Ch 9

On net, sugar tariff rate quotas cause an estimated $.... billion net loss to the economy every year.

1

safeguards- the U.S. Trade Act of ...... permits the erection of temporary trade barriers when the International Trade Commission has determined that a sudden increase in imports has seriously harmed U.S. firms

1974

the state of Florida has around ..... FTZs.

21

Should Countries Enforce Their Unfair Trade Practice Laws? economists oppose them for two reasons:

Application is often capricious and political. harm domestic consumers by increasing prices.

an infographic showing the countries with the most antidumping complaints to the WTO that were reported from January 2016 through June 2016. The top two countries that initiated antidumping complaints were

India and the United States.

occurs when a firm charges a lower price in a foreign market than in a domestic market.

International price discrimination

the ...... Ministry of International Trade and Industry (MITI) diverted resources from labor-intensive to capital-intensive industries in the 1950s and 1960s, and it channeled resources to high-potential industries, such as semiconductors, aerospace, ceramics, and biotechnology in the 1970s and 1980s.

Japanese

.... occurs when a firm sells a good below cost in a foreign market. This is done to drive domestic competitors out of business and achieve monopoly power in the market

Predatory pricing

Henry George, who said, "......, in all of its forms, does to your own people in peacetime, what your enemy would do in wartime."

Protectionism

is a branch of economics that studies how government bureaucrats make decisions

Public choice

has also had success with its industrial policy in the electronics industry by supporting companies such as LG and Samsung.

South Korea

The ....... is the individual responsible for coordinating trade policy across departments in government, and he gathers data and information on U.S. trading partners, trade-related issues, and trade agreements, with regard to U.S. involvement, which he reports to Congress and the president.

U.S. Trade Representative (USTR)

The ..... also acts as the principal spokesperson for the president on the topic of international trade policy, and he leads all negotiations with the WTO.

USTR

......tariff is a percentage of the imported good's market value. most tariffs are this

ad valorem "according to value"

Predatory pricing often justifies ...... , which are imposed to counteract the impact of a foreign firm offering its products in the domestic market at a price lower than its costs. These are similar to, but different than, ......, which are imposed to offset the unfair competition from foreign firms that charge lower prices due to government subsidies.

antidumping laws countervailing duties

Canada currently imposes a tariff rate quota on imports of .... (subject to 298% tariff)

butter.

.... tariff has components of both an ad valorem tariff and a specific tariff.

compound

A ....... is an ad valorem tariff on imports that is intended to offset any benefit of a government subsidy.

countervailing duty (CVD)

To illustrate strategic theory, we will employ ......, which was created by John Nash.

game theory

Note that local-purchasing requirements, which instruct foreign FIRMS, are different from public-sector procurement policies, which compel ...... to buy domestically.

government officials

Countries generally list tariffs in the context of a ....., which lists tariff rates for different classifications of goods. A good's classification determines its tariff rate.)

harmonized tariff schedule (HTS)

A government that has an ...... takes an active role in identifying key industries and helping them succeed.

industrial policy

Domestic antidumping laws protect local industries from dumping, which can take two forms:

international price discrimination and predatory pricing.

Experts say that ..... trade is the key to economic growth in Africa

intra-African

Threats to impose tariffs on nearly all Chinese exports may have consequences for the U.S. Although China would not retaliate in the same manner, they could impose ....., which would be very detrimental, as they would alter the supply chains and operational decisions of multinational companies. Unlike tariffs, which can be lifted from one day to the next, this could not be easily reversed.

investment restrictions

jones act costs consumers about $10.5 billion per year in higher prices ($35 per person), while benefiting U.S. ship owners far .... (an estimated $630 million per year).

less

game theory- Subsidies allow firms to ...... and beat out competition. Without subsidies, firms would be unable to produce products cheaply enough to win contracts

lower costs

4 characteristics of a perfectly competitive industry:

many buyers and many sellers. perfect information identical product. perfect mobility

One example of the use of a foreign trade zone is the ..... system. A ...... is a factory located in a Mexican foreign trade zone—usually near the U.S. border. receive raw materials and unfinished goods, process them, and reexport them as finished goods. As long as they are reexported and processed in Mexico, the Mexican government charges no customs duties on them.

maquiladora

If a majority of ITC commissioners conclude that unfair trade practices have occurred and that a domestic firm or industry has suffered "..........."—usually, a loss of jobs or profits—it can impose countervailing duties on foreign goods.

material injury

once the tariff was imposed, domestic steel producers raised their prices as well, in order to increase their profit margins. now more expensive in the U.S. than nearly anywhere else in the world. makes the U.S. a ..... appealing market for foreign steel producers, even after accounting for tariff and shipping costs.

more

nontariff barriers- ........ may require firms to acquire licenses or pass certain inspections before they can operate within a country

regulatory controls

infant industry- If the government offers subsidies or tariff protection, it can effectively shift the domestic supply curve to the ....., lowering the domestic price and making domestic producers more competitive.

right

Domestic and international laws often include ".........." or "escape clauses" that allow a country to temporarily protect an industry that has been seriously harmed by a sudden surge in imported goods

safeguard clauses

.... tariff is a specified dollar amount per unit, or per unit weight.

specific

Barriers to trade can be divided into two major groups: ......... barriers.

tariffs and nontariff

game theory- describes a case where government intervention can increase

overall national welfare.

game theory- Subsidies increase ..... because when a government targets an industry to support, every company down the entire supply cha in benefits.

overall welfare

Most economists advocate free trade, endorsing the belief that government intervention reduces market efficiency by creating distortions and increasing consumer prices. However, this conclusion is based on the assumption that international markets are ......, which is not usually the case in the real world.

perfectly competitive

The "level playing field" argument is often used to justify fair trade policies that restrict foreign competition. However, what is an "equitable" market share to one country or government may be unfair ...... to another.

protectionism

According to ........., governments decide to impose protectionist policies because the legislators that run them want to get re-elected

public choice analysis

Today, tariffs are mostly used to

punish other countries for implementing unfair trade practices.

Three categories of nontariff barriers include

quotas, numerical export controls, voluntary export restraints, embargoes, other nontariff barriers

—industries with just two firms.

duopolies

Although the national defense argument is legitimate when it concerns sensitive military contracts, it has been taken too far in some cases. For example, the ........ Act used the national defense argument to protect the U.S. mohair industry. (Mohair is a fabric made from the hair of the Angora goat.) Proponents of this legislation argued that trade protection was necessary because mohair was once used in military uniforms!

1954 Wool

2009 tire tariffs- the ripple effects from only this particular protectionist policy actually produced a net loss of more than ..... jobs and cost U.S. consumers more than $1 billion per year. This demonstrates how, ultimately, protectionism negatively affects national welfare.

2,500

In 2016, the EXIM Bank facilitated $.... million in medium- term financing. This is a very small amount compared to other countries' versions of the EXIM Bank. China facilitated $34 billion and the BRICS countries facilitated $51 billion

200

There is still the potential for China to completely stop exporting metals, as it did in ....., or to impose other protectionist measures on them as a means of retaliation.

2010

In 2017, the EXIM Bank facilitated $..... billion in short-term export credit and supported about 40,000 U.S. jobs. This is down from 2014, when the EXIM Bank facilitated $20 billion in short-term export credit and supported 165,000 jobs.

3.4

2009, the Obama Administration acquiesced to petitions from U.S. tire manufacturers to combat government-subsidized tire companies from China. The administration imposed a .....% tariff on Chinese tire imports, in part to save U.S. jobs in the midst of a weak economy. These tariffs saved 1,200 jobs in the country but resulted in the price of tires rising.

35

FDI Restrictiveness Index- The United States has moderate restrictiveness, ranking

38th.

Estimates are that transport costs make goods ....% more expensive for the average African customer, compared to 10% in the rest of the world.

40

Proponents of these tariffs claim that they are necessary to save jobs of American steelworkers, who have been suffering due to low-cost foreign competition. However, critics point out that for each individual job in the steel business there are ..... jobs in industries that use steel, such as construction, machinery, metal products, home appliances, electrical equipment, and transportation. One estimate is that these tariffs will cause 470,000 people in these industries to lose their jobs.

40

The OECD has an FDI Restrictiveness Index. China has very high restrictiveness, ranking ..... out of 62 countries (with the first being the least restrictive).

59th

Estimates are that China has access to 30% of the world's rare earths, but that in practice, it controls more than ...% of all rare earth production.

90

jones act- Hawaii is cut off from ....% of all the world's shipping.

90

we can classify import tariffs into three groups:

Ad valorem tariffs specific tariffs compound tariffs

When a U.S. firm alleges unfair trade practices from a foreign competitor, (1) the International Trade ..... INVESTIGATES the claim and (2) refers CONFIRMED cases to the U.S. International Trade ..... The ..... is part of the U.S. Department of Commerce, while the ..... is an independent government agency

Administration (ITA) Commission (ITC)

..... laws in the airline industry similarly restrict foreign airlines from serving domestic routes, which reduces competition and increases prices in the airline industry.

Anti-cabotage

is by far the largest single recipient of EXIM Bank underwriting, and most of EXIM Bank's loans go to the airline industry.

Boeing

2017. Boeing lobbied the Trump Administration, claiming unfair competition from ..... (a Canadian aerospace company), which is able to sell jets at much lower prices in America thanks to subsidies it receives from the Canadian government. In 2017, the Trump Administration imposed a .....% tariff on some passenger planes produced by them. The U.S. International Trade Commission overturned this tariff in January 2018, however.

Bombardier 220

Lawmakers point out that the President of Huawei has strong ties to the ......, and that there isn't much public information about how the company operates.

Chinese military

In March 2018, ...... (a trade publication) reported that Kaspersky publicly revealed the existence of a malware program that was made by the U.S. military to target ISIS in the Middle East. This announcement essentially compromised this program and made it ineffective.

Cyberscoop

encourages domestic firms to participate in foreign markets. adopted to harness its comparative advantage.

Export promotion

The ....... of the United States provides loans and loan guarantees to facilitate purchases of U.S. exports.

Export-Import Bank (EXIM Bank)

..... trade involves little government intervention in foreign trade, while ..... trade (also called managed trade) involves significant government intervention to "level the playing field" for domestic firms.

Free fair

The Jones Act particularly impacts .... and ...., which have far fewer shipping options than other states. International ships cannot stop in Hawaii, for example, on the way to California because they would then be in violation of the act.

Hawaii and Alaska

involves protecting domestic industries by imposing high barriers to imported goods.

Import substitution

the United States government enacted the .... Act, which provided the shipping industry with long-term relief from global competition, thereby extending the industry's life for more than 50 years.

Jones

a law passed in 1920 that prohibits foreign ships from providing cabotage (transportation of people or goods) between U.S. ports.

Jones Act,

is a Moscow-based Russian company that makes antivirus software and is supposedly a privately-owned company

Kaspersky

Kaspersky was recently the subject of an FBI counterintelligence investigation of the Russian company's potential ties to the ....... Company employees were questioned by FBI agents as part of this investigation, who pressed for information regarding company operations and possible ties to the Russian government. Intelligence officials have become aware that at least ........ executives at the firm have past ties to the KGB or Russian military.

Kremlin. three

The most recent example of protectionist policies enacted to "save U.S. jobs" were the steel tariffs that the Trump Administration announced in ...... President Trump announced that it would impose tariffs on steel imports.

March 2018

the ....... provides political-risk insurance that compensates companies whose assets are confiscated by a foreign government.

Overseas Private Investment Corporation (OPIC)

In the 20th century, ..... pointed out that even if the economy gains overall, there are still those who benefit more and those who benefit less. His work highlighted the distributional impact of trade and indicated ways to help the losers of globalization.

Paul Samuelson

FDI Restrictiveness Index- The top-ranking countries, which are the most open, include Luxembourg, ......, Slovenia, ......, and the Czech Republic.

Portugal Romania

nontariff barrier- the government may have rules that require public-sector agencies to only purchase goods and services from domestic suppliers.

Public-sector procurement policies

Two practical flaws with a trade policy designed to protect infant industries are as follows:

The decision about which industries to protect is often political rather than economic because government bureaucrats get to decide Once an industry receives protection, it is hard to wean that industry off the protection, even in its maturity.

imposes low tariff rates on imports below a certain quantity and high tariff rates above a certain quantity.

tariff rate quota (TRQ)

The infant industry argument was a powerful economic development strategy in Japan after ...... and in South Korea after the ....... Protection of infant industries, such as the electronics and automobile industries, was relatively successful in that country. Other countries, including many Latin American countries, have had less success with protection of their infant industries

World War II Korean War

While critics complain that the EXIM Bank is essentially "..........," it is actually a profitable government agency (though this may sound like an oxymoron). Additionally, other countries have powerful versions of the U.S. EXIM Bank, which give foreign companies a competitive advantage. Other sovereign agencies of this kind receive up to ten times as much funding as EXIM Bank, making it one of the smallest export financing agencies in the world, relative to the size of the U.S. economy.

corporate welfare

The U.S. established tariffs in response to its trade ..... (importing more goods than are exported), with the goal of making imported goods more expensive and thereby less desirable than domestic products. However, the greatest economists in history would argue that the better way to address a trade imbalance is to ........., rather than reduce imports by making them more expensive.

deficit export more

National, state, and local governments offer subsidies in the form of ...... (such as free land, tax breaks, and reduced utility rates) to international firms.

development incentives

some governments have ..... rates. A government may give favorable exchange rates to exporters and force importers to get the local currency from the central bank (which has unfavorable exchange rates), in order to discourage imports of foreign goods.

dual exchange

The 2017 hearing ultimately resulted in a bill that banned Kaspersky software on government computers. Putin and the Kremlin publicly responded by asserting that the ban was "unfair competition," and Kaspersky has filed a federal lawsuit that claims that the ban violated its rights to ....

due process.

—an absolute ban on trading goods with another country.

embargo

Adam Smith was in favor of levying taxes on imports and exports at a moderate level but not so high that smuggling would be profitable. He believed in establishing ..... for different producers and importers, so no single group or country has an advantage.

equal duties

Two economic development strategies are as follows:

export promotion import substitution

Governments worldwide spur regional economic development through ......, geographic areas that benefit from preferential tariff treatments for imports and exports (such as reduced tariffs).

foreign trade zones (FTZ)

.... tariffs are the most common.

import

extent to which a tariff increases the price of the good being produced depends on the elasticity of demand, which reflects how sensitive quantity demanded is to changes in the price. If demand is very ......., most of the tariff will be passed on to consumers in the form of higher prices.

inelastic

The .......claims that the government should protect young domestic industries to give them time to grow large enough to compete with foreign competitors. Founding Father Alexander Hamilton used this argument in support of tariffs for manufactured goods in 1791.

infant industry argument

According to the ........, a country's national defense interests require it to be self-sufficient, so trade policies should promote self-sufficiency

national defense argument

Trade and competition have a ..... to society, so Dr. Phalin believes that the government should not impose tariffs. Rather, the government should work to retrain these workers in industries in which we do have a comparative advantage, such as services, technology, and advanced manufacturing

net benefit

some examples of ..... barriers: product and testing standards, restricted access to distribution networks, public-sector procurement policies, local-purchase requirements, regulatory controls, currency controls, and investment controls

nontariff

cost of engaging in trade is very high on the African continent, largely due to ..... such as poor infrastructure, high transaction costs, complicated immigration processes, costly licensing requirements, lack of investment in trade associations, limited capacity of border officials, and corruption.

nontariff barriers

the government may impose ..... on domestic companies in certain industries in order to divert resources to the supply chain of certain other industries, pursuant to industrial policy.

numerical export controls

numerical restriction on imports—a quantitative limit on the amount of a good that can be imported during a given time (usually a year).

quota

According to ..... (which was developed in the 1980s), protectionism might benefit a country when the industry is oligopolistic because start-up costs are high. If a firm can become one of the few that earn profits, its success will benefit not only the firm but also the overall welfare of the country.

strategic trade theory

hree ways in which governments can promote international business:

subsidies, foreign trade zones, and export financing programs.

game theory- In global oligopolies, such as the commercial aircraft industry, governments can make companies profitable by ....

subsidizing them.

Historically, tariffs have been used for two purposes:

to raise revenue for the government and to protect domestic firms from foreign competition.

.... tariff is a tax on goods passing through a country en route to their final destination.

transit

..... is a promise by a country to limit its exports to another country to a certain amount.

voluntary export restraint (VER)

game theory- A ...... strategy (also called a Nash equilibrium) exists when a firm has a "best strategy" that it should pursue regardless of what the other firm does.

weakly dominant

One problem with industrial policy is that government planners cannot predict ....

which will be the most attractive industries

The vast majority of economists believe that free trade is a good thing, in general. Nevertheless, there are several arguments in support of trade intervention. In this section, we will discuss four arguments or rationales for trade intervention:

• The national defense argument • The infant industry argument • Maintenance of jobs • Strategic trade theories

National trade policies affect all of the following: (4)

• The size of the investments made and the foreign markets pursued by MNCs • The profitability of an MNC's investments in a foreign market • The impact and competitiveness of foreign imports on domestic markets • The price, availability, and quality of products available worldwide

Two issues that shape the debate on trade policies are as follows:

• Whether a government should help domestic firms through subsidies, guaranteed loan programs, and/or government-to-government negotiations. • Whether a government should protect domestic firms against foreign competition through tariffs (a tax on imports) or other nontariff barriers to trade.