IB Exam 2

What two groups are positively impacted by tariffs?

domestic producers government

The idea that an MNE could come into a country and monopolize a market tends to be a greater concern in countries that have ___.

few large firms of their own

Ridardo's theory encourages ___ because it suggests that trade is a positive-sum game where all participating countries realize economic gains.

free trade

The US has placed a limit on the amount of tuna in airtight containers that can be imported into this country. This is an example of a ___

import quota

The oldest argument for government intervention in trade where developing nations must protect their domestic industries until they are ready to compete globally is the ______ argument.

infant industry

The EU's support for the Common Agricultural Policy illustrates why strategic trade policy is problematic. In this instance, the government was influenced by ___ to the detriment of consumers.

interest groups

In order to win a contract in Mexico, QVB Auto Manufacturing must make 65% of the component parts of their vehicles in Mexico. This is an example of a ___

local content requirement

When a government intervenes to achieve a surplus in the nation's balance of trade, this action is consistent with the main tenet of ___.

mercantilism

Taxes placed on imports to protect domestic producers from foreign competition and to produce revenue for the governments are called ___

tariffs

What 2 factors cause major adverse effects on a host country's balance of payments?

1. A foreign subsidiary importing a large # if inputs from abroad 2. The outflow of earnings from a foreign subsidiary to its parent company

What are 2 simultaneous outcomes of new trade theory?

1. A nation can increase the variety of goods available to consumers 2. A nation can lower the cost of the goods being offered to consumers

What are 3 advantages of FDI?

1. Allows for tight control over the firm's operations 2. Allows the firm to maintain control over technological how-to 3. Overcomes high transportation costs

A study of FDI by the Organization for Economic Cooperation and Development (OECD) found what?

1. Foreign investors invested significant amounts of capital in R&D in the countries in which they had invested. 2. Foreign investors transferred technology to countries in which they invested

What two industries have been targeted by the WTO as industries that need expanded trade agreements?

1. Global telecommunications 2. Intellectual property

What are 2 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

What are 2 drawbacks of government intervention in the process of free trade?

1. It invites retaliation and trade wars 2. It is unlikely to be well-executed

What are 3 major drawbacks associated with licensing?

1. It may give away valuable technological know-how to a potential foreign competitor 2. It does not allow a company to control the marketing strategy used in the foreign country 3. It can potentially damage a company's established brand

What are 2 alternatives companies can use instead of FDI to take advantage of opportunities in foreign markets?

1. Licensing 2. Exporting

What are the 3 benefits of FDI to a home country?

1. MNE learns skills from exposure to foreign market 2. Foreign subsidiary creates demand for home-country exports 3. Balance of payments increase from inward flow of earnings

What 2 issues were addressed by the Uruguay Round?

1. Reducing tariffs on manufactured goods 2. Reducing agricultural subsidies

What are 3 reasons that caused the global trading system erected under GATT to be strained during the 1980s and early 1990s?

1. The economic success of Japan 2. The persistent trade deficit in the US 3. Countries found ways to get around GATT regulations

What 2 factors cause major adverse effects on a host country's balance of payments?

1. The outflow of earnings from a foreign subsidiary to its parent company 2. A foreign subsidiary importing a large number of inputs from abroad

What are 2 characteristics of countervailing duties?

1. They are a special tariff 2. They can be substantial and stay in place for 5 years

In what 2 ways can a government use intervention in trade as a foreign policy instrument?

1. To pressure or punish "rogue states" 2. To grant preferential trading terms to countries it wants to build relations wiht

What are 2 reasons countries should remain focused on opening markets?

1. because average tariffs on services remain higher than on industrial goods 2. because of high tariff rates on imports of selected goods from developing nations into developed nations.

What are the 4 national attributes that Porter theorizes shape the environment that local firms compete in?

1. demand conditions 2. firm strategy, structure, and rivalry 3. Related and supporting industries 4. Factor endowments

What does Porter argues is the factor that helps a country achieve international success in a certain industry?

1. endowments 2. domestic demand conditions 3. related and supported industries 4. domestic rivalry

What are the 3 costs of FDI to a home country?

1. the balance of payments suffers from the initial capital outflow required to finance the FDI 2. The current account suffers if the purpose of the FDI is to serve the home market from a low-cost production location 3. The current account suffers if the FDI is a substitute for direct exports

While there were a total of 196 cases handled by GATT, record show that between 1995 and 2019, the WTO successfully handled more than ___ trade disputes.

500

What is a greenfield investment?

A form of FDI which occurs when a firm establishes a new operation in a foreign market.

Internalization theory is used to explain why a firm would prefer FDI over ___ as a strategy to enter a foreign market.

Licensing

One cost to a host country related to FDI would be the ___ of sovereignty and autonomy.

Loss

Exporting strategy does not work for a ___ value-to-weight ratio product that can be produced anywhere.

Low

T/F: A company would favor FDI over exporting when trade barriers are in place.

True

T/F: Export tariffs are sometimes levied to raise revenue for the government.

True

T/F: Government can detract or improve a country's advantage by choice of policies.

True

T/F: Government-imposed import quotas can limit a company's ability to serve a country from a foreign location.

True

T/F: Tax concessions can be used by a government to encourage foreign firms to do business in that country.

True

Paul Krugman would agree that while strategic trade policy seems appealing in theory, in reality, strategic trade policy is ___.

Unworkable

Japan imposed a limit on auto exports to the United States as a result of pressure by the U.S. government. What instrument of trade policy does this represent?

Voluntary Export Restraint (VER)

What is a criticism of Ricardo's theory of comparative advantage?

It is a simple model that includes many unrealistic assumptions

What type of tariff is a tax that is levied on a good on the basis of its value, not on the basis of tis weight or quantity?

Ad valorem tariff

A country might create safety standards for certain products that other nations can't comply with. As a result, these nations can't be involved with exporting parts for those goods and trade does not exist. These safety standards are a form of ___.

Administrative Trade Policy

A country's ___________ accounts track expenditures and receipts from other countries.

Balance-of-Payments

According to Adam Smith's theory of absolute advantage, who benefits from engaging in trade?

Both countries engaging in a trade process

When did Britain withdraw from the EU and why?

Britain left the EU in 2016 following a national referendum (Brexit)

Earnings from a foreign subsidiary to the parent company are recorded as ______ on the balance-of-payments accounts.

Capital Outflow

What is a potential negative consequence of the infant industry requirement?

Causing infant industries to lack efficiency

What's the main reason a country would use export tariffs?

To ensure sufficient supply of a good within the country.

Heckscher and Ohlin identified differences in national factor endowments as the root of ___.

Comparative Advantage

Comparative advantage assumes ___ returns to scale.

Constant

According to product life-cycle theory, as products mature, ___ considerations become far more important in the competitive process.

Cost

Countries can use ____ duties on an offending import to offset dumping.

Countervailing Duties

Tracking exports and imports of goods and services is measured by the _____ account in balance-of-payments accounting.

Current Account

The concern that an MNE could drive local firms out of business, monopolize the market, and raise prices above those that would prevail in competitive markets is more of a worry for ___ economies

Developing

To encourage FDI, many countries have eliminated ______ taxation of foreign income.

Double

When the German-based company Forrest Health Supply Inc. developed operations in Italy, it built a manufacturing facility there. In turn, the new facility also imported supplies and equipment from companies based in Germany. Which home country benefit of FDI does this represent?

Employment effects

T/F: Critics say that protectionism afforded by the infant industry argument has helped eliminate inefficient industries.

False

The ____ of FDI is the amount of FDI attempted over a period of time.

Flow

What view of FDI states that international production should be allocated based on the theory of comparative advantage.

Free market view

A low-cost, no-frills grocery store chain that began in the United States decided to open similar stores in Germany which did not have any stores like this. What type of FDI is this company using?

Greenfield Investment

What theory states that countries will export goods that make intensive use of the factors that are abundant in the economy?

Heckscher-Ohlin

American car makers promote the idea that Japan makes it difficult for others to compete in the industry because the country has ___

Implemented vehicle parts standards that no other country uses.

During the 1980s and early 1990s, protectionism around the world ___.

Increased

The market imperfections approach is also known as the ____ theory.

Internalization

Why would a government impose administrative trade policies?

Make it difficult for imports to enter a country, and to boost exports.

What was the first trade theory that advocated that a country should export more than it imports and should accumulate gold and silver to make up the difference and maintain a trade surplus?

Mercantilism

Which trade theory has the following implications: 1. Nations may benefit from trade even when they do not differ in resource endowments or technology 2. Specialization allows for scale economies and lower production costs?

New Trade Theory

Countries base the decision for intervention on ______ when protecting aerospace and semiconductor industries.

Protecting national security

What are multilateral trade agreements?

Reciprocal trade agreements between 2 or more partners.

A ____ effect has occurred when a company's FDI of capital, technology, and management resources creates a positive contribution to a host country that might not otherwise be available.

Resource transfer

According to new trade theory, first movers in an industry can gain a ___ advantage that later entrants find almost impossible to match.

Scale-Based-Cost

If we accept that the tenets of strategic trade policy are correct, then the government _____ intervene in international trade.

Should

Critics argue that not all new jobs created by FDI represent net additions in employment. This is due to the ___ effect where some jobs created are offset by jobs lost elsewhere.

Substitution

Which theory of FDI attempts to combine the theories that focus on favoring direct investment when exporting and licensing are available, and theories that say certain locations are favored over others for FDI?

The Eclectic Paradigm

What group worked to extend GATT rules to provide enhanced protection for intellectual property and significantly reduce barriers on trade in textiles?

The Uruguay Round

What does the stock of foreign direct investment refer to?

The accumulated value of foreign-owned assets at a given point in time.

What is a bound tariff rate?

The highest tariff rate that can be charged

What is a consequence of subsidies paid to companies during difficult economic times?

They give recipients an unfair competitive advantage

Why do countries agree to impose voluntary export restraints?

To avoid damaging tariffs and import quotas on their products.

The theory of ____ was the first to attack the tenet of mercantilism, which applied that trade is a zero-sum game.

absolute advantage