycle of a new product, while demand is starting to grow rapidly in the U.S.

demand in other advanced countries is limited to high-income groups

Common Agricultural Policy (CAP)

designed to protect the jobs of Europe's politically powerful farmers by restricting imports and guaranteeing prices

Antidumping Policies

designed to punish foreign firms that engage in dumping -protects domestic producers from unfair foreign competition

Heckscher-Ohlin theory argues that the pattern of international trade is determined by

differences in factor endowments, rather than differences in productivity

the goal behind an export tariff

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

first-mover advantages

economic and strategic advantages that accrue to early entrants into an industry

what raises revenue for the government and reduces exports from a sector, often for political reasons?

export tariffs

what term does Heckscher-Ohlin use to refer to the extent to which a country is enriched with resources?

factor endowments

who gains/suffers from tariffs

gains: -government because the tariff increases government revenue -domestic producer because the tariff affords them some protection against foreign competitors by increasing the cost of imported foreign goods suffers: -consumers because they must pay more for certain imports

principle assertion of mercantilism

gold and silver were mainstays of national wealth and essential to vigorous commerce

free trade

government does not attempt to influence through quotas or duties what its citizens can buy from another country or what they can produce and sell to another country

constant returns to specialization

units of resources required to produce a good are assumed to remain constant

the threat of antidumping action limits the ability of a firm to

use aggressive pricing to gain market share in a country

An implication of trade barriers for business practices is that they

limit a firm's ability to serve a country from locations outside of that country

diminishing returns to specialization occur when

more units of resources are required to produce each additional unit -not all resources are of the same quality -different goods use resources in different proportions

GATT(General Agreement on Tariffs and Trade)

multilateral agreement whose objective was to liberalize trade by eliminating tariffs, subsidies, import quotas, etc.

The locus of global production initially switches from the U.S. to

other advanced nations and then from those nations to developing countries

basic theory of comparative advantage

potential world production is greater with unrestricted free trade than it is with restricted trade

According to the product life-cycle theory, once a new product becomes widely accepted internationally then

production for that product will start to take place in other countries

absolute advantage

production of a product is more efficient than in any other country

the rather vague definition of what constitues for "dumping" has

proved to be a loophole that many countries are exploiting

Multilateral or Bilateral Trade Agreements

reciprocal trade agreements between two or more partners

dumping

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

According to new trade theory, each nation may be able to

specialize in producing a narrower range of products than it would in the absence of trade

export tariff

tax placed on the export of a good

Mercantilism advocated

that countries should simultaneously encourage exports and discourage imports

quota rent

the extra profit that producers make when supply is artificially limited by an import quota

Heckscher-Ohlin theory emphasizes

the interplay between the proportions in which the factors of production are available in different countries and the proportions in which they are needed for producing particular goods

According to Adam Smith,____ should determine what a country imports and exports

the market mechanism

According to David Hume, if England exported more than it imported

the resulting inflow of gold and silver would swell the domestic money supply and generate inflation -surplus is not sustainable