Wild Ib9 Tif 06

International Business: The Challenges of Globalization, 9e, Global Edition (Wild)
Chapter 6 Political Economy of Trade
1) Free trade ________.

A) is another term for managed trade
B) implies that the national government exerts minimal influence on the exporting and importing
decisions of private firms
C) proposes that national governments should directly help domestic firms by providing export
subsidies and tax breaks
D) suggests that the national government should actively intervene to ensure that domestic firms'
exports receive an equitable share of foreign markets and that imports are controlled to minimize
losses of domestic jobs and market share in specific industries
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.1: Explain why governments sometimes intervene in trade.
2) Which of the following is true of government interventions in a country's trade practices?

A) Lower restrictions should be placed on products coming from countries where a government
has a large sphere of political influence.
B) A major political motive behind government intervention in trade is the protection of infant
industries.
C) Government interventions help companies take advantage of economies of scale and be the
first movers in their industries.
D) Governments intervene to protect only imports, as the protection of exports is handled by
private agencies.
Answer: C
Skill: Concept
Difficulty: Moderate
3) Managers should understand the effect of trade protectionism because ________.

A) trade protectionism may limit the number of people permitted to practice a specific profession
B) trade protectionism requires the payment of high insurance rates to transport goods
internationally
C) trade protectionism may prevent companies' enactment of merger and acquisition agreements
D) trade protectionism may make it difficult for a company to buy what it needs from foreign
suppliers
Answer: D
Skill: Concept
Difficulty: Easy
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4) Which of the following do products designated as dual use require before exports can take
place?
A) currency controls
B) countervailing duties
C) special government approval
D) local content requirements
Answer: C
Skill: Concept
Difficulty: Easy
5) Which of the following is an example of a dual use product?

A) a blowdryer
B) a GPS navigation device
C) a food processor
D) a vacuum cleaner
Answer: B
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
6) ________ refers to the unwanted cultural influence in a nation that can cause great distress
and lead governments to block imports it believes to be harmful.
A) Cultural imperialism
B) Cultural protectionism
C) Dumping
D) Capitalism
Answer: A
Skill: Concept
Difficulty: Easy
7) Which of the following is the main cultural motive behind government intervention in trade?
A) promotion of strategic trade policies
B) protection of jobs
C) protection of national identity
D) protection of young industries from competition
Answer: C
AACSB: Diverse and multicultural work environments
Skill: Concept
Difficulty: Easy
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8) Which of the following statements is true about cultural influences?
A) Culture and trade are independent of each other.
B) Unwanted cultural influence in a nation can cause governments to block imports that it
believes are harmful.
C) The cultures of countries are independent of the effects of exposure to the people and
products of other cultures.
D) The culture of the United States is readily adapted into the local culture of countries all over
the world.
Answer: B
Skill: Concept
Difficulty: Easy
9) Which of the following countries is seen as a threat to national cultures around the world?
A) United States
B) India
C) Russia
D) France
Answer: A
Skill: Concept
Difficulty: Easy
10) The purpose of ________ is to force companies from other nations to use local resources in
their production processes, particularly labor.
A) administrative delays
B) currency controls
C) local content requirements
D) voluntary export restraints
Answer: C
Skill: Concept
Difficulty: Easy
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11) Which of the following statements is true of local content requirements?
A) It is a strategy mainly used by developed nations.
B) This strategy enforces companies to locate their manufacturing facilities in their home
countries.
C) Local content requirements hurt domestic producers through their effect on prices.
D) It forces companies from other countries to employ local resources in their production
processes.
Answer: D
Skill: Concept
12) ________ can occur when a firm sells its goods in a foreign market at a price below what it
charges in its home market.
A) Predatory pricing
B) Dumping
C) Foreign trade duties
D) Subsidies
Answer: B
Skill: Concept
Difficulty: Easy
13) A(n) ________ is calculated to offset the advantage an exporter receives from a subsidy.
A) compound tariff
B) export promotion
C) countervailing duty
D) substitution tariff
Answer: C
Skill: Concept
Difficulty: Easy
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Scenario: Not-So-Free Freeland
Freeland is a semi-closed economy whose government believes in protecting national identity
and building a self-sustained economy. The government's priority is to protect local jobs and
provide opportunities to Freeland's emerging industries to flourish without the threat of external
competition.
14) Which of the following motives is least likely attributed to Freeland's restriction on free
trade?
A) political motives
B) economic motives
C) social motives
D) cultural motives
Answer: C
Skill: Application
Difficulty: Hard
15) Freeland's protection of its national identity is an example of a(n) ________.

A) political motive
B) economic motive
C) cultural motive
D) social motive
Answer: C
Skill: Application
Difficulty: Hard
16) Which of the following motives illustrates Freeland's efforts to protect local jobs?
A) political motive
B) economic motive
C) cultural motive
D) social motive
Answer: A
Skill: Application
Difficulty: Hard
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17) Freeland's efforts to provide opportunities to its emerging industries is an example of its
________.
A) political motive
B) economic motive
C) cultural motive
D) social motive
Answer: B
Skill: Application
Difficulty: Hard
18) Industries considered essential to national security often receive government-sponsored

protection.
Answer: TRUE
Skill: Concept
Difficulty: Easy
19) The most common economic reasons for nations' attempts to influence international trade are
the protection of young industries from competition and the promotion of a strategic trade policy.
Answer: TRUE
Skill: Concept
Difficulty: Easy
20) The protection of infant industries by a nation's government can cause domestic companies
to become complacent toward innovation.
Answer: TRUE
Skill: Concept
21) The protection of infant industries by a nation's government can cause more economic harm
than good.
Answer: TRUE
Skill: Concept
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22) Nations often restrict trade in goods and services to achieve cultural objectives, the most
common being protection of national identity.
Answer: TRUE
Skill: Concept
Difficulty: Easy
23) Unwanted cultural influence in a nation can cause governments to block imports that it
believes are harmful.
Answer: TRUE
Skill: Concept
24) Tariffs are taxes placed on goods being imported into a country. A tariff can act as a barrier
to trade by increasing the cost of the imported goods to the consumers.
Answer: TRUE
Skill: Concept
Difficulty: Easy
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25) Describe the main political motives behind government intervention in trade.
Answer: Government officials often make trade-related decisions based on political motives
because a politician's career can depend on pleasing voters and getting reelected. Yet a trade
policy based purely on political motives is seldom wise in the long run. The main political
motives behind government intervention in trade include protecting jobs, preserving national
security, responding to other nations' unfair trade practices, and gaining influence over other
nations.
Protect Jobs- Short of an unpopular war, nothing will oust a government faster than high rates of
unemployment. Thus, practically all governments become involved when free trade creates job
losses at home.
Preserve National Security-Industries considered essential to national security often receive
government-sponsored protection. This is true for both imports and exports.
Respond to "Unfair" Trade- Many observers argue that it makes no sense for one nation to allow
free trade if other nations actively protect their own industries. Governments often threaten to
close their ports to another nation's ships or to impose extremely high tariffs on its goods if the
other nation does not concede on some trade issue that is seen as being unfair. In other words, if
one government thinks another nation is not "playing fair," it will often threaten to retaliate
unless certain concessions are made.
Gain Influence- Governments of the world's largest nations may become involved in trade to
gain influence over smaller nations. The United States goes to great lengths to gain and maintain
control over events in all of Central, North, and South America, and the Caribbean basin.
Skill: Concept
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26) Explain why job protection is a political motive for governments to restrict free trade. Why
might a government interested in job protection insist on local content requirements for
international firms doing business in that country?
Answer: Government officials often make trade-related decisions based on political motives
because a politician's career can depend on pleasing voters and getting reelected. The main
political motives behind government intervention in trade include protecting jobs, preserving
national security, responding to other nations' unfair trade practices, and gaining influence over
other nations.
Short of an unpopular war, nothing will oust a government faster than high rates of
unemployment. Thus, practically all governments become involved when free trade creates job
losses at home. Ohio lost around 215,000 manufacturing jobs over a recent 14 year period. Most
of those jobs went to China and the nations of Central and Eastern Europe. The despair of
unemployed workers and the pivotal role of Ohio in presidential elections lured politicians to the
state who promised Ohio lower income taxes, expanded worker retraining, and greater
investment in the state's infrastructures.
A government interested in preserving jobs might consider local content requirements because
often those requirements include local labor. Local content requirements are laws stipulating that
producers in the domestic market must supply a specified amount of a good or service. These
requirements can state that a certain portion of the end product consists of domestically produced
goods or that a certain portion of the final cost of a product has domestic sources. The purpose of
local content requirements is to force companies from other nations to use local resources in their
production processes-particularly labor. Similar to other restraints on imports, such requirements
help protect domestic producers from the price advantage of companies based in other, low-wage
countries. Today, many developing countries use local content requirements as a strategy to
boost industrialization. Companies often respond to local content requirements by locating
production facilities inside the nation that stipulates such restrictions.
AACSB: Reflective thinking
Skill: Synthesis
Difficulty: Hard
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27) What is meant by dumping? Describe the various roles of the World Trade Organization,
including when a country is accused of dumping.
Answer: When a company exports a product at a price that is either lower than the price
normally charged in its domestic market or lower than the cost of production, it is said to be
dumping. Charges of dumping are made (fairly or otherwise) against companies from almost
every nation at one time or another and can occur in any type of industry. For example, Western
European plastic producers considered retaliating against Asian competitors whose prices were
substantially lower in European markets than at home. More recently, U.S. steel producers and
their powerful union charged that steelmakers in Brazil, Japan, and Russia were dumping steel
on the U.S. market at low prices. The problem arose as those nations tried to improve their
economies through increased exporting of all products, including steel.
The three main goals of the WTO are to help the free flow of trade, to help negotiate further
opening of markets, and to settle trade disputes among its members. One key component of the
WTO that was carried over from GATT is the principle of nondiscrimination called normal trade
relations (formerly called "most favored nation status")-a requirement that WTO members
extend the same favorable terms of trade to all members that they extend to any single member.
The WTO cannot punish the country in which the company accused of dumping is based because
dumping is an act by a company, not a country. The WTO can respond only to the actions of a
country that retaliates against a company that is dumping. The WTO allows a nation to retaliate
against dumping if it can show that dumping is actually occurring, can calculate the damage to
its own companies, and can show that the damage is significant. The normal way a country
retaliates is to charge an antidumping duty-an additional tariff placed on an imported product that
a nation believes is being dumped on its market. But such measures must expire within five years
of the time they are initiated unless a country can show that circumstances warrant their
continuation.
Skill: Concept
28) Which of the following is an instrument that governments use to promote trade?
A) embargoes
B) tariffs
C) export financing
D) administrative delays
Answer: C
Skill: Concept
Difficulty: Easy
LO: 6.2: Outline the instruments that governments use to promote trade.
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29) Which of the following would most likely be used as a subsidy to entice firms to locate or
expand facilities in a particular community?
A) quotas
B) an embargo
C) a granting of corporate citizenship status
D) reduced utility rates
Answer: D
Skill: Concept
Difficulty: Easy
30) A(n) ________ is a geographic area where imported or exported goods receive preferential
tariff treatment.
A) free trade zone
B) foreign trade zone
C) fair trade zone
D) economic incentive zone
Answer: B
Skill: Concept
Difficulty: Easy
31) Which of the following statements is true of export financing?

A) Small businesses that have just started to export are financially stable and seldom require
financing from government agencies.
B) The Ex-Im Bank finances the export activities of companies all over the world.
C) Governments usually offer loans to exporters with above-market interest rates.
D) Governments may promote exports by offering loan guarantees.
Answer: D
Skill: Concept
32) Which of the following financial companies in the United States is involved in activities of
selling of goods abroad, and offers insurance on foreign accounts receivable?
A) National Cooperative Bank
B) Overseas Private Investment Corporation
C) Export-Import Bank
D) Inter-American Development Bank
Answer: C
Skill: Concept
Difficulty: Easy
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33) Country X protects its domestic manufacturers from foreign competition by using a variety
of nontariff barriers. Which of the following is not one of those nontariff barriers?
A) foreign trade zones
B) product standards
C) regulatory controls
D) local purchase requirements
Answer: A
Skill: Concept
34) A foreign trade zone is primarily used by governments to ________.

A) protect currency rates
B) enforce tariffs and duties
C) monitor foreign investments
D) spur economic development
Answer: D
Skill: Concept
Difficulty: Easy
35) Government trade promotion agencies ________.

A) enable imports at discounts
B) set up foreign trade zones across the country
C) advertise in other countries to promote the nation's exports
D) place voluntary export restraints on companies that fail to export adequately
Answer: C
Skill: Concept
36) The Export-Import Bank of the United States provides financing for U.S. exports through
direct loans and loan guarantees.
Answer: TRUE
Skill: Concept
Difficulty: Easy
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37) The major purpose of foreign trade zones is to implement barriers to trade and commerce.
Answer: FALSE
Skill: Concept
Difficulty: Easy
38) Describe each instrument that governments use to promote trade.

Answer:
1. Subsidies-Financial assistance to domestic producers in the form of cash payments, low-
interest loans, tax breaks, product price supports, or other forms is called a subsidy. Regardless
of the form a subsidy takes, it is intended to assist domestic companies in fending off
international competitors. This can mean becoming more competitive in the home market or
increasing competitiveness in international markets through exports.
2. Export Financing-Governments often promote exports by helping companies finance their
export activities. They can offer loans that a company could otherwise not obtain or charge them
an interest rate that is lower than the market rate. Another option is for a government to
guarantee that it will repay the loan of a company if the company should default on repayment;
this is called a loan guarantee.
3. Foreign Trade Zones-Most countries promote trade with other nations by creating what is
called a foreign trade zone (FTZ)—a designated geographic region through which merchandise
is allowed to pass with lower customs duties (taxes) and/or fewer customs procedures. Increased
employment is often the intended purpose of foreign trade zones, with a by-product being
increased trade.
4. Special Government Agencies-The governments of most nations have special agencies
responsible for promoting exports. Such agencies can be particularly helpful to small and
medium-sized businesses that have limited financial resources. Government trade promotion
agencies often organize trips for trade officials and businesspeople to visit other countries to
meet potential business partners and generate contacts for new business. They also typically open
trade offices in other countries. These offices are designed to promote the home country's exports
and introduce businesses to potential partners in the host nation. Government trade promotion
agencies typically do a great deal of advertising in other countries to promote the nation's
exports.
Skill: Concept
13
39) Describe the role of special government agencies in promoting exports and imports.
Answer: The governments of most nations have special agencies responsible for promoting
exports. Such agencies can be particularly helpful to small and medium-sized businesses that
have limited financial resources. Government trade promotion agencies often organize trips for
trade officials and businesspeople to visit other countries to meet potential business partners and
generate contacts for new business. They also typically open trade offices in other countries.
These offices are designed to promote the home country's exports and introduce businesses to
potential partners in the host nation. Government trade promotion agencies typically do a great
deal of advertising in other countries to promote the nation's exports. For example, Chile's Trade
Commission, ProChile, has commercial offices in 40 countries and a Web site.
Governments not only promote trade by encouraging exports but also can encourage imports that
the nation does not or cannot produce. For example, the Japan External Trade Organization
(JETRO) is a trade promotion agency of the Japanese government. The agency coaches small
and medium-sized overseas businesses on the protocols of Japanese deal making, arranges
meetings with suitable Japanese distributors and partners, and even assists in finding temporary
office spaces.
For all companies, and particularly small ones with fewer resources, learning the government
regulations in other countries is a daunting task. A company must know whether its product is
subject to a tariff or quota, for instance. Fortunately, it is now possible to get answers to many
such questions through the Internet.
Skill: Concept
40) Which of the following is a method of restricting trade?

A) export financing
B) local content requirements
C) subsidy
D) foreign trade zones
Answer: B
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
41) Which of the following will add to the cost of an imported product by levying an additional
tax upon it?
A) tariffs
B) quotas
D) embargoes
Answer: A
Skill: Concept
Difficulty: Easy
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42) Which of the following is an import tariff?
A) transit tariff
B) ad valorem tariff
C) sua sponte tariff
D) complex tariff
Answer: B
Skill: Concept
Difficulty: Easy
43) Which of the following statements is true of tariffs?

A) Tariffs increase an imported product's appeal to buyers.
B) Transit tariffs are the most widely-levied tariffs.
C) Ad valorem tariffs are levied as a specific fee for each unit of an imported product.
D) Export tariffs are used by countries when they believe an export's price is lower than it should
be.
Answer: D
Skill: Concept
44) Products manufactured in Brazil are transported through Mexico on their way to England.
Mexico applies a tariff on the goods. What type of tariff is implemented by Mexico?
A) transit tariff
C) export tariff
D) compound tariff
Answer: A
Skill: Concept
Difficulty: Easy
45) The most common tariffs used today are the ________ tariffs.
A) import
B) transit
C) inverted
D) export
Answer: A
Skill: Concept
Difficulty: Easy
15
46) A(n) ________ tariff is levied as a percentage of the value of an imported product.
A) specific
B) compound
C) ad valorem
D) transit
Answer: C
Skill: Concept
Difficulty: Easy
47) A(n) ________ tariff (or duty) is levied as a particular fee for each unit of an imported
product.
A) specific
B) compound
C) ad valorem
D) transit
Answer: A
Skill: Concept
Difficulty: Easy
48) A(n) ________ tariff (or duty) is levied on an imported product and calculated partly as a
percentage of its stated price and partly as a specific fee for each unit.
A) specific
B) compound
C) ad valorem
D) transit
Answer: B
Skill: Concept
Difficulty: Easy
49) Which of the following statements is true of tariffs?

A) They are the major source of government revenue in developed nations.
B) They increase products' appeal to buyers.
C) They lower the effective prices of imports.
D) They protect domestic producers.
Answer: D
Skill: Concept
16
50) Using tariffs to generate government revenue is most common among ________.
A) developed countries
B) developing countries
C) western nations
D) First World nations
Answer: B
Skill: Concept
Difficulty: Easy
51) A ________ is a numerical limit on the quantity of a good that may be imported into a
country during some time period.
A) quota
B) numerical export control
C) voluntary export restraint
D) regulatory control
Answer: A
Skill: Concept
Difficulty: Easy
52) Which of the following is true of quotas?

A) They are the most common type of trade barrier.
B) They help domestic producers maintain their market shares and prices.
C) Their licenses are granted by governments to other nation companies on a five-year basis.
D) They lead to a decrease in the prices of intermediate goods.
Answer: B
Skill: Concept
53) A country imposes a tariff on goods that it sells abroad at the request of another nation. This
is an example of a(n) ________.
A) embargo
C) compound tariff
D) voluntary export restraint
Answer: D
Skill: Concept
Difficulty: Easy
17
54) Countries might impose a(n) ________ in response to the threat of an import quota or total
ban on a product by an importing nation.
A) embargo
C) compound tariff
D) voluntary export restraint
Answer: D
Skill: Concept
Difficulty: Easy
55) A(n) ________ imposes a low tariff rate on a limited amount of imports of a specified good,
but imposes a prohibitively high tariff on the good above that limited amount.
A) tariff rate quota
B) numerical export control
C) voluntary export restraint
D) ad valorem tariff
Answer: A
Skill: Concept
Difficulty: Easy
56) The U.S. government has decided to impose a tariff rate quota on sugar imports into the
United States. Which of the following would benefit from this decision?
A) soft drink producers
B) domestic sugar producers
C) steel producers
D) consumers of sugar products
Answer: B
Skill: Application
Difficulty: Easy
57) A(n) ________ is an absolute ban on the exporting and importing of goods to a particular
destination.
A) voluntary export restraint
B) embargo
C) ad valorem tariff
D) tariff rate quota
Answer: B
Skill: Concept
Difficulty: Easy
18
58) Regulatory controls or bureaucratic rules designed to impair the rapid flow of imports into a
country are called ________.
A) local content requirements
B) administrative delays
C) voluntary export restraints
D) import quotas
Answer: B
Skill: Concept
Difficulty: Easy
59) Purposely understaffing customs offices to cause time delays, requiring special licenses that
take a long time to obtain, and requiring air carriers to land at inconvenient airports are all
examples of ________.
A) local content requirements
B) import quotas
C) administrative delays
D) voluntary export restraints
Answer: C
Skill: Concept
Difficulty: Easy
60) ________ make it more difficult for importers of nonessential goods to acquire foreign
exchange.
A) Currency controls
B) Restricted access to distribution networks
C) Numerical export controls
D) Public-sector procurement policies
Answer: A
Skill: Concept
Difficulty: Easy
19
61) ________ can occur when a firm sells its goods in a foreign market at a price below what it
charges in its home market.
A) Predatory pricing
B) Dumping
C) Foreign trade duties
D) Subsidies
Answer: B
Skill: Concept
Difficulty: Easy
Scenario: Konesia Joins the World

Konesia, a former totalitarian economy and pariah state, is taking steps toward a free market
economy. The government wants to encourage trade but also wants to find a balance so that local
businesses and industries are not harmed.
62) Which of the following would be Konesia's least appropriate method to restrict unwanted
trade?
A) introduce an administrative delay
B) impose a quota
C) reduce tariffs
D) impose a currency control
Answer: C
Skill: Application
Difficulty: Hard
63) If Konesia chooses to levy tariffs as a percentage of the stated price of an imported product,
this would be an example of a(n) ________.
A) compound tariff
B) specific tariff
D) tariff-quota
Answer: C
Skill: Concept
Difficulty: Easy
20
64) Which of the following is the most likely reason for Konesia's government to impose an
import quota?
A) to maintain adequate supplies of a product in the home market
B) to maintain market shares and prices of domestic producers
C) to restrict the supply of a product to world markets
D) to maintain the exports of a product at target levels
Answer: B
Skill: Application
Difficulty: Hard
Scenario: Excelsior's Limited

Excelsior's Limited, a manufacturer of health and beauty aids, is expanding its presence in
several countries around the world. Excelsior's president is surprised at some of the responses the
company is receiving from other countries.
65) Excelsior's Limited tried to sell its product in Canada, but was told that at least forty percent
of the product must be manufactured in Canada. This is an example of a(n) ________.
A) administrative delay
B) local content requirement
C) tariff
D) embargo
Answer: B
Skill: Application
Difficulty: Hard
66) When Excelsior's Limited tried to convert its earnings from one country, the government
stipulated that the company had to exchange its currency at a very unfavorable rate. This is an
example of a(n) ________.
B) currency control
C) subsidy
D) tariff
Answer: B
Skill: Application
Difficulty: Hard
21
67) France gave Excelsior's Limited permission to export its product as long as the company
obtained a special license first. Excelsior has been waiting six months for the license and is
wondering if it will ever arrive. Excelsior's Limited is experiencing a(n) ________.
B) local content requirement
C) embargo
D) currency control
Answer: A
Skill: Application
Difficulty: Hard
68) A disadvantage of protection from import competition is the added cost of continuing to
produce a good domestically that could be supplied more efficiently by an international supplier.
Answer: TRUE
Skill: Concept
69) The automobile industry is typically protected for national security reasons.
Answer: FALSE
Skill: Concept
Difficulty: Easy
70) Products that are of use in both industrial and military applications are designated as dual-use
products.
Answer: TRUE
Skill: Concept
Difficulty: Easy
71) Customs duties decrease the total amount of a good's production cost.
Answer: FALSE
Skill: Concept
Difficulty: Easy
22
72) An import tariff is levied by the government of a country that a product is passing through on
its way to its final destination.
Answer: FALSE
Skill: Concept
Difficulty: Easy
73) A compound tariff on an imported product is calculated partly as a percentage of its stated
price and partly as a specific fee for each unit.
Answer: TRUE
Skill: Concept
Difficulty: Easy
74) Tariffs are a source of government revenue mostly among developing nations.
Answer: TRUE
Skill: Concept
Difficulty: Easy
75) Tariffs tend to exact a cost on countries as a whole because they reduce consumer choices.
Answer: TRUE
Skill: Concept
Difficulty: Easy
76) Consumers are benefitted when a government imposes import quotas on products.
Answer: FALSE
Skill: Concept
Difficulty: Easy
77) A voluntary export restraint refers to a quota that a nation imposes on its exports, usually at
the request of another nation.
Answer: TRUE
Skill: Concept
Difficulty: Easy
23
78) An embargo is the most restrictive nontariff trade barrier available.
Answer: TRUE
Skill: Concept
Difficulty: Easy
79) Restrictions on the convertibility of one currency into others is called currency controls.
Answer: TRUE
Skill: Concept
Difficulty: Easy
80) When a company exports a product at a price lower than the price normally charged in its
domestic market, it is said to be dumping.
Answer: TRUE
Skill: Concept
Difficulty: Easy
81) Explain why governments impose restrictions on free trade.

Answer: Governments impose restrictions on free trade for reasons that are political, economic,
or cultural-or some combination of the three. Countries often intervene in trade by strongly
supporting their domestic companies' exporting activities. But the more emotionally charged
intervention occurs when a nation's economy is underperforming. In tough economic times,
businesses and workers often lobby their governments for protection from imports that are
eliminating jobs in the domestic market.
Government officials often make trade-related decisions based on political motives because a
politician's career can depend on pleasing voters and getting reelected. The main political
motives behind government intervention in trade include protecting jobs, preserving national
security, responding to other nations' unfair trade practices, and gaining influence over other
nations.
Although governments intervene in trade for highly charged cultural and political reasons, they
also have economic motives for their intervention. The most common economic reasons for
nations' attempts to influence international trade are the protection of young industries from
competition and the promotion of a strategic trade policy.
Nations often restrict trade in goods and services to achieve cultural objectives, the most
common being protection of national identity. Culture and trade are intertwined and greatly
affect one another. The cultures of countries are slowly altered by exposure to the people and
products of other cultures. Unwanted cultural influence in a nation can cause great distress and
cause governments to block imports that it believes are harmful.
Skill: Concept
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82) Describe the different types of tariffs and provide an example of each.
Answer: We can classify a tariff into one of three categories. An export tariff is levied by the
government of a country that is exporting a product. Countries can use export tariffs when they
believe an export's price is lower than it should be. Developing nations whose exports consist
mostly of low-priced natural resources often levy export tariffs. A transit tariff is levied by the
government of a country that a product is passing through on its way to its final destination.
Transit tariffs have been almost entirely eliminated worldwide through international trade
agreements. An import tariff is levied by the government of a country that is importing a product.
The import tariff is by far the most common tariff used by governments today.
We can further break down the import tariff into three subcategories based on the manner in
which it is calculated. An ad valorem tariff is levied as a percentage of the stated price of an
imported product. A specific tariff is levied as a specific fee for each unit (measured by number,
weight, etc.) of an imported product. A compound tariff is levied on an imported product and
calculated partly as a percentage of its stated price and partly as a specific fee for each unit.
Skill: Concept
83) Explain how tariffs protect domestic producers, and describe how a foreign trade zone might
offset the effects of tariffs.
Answer: A tariff is a government tax levied on a product as it enters or leaves a country. A tariff
increases the price of an imported product directly and, therefore, reduces its appeal to buyers.
Nations can use tariffs to protect domestic producers. For example, an import tariff raises the
cost of an imported good and increases the appeal of domestically produced goods. In this way,
domestic producers gain a protective barrier against imports.
While tariffs are designed to restrict trade, most countries promote trade with other nations by
creating what is called a foreign trade zone (FTZ)—a designated geographic region through
which merchandise is allowed to pass with lower customs duties (taxes) and/or fewer customs
procedures. Increased employment is often the intended purpose of foreign trade zones, with a
by-product being increased trade.
Customs duties increase the total amount of a good's production cost and increase the time
needed to get it to market. Companies can reduce such costs and time by establishing a facility
inside a foreign trade zone. A common purpose of many companies' facilities in such zones is
final product assembly. The U.S. Department of Commerce administers dozens of foreign trade
zones within the United States. Many of these zones allow components to be imported at a
discount from the normal duty. Once assembled, the finished product can be sold within the U.S.
market with no further duties charged. State governments welcome such zones to obtain the jobs
that the assembly operations create.
Skill: Synthesis
Difficulty: Hard
25
84) What are voluntary export restraints and how are they used?
Answer: A unique version of the export quota is called a voluntary export restraint (VER)—a
quota that a nation imposes on its own exports, usually at the request of another nation. Countries
normally self-impose a voluntary export restraint in response to the threat of an import quota or
total ban on the product by an importing nation. The classic example of the use of a voluntary
export restraint is from the 1980s when Japanese carmakers were making significant market
share gains in the United States. The closing of U.S. carmakers' production facilities in the
United States was creating a volatile anti-Japan sentiment among the population and the U.S.
Congress. Fearing punitive legislation if Japan did not limit its automobile exports to the United
States, the Japanese government and its carmakers self-imposed a voluntary export restraint on
cars headed for the United States.
Consumers in the country that imposes an export quota benefit from lower-priced products (due
to their greater supply) as long as domestic producers do not curtail production. Producers in an
importing country benefit because the goods of producers from the exporting country are
restrained, which may allow them to increase prices. Export quotas hurt consumers in the
importing nation because of reduced selection and perhaps higher prices. Yet export quotas
might allow these same consumers to retain their jobs if imports were threatening to put
domestic producers out of business. Again, detailed economic studies are needed to determine
the winners and losers in any particular export quota case.
Skill: Concept
85) The term protectionism, when applied to international trade, refers to ________.
A) governmental restrictions and competitive support actions to affect trade flows
B) payments to dock workers to prevent pilferage of imported shipments
C) border checks to prevent entry of illegal aliens
D) methods used to prevent intellectual property theft
Answer: A
Skill: Concept
Difficulty: Easy
LO: 6.4: Summarize the main features of the global trading system.
86) Which of the following is prompting farmers in many developed nations to discover new
ways to manage risk and increase agricultural efficiency?
A) enforcement of trade embargoes and tariffs
B) exposure of agribusiness to market forces
C) provision of extensive government subsidies
D) designation of agricultural products as dual use products
Answer: B
Skill: Concept
26
87) The ________ proposes that tariffs be imposed on imported manufactured goods to give U.S.
firms temporary protection from foreign competition until they can fully establish themselves.
A) national defense argument
B) infant industry argument
C) industrial policy
D) strategic trade theory
Answer: B
Skill: Concept
88) According to the ________ argument, as an industry grows and matures, it gains the
knowledge it needs to become more innovative, efficient, and competitive.
A) maturing industry
B) infant industry
C) standardized product
D) developing economy
Answer: B
Skill: Concept
Difficulty: Easy
89) Which of the following is true regarding the protection of infant industries from international
competition?
A) It is difficult for governments to identify the industries worth protecting.
B) Protection of infant industries helps domestic companies become innovative.
C) Protection from competition leads to improved quality and lower prices.
D) Protection leads to more economic good than harm.
Answer: A
Skill: Concept
27
90) Which of the following is a result of the protection of domestic companies from international
competition?
A) Consumers need to pay less for products.
B) There are increased incentives to cut production costs and improve quality.
C) Companies become more reliant on protection.
D) Protection increases a company's incentives to obtain the knowledge it needs to become more
competitive.
Answer: C
Skill: Concept
91) Rice imports to a nation under a quota limit of 8,500 tons are charged a tariff of 15 percent.
Imports of rice above the quota limit are charged a tariff of 60 percent. This is an example of a(n)
________.
A) export quota
B) voluntary export restraint
D) tariff-quota
Answer: D
Skill: Application
Difficulty: Hard
92) A(n) ________ is an absolute ban on the exporting and importing of goods to a particular
destination.
A) voluntary export restraint
B) embargo
D) tariff rate quota
Answer: B
Skill: Concept
Difficulty: Easy
28
93) Which of the following statements is true of embargoes?
A) An embargo may be placed on one or a few goods or may completely ban trade in all goods.
B) An embargo is the least restrictive nontariff barrier available.
C) An embargo is usually employed for economic reasons.
D) Embargoes are used frequently today because they are easy to implement.
Answer: A
Skill: Concept
94) The ________ altered the U.S. trade policy from a stance of free trade to one of
protectionism in the 1930s.
A) Norris-LaGuardia Act
B) Smoot-Hawley Act
C) Wheeler-Lea Act
D) Taft-Hartley Act
Answer: B
Skill: Concept
Difficulty: Easy
95) In which of the following ways did the Uruguay Round of Negotiations modify the original
General Agreement on Tariffs and Trade (GATT) treaty?
A) It helped standardize intellectual property rules around the world.
B) It called on developing and least-developed economies to cut agricultural tariffs significantly.
C) It relaxed the additional tariffs imposed on companies charged with dumping.
D) It increased barriers to trade in all developed, developing and least-developed nations.
Answer: A
Skill: Concept
96) The Uruguay Round of Negotiations created the TRIPS Agreement to ________.
A) help standardize the intellectual property rules around the world
B) increase the exposure of national agricultural sectors to market forces
C) drastically reduce tariffs and nontariff barriers in agricultural trade
D) include international trade in services for the first time
Answer: A
Skill: Concept
29
97) One of the main goals of the World Trade Organization is to ________.
A) encourage dumping among trading nations
B) restrict the free flow of trade
C) provide favorable terms of trade to a few selected countries
D) settle trade disputes among its members
Answer: D
Skill: Concept
98) A requirement that all WTO members extend the same favorable terms of trade to all
members that they extend to any single member is called ________.
A) normal trade relations
B) antidumping duties
D) countervailing duties
Answer: A
Skill: Concept
Difficulty: Easy
Scenario: Not-So-Free Freeland

Freeland is a semi-closed economy whose government believes in protecting national identity
and building a self-sustained economy. The government's priority is to protect local jobs and
provide opportunities to Freeland's emerging industries to flourish without the threat of external
competition.
99) The belief that Freeland's emerging industries need protection from international competition
during their development phase is an example of ________.
A) a local content requirement
B) a normal trade relation
C) the infant industry argument
D) the political motive of Freeland
Answer: C
Skill: Concept
Difficulty: Easy
30
Scenario: Konesia Joins the World
Konesia, a former totalitarian economy and pariah state, is taking steps toward a free market
economy. The government wants to encourage trade but also wants to find a balance so that local
businesses and industries are not harmed.
100) Konesia has created a hybrid form of trade restriction-a lower tariff rate for a certain
quantity of imports and a higher rate for quantities that exceed the quota. This is an example of
a(n) ________.
A) compound tariff
B) export quota
D) tariff-quota
Answer: D
Skill: Concept
Difficulty: Easy
101) The pattern of imports and exports that occurs in the absence of trade barriers is called free
trade.
Answer: TRUE
Skill: Concept
Difficulty: Easy
102) When one World Trade Organization member files a complaint against another, decisions
are to be rendered in less than one year.
Answer: TRUE
Skill: Concept
103) The World Trade Organization can punish a company that exports a product at a price that
is either lower than the price normally charged in its domestic market or lower than the cost of
production.
Answer: TRUE
Skill: Concept
31
104) Define subsidies. What are their disadvantages? In what ways do the protection of infant
industries produce similar drawbacks?
Answer: Financial assistance to domestic producers in the form of cash payments, low-interest
loans, tax breaks, product price supports, or other forms is called a subsidy. Regardless of the
form a subsidy takes, it is intended to assist domestic companies in fending off international
competitors. This can mean becoming more competitive in the home market or increasing
competitiveness in international markets through exports. It is nearly impossible to calculate the
amount of subsidies a country offers its producers because of their many forms. Critics say that
subsidies encourage inefficiency and complacency by covering costs that truly competitive
industries should be able to absorb on their own. Many believe subsidies benefit companies and
industries that receive them but harm consumers because they tend to be paid for with income
and sales taxes. Thus, although subsidies provide short-term relief to companies and industries,
whether they help a nation's citizens in the long term is questionable.
In a similar way, the protection of infant industries can produce complacency and prevent an
industry from being fully competitive. According to the infant industry argument, a country's
emerging industries need protection from international competition during their development
phase until they become sufficiently competitive internationally. This argument is based on the
idea that infant industries need protection because of a steep learning curve. In other words, only
as an industry grows and matures does it gain the knowledge it needs to become more
innovative, efficient, and competitive.
Protection from international competition can cause domestic companies to become complacent
toward innovation. This can limit a company's incentives to obtain the knowledge it needs to
become more competitive. The most extreme examples of complacency are industries within
formerly communist nations. When their communist protections collapsed, nearly all companies
that were run by the state were decades behind their competitors from capitalist nations. To
survive, many government-owned businesses required financial assistance in the form of
infusions of capital or outright purchase.
Skill: Synthesis
Difficulty: Hard
32
105) Describe the purpose of a foreign trade zone. How is it used to promote trade?
Answer: Most countries promote trade with other nations by creating what is called a foreign
trade zone (FTZ)—a designated geographic region through which merchandise is allowed to pass
with lower customs duties (taxes) and/or fewer customs procedures. Increased employment is
often the intended purpose of foreign trade zones, with a by-product being increased trade.
Customs duties increase the total amount of a good's production cost and increase the time
needed to get it to market. Companies can reduce such costs and time by establishing a facility
inside a foreign trade zone. A common purpose of many companies' facilities in such zones is
final product assembly. The U.S. Department of Commerce administers dozens of foreign trade
zones within the United States. Many of these zones allow components to be imported at a
discount from the normal duty. Once assembled, the finished product can be sold within the U.S.
market with no further duties charged. State governments welcome such zones to obtain the jobs
that the assembly operations create.
Skill: Concept
33
106) Discuss the benefits and drawbacks of strategic trade policy. How are the drawbacks of
subsidies similar to the drawbacks of strategic trade policy?
Answer:
Benefits of Strategic Trade Policy—Supporters of strategic trade policy argue that it results in
increased national income. Companies should earn a good profit if they obtain first-mover
advantages and solidify positions in their markets around the world. Advocates claim that
strategic trade policies helped South Korea build global conglomerates (called Chaebol) that
dwarf competitors. For years, South Korean shipbuilders received a variety of government
subsidies, including low-cost financing. The Chaebol helped South Korea to emerge strongly
from the global economic crisis because of their market power and the wide range of industries
in which they compete. Such policies had spin-off effects on related industries, and local
suppliers to the Chaebol are now thriving.
Drawbacks of Strategic Trade Policy—Although it sounds as if strategic trade policy has only
benefits, there can be drawbacks as well. Lavish government assistance to domestic companies
in the past caused inefficiency and high costs for both South Korean and Japanese companies.
Large government concessions to local labor unions hiked wages and forced Korea's Chaebol to
accept low profit margins.
In addition, when governments decide to support specific industries, their choice is often subject
to political lobbying by the groups seeking government assistance. It is possible that special
interest groups could capture all the gains from assistance with no benefit for consumers. If this
were to occur, consumers could end up paying more for lower-quality goods than they could
otherwise obtain.
Like strategic trade policy, government subsidies can also encourage complacency in an industry
and prevent it from becoming competitive internationally. Critics say that subsidies encourage
inefficiency and complacency by covering costs that truly competitive industries should be able
to absorb on their own. Many believe subsidies benefit companies and industries that receive
them but harm consumers because they tend to be paid for with income and sales taxes. Thus,
although subsidies provide short-term relief to companies and industries, whether they help a
nation's citizens in the long term is questionable.
Skill: Synthesis
Difficulty: Hard
34
107) Describe the three categories of tariffs, and explain how the Smoot–Hawley Act of 1930
influenced tariffs in the United States.
Answer: A tariff is a government tax levied on a product as it enters or leaves a country. A tariff
increases the price of an imported product directly and, therefore, reduces its appeal to buyers.
We can classify a tariff into one of three categories. An export tariff is levied by the government
of a country that is exporting a product. Countries can use export tariffs when they believe an
export's price is lower than it should be. Developing nations whose exports consist mostly of
low-priced natural resources often levy export tariffs. A transit tariff is levied by the government
of a country that a product is passing through on its way to its final destination. Transit tariffs
have been almost entirely eliminated worldwide through international trade agreements. An
import tariff is levied by the government of a country that is importing a product. The import
tariff is by far the most common tariff used by governments today.
We can further break down the import tariff into three subcategories based on the manner in
which it is calculated. An ad valorem tariff is levied as a percentage of the stated price of an
imported product. A specific tariff is levied as a specific fee for each unit (measured by number,
weight, etc.) of an imported product. A compound tariff is levied on an imported product and
calculated partly as a percentage of its stated price and partly as a specific fee for each unit.
The Smoot-Hawley Act of 1930 caused a major increase in the number of U.S. tariffs. World
trade volume reached a peak in the late 1800s, only to be devastated when the United States
passed the Smoot–Hawley Act in 1930. The act represented a major shift in U.S. trade policy
from one of free trade to one of protectionism. The act set off round after round of competitive
tariff increases among the major trading nations. Other nations felt that, if the United States was
going to restrict its imports, they were not going to give exports from the United States free
access to their domestic markets. The Smoot–Hawley Act, and the global trade wars that it
helped to usher in, crippled the economies of the industrialized nations and helped spark the
Great Depression. Living standards around the world were devastated throughout most of the
1930s.
Skill: Synthesis
Difficulty: Hard
35
108) Write a short note on the World Trade Organization and its influence on the environment.
Answer: Steady gains in global trade and rapid industrialization in many developing and
emerging economies have generated environmental concerns among both governments and
special interest groups. Of concern to many people are levels of carbon dioxide emissions–the
principal greenhouse gas believed to contribute to global warming. Most carbon dioxide
emissions are created from the burning of fossil fuels and the manufacture of cement.
The World Trade Organization has no separate agreement that deals with environmental issues.
The WTO explicitly states that it is not to become a global environmental agency responsible for
setting environmental standards. It leaves such tasks to national governments and the many
intergovernmental organizations that already exist for such purposes. The WTO works alongside
existing international agreements on the environment, including the Montreal Protocol for
protection of the ozone layer, the Basel Convention on international trade or transport of
hazardous waste, and the Convention on International Trade in Endangered Species.
Nevertheless, the preamble to the agreement that established the WTO does mention the
objectives of environmental protection and sustainable development. The WTO also has an
internal committee called the Committee on Trade and Environment. The committee's
responsibility is to study the relationship between trade and the environment and to recommend
possible changes in the WTO trade agreements.
In addition, the WTO does take explicit positions on some environmental issues related to trade.
Although the WTO supports national efforts at labeling "environmentally friendly" products as
such, it states that labeling requirements or policies cannot discriminate against the products of
other WTO members. Also, the WTO supports policies of the least developed countries that
require full disclosure of potentially hazardous products entering their markets for reasons of
public health and environmental damage.
Skill: Concept
36

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International Business: The Challenges of Globalization, 9e, Global Edition (Wild)

Chapter 6 Political Economy of Trade

1) Free trade ________.

2) Which of the following is true of government interventions in a country's trade practices?

3) Managers should understand the effect of trade protectionism because ________.

5) Which of the following is an example of a dual use product?

15) Freeland's protection of its national identity is an example of a(n) ________.

18) Industries considered essential to national security often receive government-sponsored

31) Which of the following statements is true of export financing?

34) A foreign trade zone is primarily used by governments to ________.

35) Government trade promotion agencies ________.

38) Describe each instrument that governments use to promote trade.

40) Which of the following is a method of restricting trade?

43) Which of the following statements is true of tariffs?

49) Which of the following statements is true of tariffs?

52) Which of the following is true of quotas?

Scenario: Konesia Joins the World

Scenario: Excelsior's Limited

81) Explain why governments impose restrictions on free trade.

Scenario: Not-So-Free Freeland

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