Econ Exam 2 Questions and Vignettes

Vignette Pg 318 key takeaways / talking points

1989 central and southeastern Europe transitioned from central planning to market economies Soviet Union joined this transition Very dramatic role of economic liberization Before this transition to market economies, trade was discouraged and a self-sufficient economy was encouraged one that included treaded only inside themselves. Transition to market economy was difficult and they didn't understand how to trade...in order to be successful they must let market determine prices, establish private ownership, and establish a legal system Had to fight their major deficiencies with trade They use GDP to judge how successful the country's transition was Greater success is seen in developing countries adopting more open and outward orientated trade policies Speed of transition is important....reforms are enacted and the increased international trade and greater market competition impose discipline and offer encouragement, before such special interest groups have time to coalesce and exert their power

11.What is a countervailing duty?

According to the textbook, a countervailing duty is a tariff used to offset the price or cost advantage created by a subsidy to foreign exports. So for example, if another country is engaging in dumping and charging higher amounts for its products in a foreign market than they are in their domestic market, they can impose a countervailing duty to rectify the situation.

10.What is the infant industry argument for putting up barriers to imports? What are its merits and weaknesses?

Answer 1: The infant industry argument states that a country can benefit by shielding an industry, the infant, that is currently uncompetitive against foreign rivals if that industry can lower its costs over time and become competitive in the future. Merits: It is potentially a valid argument for the government to do something to assist the infant industry because the future benefits can be larger than the current costs of doing so. Weaknesses: Even if some form of government assistance is appropriate, a subsidy to initial production or to whatever is the source of cost reductions over time is usually the best policy. If the industry is so promising, it is often the case that no government assistance to the initial firms is needed. Instead, these firms should borrow from private lenders to cover their initial losses and repay these loans from future profits. The argument is subject to abuse and corruption. Will the industry really grow up and lower its costs to become competitive over time?

10.What is the Free Rider Problem and how does it affect trade policy?

Answer: The free-rider problem occurs whenever the benefits of a group effort fall on everyone apart of that group regardless of each's contribution levels.(In time, effort, voting, money). Each selfishly rational individual will try to free-ride and sit back, letting others advance the common cause. It usually affects a large, dispersed group more seriously than it affects a small, well-defined group. If members of the team are largely free-riding and enjoying the benefits without inputing any of the costs, then there is a danger that the good in a free market will be under provided or not provided at all. A common example would be pollution. If pollution was rid of, everyone would benefit but not all of the people who benefit had contributed to the elimination of pollution.

9.China in the WTO,

Before highlighting some of the ideas and takeaways discussed in the vignette, it is first important to note one fundamental difference between the WTO and GATT. Unlike GATT, negotiation is invited in the WTO. Procedures over trade settlement are more stringent in the WTO and members cannot reject new rulings as easily (and a panel is involved in the decision-making process). This difference matters in reflecting on China's tenure in the WTO because they have been both a substantial initiator and respondent in trade complaints since 2007. Below, I want to share two trade disputes during China's time in the WTO because they involve concepts from recent chapters: 2006- The United States and China challenged China's tariffs on automotive parts. We analyzed effects on tariffs in chapter eight. 2010- The United States, European Union, and Mexico challenged China's export restrictions on raw materials. In chapter nine, we saw how trade quotas compare to tariffs. Despite these disputes, China has adjusted policies to ensure membership in the WTO, including a commitment to reduce tariffs. I think there are a few things to remember from this vignette. First, in the WTO, countries can file complaints and participate in a formal dispute process. Second, China is an influential member in the WTO. They often engage in settlements with trading partners like the U.S. and EU. The final takeaway is this vignette in particular revisits concepts even from chapter one. Elements of The Trade War of 2018, one of the four international economics controversies featured in the text, have indeed spurred from disputes between China and the United States in the WTO.

11."US Anti dumping policy uses its injury test to ensure that antidumping duties imposed by the US government enhance the US national wellbeing" Do you agree or disagree? Why?

Dumping is selling exports at a price that is too low and below the international price. There are multiple types of dumping but ultimately they all lead to profitable price discirmination because the marginal production cost is the same whether it is sold in autarky or on the international market. Tariffs or non-tariff barriers to trade ensure against dumping. Going back to the statement above, antidumping policies enhance the well-ebing of US citizens because there is more opportunity for domestic industry. When US businesses don't have to compete with the dumping prices of international business, there is less competition, and they are more able to sell. On the other hand, although internationally made products are more expensive, it provides the opportunity for more domestic made products to be sold. These policies enhance US well-being, but most definitely prioritize US wellbeing over the well-being of other countries. The next question to ask is, who's well-being is more valuable? That of a US citizen? Or someone in another country?

9.Carrots are Fruit, Snails are Fish, and X-Men are Not Humans- page 180

Governments have the ability to decide which categories imported good belong to. The importance for this lies in the fact that the title of an imported good can decide whether it will be allowed into the country duty-free or with a high tariff. These product definitions matter so much that there is often lobbying over the actual definition of the product. This results in some bizarre rulings on various goods: For example, in 1994 the EU passed a regulation that carrots were a fruit. This ruling allowed Portugal to sell its carrot jam throughout Western Europe without high duties. Private firms have taken this to the next level, by changing the look and names of their products to get around the definitions set by government. Subaru imported pickup trucks with two flimsy rear seats bolted to the bed of the truck to avoid the U.S tariff of 25 percent on so-called "regular" pickup trucks. In some other cases, judges have gotten involved to make the final verdict. For example, in 2003 a judge ruled that X-Men action figures were not depicting humans, therefore they dodged the title of being a "doll" which was subject to a 12 percent tariff.

8. "A tariff on imports of a product hurts domestic consumers of this product more than it benefits domestic producers of this product?" Do you agree or disagree? Why?

I agree that the tariff hurts domestic consumers of the product more than it benefits domestic producers. The tariff raises the domestic price of the imported product, and domestic producers of the product raise their price when the domestic price of the imported product, and domestic producers of the product raise their price of imports increase. This causes consumers to lose on total consumer surplus due to the increase in domestic price. Consumers lose more because the domestic quantity consumed is larger than domestic quantity produced.

10.Assume that the sock-importing countries are determined to expand their domestic production of socks. From the point of view of sock-exporting countries, how would you rank each of these three policies that could be used by the sock importers? Why?

I would rank Policy C (VERs on sock imports) first, then Policy A (subsidies to domestic sock production in the importing countries), and Policy B (tariffs on sock exports) last. This is because, under VER, all of the extra money made by the artificial increase in price from fewer exports goes to the sock-exporters. Thus, they will make more money. Subsidies will not increase the amount of money that sock-exporters make, but subsidies will also not raise the world price of socks, which means that demand for exports will not decrease as much as it would with a tariff. The tariff is last because sock exporters do not make any money from the revenue of the tariff, and tariffs increase the world price, which results in a relatively large loss of demand.

15.China as a Host Country

In 1978 the Chinese government began a process of slowly opening China to direct investments by foreign multinationals. The cumulation of liberalizations paid off in the 1990s, when annual inflows of FDI increased 10-fold from 1991 to 1997. Inflows since then have remained strong, and during 2015-2017 China was the second-largest recipient of direct investment flows in the world. Nearly half of FDI into China is in manufacturing, and foreign-affiliated firms account for over one-quarter of production value added in Chinese manufacturing. China has been unusual in that much of the FDI has come from developing countries located close to it, not from the industrialized countries whose firms are the source of most FDI worldwide. Inflows of FDI are generally viewed as benefiting China's economic development. A study by the Organization for Economic Cooperation and Development concluded that FDI has assisted the development of new industries in China, offered new and better products to Chinese consumers, brought new technologies to China, offered employment to Chinese workers, provided them with training and experience that has allowed them to build their technological and managerial skills, and increased China's exports. Categories of FDI: Some types of FDI, including investments that bring in advanced and environmentally friendly technologies, are encouraged, so they receive incentives and privileges, like subsidized land or temporary low taxes. Some types of FDI, including investments that use old technologies and investments in many mining and service industries, are restricted, so they get additional scrutiny before approval. Some types of FDI, including investments that would be highly polluting, investments in defense industries, and investments in traditional Chinese crafts, are prohibited. All other types of FDI not named in the first three categories are permitted.

10.How much does it cost to protect a Job?

In short the cost of protecting a job is very costly, and the cost of protectionism can often outweigh the benefits. It is argued that protection of imports is needed to protect domestic jobs. This means that restrictions on imports are crucial to maintain jobs in the import competing industry that is receiving the protection. This is possible because by permitting domestic production at a level higher than it would be with free trade. It can also be argued that the specificity rule shows that an import barrier is not the best government policy to accomplish this. Just paying workers to have jobs in which they are not doing anything would be less costly. The cost per person of a high quality worker adjustment program that would offer training and assistance to the workers to find well paying jobs in other industries would be much less then the net national cost of maintain these jobs through high import barriers.

9.The WTO: Beyond Tariffs

In the original GATT of 1947 included provisions about some barriers other than tariffs but as NTBs (other than quotas) have increased use, but have had less success in reducing NTBs. The effects of NTBs are harder to measure so it is harder to get negotiated. The Kennedy Round included more mention of NTB negotiations, but results were slim. The Uruguay Round was more ambitious and required that all countries joining the new WTO must accept nearly all NTB agreements. The Uruguay Round helped to establish WTO rules to cover three new areas that had recieved no prior attention: treatment of agriculture goods was shifted to be similar to that of industrial goods, global rules on requiring protections of patents, copyrights, and treatments, and established the General Agreement on Trade in Services. THe Doha Round included negotiations that were intermittent and unproductive for a decade. The US resisted cuts in agriculture subsidies. The EU sought to limit lowering its barriers to agriculture imports. Developing countries were unwilling to reduce tariffs. Takeaways: 1. NTBs are hard to measure and difficult to negotiate 2. The Uruguay rounds were important in helping establish WTO rules that cover new areas. 3. The Doha Round was very unsuccessful.

8. What is the consumption effect of a tariff? How would you describe it in words, without reference to any diagram or numbers? How would you show it on a diagram, and how would you compute its value?

It increases the prices of imported good. Consumers have to pay higher prices which could decrease their consumption of goods and services. The consumers are being impacted more compared to the producers because the producers are not facing increased competition.

15.CEMEX: A Model Multinational from an Unusual Place

Key Takeaways -Firm-specific advantages, like CEMEX's technology, are very important for the success of multinational companies -It is important for multinational companies to strategically pick what countries they want to invest in. In CEMEX's case, investing in Spain first was a great strategic move because of the similar culture and language of Mexico -Although it is very challenging for companies to become multinational, with the proper infrastructure to replicate a quality business in other countries, a business can be successful

11.Antidumping in Action

Key Takeaways: Anti-dumping duties are used as an intent to save domestic jobs, but sometimes these tariffs may lead to increased prices for domestic consumers. Anti-dumping duties for the long term effect can decrease the international competition of domestic firms producing like goods. Used as a protection tariff placed by the domestic government to save their personal domestic economy. WTO and ITC places anti-dumping regulations and rules onto those countries who partake in dumping and unfair trading.

12.Are trade blocs consistent with the most favored nation principle?

No, the most favored nation states that any trade policy given by one country to another must be given to all foreign countries having MFN status. The World Trade Organization espouses the most favored nations principle, but there a few exceptions with one being trade blocs. Countries in a trade bloc treat imports from other member countries more favorable than imports from outside countries making it not consistent with the most favored nation principle.

8. What is the effective rate of protection

Overall, this vignette discussed how producers are affected by tariffs. It highlighted that firms can be affected by not only tariffs on their outputs, but also their inputs. This was one of the main takeaways from the vignette. The example given was that a bike manufacturing company would not just be affected by a tariff on bikes. Tariffs on handlebars and bike tires would also impact the company. Another key takeaway was the effective rate of protection, which is the percentage by which the entire set of a nation's trade barriers raises the industry's value added per unit of output. This can be hard to compute because of the previously mentioned complicated effects tariffs can have on both a firm's outputs and inputs.

9.Dodging Protectionism

Protectionism was implemented in 1930 under the Smoot-Hawley tariff bill. The objective was to increase US tariffs by a small percentage. This strategy backfired when other countries started enacting similar tariff increases. As a result, the average world tariff rose from 9 percent in 1929 to 20 percent in 1933. The rapid increase in protectionism may not have caused the Great Depression, but did cause it to last longer than it otherwise would have. In the 2000s, countries began using other forms of protectionism. Instead of global tariffs, there was a rise in nontariff barriers to trade. These protectionist measures did not have the same negative impact in the 1930s. It was estimated to only affect world trade by about 1 percent. Key Takeaways 1) Acting out of self-interest in a global market may cause other participants to follow the precedent. 2) Protectionism can be beneficial, but only when used responsibly.

12.Why are rules of origin needed for a free-trade area? How might they be protectionist?

Rules of origin prevent countries outside the free-trade area from sending their exports to a low-barrier member country and then shipping the same goods to a high-barrier member country. Without rules of origin, it would be much easier to circumvent the high barriers of trade. They might be considered protectionist because it may add to the difficulty of one member country exporting products to a different member country. It could also encourage the utilization of resources found within the free-trade area instead of relying on imports from outside the area.

9.A Japenese friend asks you to explain and defend America's use of Section 301. What will you say?

Section 301 gives the President the power to take action in case a foreign government violates an international trade agreement or there is any discriminatory policy of that particular country that creates restrictions towards the US commerce. The US can use its economic size and Section 301 to try and bring freer trade back into the world and help many other governments including their own. With a diligent use of Section 301, the US brings benefits into their own country while helping foreign countries receive net gains from trade. It can also be justified because there are many scenarios when the World Trade Organization does not expend appropriate action or any action against countries when they are creating an unreasonable barrier. If America does not have Section 301, some other large economies can get away with discriminatory and unreasonable barriers, and this can be seen most recently with China.

11.Agriculture is Amazing

Takeaways: The farmers political lobbies in these countries are extremely powerful, especially in comparison to the small role oof agriculture ion the economy. In contrasts to the rules for industrial products, governments had been permitted to use import quotas and export subsidies. This is however changing, especially for developed countries. Most developed countries are able to maintain import production due to their agreements and keep their highly protected products, highly protected. The effect oof reduction of domestic subsidies are moderate in developed countries due to major subsidy programs exempt from cuts.

15-6 question

The answer is C- Mattell, a U.S based toy company, buys 51 percent of its Mexican affiliate that it did not already own. The intuition here is that FDI is any flow of lending to, or purchases of ownership in, a foreign firm in which the investor has ownership of 10% or more of the firm. In this case, Mattell purchases more than 10% of a Mexican firm, which fits the description of a FDI.

14-8 question

The growth rate would go up in India due to expanding trade outward. By trading with more countries around the world it s allows for growth because there are more opportunities to trade with people than an inward trade policy. The figure supports this as the growth rate went from 2% to 4.9%.

10.What is the national defense argument for putting up barriers to imports? Why is import protection probably not the best approach?

The national defense argument is an argument made by domestic producers that there should be import barriers to protect their industry because their industry is necessary in the event of a war that would stop world trade. They argue that world trade would not allow them to compete, so they would not be able to produce enough during a time of war. However, a subsidy, and not import barriers, to these industries is the best way to keep these industries alive, as it is a lower cost to the country.

10.What is the tariff escalation pattern? Why does it exist in so many countries?

The tariff escalation pattern is a pattern where the import duty (or tax collected from the import) grows as the goods become more finished. This means that the import duty on raw materials is the lowest and the import duty on the finished goods is the highest. It is called the escalation pattern because the duties increase, or escalate in accordance with the product in the manufacturing cycle. This is used by so many countries for a few reasons, but the overall reason is to protect processed products in the importing countries. Countries have this pattern to use in lobbying efforts and political situations. This is also used to discourage developing countries from manufacturing products and to stick with exporting raw materials. It doesn't prevent them, but it acts as a way to balance the scales and keep order.

12.Dolphins, Turtles and WTO

This case study talks about the methods that have been used prior to 1960 to catch tuna did not harm dolphin's due to their sonar capabilities, but in the 1960's there was a new method that came out to catching the tuna that tend to swim around the dolphins and since then there have been 6 million dolphins that have died due to this new method. After this, the US passed a Marine Mammals Protection Act of 1972 that prohibited using these unsafe methods. They also pressured the three-main tuna packaging and retailing firms (StarKist, Bumble Bee and Chicken of the Sea) to only buy tuna that was caught using dolphin-safe methods. Since this has been passed, the dolphin mortality because of tuna fishing dropped to 1/5 of what it was. The US also banned the tuna imports from Mexico and four other countries. Mexico protested this and the GATT panel ruled the US cannot restrict imports based on production methods used by firms in other countries, even if it was unfair. A similar case with sea turtles shows that some shrimp are caught with nets that also kill sea turtles. Four countries in Asia filed a complaint to the WTO and the WTO decided 4 things. After this, the US gov. removes the discriminatory terms and created other turtle-protection methods. In 2001, the WTO ruled that the US was in compliance of the WTO rules so they were allowed to restrict imports of the shrimp caught in ways that harm sea turtles. Environmentalists believe that WTO always favor free trade to prevent a country from using trade-related measures to protect the environment. The WTO cannot force a country to change its policies if they do not want to. I think that the rules that the WTO put into place were fair for the specific countries that choose to live this way. If they don't want tuna or shrimp that have been caught using those harmful methods, the other countries should respect this but its not always that easy.

12.Postwar Trade Integration in Europe

This vignette describes the timeline of international trade postwar in Europe. In 1950 the Schuman Plan was introduced, which was the proposal by the French foreign minister at the time for the creation of a single authority to control the production of steel and coal in France and West Germany to then be opened for membership to other European countries. Following this plan, "the six" including Belgium, France, West Germany, Italy, the Netherlands, and Luxembourg set up the European Coal and Steel Community which is an example of the early integrations that began to happen postwar. From 1957-1958, "the six" sign the Treaty of Rome which sets up the European Economic Community or EEC. With this, trade preferences were given to a host of developing countries. A few years down the road in 1960, the Stockholm Convention created the European Free Trade Area (EFTA) with seven nations where trade barriers were removed in stages. In 1967, the European Community or EC is formed by merging the EEC, the European Atomic Energy Commission, and the European Coal and Steel Community. Over a decade later, in 1979, the European Monetary System begins to operate based on the European Currency Unit. In 1993, the Maastricht Treaty is approved which made the EC into the European Union as we know today which called for unification on matters of foreign policy, cooperation in fighting crime, and monetary union. Six years later, many EU countries established the euro as the common currency and replaces the national currency of 12 countries. Currently the European Union has 27 member countries after the United Kingdom withdrew in January of 2020, with 19 of the 27 using the euro as a currency encouraging international trade.

9. What are voluntary export restraints? Why do some governments force foreign exporters into them instead of just using quotas or tariffs to restrict imports by the same amount? Is it because VERs bring the importing country a bigger national gain than quotas or tariffs?

VER agreements are a trade barrier in which the importing country government compels the foreign exporting country to agree "voluntarily" to restrict its imports to this country. Some governments force foreign exporters into them instead of just using quotas or tariffs to restrict imports because they don't want to violate their commitment to the international rules of the WTO. The VER causes deterioration in the importing country's terms of trade and is economically expensive.

8. Global Agreements

Vignette was about the global agreements to reduce tariffs on non-agricultural imports with industrialized countries. The General Agreements on Tariffs and Trade (GATT) was signed in 1947 by 23 countries. The GATT led to the creation of the World Trade Organization (WTO) which works to reduce barriers to trade. The main form of trade barrier reduction is lowering tariffs. Many developing countries also benefited from the tariff reductions according to this vignette, even though they were not heavily involved in the trade. Ultimately trade is good and the WTO and GATT enables that international trade to happen. Although this vignette does not address the inequity that eventually has occurred between developing countries and developed countries, I believe that it did a thorough job at explaining the benefits of lowering barriers of trade through reduction of tariffs.