MNGT 375 Chapter 7

Strategic Trade Components (2)

1. Government should subsidize promising firms in a newly emerging industry to get First Mover Advantages. (Ex: Substantial R&D grants to Boeing) 2. Could pay a government to intervene in an industry by helping domestic firms overcome barriers to entry create by foreign firms with First Mover Advantages (Ex: Airbus vs. Boeing)

Administrative Policies

Bureaucratic rules that make it harder to import foreign goods

Which of the following is a characteristic of trade barriers? A. They reduce the cost of exporting products to a country. B. They put a foreign firm at a competitive advantage to indigenous competitors in that country. C. They allow for efficient allocation of production functions. D. They limit a firm's ability to serve a country from locations outside of that country. E. They encourage governments to engage in Foreign Direct Investment.

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

Which of the following is variously defined as selling goods in a foreign market at below their cost of production or as selling goods in a foreign market at below their fair market value? A. Circular trade B. Subsidy C. Barter D. Countertrade E. Dumping

E. Dumping

Quota Rent

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

Strategic Trade Policy

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

Import Quotas

Limits placed on the quantity of imports a nation will allow for a specific product

Infant Industry Argument

New industries in developing countries should be temporarily protected from international competition to help them reach a position where they can compete with developed nations in global market

"Beggar-thy-neighbor" trade policies

Policies aimed at putting domestic firms in a dominant global position. Boost national income at the expense of other countri

True of False: WTO rules allow countries to impose antidumping duties on foreign goods that are being sold cheaper than at home, or below their cost of production, when domestic producers are being harmed.

True

True or False: Paul Krugman argues that a strategic trade policy aimed at establishing domestic firms in a dominant position in a global industry is a beggar-thy-neighbor policy that boosts national income at the expense of other countries.

True

Subsidies

a sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive.

Ad Velorem Tariff

a tariff levied as a proportion of the value of an imported good

Specific Tariff

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

Tariff

tax levied on imports

The Uruguay Round went into effect July 1, 1995 and contained the following provisions: 1. Tariffs on industrial goods were to be ________ by more than one-third, and tariffs were to be ________ on more than 40 percent of manufactured goods. 2. Average tariff rates imposed by developed nations on manufactured goods were to be ________ to less than 4 percent of value, the ______ level in modern history. 3. Agricultural subsidies were to be _____________ ________. 4. GATT fair trade and market access rules were to be extended to cover a wide range of ________. 5. GATT rules also were to be extended to provide enhanced protection for _________, __________, and __________ (intellectual property). 6. Barriers on trade in textiles were to be significantly ________ over 10 years. 7. The _____ _____ ____________ was to be created to implement the GATT agreement.

1. removed; scrapped 2. reduced; lowest 3. substantially reduced 4. services 5. patents, copyrights, and trademarks 6. reduced 7. World Trade Organization

Local Content Requirements

A requirement that some specific fraction of a good (in physical or value terms) be produced domestically Ex: Buy America Act

Which of the following provisions is NOT contained in the Uruguay Round? A. Tariffs were imposed on more than 40% of manufactured goods B. Agricultural subsidies were to be substantially reduced C. The World Trade Organization was to be created to implement the GATT Agreeement D. Barriers on trade in textiles were to be significantly reduced over 10 years E. GATT fair trade rules were to be extended to cover a wide range of services

A. Tariffs were imposed on more than 40% of manufactured goods

Which of the following raise revenues for the government and reduce exports from a sector, often for political reasons? A. Quota rents B. Export tariffs C. Subsidies D. Import quotas E. Local content requirements

B. Export tariffs

In order to encourage its farmers, the Cerian government provided them with low-interest loans for the purchase of seed and fertilizer. The government also gave cash grants and made tax reductions. Which instruments of trade policy is being used by the government of Ceria? A. Tariffs B. Subsidies C. Voluntary export restraints D. Local content requirements E. Import quotas

B. Subsidies

Arguments for government intervention take two paths: political and economic. Political arguments for intervention are concerned with protecting the interests of certain groups within a nation (usually producers), often at the expense of other groups (usually consumers), or with achieving some political objective that lies outside the sphere of economic considerations, e.g., protecting the environment or human rights. Economic arguments are typically concerned with boosting the overall wealth of a nation to the benefit of both producers and consumers. Determine which of these elements is a political or economic argument for intervention. Roll over the box for more details. Protecting jobs Gain First Mover Advantages Protecting consumers National security Help domestic firms overcome barriers Infant Industry Argument Protecting the environment

Political Arguments for Intervention: Protecting jobs Protecting consumers National security Protecting the environment (Protecting consumers from "dangerous products") (Furthering the goals of foreign policy) (Protecting human rights in export country) Economic Arguments for Intervention: Gain First Mover Advantages Help domestic firms overcome barriers Infant Industry Argument

Voluntary Export Restraints

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

Governments intervene in international trade for political and economic reasons. Choices are abundant when selecting from the "arsenal" of trade weapons, including tariffs, subsidies, import quotas, voluntary export restraints (VERs), local content requirements (LCRs), administrative policies, and antidumping duties. Nations usually adopt trade regulations to achieve stated national objectives, but these regulations may have undesirable effects on many sectors of the economy, including higher prices for consumers, overproduction of agricultural products, and the insulation of non-efficient producers. Match the correct trade instrument with its corresponding example. Instrument: Specific tariff Subsidies Import quotas Voluntary export restraints (VER) Local content requirements Administrative policies Antidumping policies Ad velorum tariff

Specific tariff - US levies a $1 tariff on imported watches Subsidies - EU payments to European farmers Import quotas - US restricts the number of imported video games Voluntary export restraints (VER) - Peru restricts sugar exports by US request Local content requirements - Specific % of good produced domestically Administrative policies - US stops medicine imports unapproved by the FDA Antidumping policies - EU imposes a special tariff on the offending foreign imports Ad velorum tariff - US imposes 2.5% tariff