Chap 007

Chapter 07
The Political Economy of International Trade
True / False Questions
1. Tariffs are unambiguously pro-consumer and anti-producer.
True False
2. Specific tariffs are levied as a proportion of the value of the imported good.
True False
3. Export tariffs are far less common than import tariffs.
True False
4. A subsidy helps domestic producers to compete against foreign imports.
True False
5. Under a tariff rate quota, a higher tariff rate is applied to imports within the quota
than those over the quota.
True False
6. A common hybrid of a quota and a rent is known as a quota rent.
True False
7. Unlike other trade policies, local content regulations tend to benefit consumers
and not producers.
True False
8. The Buy America Act specifies that government agencies must give preference to
American products when putting contracts for equipment out to bid unless the
foreign products have a significant price disadvantage.
True False
9. Bureaucratic rules designed to make it difficult for imports to enter a country are
called local content requirements.
True False
10. Local content regulations provide protection for a domestic producer of parts by
limiting foreign competition.
True False
11. A company that sells its product in a foreign market below the cost of production
may be accused of dumping.
True False
12. Antidumping policies are designed to punish foreign firms that are engaged in
dumping.
True False
13. Antidumping policies vary drastically from country to country.
True False
14. Protecting industries deemed important for national security, and retaliating
against unfair foreign competition are economic arguments for intervention.
True False
15. The Helms-Burton Act of 1996 was aimed at foreign companies that were
undermining U.S. trade sanctions against Libya and Iran.
True False
16. According to the infant industry argument, many developing countries have a
potential comparative advantage in manufacturing, but new manufacturing
industries cannot initially compete with established industries in developed
countries.
True False
17. The infant industry argument is the latest argument for government intervention in
trade.
True False
18. Strategic trade policy suggests that a government should use subsidies to support
promising firms that are active in newly emerging industries.
True False
19. GATT has not recognized the infant industry argument as a legitimate reason for
protectionism.
True False
20. Krugman has suggested that trade policy designed to retaliate against another
country's trade policy would hurt the citizens of both countries.
True False
21. Governments do not always act in the national interest when they intervene in the
economy; politically important interest groups often influence them.
True False
22. The Smoot-Hawley Act raised tariff barriers in the hope of protecting jobs and
diverting consumer demand away from foreign products.
True False
23. The Great Depression had roots in the failure of the world economy to mount a
sustained economic recovery after the end of World War I in 1918.
True False
24. During the 1980s and early 1990s, the world trading system erected by the GATT
gained momentum as protectionist demands generally decreased across the
world.
True False
25. A key goal of the 1986 Uruguay Round was to extend GATT to cover trade in
commodities.
True False
26. The World Trade Organization was created as part of the Uruguay Round.
True False
27. The WTO does not have the power to impose trade sanctions.
True False
28. A key issue in the "millennium round" of the WTO was to increase barriers to
cross-border trade in agricultural products.
True False
29. Human rights activists see WTO rules as outlawing the ability of nations to stop
imports from countries where child labor is used or working conditions are
hazardous.
True False
30. The WTO has the ability to force any member nation to take an action to which it
is opposed.
True False
31. One issue at the forefront of the current agenda of the WTO is the increase in tariff
rates on nonagricultural goods and services in many nations.
True False
32. WTO rules do not allow countries to impose antidumping duties on foreign goods
that are being sold cheaper than at home, or below their cost of production, even
when domestic producers can show that they are being harmed.
True False
33. Antidumping actions are concentrated in certain sectors of the economy such as
basic metal industries, chemicals, plastics, and machinery and electrical
equipment.
True False
34. Free trade in agriculture could jump-start economic growth among the world's
poorer nations and alleviate global poverty.
True False
35. The TRIPS regulations oblige WTO members to grant and enforce patents lasting
at least 20 years and copyrights lasting 50 years.
True False
36. Inadequate protections for intellectual property reduce the incentive for
innovation.
True False
37. Tariffs on industrial goods remain higher than tariffs on services.
True False
38. Tariff barriers lower the costs of exporting products to a country.
True False
39. The threat of antidumping action limits the ability of a firm to use aggressive
pricing to gain market share in a country.
True False
40. To conform to local content regulations, a firm may have to locate more
production activities in a given market than it would otherwise.
True False
Multiple Choice Questions
41. Which of the following is NOT one of the main instruments of trade policy?
A. Tariffs
B. Credit portfolios
C. Local content requirements
D. Administrative policies
42. Specific tariffs are:
A. levied as a proportion of the value of the imported good.
B. government payment to domestic producers.
C. in the form of manufacturing or production requirements of goods.
D. levied as a fixed charge for each unit of a good imported.
43. Tariffs do not benefit:
A. consumers.
B. domestic producers.
C. governments.
D. domestic firms.
44. Import tariffs:
A. reduce the price of foreign goods.
B. create efficient utilization of resources.
C. reduce the overall efficiency of the world economy.
D. are unambiguously pro-consumer and anti-producer.
45. By lowering production costs, _____ help domestic producers compete against
foreign imports.
A. subsidies
B. duties
C. quotas
D. tariffs
46. Which of the following observations about subsidies is true?
A. Government subsidies must be paid for, typically by taxing individuals and

corporations.
B. Subsidies are used to reduce exports from a sector, often for political reasons.
C. Whether subsidies generate national benefits that exceed their national costs is
debatable.
D. Subsidies help foreign producers gain a competitive advantage over domestic

producers.
47. Which of the following is a consequence of subsidies?
A. Subsidies make domestic producers vulnerable to foreign competition.
B. Subsidies lead to lowered production.
C. Subsidies protect inefficient domestic producers.
D. Subsidies produce revenue for the government.
48. According to the _____ policy, subsidies can help a firm achieve a first-mover
advantage in an emerging industry.
A. strategic trade
B. antidumping
C. tariff quota
D. free trade
49. _____ is a direct restriction on the quantity of some good that may be imported
into a country.
A. Import tariff
B. Import quota
C. Import subsidy
D. Ad valorem tariff
50. A common hybrid of a quota and a tariff is known as a(n):
A. import tariff quota.
B. voluntary export restraint.
C. ad valorem tariff.
D. tariff rate quota.
51. _____ is a quota on trade imposed by the exporting country, typically at the request
of the importing country's government.
A. Voluntary export restraint
B. Specific tariff quota
C. Trade reconciliation
52. The Japanese government was pressurized by the U.S. government to place limits
on the number of vehicles exported to the United States by Japanese automobile
producers in 1981. This is an example of:
A. tariff rate quota.
B. specific tariffs.
C. voluntary export restraint.
D. ad valorem tariff.
53. Tariff rate quotas are common in agriculture, where their goal is to:
A. reduce the use of synthetic fertilizers.
B. limit imports over quota.
C. increase agricultural imports.
D. increase foreign competition.
54. A quota rent is:
A. a quota on trade imposed by the exporting country.
B. levied as a fixed charge for each unit of a good imported.
C. levied as a proportion of the value of the imported good.
D. the extra profit producers make when supply is artificially limited by an import
quota.
55. Foreign producers typically agree to voluntary export restrictions because:
A. their manufacturing capacity is limited.
B. they can divert their exports to other countries and charge more for their
products.
C. they fear far more damaging punitive tariffs or import quotas might follow if
they do not.
D. they are required to by the World Trade Organization.

56. Which of the following statements concerning a voluntary export restraint is NOT
true?
A. It benefits domestic producers by limiting import competition.
B. In most cases, it benefits consumers.
C. It raises the domestic price of an imported good.
D. It is a variant of the import quota.
57. According to _____, some specific fraction of a good must be produced

domestically.
A. import quotas
B. voluntary export restraints
C. local content requirements
D. antidumping duties
58. According to the Buy America Act, if a company wishes to win a contract from a
U.S. government agency to provide some equipment, it must ensure that at least
51 percent of the product by value is manufactured in the United States. This is an
example of:
A. antidumping duties.
B. voluntary export restraints.
C. import quotas.
D. local content requirements.
59. Local content regulations:
A. protect domestic producers by limiting foreign competition.
B. lower the prices of imported components.
C. tend to benefit consumers and not producers.
D. encourage outsourcing of production units.
60. Administrative trade policies are:
A. requirements that some specific fraction of a good be produced domestically.
B. quotas on trade imposed by the exporting country.
C. bureaucratic rules designed to make it difficult for imports to enter a country.
D. designed to punish foreign firms that engage in dumping.

61. The Netherlands exported tulip bulbs to almost every country in the world except
Japan. This was because in Japan, customs inspectors insisted on checking every
tulip bulb by cutting it vertically down the middle. This is an example of which of
the following trade barriers?
A. Export restraint
B. Administrative trade policies
C. Local content requirement
D. Ad valorem
62. _____ is variously defined as 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.
A. Export restraint
B. Dumping
D. Ad valorem
63. In 1997, two South Korean manufacturers of semiconductors, LG Semicon and
Hyundai Electronics, were accused of selling dynamic random access memory
chips (DRAMs) in the U.S. market at below their costs of production. It was alleged
that the firms were trying to unload their excess production in the United States.
This is an example of:
A. ad valorem tariff.
B. subsidy.
C. dumping.
D. import quota.
64. The U.S. government has used the threat of punitive trade sanctions to try to get
the Chinese government to enforce its intellectual property laws. This is an
example of government intervention based on:
A. human rights protection.
B. national security.
C. consumer protection.
D. retaliation.
65. Which of the following acts allows Americans to sue foreign firms that use property
in Cuba confiscated from them after the 1959 revolution?
A. D'Amato Act
B. Smoot-Hawley Act
C. Helms-Burton Act
D. Antidumping Act
66. According to the _____ argument, governments should temporarily support new
industries until they have grown strong enough to meet international competition.
A. retaliatory action
B. human rights
C. infant industry
D. antidumping
67. The infant industry argument is criticized because it relies on an assumption that:
A. new manufacturing industries in developing nations can initially compete with

established industries in developed countries.
B. selling goods in a foreign market at below their "fair" market value is legally and
ethically justified.
C. the domestic industry in a developing nation lacks the capacity to meet

demand.
D. firms are unable to make efficient long-term investments by borrowing money

from the domestic or international capital market.
68. According to the strategic trade policy argument:
A. government intervention is not required because firms can borrow money from
the capital markets to finance the required investments.
B. selling goods in a foreign market at below their "fair" market value is legally and
ethically justified.
C. government support can help domestic firms overcome the first-mover

advantages enjoyed by foreign competitors.
D. a government should use subsidies to support promising firms that are active in
old, established industries.
69. Economic problems during the Great Depression were compounded in 1930 when
the U.S. Congress passed the _____, aimed at avoiding rising unemployment by
protecting domestic industries and diverting consumer demand away from foreign
products.
A. Smoot-Hawley Act
B. Antidumping Act
C. Helms-Burton Act
D. D'Amato Act
70. The Smoot-Hawley Act aimed at:
A. diverting consumer demand toward foreign products.
B. promoting unrestricted free trade.
C. limiting global warming.
D. avoiding rising unemployment.

71. Which of the following is a reason for the pressure for greater protectionism that
occurred during the 1980s and early 1990s?
A. The U.S. Congress erected an enormous wall of tariff barriers.
B. Japanese economic failure strained the world trading system.
C. The persistent trade surplus in the United States strained the world trading
system.
D. Many countries found ways to get around GATT regulations.
72. Until 1995, GATT rules applied to all of the following EXCEPT:
A. manufactured goods.
B. services.
C. textiles.
D. agricultural products.
73. According to the 1986 Uruguay Round, the _____ was to be created to implement
the GATT agreement.
A. World Trade Organization
B. International Monetary Fund
C. United Nations
D. World Bank
74. After the Uruguay Round of GATT extended global trading rules to cover trade in
services, the first two industries targeted for reform by the WTO were:
A. textiles and technology.
B. telecommunications and financial services.
C. automotives and aerospace.
D. agriculture and consulting services.
75. The "millennium round" ended in 1999 with:
A. a successful record on agricultural products.
B. a new agenda for the next round focusing on financial services.
C. no agreement on the reduction of barriers to cross-border trade and

investment.
D. a decision to avoid FDI.
76. The WTO argues that removing tariff barriers and subsidies in the agricultural
sector could:
A. protect domestic agriculture in developed nations.
B. lower the overall level of agricultural trade.
C. restrict global economic growth.
D. lower prices to consumers.

77. The TRIPS regulations established at the 1995 Uruguay Round:
A. established regulations on patents and copyrights.
B. set a new level of agriculture subsidies.
C. organized OECD countries to eliminate tariffs on textiles.
D. established new tariff levels on technology.
78. TRIPS regulations oblige WTO members to all of the following EXCEPT:
A. grant and enforce patents lasting at least 20 years.
B. grant and enforce copyrights lasting 50 years.
C. comply with the rules within five years in the case of rich countries.
D. comply with the rules within 10 years in the case of the poorest countries.
79. _____ are the highest rate that can be charged, which is often, but not always, the
rate that is charged.
A. Ad valorem tariff rates
B. Tariff rents
C. Specific tariff rates
D. Bound tariff rates

80. Identify the INCORRECT statement about trade barriers.
A. They raise the costs of exporting products to a country.
B. They may put a firm at a competitive advantage to indigenous competitors.
C. They may limit a firm's ability to serve a country from locations outside of that
country.
D. To conform to local content regulations, a firm may have to locate more

Essay Questions
81. Compare and contrast import quotas and voluntary export restraints.
82. What is a quota rent? Provide an example of how an import quota affects price.
83. Discuss the Buy America Act and its connection with local content requirements.
84. Explain how governments use administrative trade policies to boost exports and
restrict imports. Provide an example of an administrative trade policy.
85. What is dumping? How do governments respond to charges of dumping?
86. Explain the notion of predatory behavior with regard to dumping.
87. What are the political reasons for governments to intervene in markets?
88. Discuss the economic reasons for government intervention in markets.
89. Discuss the infant industry argument for intervention in markets. What is GATT's
position on the argument?
90. What is strategic trade policy? Provide an example.

91. What is Paul Krugman's position on strategic trade policy?
92. Discuss the establishment of GATT. What was GATT's objective?
93. What happened to GATT during the 1980s and early 1990s?
94. What has been the experience of the WTO to date? What does the future look like
for the organization?
95. What are the central issues facing the WTO at the present time?
96. Why are tariff rates on agricultural products generally higher than tariff rates on
manufactured products or services?
97. What is the TRIPS agreement? Why was it established?
98. Discuss the Doha Round of trade talks.

99. Explain how trade barriers affect a firm's strategy.
100.What are the drawbacks of government intervention?

Chapter 07 The Political Economy of International Trade Answer Key
True / False Questions
1. Tariffs are unambiguously pro-consumer and anti-producer.
FALSE
Tariffs are generally pro-producer and anti-consumer. While they protect

producers from foreign competitors, this restriction of supply also raises
domestic prices.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01 Identify the policy instruments used by governments to influence international trade flows.
Topic: Instruments of Trade Policy
2. Specific tariffs are levied as a proportion of the value of the imported good.
FALSE
Tariffs fall into two categories. Specific tariffs are levied as a fixed charge for
each unit of a good imported. Ad valorem tariffs are levied as a proportion of
the value of the imported good.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
3. Export tariffs are far less common than import tariffs.
TRUE
Export tariffs are far less common than import tariffs.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
4. A subsidy helps domestic producers to compete against foreign imports.
TRUE
A subsidy is a government payment to a domestic producer. By lowering

production costs, subsidies help domestic producers in two ways: (1) competing
against foreign imports and (2) gaining export markets.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
5. Under a tariff rate quota, a higher tariff rate is applied to imports within the
quota than those over the quota.
FALSE
Under a tariff rate quota, a lower tariff rate is applied to imports within the
quota than those over the quota.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
6. A common hybrid of a quota and a rent is known as a quota rent.
FALSE
The extra profit that producers make when supply is artificially limited by an
import quota is referred to as a quota rent.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
7. Unlike other trade policies, local content regulations tend to benefit consumers
and not producers.
FALSE
Local content regulations provide protection for a domestic producer of parts in

the same way an import quota does: by limiting foreign competition. As with all
trade policies, local content regulations tend to benefit producers and not
consumers.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
8. The Buy America Act specifies that government agencies must give preference
to American products when putting contracts for equipment out to bid unless
the foreign products have a significant price disadvantage.
FALSE
A little-known law in the United States, the Buy America Act, specifies that
government agencies must give preference to American products when putting
contracts for equipment out to bid unless the foreign products have a significant
price advantage.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
9. Bureaucratic rules designed to make it difficult for imports to enter a country are
called local content requirements.
FALSE
A local content requirement is a requirement that some specific fraction of a

good be produced domestically. Administrative trade policies are bureaucratic
rules designed to make it difficult for imports to enter a country.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
10. Local content regulations provide protection for a domestic producer of parts
by limiting foreign competition.
TRUE

the same way an import quota does: by limiting foreign competition. The
aggregate economic effects are also the same; domestic producers benefit, but
the restrictions on imports raise the prices of imported components.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
11. A company that sells its product in a foreign market below the cost of
production may be accused of dumping.
TRUE
In the context of international trade, dumping is variously defined as 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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
12. Antidumping policies are designed to punish foreign firms that are engaged in
dumping.
TRUE
Antidumping policies are designed to punish foreign firms that engage in

dumping. The ultimate objective is to protect domestic producers from unfair
foreign competition.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
13. Antidumping policies vary drastically from country to country.
FALSE
Although antidumping policies vary somewhat from country to country, the

majority are similar to those used in the United States.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
14. Protecting industries deemed important for national security, and retaliating
against unfair foreign competition are economic arguments for intervention.
FALSE
Political arguments for government intervention cover a range of issues,

including preserving jobs, protecting industries deemed important for national
security, retaliating against unfair foreign competition, protecting consumers
from "dangerous" products, furthering the goals of foreign policy, and
advancing the human rights of individuals in exporting countries.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-02 Understand why governments sometimes intervene in international trade.
Topic: The Case for Government Intervention
15. The Helms-Burton Act of 1996 was aimed at foreign companies that were
undermining U.S. trade sanctions against Libya and Iran.
FALSE
In 1996 the U.S. Congress passed the Helms-Burton Act. This act allows
Americans to sue foreign firms that use property in Cuba confiscated from them
after the 1959 revolution.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
16. According to the infant industry argument, many developing countries have a
countries.
TRUE
The infant industry argument is by far the oldest economic argument for
government intervention. According to this argument, many developing
countries have a potential comparative advantage in manufacturing, but new
manufacturing industries cannot initially compete with established industries in
developed countries.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
17. The infant industry argument is the latest argument for government intervention
in trade.
FALSE
government intervention. Alexander Hamilton proposed it in 1792.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
18. Strategic trade policy suggests that a government should use subsidies to
support promising firms that are active in newly emerging industries.
TRUE
It is argued that by appropriate actions, a government can help raise national

income if it can somehow ensure that the firm or firms that gain first-mover
advantages in an industry are domestic rather than foreign enterprises. Thus,
according to the strategic trade policy argument, a government should use
subsidies to support promising firms that are active in newly emerging
industries.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
19. GATT has not recognized the infant industry argument as a legitimate reason
for protectionism.
FALSE
The infant industry argument has had substantial appeal for the governments of
developing nations during the past 50 years, and the GATT has recognized the
infant industry argument as a legitimate reason for protectionism.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
20. Krugman has suggested that trade policy designed to retaliate against another
country's trade policy would hurt the citizens of both countries.
TRUE
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. In many cases,
the resulting trade war between two or more interventionist governments will
leave all countries involved worse off than if a hands-off approach had been
adopted in the first place.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-03 Summarize and explain the arguments against strategic trade policy.
Topic: The Revised Case for Free Trade
21. Governments do not always act in the national interest when they intervene in
the economy; politically important interest groups often influence them.
TRUE
Governments do not always act in the national interest when they intervene in
the economy; politically important interest groups often influence them.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
22. The Smoot-Hawley Act raised tariff barriers in the hope of protecting jobs and
diverting consumer demand away from foreign products.
TRUE
Aimed at avoiding rising unemployment by protecting domestic industries and

diverting consumer demand away from foreign products, the Smoot-Hawley Act
erected an enormous wall of tariff barriers.
AACSB: Analytic
Blooms: Understand
Learning Objective: 07-04 Describe the development of the world trading system and the current trade issues.
Topic: Development of the World Trading System
23. The Great Depression had roots in the failure of the world economy to mount a
sustained economic recovery after the end of World War I in 1918.
TRUE
By the 1930s, the British attempt to stimulate free trade was buried under the
economic rubble of the Great Depression. The Great Depression had roots in
the failure of the world economy to mount a sustained economic recovery after
the end of World War I in 1918. Things got worse in 1929 with the U.S. stock
market collapse and the subsequent run on the U.S. banking system.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
24. During the 1980s and early 1990s, the world trading system erected by the GATT
gained momentum as protectionist demands generally decreased across the
world.
FALSE
During the 1980s and early 1990s, the world trading system erected by the GATT
came under strain as pressures for greater protectionism increased around the
world.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
25. A key goal of the 1986 Uruguay Round was to extend GATT to cover trade in
commodities.
FALSE
In the Uruguay Round, member countries sought to extend GATT rules to cover
trade in services. They also sought to write rules governing the protection of
intellectual property, to reduce agricultural subsidies, and to strengthen the
GATT's monitoring and enforcement mechanisms.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
26. The World Trade Organization was created as part of the Uruguay Round.
TRUE
The Uruguay Round dragged on for seven years before an agreement was
reached December 15, 1993. It went into effect July 1, 1995. The World Trade
Organization was created to implement the GATT agreement.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
27. The WTO does not have the power to impose trade sanctions.
FALSE
Arbitration panel reports on trade disputes between member countries are

automatically adopted by the WTO. Countries that have been found by the
arbitration panel to violate GATT rules may appeal to a permanent appellate
body, but its verdict is binding. If offenders fail to comply with the
recommendations of the arbitration panel, trading partners have the right to
compensation or, in the last resort, to impose trade sanctions.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
28. A key issue in the "millennium round" of the WTO was to increase barriers to
cross-border trade in agricultural products.
FALSE
At the end of November 1999, representatives from the WTO's member states
met in Seattle, Washington. The goal of the meeting was to launch a new round
of talks—dubbed "the millennium round"—aimed at further reducing barriers to
cross-border trade and investment.
AACSB: Analytic
Blooms: Understand
29. Human rights activists see WTO rules as outlawing the ability of nations to stop
hazardous.
TRUE
Human rights activists see WTO rules as outlawing the ability of nations to stop
hazardous.
AACSB: Analytic
Blooms: Understand
30. The WTO has the ability to force any member nation to take an action to which
it is opposed.
FALSE
The WTO lacks the ability to force any member nation to take an action to
which it is opposed. The WTO can allow member nations to impose retaliatory
tariffs on countries that do not abide by WTO rules, but that is the limit of its
power.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
31. One issue at the forefront of the current agenda of the WTO is the increase in
tariff rates on nonagricultural goods and services in many nations.
TRUE
Four issues at the forefront of the current agenda of the WTO are the increase
in antidumping policies, the high level of protectionism in agriculture, the lack of
strong protection for intellectual property rights in many nations, and continued
high tariff rates on nonagricultural goods and services in many nations.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
32. WTO rules do not allow countries to impose antidumping duties on foreign
goods that are being sold cheaper than at home, or below their cost of
production, even when domestic producers can show that they are being
harmed.
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 can show that they are being harmed.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
33. Antidumping actions are concentrated in certain sectors of the economy such as
basic metal industries, chemicals, plastics, and machinery and electrical
equipment.
TRUE
Antidumping actions seem to be concentrated in certain sectors of the economy

such as basic metal industries (e.g., aluminum and steel), chemicals, plastics, and
machinery and electrical equipment. These four sectors since 1995 have been
characterized by periods of intense competition and excess productive capacity,
which have led to low prices and profits (or losses) for firms in those industries.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
34. Free trade in agriculture could jump-start economic growth among the world's
poorer nations and alleviate global poverty.
TRUE
Developing nations have been pushing hard for reforms that would allow their
producers greater access to the protected markets of the developed nations.
Free trade in agriculture could help to jump-start economic growth among the
world's poorer nations and alleviate global poverty.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
35. The TRIPS regulations oblige WTO members to grant and enforce patents
lasting at least 20 years and copyrights lasting 50 years.
TRUE
The TRIPS regulations oblige WTO members to grant and enforce patents
lasting at least 20 years and copyrights lasting 50 years. Rich countries had to
comply with the rules within a year. Poor countries, in which such protection
generally was much weaker, had five years' grace, and the very poorest had 10
years.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
36. Inadequate protections for intellectual property reduce the incentive for
innovation.
TRUE
Inadequate protections for intellectual property reduce the incentive for

innovation. Because innovation is a central engine of economic growth and
rising living standards, the argument has been that a multilateral agreement is
needed to protect intellectual property.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
37. Tariffs on industrial goods remain higher than tariffs on services.
FALSE
Tariffs on services remain higher than on industrial goods. The average tariff on
business and financial services imported into the United States, for example, is
8.2 percent, into the EU it is 8.5 percent, and into Japan it is 19.7 percent. Given
the rising value of cross-border trade in services, reducing these figures can be
expected to yield substantial gains.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
38. Tariff barriers lower the costs of exporting products to a country.
FALSE
Trade barriers constrain a firm's ability to disperse its productive activities in

such a manner. Tariff barriers raise the costs of exporting products to a country
(or of exporting partly finished products between countries).
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-05 Explain the implications for managers of developments in the world trading system.
Topic: Implication for Managers
39. The threat of antidumping action limits the ability of a firm to use aggressive
pricing to gain market share in a country.
TRUE
The threat of antidumping action limits the ability of a firm to use aggressive
pricing to gain market share in a country. Firms in a country also can make
strategic use of antidumping measures to limit aggressive competition from
low-cost foreign producers.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
40. To conform to local content regulations, a firm may have to locate more
TRUE
To conform to local content regulations, a firm may have to locate more

production activities in a given market than it would otherwise. Again, from the
firm's perspective, the consequence might be to raise costs above the level that
could be achieved if each production activity was dispersed to the optimal
location for that activity.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Multiple Choice Questions

41. Which of the following is NOT one of the main instruments of trade policy?
A. Tariffs
B. Credit portfolios
C. Local content requirements
D. Administrative policies
Trade policy uses seven main instruments: tariffs, subsidies, import quotas,
voluntary export restraints, local content requirements, administrative policies,
and antidumping duties. Tariffs are the oldest and simplest instrument of trade
policy.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
42. Specific tariffs are:
A. levied as a proportion of the value of the imported good.
B. government payment to domestic producers.
C. in the form of manufacturing or production requirements of goods.
D. levied as a fixed charge for each unit of a good imported.
Specific tariffs are levied as a fixed charge for each unit of a good imported (for
example, $3 per barrel of oil).
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
43. Tariffs do not benefit:
A. consumers.
B. domestic producers.
C. governments.
D. domestic firms.
The important thing to understand about an import tariff is who suffers and who
gains. The government gains, because the tariff increases government revenues.
Domestic producers gain, because the tariff affords them some protection
against foreign competitors by increasing the cost of imported foreign goods.
Consumers lose because they must pay more for certain imports.
AACSB: Analytic
Blooms: Understand
44. Import tariffs:
A. reduce the price of foreign goods.
B. create efficient utilization of resources.
C. reduce the overall efficiency of the world economy.
D. are unambiguously pro-consumer and anti-producer.
Import tariffs reduce the overall efficiency of the world economy. They reduce
efficiency because a protective tariff encourages domestic firms to produce
products at home that, in theory, could be produced more efficiently abroad.
The consequence is an inefficient utilization of resources.
AACSB: Analytic
Blooms: Understand
45. By lowering production costs, _____ help domestic producers compete against
foreign imports.
A. subsidies
B. duties
C. quotas
D. tariffs
By lowering production costs, subsidies help domestic producers in two ways: (1)
competing against foreign imports and (2) gaining export markets.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
46. Which of the following observations about subsidies is true?
A. Government subsidies must be paid for, typically by taxing individuals and

corporations.
B. Subsidies are used to reduce exports from a sector, often for political
reasons.
C. Whether subsidies generate national benefits that exceed their national costs
is debatable.
D. Subsidies help foreign producers gain a competitive advantage over

domestic producers.
A subsidy is a government payment to a domestic producer. Government

subsidies must be paid for, typically by taxing individuals and corporations.
AACSB: Analytic
Blooms: Understand
47. Which of the following is a consequence of subsidies?
A. Subsidies make domestic producers vulnerable to foreign competition.
B. Subsidies lead to lowered production.
C. Subsidies protect inefficient domestic producers.
D. Subsidies produce revenue for the government.
In practice, many subsidies are not that successful at increasing the international
competitiveness of domestic producers. Rather, they tend to protect the
inefficient and promote excess production.
AACSB: Analytic
Blooms: Understand
48. According to the _____ policy, subsidies can help a firm achieve a first-mover
advantage in an emerging industry.
A. strategic trade
B. antidumping
C. tariff quota
D. free trade
Advocates of strategic trade policy favor subsidies to help domestic firms

achieve a dominant position in those industries in which economies of scale are
important and the world market is not large enough to profitably support more
than a few firms. According to this argument, subsidies can help a firm achieve a
first-mover advantage in an emerging industry.
AACSB: Analytic
Blooms: Understand
49. _____ is a direct restriction on the quantity of some good that may be imported
into a country.
A. Import tariff
B. Import quota
C. Import subsidy
An import quota is a direct restriction on the quantity of some good that may
be imported into a country. The restriction is usually enforced by issuing import
licenses to a group of individuals or firms.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
50. A common hybrid of a quota and a tariff is known as a(n):
A. import tariff quota.
B. voluntary export restraint.
C. ad valorem tariff.
D. tariff rate quota.
A common hybrid of a quota and a tariff is known as a tariff rate quota. Under a
tariff rate quota, a lower tariff rate is applied to imports within the quota than
those over the quota.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
51. _____ is a quota on trade imposed by the exporting country, typically at the
request of the importing country's government.
A. Voluntary export restraint
B. Specific tariff quota
C. Trade reconciliation
A voluntary export restraint (VER) is a quota on trade imposed by the exporting

country, typically at the request of the importing country's government.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
52. The Japanese government was pressurized by the U.S. government to place
limits on the number of vehicles exported to the United States by Japanese
automobile producers in 1981. This is an example of:
A. tariff rate quota.
B. specific tariffs.
C. voluntary export restraint.
D. ad valorem tariff.
A voluntary export restraint (VER) is a quota on trade imposed by the exporting

country, typically at the request of the importing country's government. One of
the most famous historical examples is the limitation on auto exports to the
United States enforced by Japanese automobile producers in 1981.
AACSB: Analytic
Blooms: Understand
53. Tariff rate quotas are common in agriculture, where their goal is to:
A. reduce the use of synthetic fertilizers.
B. limit imports over quota.
C. increase agricultural imports.
D. increase foreign competition.
Under a tariff rate quota, a lower tariff rate is applied to imports within the
quota than those over the quota. Tariff rate quotas are common in agriculture,
where their goal is to limit imports over quota.
AACSB: Analytic
Blooms: Understand
54. A quota rent is:
A. a quota on trade imposed by the exporting country.
B. levied as a fixed charge for each unit of a good imported.
C. levied as a proportion of the value of the imported good.
D. the extra profit producers make when supply is artificially limited by an

import quota.
import quota is referred to as a quota rent.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
55. Foreign producers typically agree to voluntary export restrictions because:
A. their manufacturing capacity is limited.
B. they can divert their exports to other countries and charge more for their
products.
C. they fear far more damaging punitive tariffs or import quotas might follow if
they do not.
D. they are required to by the World Trade Organization.
Foreign producers agree to VERs because they fear more damaging punitive
tariffs or import quotas might follow if they do not. Agreeing to a VER is seen as
a way to make the best of a bad situation by appeasing protectionist pressures
in a country.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
56. Which of the following statements concerning a voluntary export restraint is
NOT true?
A. It benefits domestic producers by limiting import competition.
B. In most cases, it benefits consumers.
C. It raises the domestic price of an imported good.
D. It is a variant of the import quota.
As with all restrictions on trade, quotas do not benefit consumers. An import

quota or VER always raises the domestic price of an imported good. When
imports are limited to a low percentage of the market by a quota or VER, the
price is bid up for that limited foreign supply.
AACSB: Analytic
Blooms: Understand
57. According to _____, some specific fraction of a good must be produced
domestically.
A. import quotas
B. voluntary export restraints
C. local content requirements
D. antidumping duties
A local content requirement is a requirement that some specific fraction of a

good be produced domestically. The requirement can be expressed either in
physical terms or in value terms.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
58. According to the Buy America Act, if a company wishes to win a contract from a
U.S. government agency to provide some equipment, it must ensure that at
least 51 percent of the product by value is manufactured in the United States.
This is an example of:
A. antidumping duties.
B. voluntary export restraints.
C. import quotas.
D. local content requirements.
The Buy America Act specifies that government agencies must give preference
the foreign products have a significant price advantage. The law specifies a
product as "American" if 51 percent of the materials by value are produced
domestically. This amounts to a local content requirement.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
59. Local content regulations:
A. protect domestic producers by limiting foreign competition.
B. lower the prices of imported components.
C. tend to benefit consumers and not producers.
D. encourage outsourcing of production units.

the same way an import quota does: by limiting foreign competition. The
aggregate economic effects are also the same; domestic producers benefit, but
the restrictions on imports raise the prices of imported components.
AACSB: Analytic
Blooms: Understand
60. Administrative trade policies are:
A. requirements that some specific fraction of a good be produced

domestically.
B. quotas on trade imposed by the exporting country.
C. bureaucratic rules designed to make it difficult for imports to enter a country.
D. designed to punish foreign firms that engage in dumping.
Administrative trade policies are bureaucratic rules designed to make it difficult

for imports to enter a country. It has been argued that the Japanese are the
masters of this trade barrier.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
61. The Netherlands exported tulip bulbs to almost every country in the world
except Japan. This was because in Japan, customs inspectors insisted on
checking every tulip bulb by cutting it vertically down the middle. This is an
example of which of the following trade barriers?
A. Export restraint
B. Administrative trade policies
D. Ad valorem
Administrative trade policies are bureaucratic rules designed to make it difficult

for imports to enter a country. It has been argued that the Japanese are the
masters of this trade barrier.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
62. _____ is variously defined as 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.
A. Export restraint
B. Dumping
D. Ad valorem

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
63. In 1997, two South Korean manufacturers of semiconductors, LG Semicon and
Hyundai Electronics, were accused of selling dynamic random access memory
chips (DRAMs) in the U.S. market at below their costs of production. It was
alleged that the firms were trying to unload their excess production in the
United States. This is an example of:
A. ad valorem tariff.
B. subsidy.
C. dumping.
D. import quota.

AACSB: Analytic
Blooms: Understand
64. The U.S. government has used the threat of punitive trade sanctions to try to
get the Chinese government to enforce its intellectual property laws. This is an
example of government intervention based on:
A. human rights protection.
B. national security.
C. consumer protection.
D. retaliation.
Some argue that governments should use the threat to intervene in trade policy
as a bargaining tool to help open foreign markets and force trading partners to
"play by the rules of the game." The U.S. government has used the threat of
punitive trade sanctions to try to get the Chinese government to enforce its
intellectual property laws.
AACSB: Analytic
Blooms: Understand
65. Which of the following acts allows Americans to sue foreign firms that use
property in Cuba confiscated from them after the 1959 revolution?
A. D'Amato Act
B. Smoot-Hawley Act
C. Helms-Burton Act
D. Antidumping Act
In 1996 the U.S. Congress passed the Helms-Burton Act. This act allows
Americans to sue foreign firms that use property in Cuba confiscated from them
after the 1959 revolution. Later in 1996, Congress passed a similar law, the
D'Amato Act, aimed at Libya and Iran.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
66. According to the _____ argument, governments should temporarily support new
industries until they have grown strong enough to meet international
competition.
A. retaliatory action
B. human rights
C. infant industry
D. antidumping
government intervention. According to this argument, many developing
countries have a potential comparative advantage in manufacturing, but new
manufacturing industries cannot initially compete with established industries in
developed countries.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
67. The infant industry argument is criticized because it relies on an assumption
that:
A. new manufacturing industries in developing nations can initially compete

with established industries in developed countries.
B. selling goods in a foreign market at below their "fair" market value is legally
and ethically justified.
C. the domestic industry in a developing nation lacks the capacity to meet

demand.
D. firms are unable to make efficient long-term investments by borrowing

money from the domestic or international capital market.
The infant industry argument relies on an assumption that firms are unable to
make efficient long-term investments by borrowing money from the domestic
or international capital market. Consequently, governments have been required
to subsidize long-term investments.
AACSB: Analytic
Blooms: Understand
68. According to the strategic trade policy argument:
A. government intervention is not required because firms can borrow money

from the capital markets to finance the required investments.
B. selling goods in a foreign market at below their "fair" market value is legally
and ethically justified.
C. government support can help domestic firms overcome the first-mover

advantages enjoyed by foreign competitors.
D. a government should use subsidies to support promising firms that are active
in old, established industries.
According to the strategic trade policy argument, a government can help raise
national income if it can somehow ensure that the firm or firms that gain first-
mover advantages in an industry are domestic rather than foreign enterprises.
The second component of the strategic trade policy argument is that it might
pay a government to intervene in an industry by helping domestic firms
overcome the barriers to entry created by foreign firms that have already
reaped first-mover advantages.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
69. Economic problems during the Great Depression were compounded in 1930
when the U.S. Congress passed the _____, aimed at avoiding rising
unemployment by protecting domestic industries and diverting consumer
demand away from foreign products.
A. Smoot-Hawley Act
B. Antidumping Act
C. Helms-Burton Act
D. D'Amato Act
Economic problems were compounded in 1930 when the U.S. Congress passed
the Smoot-Hawley tariff. Aimed at avoiding rising unemployment by protecting
domestic industries and diverting consumer demand away from foreign
products, the Smoot-Hawley Act erected an enormous wall of tariff barriers.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
70. The Smoot-Hawley Act aimed at:
A. diverting consumer demand toward foreign products.
B. promoting unrestricted free trade.
C. limiting global warming.
D. avoiding rising unemployment.
Aimed at avoiding rising unemployment by protecting domestic industries and

diverting consumer demand away from foreign products, the Smoot-Hawley Act
erected an enormous wall of tariff barriers. Almost every industry was rewarded
with its "made-to-order" tariff.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
71. Which of the following is a reason for the pressure for greater protectionism
that occurred during the 1980s and early 1990s?
A. The U.S. Congress erected an enormous wall of tariff barriers.
B. Japanese economic failure strained the world trading system.
C. The persistent trade surplus in the United States strained the world trading
system.
D. Many countries found ways to get around GATT regulations.
The world trading system was strained by the persistent trade deficit in the
world's largest economy, the United States. From a political perspective, the
matter was worsened in 1992 by the $45 billion U.S. trade deficit with Japan, a
country perceived as not playing by the rules.
AACSB: Analytic
Blooms: Understand
72. Until 1995, GATT rules applied to all of the following EXCEPT:
A. manufactured goods.
B. services.
C. textiles.
D. agricultural products.
Until 1995, GATT rules applied only to industrial goods (i.e., manufactured goods
and commodities). Until the Uruguay Round, GATT rules had applied only to
trade in manufactured goods and commodities. In the Uruguay Round, member
countries sought to extend GATT rules to cover trade in services.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
73. According to the 1986 Uruguay Round, the _____ was to be created to
implement the GATT agreement.
A. World Trade Organization
B. International Monetary Fund
C. United Nations
D. World Bank
The Uruguay Round contained the following provision: The World Trade
Organization was to be created to implement the GATT agreement.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
74. After the Uruguay Round of GATT extended global trading rules to cover trade
in services, the first two industries targeted for reform by the WTO were:
A. textiles and technology.
B. telecommunications and financial services.
C. automotives and aerospace.
D. agriculture and consulting services.
The WTO was encouraged to extend its reach to encompass regulations

governing foreign direct investment, something the GATT had never done. Two
of the first industries targeted for reform were the global telecommunication
and financial services industries.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
75. The "millennium round" ended in 1999 with:
A. a successful record on agricultural products.
B. a new agenda for the next round focusing on financial services.
C. no agreement on the reduction of barriers to cross-border trade and

investment.
D. a decision to avoid FDI.
At the end of November 1999, representatives from the WTO's member states
met in Seattle, Washington. The goal of the meeting was to launch a new round
of talks—dubbed "the millennium round"—aimed at further reducing barriers to
cross-border trade and investment. The talks ended December 3, 1999, without
reaching any agreement.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
76. The WTO argues that removing tariff barriers and subsidies in the agricultural
sector could:
A. protect domestic agriculture in developed nations.
B. lower the overall level of agricultural trade.
C. restrict global economic growth.
D. lower prices to consumers.
The WTO argues that removing tariff barriers and subsidies could significantly
boost the overall level of trade, lower prices to consumers, and raise global
economic growth by freeing consumption and investment resources for more
productive uses.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
77. The TRIPS regulations established at the 1995 Uruguay Round:
A. established regulations on patents and copyrights.
B. set a new level of agriculture subsidies.
C. organized OECD countries to eliminate tariffs on textiles.
D. established new tariff levels on technology.
The 1995 Uruguay agreement that established the WTO also contained an
agreement to protect intellectual property (the Trade-Related Aspects of
Intellectual Property Rights, or TRIPS, agreement). The TRIPS regulations oblige
WTO members to grant and enforce patents lasting at least 20 years and
copyrights lasting 50 years.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
78. TRIPS regulations oblige WTO members to all of the following EXCEPT:
A. grant and enforce patents lasting at least 20 years.
B. grant and enforce copyrights lasting 50 years.
C. comply with the rules within five years in the case of rich countries.
D. comply with the rules within 10 years in the case of the poorest countries.
copyrights lasting 50 years. The very poorest countries had 10 years to comply
with the rules.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
79. _____ are the highest rate that can be charged, which is often, but not always,
the rate that is charged.
A. Ad valorem tariff rates
B. Tariff rents
C. Specific tariff rates
D. Bound tariff rates
Bound tariff rates are the highest rate that can be charged, which is often, but
not always, the rate that is charged. Australia and South Korea, both OECD
countries, still have bound tariff rates of 15.1 percent and 24.6 percent,
respectively, on imports of transportation equipment.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
80. Identify the INCORRECT statement about trade barriers.
A. They raise the costs of exporting products to a country.
B. They may put a firm at a competitive advantage to indigenous competitors.
C. They may limit a firm's ability to serve a country from locations outside of
that country.
D. To conform to local content regulations, a firm may have to locate more

Tariff barriers raise the costs of exporting products to a country (or of exporting
partly finished products between countries). This may put the firm at a
competitive disadvantage to indigenous competitors in that country.
AACSB: Analytic
Blooms: Understand
Essay Questions
81. Compare and contrast import quotas and voluntary export restraints.
An import quota is a direct restriction on the quantity of some good that may
be imported into a country. The restriction is normally enforced by issuing
import licenses to a group of individuals or firms. In contrast, a voluntary export
restraint (VER) is a quota on trade imposed by the exporting country, typically at
the request of the importing country's government. Foreign producers agree to
VERs because they fear more damaging punitive tariffs or import quotas might
follow if they do not. Both import quotas and VERs benefit domestic producers,
but hurt consumers through higher prices.
AACSB: Analytic
Blooms: Understand
82. What is a quota rent? Provide an example of how an import quota affects price.
import quota is referred to as a quota rent. If a domestic industry lacks the
capacity to meet demand, an import quota can raise prices for both the
domestically produced and the imported good. This happened in the U.S. sugar
industry, in which a tariff rate quota system has long limited the amount foreign
producers can sell in the U.S. market. According to one study, import quotas
have caused the price of sugar in the United States to be as much as 40 percent
greater than the world price.
AACSB: Analytic
Blooms: Understand
83. Discuss the Buy America Act and its connection with local content
requirements.
The Buy America Act specifies that government agencies must give preference
the foreign products have a significant price advantage. The law specifies a
product as being "American" if 51 percent of the materials by value are
produced domestically. This amounts to a local content requirement that calls
for a specific fraction of a good to be produced locally.
AACSB: Analytic
Blooms: Understand
84. Explain how governments use administrative trade policies to boost exports and
restrict imports. Provide an example of an administrative trade policy.
Administrative trade policies are bureaucratic rules that are almost always
deliberately designed to restrict the flow of a particular import into a country.
The Japanese are considered masters of this trade barrier. Students will probably
use the example of tulip bulbs when discussing this question. The Netherlands
exports tulip bulbs to almost every country of the world except Japan. The
reason is that Japanese customs inspectors insist on checking every tulip bulb by
cutting it vertically down the middle, which in effect ruins the bulb.
AACSB: Analytic
Blooms: Understand
85. What is dumping? How do governments respond to charges of dumping?
Dumping is defined as 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. Antidumping policies are designed to punish foreign firms that engage in
dumping. If a firm is found to be dumping, countervailing duties may be
imposed. These duties can be fairly substantial and stay in place for up to five
years.
AACSB: Analytic
Blooms: Understand
86. Explain the notion of predatory behavior with regard to dumping.
A firm that is dumping is selling its product in a foreign market at below their
costs of production, or is selling goods in a foreign market at below their "fair"
market value. Dumping may be the result of predatory behavior, with producers
using substantial profits from their home markets to subsidize profits in a
foreign market with a goal of driving indigenous competitors out of that market.
Once the firm achieves its goal, the company will raise prices and earn
substantial profits.
AACSB: Analytic
Blooms: Understand
87. What are the political reasons for governments to intervene in markets?
There are a number of political reasons why governments intervene in markets.

The most common reason for intervention is to protect jobs and industries.
Governments may also intervene to protect national security, to threaten
punitive retaliatory actions, to protect consumers or to protect human rights,
and to further foreign policy objectives.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
88. Discuss the economic reasons for government intervention in markets.
The economic reasons for government intervention have undergone a

renaissance in recent times as more economists support economic reasons for
intervention. The oldest argument for intervention is the infant industry
argument. According to this argument, many developing countries have a
countries.
Strategic trade policy is the other main reason given for economic government
intervention in markets.
AACSB: Analytic
Blooms: Understand
89. Discuss the infant industry argument for intervention in markets. What is GATT's
position on the argument?
Alexander Hamilton proposed the infant industry argument for intervention in

markets in 1792. According to this argument, many developing countries have a
countries. To allow manufacturing to get a toehold, the argument is that
governments should temporarily support new industries until they have grown
strong enough to meet international competitors. GATT has recognized the
infant industry argument as a legitimate reason for protectionism.
AACSB: Analytic
Blooms: Understand
90. What is strategic trade policy? Provide an example.
Strategic trade policy suggests that in industries where the existence of

substantial scale economies implies that the world will profitably support only a
few firms, countries may predominate in the export of certain products simply
because they had firms that were able to capture first-mover advantages.
Boeing's dominance in the aerospace industry has been attributed to these
types of factors. According to strategic trade policy, a government can help
raise national incomes if it can ensure that the firms that gain first-mover
advantages in such industries are domestic rather foreign. Further, the theory
argues that it might pay governments to intervene in an industry if it helps
domestic firms overcome the barriers to entry created by foreign firms that have
already reaped first-mover advantages.
AACSB: Analytic
Blooms: Understand
91. What is Paul Krugman's position on strategic trade policy?
Paul Krugman suggests that 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.
Consequently, a country that uses this type of policy will probably draw
retaliatory action. The resulting trade war would leave both countries worse off
than if a free trade approach had been implemented to start. Krugman suggests
that to avoid the disruptions a trade war would create, countries should instead
help establish the rules of the game that minimize the use of trade-distorting
subsidies.
AACSB: Analytic
Blooms: Understand
92. Discuss the establishment of GATT. What was GATT's objective?
The GATT was a multilateral agreement whose objective was to liberalize trade
by eliminating tariffs, subsidies, import quotas, and other trade barriers. GATT
was established in 1947 with 19 members. Membership increased to more than
120 nations by the time it was superseded by the WTO. Under GATT, tariff
reduction was spread over eight rounds. The last round, the Uruguay Round,
resulted in the establishment of the WTO which, among other things took over
the role of GATT in the global economy.
AACSB: Analytic
Blooms: Understand
93. What happened to GATT during the 1980s and early 1990s?
During the 1980s and early 1990s, the world trading system established by GATT
came under significant strain as pressures for greater protectionism mounted
around the world. Three issues in particular were important. First, the economic
success of Japan strained the world trading system. Second, the world's trading
system was further strained by the persistent trade deficit in the world's largest
economy, the United States. Finally, many countries found ways to get around
GATT regulations.
AACSB: Analytic
Blooms: Understand
94. What has been the experience of the WTO to date? What does the future look
like for the organization?
By 2011, the WTO had 153 members with more in the application process. The
WTO has remained at the forefront of efforts to promote free trade. So far, it
appears that its policing and enforcement mechanisms are having a positive
effect. Countries are using the WTO to settle trade disputes, which represents an
important vote of confidence in the organization's dispute resolution
procedures. So far, the users of the system have included both developed and
developing countries, which is also a promising development. In addition, some
powerful developed countries, including the United States, have been willing to
accept WTO rulings that have gone against them, which attest to the
organization's legitimacy.
AACSB: Analytic
Blooms: Understand
95. What are the central issues facing the WTO at the present time?
Four issues at the top of the agenda for the WTO are the increase in
antidumping policies, the high level of protectionism in agriculture, the lack of
strong protection for intellectual property rights in many nations, and continued
high tariff rates on nonagricultural goods and services in many nations.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
96. Why are tariff rates on agricultural products generally higher than tariff rates on
manufactured products or services?
Tariff rates on agricultural products are typically higher than tariffs on

manufactured products. High tariff rates on agricultural products were designed
to protect domestic agriculture and traditional farming communities from
foreign competition. IMF estimates indicate that removing the tariffs and
subsidies could raise global economic welfare by $128 billion annually.
AACSB: Analytic
Blooms: Understand
97. What is the TRIPS agreement? Why was it established?
copyrights lasting 50 years. The basis for this agreement was a strong belief
among signatory nations that the protection of intellectual property through
patents, trademarks, and copyrights must be an essential element of the
international trading system. Inadequate protections for intellectual property
reduce the incentive for innovation. Because innovation is a central engine of
economic growth and rising living standards, the argument has been that a
multilateral agreement is needed to protect intellectual property.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
98. Discuss the Doha Round of trade talks.
The Doha Round began in 2001. Its agenda focused on cutting tariffs on
industrial goods and services, phasing out subsidies to agricultural producers,
reducing barriers to cross-border investment, and limiting the use of
antidumping laws. Estimates suggest that a successful Doha Round would raise
global incomes by as much as $300 billion annually, with 60 percent of the gain
going to the world's poorer nations, which would help to pull 150 million people
out of poverty. As of early 2011, the goal was to reduce tariffs for manufactured
and agricultural goods by 60 to 70 percent, and to cut subsidies to half of their
current level, but getting nations to agree to these goals was proving
exceedingly difficult.
AACSB: Analytic
Blooms: Understand
99. Explain how trade barriers affect a firm's strategy.
There are four main ways trade barriers affect a firm's strategy. First, tariffs raise
the cost of exporting, putting the firm at a competitive disadvantage. Second,
quotas may limit a firm's ability to serve a country from outside of that country.
Third, to conform to local content regulations, a firm may have to locate more
production activities in a given market than it would otherwise. Finally, the threat
of antidumping actions limits the firm's ability to use aggressive pricing to gain
market share in a country.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
100. What are the drawbacks of government intervention?
Government intervention has three drawbacks. Intervention can be self-

defeating because it tends to protect the inefficient rather than help firms
become efficient global competitors. Intervention is dangerous; it may invite
retaliation and trigger a trade war. Finally, intervention is unlikely to be well
executed, given the opportunity for such a policy to be captured by special-
interest groups.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy

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Chapter 07

The Political Economy of International Trade

True / False Questions

1. Tariffs are unambiguously pro-consumer and anti-producer.

3. Export tariffs are far less common than import tariffs.

4. A subsidy helps domestic producers to compete against foreign imports.

6. A common hybrid of a quota and a rent is known as a quota rent.

13. Antidumping policies vary drastically from country to country.

37. Tariffs on industrial goods remain higher than tariffs on services.

38. Tariff barriers lower the costs of exporting products to a country.

C. Local content requirements

42. Specific tariffs are:

A. levied as a proportion of the value of the imported good.

B. government payment to domestic producers.

C. in the form of manufacturing or production requirements of goods.

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

43. Tariffs do not benefit:

A. reduce the price of foreign goods.

B. create efficient utilization of resources.

C. reduce the overall efficiency of the world economy.

D. are unambiguously pro-consumer and anti-producer.

46. Which of the following observations about subsidies is true?

A. Government subsidies must be paid for, typically by taxing individuals and

D. Subsidies help foreign producers gain a competitive advantage over domestic

A. Subsidies make domestic producers vulnerable to foreign competition.

B. Subsidies lead to lowered production.

C. Subsidies protect inefficient domestic producers.

D. Subsidies produce revenue for the government.

A. import tariff quota.

B. voluntary export restraint.

D. tariff rate quota.

A. Voluntary export restraint

B. Specific tariff quota

A. tariff rate quota.

C. voluntary export restraint.

A. reduce the use of synthetic fertilizers.

B. limit imports over quota.

C. increase agricultural imports.

D. increase foreign competition.

54. A quota rent is:

A. a quota on trade imposed by the exporting country.

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

C. levied as a proportion of the value of the imported good.

55. Foreign producers typically agree to voluntary export restrictions because:

A. their manufacturing capacity is limited.

D. they are required to by the World Trade Organization.

A. It benefits domestic producers by limiting import competition.

B. In most cases, it benefits consumers.

C. It raises the domestic price of an imported good.

D. It is a variant of the import quota.

57. According to _____, some specific fraction of a good must be produced

B. voluntary export restraints

C. local content requirements

B. voluntary export restraints.

D. local content requirements.

59. Local content regulations:

A. protect domestic producers by limiting foreign competition.

B. lower the prices of imported components.

C. tend to benefit consumers and not producers.

D. encourage outsourcing of production units.

60. Administrative trade policies are:

A. requirements that some specific fraction of a good be produced domestically.

B. quotas on trade imposed by the exporting country.