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Chapter 06 - The Political Economy of International Trade
Chapter 06
The Political Economy of International Trade
True / False Questions
1. Subsidies are a trade policy instrument.

True False
2. Tariffs are the most complex instrument of trade policy.

True False
3. Tariffs are the instrument that the GATT and WTO have been most successful in limiting.
True False
4. In recent decades, a fall in subsidies, quotas, and voluntary export restraints has been
accompanied by a corresponding fall in nontariff barriers.
True False
5. Nontariff barriers include subsidies, quotas, voluntary export restraints, and antidumping
duties.
True False
6. Specific tariffs are levied as a proportion of the value of the imported good.
True False
7. Ad valorem tariffs reduce the cost of imported products relative to domestic products.
True False
6-1
8. Tariffs are largely pro-producer and anti-consumer.

True False
9. Tariffs increase the overall efficiency of the world economy because a protective tariff
encourages domestic firms to produce products more efficiently at home that, in theory, could
be produced abroad.
True False
10. Export tariffs are far less common than import tariffs.
True False
11. The main gains from subsidies accrue to importers, whose international competitiveness is
increased as a result of these subsidies.
True False
12. Japan has a long history of supporting inefficient domestic producers with farm subsidies.
True False
13. A direct restriction on the quantity of some good that may be imported into a country is a
quota rent.
True False
14. Quotas benefit consumers the most.

True False
6-2
15. The Buy America Act specifies that government agencies must give preference to
American products when putting contracts for equipment out for bid unless the foreign
products have a significant advantage.
True False
16. Administrative trade policies are bureaucratic rules that are designed to make it easy for
imports to enter a country.
True False
17. 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.
True False
18. Antidumping policies are designed to punish foreign firms that engage in dumping
industrial waste into the environment.
True False
19. The fair market value of a good is normally judged to be lesser than the costs of producing
that good.
True False
20. Countries sometimes argue that it is necessary to protect certain industries because they
are important for national security.
True False
21. Protecting consumers from "dangerous" products and furthering the goals of foreign
policy are types of economic arguments for intervention.
True False
6-3
22. The relationship between pollution and income levels follows a linear pattern.
True False
23. The infant industry argument is the oldest economic argument for government
intervention.
True False
24. Until the early 1980s, most economists saw little benefit in government intervention and
strongly advocated a free trade policy.
True False
25. Brazil's auto industry, once the world's tenth-largest and built behind tariff barriers and
quotas, has been proven as one of the world's most inefficient.
True False
26. Protection of manufacturing from foreign competition does no good unless the protection
helps make the industry efficient.
True False
27. The roots of strategic trade policy arguments can be traced back to the late 18th century
and the works of Adam Smith and David Ricardo.
True False
28. Several economists, including Paul Krugman, point out that although free trade policy
looks appealing in theory, in practice it may be unworkable.
True False
6-4
29. The Smoot-Hawley Act was a multilateral agreement whose objective was to liberalize
trade by eliminating tariffs, subsidies, and import quotas.
True False
30. In the Uruguay Round of the WTO, member countries sought to exempt trade in services
from GATT rules.
True False
31. The United States wanted the WTO to allow governments to impose tariffs on goods
imported from countries that did not abide by what the United States saw as fair labor
practices during a WTO meeting at the end of November 1999.
True False
32. 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.
True False
33. The biggest defenders of agricultural subsidies are the developed nations of the world.
True False
34. Free trade in agriculture could help to jump-start economic growth among the world's
poorer nations and alleviate global poverty.
True False
35. The threat of antidumping action enhances the ability of a firm to use aggressive pricing to
gain market share in a country.
True False
6-5
36. Government intervention may invite retaliation and trigger a trade war.
True False
Multiple Choice Questions
37. Which of the following is one of the seven main instruments utilized in trade policy?
A. Local content requirements
B. Licensing
C. Foreign direct investment
D. Employment guarantees
38. While _____ tariffs are levied as a fixed charge for each unit of a good imported, _____
tariffs are levied as a proportion of the value of the imported good.
A. ground; ceiling
B. ad hoc; nonconvertible
C. posited; floating
D. specific; ad valorem
39. Tariffs cause damage to _____ because this group must pay more for certain imports.
A. investors
B. governments
C. consumers
D. producers
40. According to experts, which of the following groups most benefits from the imposition of
tariffs?
A. Government and producers
B. Consumers and trade associations
C. Exporters and importers
D. Producers and foreign competitors
6-6
41. A protective tariff encourages domestic firms to produce products at home that, in theory,
could be produced more efficiently abroad. This results in:
A. an establishment of a comparative advantage over firms from other countries.
B. improved productivity of the labor workforce in that country.
C. higher mobility of resources within the country.
D. an inefficient utilization of resources.
42. The U.S. government imposed an eight to thirty percent tariff on steel imports into the
United States in March 2002. This belongs to which of the following categories?
A. General
B. Ad valorem
C. Specific
D. Ad hoc
43. Tariffs:
A. reduce the price of foreign goods.
B. reduce the overall efficiency of the world economy.
C. help in efficient utilization of resources.
D. are unambiguously pro-consumer and anti-producer.
44. One of the objectives of export tariffs is to:

A. improve the efficiency of utilization of resources.
B. curb the competition offered by foreign firms to domestic firms.
C. reduce exports from a sector, often for political reasons.
D. maintain a positive trade deficit.
45. Which of the following is a government payment to a domestic producer?

A. Duty
B. Subsidy
C. Quota
D. Tariff
6-7
46. _____ take many forms including cash grants, low-interest loans, tax breaks, and
government equity participation in domestic firms.
A. Ad valorem tariffs
B. Subsidies
C. Quota rents
D. Specific tariffs
47. By lowering production costs, subsidies help domestic producers in:

A. gaining export markets.
B. curtailing exports to other countries.
C. meeting voluntary export restraints.
D. regulating the quality of services they offer.
48. _____ tend(s) to be one of the largest beneficiaries of subsidies in most countries.
A. Banks
B. Commercial airlines
C. Agriculture
D. Defense
49. By lowering production costs, _____ help domestic producers compete against foreign
imports.
A. tariffs
B. custom duties
C. quotas
D. subsidies
50. Governments typically pay for subsidies by:

A. selling junk bonds.
B. taxing individuals and corporations.
C. foreign direct investment in poorer countries.
D. privatization of public holdings.
6-8
51. Advocates of _____ believe that subsidies can help a firm achieve a first-mover advantage
in an emerging industry.
A. strategic trade policy
B. free trade
C. open market system
D. justice theories
52. Which of the following groups would most benefit from receiving subsidies?
A. Governments
B. Consumers
C. Domestic producers
D. Importers
53. An import quota is a direct restriction on the quantity of some good that may be
__________ by a country.
A. subsidized
B. imported
C. dumped
D. produced
54. Under a(n) _____, a lower tariff rate is applied to imports within the quota than those over
the quota.
A. tariff rate quota
B. voluntary import restraint
C. import tariff rent
D. quota rent
55. A(n) _____ is a quota on trade imposed by the exporting country, typically at the request
of the importing country's government.
B. quota rent
C. import quota
D. voluntary export restraint (VER)
6-9
56. Foreign producers agree to VERs because they fear:

A. a fall in demand for their products in foreign markets.
B. the aggravation of protectionist pressures in their home markets.
C. more damaging punitive tariffs or import quotas might follow if they do not.
D. political and economic instability in foreign markets.
57. Agreeing to a VER is seen by foreign producers as a way to make the best of a bad
situation by appeasing _____ pressures in a country.
A. free trade
B. protectionist
C. libertarian
D. consumer
58. The Multi-Fiber Agreement (MFA) of 1974 fixed upper limits on exports of textiles from
all major exporting countries to all major importing countries. The MFA is an example of:
A. voluntary export restraint.
B. local content requirement.
C. subsidy.
D. specific tariff.
59. The extra profit that producers make when supply is artificially limited by an import quota
is referred to as a:
A. trade surplus.
B. quota rent.
C. trade reconciliation.
D. profit hike margin.
60. Both import quotas and VERs benefit _____ by limiting import competition, but they
result in higher prices, which hurt _____.
A. domestic producers; consumers
B. governments; domestic producers
C. importers; foreign producers
D. consumers; governments
6-10
61. A(n) _____ requires that some specific fraction of a good must be produced domestically.
A. international allocation requirement
B. local content requirement
C. specific quota requirement
D. ad valorem portion requirement
62. Local content regulations have been widely used by developing countries to shift their
manufacturing base from the simple _____ of goods whose parts are manufactured elsewhere
into the local _____ of component parts.
A. production; integration
B. assembly; manufacture
C. design; assembly
D. generation; packaging
63. Local content regulations provide protection for a domestic producer of parts in much the
same way a(n) _____ does, by limiting foreign competition.
A. greenfield investment
B. international content requirement
C. specific content requirement
D. import quota
64. If Apple won an order to sell 500 new minicomputers to Australia, but the Australian
government stipulated that 20 percent of the component parts of the minicomputers it
purchased must be produced in Australia, that stipulation would be an example of a(n):
B. administrative policy.
C. import quota.
D. local content requirement.
6-11
65. The _____ in the U.S. 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.
A. Export Administration Act
B. Helms-Burton Act
C. Hawley-Burton Act
D. Buy America Act
66. In addition to the formal instruments of trade policy, informal bureaucratic rules that are
designed to make it difficult for imports to enter a country are referred to as:
A. regional trade inhibitors.
B. back-door trade policies.
C. domestic trade hurdles.
D. administrative trade policies.
67. At one time, the French government required that all imported videotape recorders arrive
in France through a small customs entry point that was both remote and poorly staffed. This is
an example of a(n):
A. regional trade inhibitor.
B. domestic business hurdle.
C. administrative trade policy.
D. ad hoc red tape.
68. _____ are specific duties representing a special tariff for punishing foreign firms engaged
in dumping, which can be fairly substantial and stay in place for up to five years.
A. Punitive damages
B. Civil duties
C. Import damages
D. Countervailing duties
6-12
69. In the context of international trade, _____ is defined as selling goods in a foreign market
at a price below their costs of production or as selling goods in a foreign market at below their
"fair" market price.
A. monopolizing
B. dumping
C. slashing
D. subsidizing
70. If China were to export vast quantities of cheap toys to India, selling them at below their
costs of production, it would constitute:
A. monopolism.
B. dumping.
C. slashing.
D. safeguarding.
71. In the context of dumping, predatory behavior can be described as foreign producers:
A. attempting hostile takeovers of domestic firms and usurping the available resources for
production.
B. indiscriminately exploiting the natural resources of a foreign country to create a later
demand that can be met only by imports.
C. eliminating competition by subsidizing prices in a foreign market with home market profits
and eventually raising prices to earn substantial profits.
D. buying goods of competing domestic firms and hoarding them to create an artificial
demand, and exporting those goods at higher prices.
72. One of the motives for foreign firms engaged in dumping may be:
A. unloading excess production in foreign markets.
B. cutting labor costs to reduce the costs of production.
C. offering a wider range of products for consumers in foreign markets.
D. offering competitive pricing for goods that are not produced in foreign countries.
6-13
73. An alleged example of _____ occurred in 1997, when two Korean manufacturers of
semiconductors, LG Semicon and Hyundai Electronics, were accused of selling dynamic
random access memory chips in the U.S. market at below their costs of production.
A. dumping
B. monopolizing
C. slicing
D. subsidizing
74. The two US agencies that deal with antidumping complaints are the:
A. Economic Offences Wing and Conciliation Services.
B. International Trade Commission and the Industry Council.
C. Commerce Department and the International Trade Commission.
D. Federal Trade Commission and the Economic Council.
75. Which of the following is considered to be the ultimate objective of antidumping

policies?
A. Protect consumers from competitive pricing
B. Prevent domestic firms from unloading their excess production in domestic markets
C. Protect domestic producers from unfair foreign competition
D. Protect consumers from substandard and hazardous products
76. In general, what are the two paths of arguments for government intervention into the free
flow of trade?
A. Political and cultural
B. Economic and legal
C. Political and economic
D. Legal and social
77. Furthering the goals of foreign policy and advancing the human rights of individuals in
exporting countries are examples of issues covered by _____ for government intervention.
A. political arguments
B. humanitarian arguments
C. legal arguments
D. economic arguments
6-14
78. _____ arguments for government intervention into international trade are typically
concerned with boosting the overall wealth of a nation.
A. Economic
B. Political
C. Legal
D. Commercial
79. Which of the following is perhaps the most common political argument for government
intervention into the free flow of trade?
A. Protecting national identity
B. Protecting national sovereignty from being usurped by supranational organizations
C. Protecting jobs and industries from unfair foreign competition
D. Improving efficiency of domestic labor
80. At times, countries contend that it is necessary to protect industries such as those related
to defense—aerospace, advanced electronics, and semiconductors—because these industries
are important for:
A. retaining innovation.
B. national entrepreneurial spirit.
C. national security.
D. diplomatic reasons.
81. Some argue that governments should use the threat of _____ 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."
A. free trade
B. deregulation
C. retaliation
D. liberalization
6-15
82. Why is retaliation by government intervention a risky strategy?

A. It may liberalize trade and bring with it resulting economic gains.
B. A country that is being pressured may respond by raising trade barriers of its own.
C. It may expose certain industries that are important for national security to foreign
competition.
D. It allows firms to sell goods in foreign market at below their fair market value.
83. In 2006, several countries of the European Union and U.S. banned imports of Mattel toys
with high levels of lead, manufactured in China. The underlying motive for such a move
could be:
A. protecting domestic businesses from unfair pricing.
B. protesting the pricing of toys below their costs of production.
C. protecting consumers from unsafe products.
D. increasing the trade surplus of the U.S.
84. Which of the following would be a likely action motivated by the desire of governments
to protect their consumers from unsafe products?
A. Placing tariffs on imports of foreign steel, by the Bush administration in 2002
B. Threatening 100 percent tariffs on a range of Chinese products violating intellectual
property laws
C. Outlawing importation, sale, or use of genetically modified organisms by Austria and
Luxembourg
D. Passing legislations such as the D'Amato Act and the Helms-Burton Act targeting products
from Libya, Iran, and Cuba
85. Which of the following actions reflect the use of trade policies by governments to further
their foreign policy objectives?
A. Pressuring "rogue states" that do not abide by international law or norms
B. Enforcing tougher intellectual property regulations
C. Threatening high tariffs and quotas
D. Limiting or banning imports of unsafe or substandard products
6-16
86. U.S. trade sanctions against Cuba, Libya, and Iran are examples of:
A. governments protecting domestic consumers from unsafe products.
B. governments using trade policy to support their foreign policy objectives.
C. governments protecting local businesses from international competition.
D. governments punishing foreign companies for dumping products in their markets.
87. Legislation that allows Americans to sue foreign firms that use property in Cuba
confiscated from them after the 1959 revolution is known as the:
A. Frederick-Peterson Act.
B. D'Amato-Perkins Act.
C. Perkins-Dole Act.
D. Helms-Burton Act.
88. Which one of the following Acts represents U.S. legislation that is similar to the Helms-
Burton Act, but is aimed at Libya and Iran?
A. Perkin's Act
B. D'Amato Act
C. Williams Act
D. Cato Act
89. _____ status allows countries to export goods to the U.S. under favorable terms.
A. Most favored nation
B. Preferred trade partner
C. Strategic ally
D. Friendly state
90. China did not join the WTO until 2001, so historically the decision of whether to grant
MFN status to China was a real one. The decision was made more difficult by the perception
that China had a(n) _____.
A. unskilled and unemployable population
B. high-cost labor structure
C. poor human rights record
D. large population
6-17
91. Environmental organizations pushing for greater regulation of international trade argue
that there is a strong relationship between _____ and environmental pollution and
degradation.
A. dumping
B. trade sanctions
C. income levels
D. factor endowments
92. Empirical evidence suggests the relationship between income levels and pollution is not a
linear one—rather it is an inverted U-shaped relationship—implying that international trade,
and the growth that results from it, may not be damaging to the environment. Important
exceptions to this trend are:
A. pollution levels evidenced in burgeoning economies like China and India.
B. incidents like the Chernobyl disaster and Tokaimura nuclear accident.
C. results revealing rise in carbon dioxide emissions with rise in income levels.
D. frequent oil spills occurring in various seas across the world.
93. Which of the following is one of the reasons offered to explain the high levels of carbon
dioxide emissions in developed countries like the U.S.?
A. Richer societies are more energy intensive and use carbon dioxide rich hydrocarbons
extensively.
B. Developed countries tend to be more densely populated than other countries and hence
reflect higher carbon dioxide emissions.
C. Companies in developed countries are less likely to take up social responsibility initiatives
than those in developing countries.
D. Developed countries generally have environmental pollution regulations less stringent than
those in developing countries.
94. If countries do not meet their targets for reducing carbon emissions specified in
international treaties, they may find themselves the targets of _____.
A. dumping
B. inflation
C. economic crisis
D. retaliatory action
6-18
95. According to the text, which of the following factors is likely to be the least important in
determining location decisions for businesses?
A. Labor productivity
B. Transportation costs
C. Pollution abatement costs
D. Access to technological know-how
96. With the development of the _____ and _____, the economic arguments for government
intervention have undergone a renaissance in recent years.
A. technology; WTO
B. free trade; democratic governments
C. new trade theory; strategic trade policy
D. democratic governments; anti-globalization movement
97. Which of the following is by far, the oldest economic argument for government
A. Impoverished industry argument
B. Infant industry argument
C. Sick industry argument
D. National security-related industry argument
98. According to _____, many developing countries have a potential comparative advantage
in manufacturing, but new manufacturing industries cannot initially compete with well-
established industries in developed countries.
A. mercantilism
B. comparative advantage theory
C. product life-cycle theory
D. infant industry argument
6-19
99. _____ has recognized the infant industry argument as a legitimate reason for
protectionism.
A. GATT
B. North Atlantic Treaty Organization
C. United Nations
D. International Monetary Fund
100. One of the main reasons why many economists remain critical of the infant industry
argument is its assumption that:
A. protection of manufacturing from foreign competition is harmful.
B. absolute advantage cannot sustain productivity of an industry.
C. foreign firms too come under the definition of infant industry when they newly enter a
foreign market.
D. firms are unable to make efficient long-term investments through domestic or international
capital markets.
101. Protection of manufacturing from foreign competition does no good unless the
protection:
A. helps make the industry efficient.
B. provides guaranteed employment for the citizens.
C. affects the standards of living and per capita income of the people.
D. promotes foreign direct investment.
102. Given financial support, firms based in countries with a potential comparative advantage
have an incentive to endure the necessary initial losses in order to make long-run gains
without requiring _____.
A. good governance
B. latest technology
C. government protection
D. regular monitoring
6-20
103. According to the text, given efficient global capital markets, the only industries that
would require government protection would be:
A. those that are not worthwhile.
B. defense-related, such as aerospace and semiconductors.
C. chemical and processing industries.
D. those that require efficient administration.
104. A government should use subsidies to support promising firms that are active in newly
emerging industries, according to the _____ argument.
B. infant industry
C. absolute advantage
D. product life-cycle
105. According to the text, governments should target technologies that may be important in
the future and use _____ to support development work aimed at commercializing those
technologies.
A. subsidies
B. sanctions
C. factor endowments
D. personnel
106. An important component of strategic trade policy is 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 _____.
A. all available profits
B. first-mover advantages
C. comparative advantage
D. foreign direct investment
6-21
107. To try and establish Airbus as a global competitor against Boeing, the governments of
Britain, France, Germany, and Spain:
A. threatened 100% tariffs on the import of Boeing aircraft.
B. drafted legislations that required 25% of Boeing's aircraft by value to be manufactured in
Europe.
C. imposed import quotas on American-manufactured Boeing aircraft.
D. pooled in subsidies worth $15 billion.
108. The strategic trade policy arguments of the new trade theorists challenge the rationale for
unrestricted free trade found in the work of classic trade theorists. In response to this
challenge to economic orthodoxy, a number of economists—including some of those
responsible for the development of the new trade theory, such as Paul Krugman are:
A. advocating a world-wide swing toward mixed economies.
B. debunking assertions made by Adam Smith and David Ricardo.
C. making a revised case for free trade.
D. pointing out that in practice free trade may be unworkable.
109. According to Paul Krugman, a country that attempts to use strategic trade policy to
establish a domestic firm in a dominant position in a global industry will probably:
A. dominate the industry.
B. move away from protectionism.
C. provoke retaliation.
D. incur huge financial debts.
110. According to Krugman, the ideal way for a country to respond when one's competitors
are already being supported by government subsidies is probably not to engage in retaliatory
action but to:
A. help establish rules that minimize the use of trade-distorting subsidies.
B. adopt the strategic trade policy as a way to establish domestic firms in a dominant position
in the global industry.
C. move to an industry where the competitors have not had the benefit of such strategic trade
policies.
D. use a combination of home-market protection and export-promoting subsidies.
6-22
111. According to Krugman, one of the reasons for not embracing strategic trade policy is that
such a policy might:
A. hamper the chances of a country's firms to effectively exploit first-mover advantages.
B. be captured by special-interest groups within the economy for personal benefits.
C. be used to establish rules of the game that minimize use of trade-distorting subsidies.
D. divert attention from the need to establish domestic firms in a dominant position in the
global industry.
112. Which of the following historical events signified the first official embracing of free
trade as a government policy by Great Britain?
A. The Union of the Crowns in 1603
B. The repeal of the Corn Laws by the British Parliament in 1846
C. The Treaty of American Independence in 1783
D. The Industrial Revolution of the 18th and 19th centuries
113. Which of the following represents the reason for the British Parliament repealing the
Corn Laws in 1846?
A. Opium wars that polarized world opinion against Great Britain
B. Prospect of harvest failure in Britain and famine in Ireland
C. Imminent threat of rebellions in most of its colonies
D. Labor party taking over the government from the Liberal Conservatives
114. According to the text, the only reason Great Britain pushed the case for trade
liberalization for as long as 80 years in the 19th century was that:
A. it was starting to lose the military stranglehold over much of its colonies.
B. the emergence of the U.S. threatened its position as the most industrialized nation.
C. it stood to lose the most from a trade war.
D. it had experienced severe famines and droughts in the earlier part of the 19th century.
6-23
115. The economically damaging effects of the Great Depression were worsened in 1929 by
the _____.
A. First World War
B. U.S. stock market collapse
C. spread of communism through Europe
D. Cold War between the world's superpowers
116. Which one of the following aimed at avoiding rising unemployment by protecting
domestic industry and diverting consumer demand away from foreign products, erected an
enormous wall of tariff barriers?
A. Smoot-Hawley Act
B. D'Amato Act
C. Helms-Burton Act
D. Buy America Act
117. A particularly odd aspect of the Smoot-Hawley tariff-raising binge was that the United
States was running a balance-of-payment surplus at the time and it was the world's largest
_____ nation.
A. debtor
B. free-trade
C. importing
D. creditor
118. Established under U.S. leadership in 1947, which of the following was a multilateral
agreement whose objective was to liberalize trade by eliminating tariffs, subsidies, import
quotas, and the like?
A. General Agreement of Tariffs and Trade (GATT)
B. North American Free Trade Agreement (NAFTA)
C. Central American Free Trade Agreement (CAFTA)
D. Free Trade Areas of the Americas (FTAA)
6-24
119. Which of the following statements regarding GATT is true?

A. GATT attempted to liberalize trade restrictions in one go.
B. In its early years, GATT was unsuccessful and hence was superseded by the WTO.
C. GATT regulations failed as they were enforced by an unshared monitoring mechanism.
D. Tariff reductions through negotiations were spread over eight rounds.
120. One of the reasons that protectionist pressures arose around the world during the 1980s
was:
A. that many countries found ways to get around GATT regulations.
B. the opening up of national markets to cheap products from China.
C. the fall of the Soviet Union.
D. the persistent trade lead taken by the United States.
121. _____ is one of the ways in which countries can circumvent GATT regulations and is
exemplified by the agreement between Japan and America under which Japanese producers
promised to limit their auto imports into the United States.
A. Voluntary export restraint
B. Import quota
C. Specific tariff
D. Quota rent
122. Bilateral voluntary export restraints, or VERs, circumvented GATT agreements,

because:
A. these nations withdrew their membership to the GATT.
B. the member nations had ceased to recognize GATT as a regulatory body for international
trade.
C. VERs were not a recognized trade barrier under the GATT constitution.
D. neither the importing country nor the exporting country complained to the GATT
bureaucracy.
6-25
123. The main effect of the Uruguay Round Agreement on agricultural products was that:
A. caps were imposed on textile exports.
B. farm subsidies were reduced.
C. tariffs on industrial goods were increased.
D. a wide range of agricultural services were exempted from GATT rules.
124. All of the following were provisions of the Uruguay Round Agreement EXCEPT:
A. clearer and stronger GATT rules.
B. extension of GATT fair trade and market access rules to cover a wider range of services.
C. substantial reduction in agricultural subsidies.
D. increase in tariffs on industrial goods in lieu of the reduction in agricultural subsidies.
125. Which of the following has taken over responsibility to arbitrate trade disputes and
monitor the trade policies of member countries and resulted because of the Uruguay Round
agreement?
A. World Bank
B. World Trade Organization
C. International Trade Commission
126. The WTO's Agreement on _____ is an attempt to narrow the gaps in the way intellectual
property rights are protected around the world and to bring them under common international
rules.
A. International Body on Intellectual Property (IBIP)
B. Court of Arbitration of Intellectual Property (CAIP)
C. Trade-Related Aspects of Intellectual Property Rights (TRIPS)
D. Intellectual Property Rights Enforcement and Resolution (IPER)
127. Countries that have been found by the arbitration panel to violate GATT rules may
appeal to _____ of the World Trade Organization, but its verdict is binding.
A. human rights commission
B. permanent appellate body
C. International Court of Justice
D. Security Council
6-26
128. The millennium round of talks of WTO attempted to get the assembled countries to agree
to work toward:
A. agreeing on raising barriers to cross-border trade.
B. strengthening their defense ties and carry on with their war against terror.
C. reducing barriers to cross-border trade in agricultural products and trade and investment in
services.
D. increasing average tariff rates imposed by developing nations on manufactured goods to
more than four percent of value, the highest level in modern history.
129. Two of the first industries targeted for reform by the WTO with a view to encompass
regulations governing foreign direct investment were:
A. global telecommunication and financial services industries.
B. scientific research and defense sector.
C. pharmaceuticals and heavy metal industry.
D. agriculture and biotechnology.
130. Which of the following countries, with minor exceptions, is fully open to inward
investment by foreign banks, insurance, and security companies?
A. Russia
B. Cuba
C. Venezuela
D. The United States
131. Human rights activists see WTO rules as _____ the ability of nations to stop imports
from countries where child labor is used or working conditions are hazardous.
A. enabling
B. outlawing
C. supplementing
D. facilitating
6-27
132. One of the loopholes in antidumping laws that is being exploited by many countries to
pursue protectionism is the:
A. toothlessness of the enforcement agencies.
B. WTO's non-committal approach to antidumping laws.
C. bilateral VERs which subvert antidumping laws.
D. rather vague definition of what constitutes "dumping."
133. Which of the following is NOT true about agricultural subsidies?

A. They clear distortions in the production and international trade of agricultural products.
B. They encourage countries to overproduce heavily subsidized agricultural products.
C. They reduce international trade in agricultural products.
D. They raise the prices of agricultural products to consumers.
134. _____ are the highest rate that can be charged, which is often, but not always, the rate
that is charged.
A. Ceiling rates
B. Specific tariffs
C. Bound tariff rates
D. Ad maximum rates
135. Which of the following has been excluded from the agenda for the Doha round of WTO
talks that began in 2001?
A. Reducing barriers to cross-border investment
B. Phasing out subsidies to agricultural producers
C. Limiting the use of antidumping laws
D. Attempts to tie trade to labor standards in a country
136. The threat of antidumping action limits the ability of a firm to:
A. raise capital in the primary market.
B. raise prices in response to high demand.
C. disperse its productive activities in an efficient manner.
D. use aggressive pricing to gain market share in a country.
6-28
137. According to the text, most economists would probably argue that the best interests of
international business are served by a free trade stance, but not a _____ stance.
A. facilitating
B. open market
C. laissez-faire
D. ad valorem
Essay Questions
138. What is a tariff? Describe the difference between specific tariffs and ad valorem tariffs,
illustrating each with an example.
139. Who gains and who loses from the imposition of a tariff on imported goods? How can it
be determined whether the net gain from the tariff exceeds the net loss?
140. What is a subsidy? Provide some examples of the forms that subsidies take. How do
subsidies help domestic producers?
6-29
141. What is a voluntary export restraint? Why do exporting countries agree to VERs?
Explain with an example.
142. What is local content requirement? How can local content requirements typically be
expressed? How have local content requirements been used as trade barriers?
143. What are the principle political arguments for government intervention into international
trade?
144. Describe briefly, with examples, the use of trade policies by governments to support their
foreign policy objectives.
6-30
145. What is the "infant industry argument"? What are its implications for the world
economy? What are the criticisms of this argument?
146. Briefly describe the implications of the strategic trade policy as applied to international
trade.
147. Give a brief description of the origin, functions, and successes of GATT from 1947 to
1979, before protectionist trends gained momentum across the world.
148. Describe how the world trade system erected by GATT came under strain from
protectionist trends that dominated the world economy from 1980 to 1993.
6-31
149. State the provisions that were formed after the completion of the Uruguay Round of
talks.
150. Explain the organizational structure of the WTO and mention the functions of its key
organs.
151. Why is the WTO meeting in Seattle considered a watershed?
152. List the fours issues at the forefront of the current agenda of the WTO.
6-32
Chapter 06 The Political Economy of International Trade Answer Key
True / False Questions
1. (p. 205) Subsidies are a trade policy instrument.

TRUE
Trade policy uses seven main instruments: tariffs, subsidies, import quotas, voluntary export
restraints, local content requirements, administrative policies, and antidumping duties.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
Learning Objective: 06-01
Topic: Instruments of Trade Policy
2. (p. 205) Tariffs are the most complex instrument of trade policy.
FALSE
Tariffs are the oldest and simplest instrument of trade policy.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-33
3. (p. 205, 206) Tariffs are the instrument that the GATT and WTO have been most successful in
limiting.
TRUE
Tariffs are the instrument of trade policy that GATT and WTO have been most successful in
limiting.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
4. (p. 206) In recent decades, a fall in subsidies, quotas, and voluntary export restraints has been
accompanied by a corresponding fall in nontariff barriers.
FALSE
A fall in tariff barriers in recent decades has been accompanied by a rise in nontariff barriers,
such as subsidies, quotas, voluntary export restraints, and antidumping duties.
AACSB: Reflective Thinking

Bloom's: Understand
Difficulty: Medium
5. (p. 206) Nontariff barriers include subsidies, quotas, voluntary export restraints, and
antidumping duties.
TRUE
A fall in tariff barriers in recent decades has been accompanied by a rise in nontariff barriers,
such as subsidies, quotas, voluntary export restraints, and antidumping duties.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-34
6. (p. 206) Specific tariffs are levied as a proportion of the value of the imported good.
FALSE
Specific tariffs are levied as a fixed charge for each unit of a good imported.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
7. (p. 206) Ad valorem tariffs reduce the cost of imported products relative to domestic
products.
FALSE
Tariffs, specific and ad valorem, are placed on imports to protect domestic producers from
foreign competition by raising the price of imported goods.

Bloom's: Remember
Difficulty: Medium
8. (p. 206) Tariffs are largely pro-producer and anti-consumer.

TRUE
Tariffs are pro-producer and anti-consumer. While they protect producers from foreign
competitors, this restriction of supply also raises domestic prices.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-35
9. (p. 206) Tariffs increase the overall efficiency of the world economy because a protective
tariff encourages domestic firms to produce products more efficiently at home that, in theory,
could be produced abroad.
FALSE
Import tariffs reduce the overall efficiency of the world economy because a protective tariff
encourages domestic firms to produce products at home that, in theory, could be produced
more efficiently abroad.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
10. (p. 207) Export tariffs are far less common than import tariffs.
TRUE
Sometimes tariffs are levied on exports of a product from a country. Export tariffs are far less
common than import tariffs.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
11. (p. 207) The main gains from subsidies accrue to importers, whose international
competitiveness is increased as a result of these subsidies.
FALSE
The main gains from subsidies accrue to domestic producers, whose international
competitiveness is increased as a result.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-36
12. (p. 207) Japan has a long history of supporting inefficient domestic producers with farm
subsidies.
TRUE
Agriculture tends to be one of the largest beneficiaries of subsidies in most countries. Japan
has long history of supporting inefficient domestic producers with farm subsidies. Even the
European Union and the U.S. are not exempt from this rule.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
13. (p. 208) A direct restriction on the quantity of some good that may be imported into a
country is a quota rent.
FALSE
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
Bloom's: Remember
Difficulty: Easy
14. (p. 209, 210) Quotas benefit consumers the most.

FALSE
As with all restrictions on trade, quotas do not benefit consumers. An import quota or
voluntary export restraint always raises the domestic price of an imported good.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-37
15. (p. 210) The Buy America Act specifies that government agencies must give preference to
American products when putting contracts for equipment out for bid unless the foreign
products have a significant advantage.
TRUE
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
Bloom's: Remember
Difficulty: Easy
16. (p. 210) Administrative trade policies are bureaucratic rules that are designed to make it easy
for imports to enter a country.
FALSE
In addition to the formal instruments of trade policy, governments of all types sometimes use
informal or administrative policies to restrict imports and boost exports. Administrative trade
policies are bureaucratic rules designed to make it difficult for imports to enter a country.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
17. (p. 211) 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.
TRUE
Dumping is defined as selling goods in a foreign market at below their costs of production or
"fair" market value. Dumping is viewed as a method by which firms unload excess production
in foreign markets.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-38
18. (p. 211) Antidumping policies are designed to punish foreign firms that engage in dumping
industrial waste into the environment.
FALSE
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.
Antidumping policies are designed to punish foreign firms that engage in dumping and thus
protect domestic producers from unfair foreign competition.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
19. (p. 211) The fair market value of a good is normally judged to be lesser than the costs of
producing that good.
FALSE
The fair market value of a good is normally judged to be greater than the costs of producing
that good as the former includes a "fair" profit margin.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
20. (p. 213) Countries sometimes argue that it is necessary to protect certain industries because
they are important for national security.
TRUE
Countries sometimes argue that it is necessary to protect certain industries because they are
important for national security. Defense-related industries often get this kind of attention (e.g.,
aerospace, advanced electronics, semiconductors, etc.).
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
Topic: The Case for Government Intervention
6-39
21. (p. 213) Protecting consumers from "dangerous" products and furthering the goals of foreign
policy are types of economic arguments for intervention.
FALSE
Political arguments for government intervention cover a range of issues, including protecting
consumers from "dangerous" products, furthering the goals of foreign policy.

Bloom's: Understand
Difficulty: Medium
22. (p. 217) The relationship between pollution and income levels follows a linear pattern.
FALSE
Empirical evidence suggests the relationship between income levels and pollution is not a
linear one—rather it is an inverted U-shaped relationship. To begin with, as countries start to
climb the ladder of economic progress, pollution levels do increase, but past some threshold,
they start to decline.
AACSB: Analytic
Bloom's: Remember
Difficulty: Medium
23. (p. 219) The infant industry argument is the oldest economic argument for government
intervention.
TRUE
The infant industry argument is by far the oldest economic argument for government
intervention.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-40
24. (p. 219) Until the early 1980s, most economists saw little benefit in government intervention
and strongly advocated a free trade policy.
TRUE
Until the early 1980s, most economists saw little benefit in government intervention and
strongly advocated a free trade policy. This position has changed at the margins with the
development of strategic trade policy, although there are still strong economic arguments for
sticking to a free trade stance.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
25. (p. 219) Brazil's auto industry, once the world's tenth-largest and built behind tariff barriers
and quotas, has been proven as one of the world's most inefficient.
TRUE
Brazil built the world's tenth-largest auto industry behind tariff barriers and quotas. Once
those barriers were removed in the late 1980s, however, foreign imports soared, and the
industry was forced to face up to the fact that after 30 years of protection, Brazil had one of
the world's most inefficient industry.
AACSB: Analytic
Bloom's: Remember
Difficulty: Medium
26. (p. 219) Protection of manufacturing from foreign competition does no good unless the
protection helps make the industry efficient.
TRUE
Protection of manufacturing from foreign competition does no good unless the protection
helps make the industry efficient.
AACSB: Analytic
Bloom's: Remember
Difficulty: Medium
6-41
27. (p. 221) The roots of strategic trade policy arguments can be traced back to the late 18th
century and the works of Adam Smith and David Ricardo.
FALSE
The strategic trade policy arguments of the new trade theorists suggest an economic
justification for government intervention in international trade which challenges the rationale
for unrestricted free trade found in the work of classic trade theorists such as Adam Smith and
David Ricardo.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
Topic: The Revised Case for Free Trade
28. (p. 221) Several economists, including Paul Krugman, point out that although free trade
policy looks appealing in theory, in practice it may be unworkable.
FALSE
In response to the challenge to economic orthodoxy posed by new trade theory, which argues
for government intervention, a number of economists—including some of those responsible
for the development of the new trade theory, such as Paul Krugman—point out that although
strategic trade policy looks appealing in theory, in practice it may be unworkable.
AACSB: Analytic
Bloom's: Remember
Difficulty: Medium
6-42
29. (p. 223) The Smoot-Hawley Act was a multilateral agreement whose objective was to
liberalize trade by eliminating tariffs, subsidies, and import quotas.
FALSE
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
Bloom's: Remember
Difficulty: Easy
Topic: Development of the World Trading System
30. (p. 224) In the Uruguay Round of the WTO, member countries sought to exempt trade in
services from GATT rules.
FALSE
Against the background of rising pressures for protectionism, in 1986 GATT members
embarked on their eighth round of negotiations to reduce tariffs, the Uruguay Round. Until
then, 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
Bloom's: Remember
Difficulty: Easy
6-43
31. (p. 227) The United States wanted the WTO to allow governments to impose tariffs on goods
imported from countries that did not abide by what the United States saw as fair labor
practices during a WTO meeting at the end of November 1999.
TRUE
During the Seattle round of WTO talks, the United States wanted the WTO to allow
governments to impose tariffs on goods imported from countries that did not abide by what
the United States saw as fair labor practices. Representatives from developing nations reacted
angrily to this proposal, suggesting it was simply an attempt by the United States to find a
legal way of restricting imports from poorer nations.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
32. (p. 228) 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.
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 sectors account for some 70 percent of all antidumping actions reported to
the WTO.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-44
33. (p. 230) The biggest defenders of agricultural subsidies are the developed nations of the
world.
TRUE
The biggest defenders of agricultural subsidies have been the advanced nations of the world,
which want to protect their agricultural sectors from competition by low-cost producers in
developing nations. In contrast, developing nations have been pushing hard for reforms that
would allow their producers greater access to the protected markets of the developed nations.

Bloom's: Understand
Difficulty: Medium
34. (p. 230) Free trade in agriculture could help to jump-start economic growth among the
world's poorer nations and alleviate global poverty.
TRUE
Estimates suggest that removing all subsidies on agricultural production alone in OECD
countries could return to the developing nations of the world three times more than all the
foreign aid they currently receive from the OECD nations. In other words, free trade in
agriculture could help to jump-start economic growth among the world's poorer nations and
alleviate global poverty.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-45
35. (p. 235) The threat of antidumping action enhances the ability of a firm to use aggressive
pricing to gain market share in a country.
FALSE
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
Bloom's: Remember
Difficulty: Medium
Topic: Focus on Managerial Implications
36. (p. 236) Government intervention may invite retaliation and trigger a trade war.
TRUE
Government 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. Intervention is unlikely to be well executed, given the
opportunity for such a policy to be captured by special-interest groups.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-46
Multiple Choice Questions
37. (p. 205) Which of the following is one of the seven main instruments utilized in trade
policy?
A. Local content requirements
B. Licensing
C. Foreign direct investment
D. Employment guarantees
Trade policy uses seven main instruments: tariffs, subsidies, import quotas, voluntary export
restraints, local content requirements, administrative policies, and antidumping duties.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
38. (p. 206) While _____ tariffs are levied as a fixed charge for each unit of a good imported,
_____ tariffs are levied as a proportion of the value of the imported good.
A. ground; ceiling
B. ad hoc; nonconvertible
C. posited; floating
D. specific; ad valorem
Tariffs fall into two categories - specific tariffs are levied as a fixed charge for each unit of a
good imported and ad valorem tariffs are levied as a proportion of the value of the imported
good.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-47
39. (p. 206) Tariffs cause damage to _____ because this group must pay more for certain
imports.
A. investors
B. governments
C. consumers
D. producers
Consumers stand to lose more due to tariffs than governments and domestic producers as they
must pay more for certain imports.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
40. (p. 206) According to experts, which of the following groups most benefits from the
imposition of tariffs?
A. Government and producers
B. Consumers and trade associations
C. Exporters and importers
D. Producers and foreign competitors
Due to imposition of import tariffs, the government gains, because the tariff increases
government revenues, and domestic producers gain, because the tariff affords them some
protection against foreign competitors by increasing the cost of imported foreign goods.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-48
41. (p. 206) A protective tariff encourages domestic firms to produce products at home that, in
theory, could be produced more efficiently abroad. This results in:
A. an establishment of a comparative advantage over firms from other countries.
B. improved productivity of the labor workforce in that country.
C. higher mobility of resources within the country.
D. an inefficient utilization of resources.
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
Bloom's: Remember
Difficulty: Medium
42. (p. 206) The U.S. government imposed an eight to thirty percent tariff on steel imports into
the United States in March 2002. This belongs to which of the following categories?
A. General
B. Ad valorem
C. Specific
D. Ad hoc
Tariffs fall into two categories—specific tariffs are levied as a fixed charge for each unit of a
good imported and ad valorem tariffs are levied as a proportion of the value of the imported
good.

Bloom's: Understand
Difficulty: Medium
6-49
43. (p. 206) Tariffs:

A. reduce the price of foreign goods.
B. reduce the overall efficiency of the world economy.
C. help in efficient utilization of resources.
D. are unambiguously pro-consumer and anti-producer.
Tariffs are pro-producer and anti-consumer, increase the prices of imported goods, and reduce
the overall efficiency of the world economy.

Bloom's: Understand
Difficulty: Medium
44. (p. 207) One of the objectives of export tariffs is to:

A. improve the efficiency of utilization of resources.
B. curb the competition offered by foreign firms to domestic firms.
C. reduce exports from a sector, often for political reasons.
D. maintain a positive trade deficit.
Sometimes tariffs are levied on exports of a product from a country in order to raise revenue
for the government and reduce exports from a sector, often for political reasons. For example,
in 2004, China imposed a tariff on textile exports to moderate the growth in exports of textiles
from China, thereby alleviating tensions with other trading partners.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-50
45. (p. 207) Which of the following is a government payment to a domestic producer?
A. Duty
B. Subsidy
C. Quota
D. Tariff
A subsidy is a government payment to a domestic producer. Subsidies take many forms,

including cash grants, low-interest loans, tax breaks, and government equity participation in
domestic firms.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
46. (p. 207) _____ take many forms including cash grants, low-interest loans, tax breaks, and
government equity participation in domestic firms.
A. Ad valorem tariffs
B. Subsidies
C. Quota rents
D. Specific tariffs
A subsidy is a government payment to a domestic producer. Subsidies take many forms,

domestic firms.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-51
47. (p. 207) By lowering production costs, subsidies help domestic producers in:
A. gaining export markets.
B. curtailing exports to other countries.
C. meeting voluntary export restraints.
D. regulating the quality of services they offer.
By lowering production costs, subsidies help domestic producers in two ways: (1) competing
against foreign imports and (2) gaining export markets.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
48. (p. 207) _____ tend(s) to be one of the largest beneficiaries of subsidies in most countries.
A. Banks
B. Commercial airlines
C. Agriculture
D. Defense
Agriculture tends to be one of the largest beneficiaries of subsidies in most countries.

Developed countries like the U.S., the EU and Japan are not exempt from this rule either.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-52
49. (p. 207) By lowering production costs, _____ help domestic producers compete against
foreign imports.
A. tariffs
B. custom duties
C. quotas
D. subsidies
By lowering production costs, subsidies help domestic producers in two ways: (1) competing
against foreign imports and (2) gaining export markets.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
50. (p. 207) Governments typically pay for subsidies by:

A. selling junk bonds.
B. taxing individuals and corporations.
C. foreign direct investment in poorer countries.
D. privatization of public holdings.
Government subsidies must be paid for, typically by taxing individuals and corporations.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-53
51. (p. 207) Advocates of _____ believe that subsidies can help a firm achieve a first-mover
advantage in an emerging industry.
B. free trade
C. open market system
D. justice theories
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.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
52. (p. 207) Which of the following groups would most benefit from receiving subsidies?
A. Governments
B. Consumers
C. Domestic producers
D. Importers
The main gains from subsidies accrue to domestic producers, whose international
competitiveness is increased as a result. 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.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-54
53. (p. 208) An import quota is a direct restriction on the quantity of some good that may be
__________ by a country.
A. subsidized
B. imported
C. dumped
D. produced
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
Bloom's: Remember
Difficulty: Easy
54. (p. 209) Under a(n) _____, a lower tariff rate is applied to imports within the quota than
those over the quota.
B. voluntary import restraint
C. import tariff rent
D. quota rent
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
Bloom's: Remember
Difficulty: Easy
6-55
55. (p. 209) A(n) _____ is a quota on trade imposed by the exporting country, typically at the
request of the importing country's government.
B. quota rent
C. import quota
D. voluntary export restraint (VER)
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
Bloom's: Remember
Difficulty: Easy
56. (p. 209) Foreign producers agree to VERs because they fear:
A. a fall in demand for their products in foreign markets.
B. the aggravation of protectionist pressures in their home markets.
C. more damaging punitive tariffs or import quotas might follow if they do not.
D. political and economic instability in foreign markets.
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
Bloom's: Remember
Difficulty: Medium
6-56
57. (p. 209) Agreeing to a VER is seen by foreign producers as a way to make the best of a bad
situation by appeasing _____ pressures in a country.
A. free trade
B. protectionist
C. libertarian
D. consumer
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
Bloom's: Remember
Difficulty: Easy
58. (p. 209) The Multi-Fiber Agreement (MFA) of 1974 fixed upper limits on exports of textiles
from all major exporting countries to all major importing countries. The MFA is an example
of:
B. local content requirement.
C. subsidy.
D. specific tariff.
A variant of the import quota is the voluntary export restraint. 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.

Bloom's: Apply
Difficulty: Hard
6-57
59. (p. 210) The extra profit that producers make when supply is artificially limited by an import
quota is referred to as a:
A. trade surplus.
B. quota rent.
C. trade reconciliation.
D. profit hike margin.
The extra profit that producers make when supply is artificially limited by an import quota is
referred to as a quota rent.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
60. (p. 209, 210) Both import quotas and VERs benefit _____ by limiting import competition, but
they result in higher prices, which hurt _____.
A. domestic producers; consumers
B. governments; domestic producers
C. importers; foreign producers
D. consumers; governments
As with all tariffs and subsidies, both import quotas and VERs benefit domestic producers by
limiting import competition and raise domestic prices of imported goods. When imports are
limited to a low percentage of the market by an import quota or VER, the price is bid up for
that limited foreign supply, hurting the customers.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-58
61. (p. 210) A(n) _____ requires that some specific fraction of a good must be produced
domestically.
A. international allocation requirement
B. local content requirement
C. specific quota requirement
D. ad valorem portion requirement
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
Bloom's: Remember
Difficulty: Easy
62. (p. 210) Local content regulations have been widely used by developing countries to shift
their manufacturing base from the simple _____ of goods whose parts are manufactured
elsewhere into the local _____ of component parts.
A. production; integration
B. assembly; manufacture
C. design; assembly
D. generation; packaging

produced domestically. Local content regulations have been widely used by developing
countries to shift their manufacturing base from the simple assembly of products whose parts
are manufactured elsewhere into the local manufacture of component parts.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-59
63. (p. 210) Local content regulations provide protection for a domestic producer of parts in
much the same way a(n) _____ does, by limiting foreign competition.
A. greenfield investment
B. international content requirement
C. specific content requirement
D. import quota
Local content regulations provide protection for a domestic producer of parts in 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
Bloom's: Remember
Difficulty: Easy
64. (p. 210) If Apple won an order to sell 500 new minicomputers to Australia, but the
Australian government stipulated that 20 percent of the component parts of the minicomputers
it purchased must be produced in Australia, that stipulation would be an example of a(n):
B. administrative policy.
C. import quota.
D. local content requirement.

produced domestically. The requirement can be expressed either in physical terms (e.g., 75
percent of component parts for this product must be produced locally) or in value terms.

Bloom's: Apply
Difficulty: Hard
6-60
65. (p. 210) The _____ in the U.S. 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.
A. Export Administration Act
B. Helms-Burton Act
C. Hawley-Burton Act
D. Buy America Act
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. The law specifies a
product as "American" if 51 percent of the materials by value are produced domestically.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
66. (p. 210) In addition to the formal instruments of trade policy, informal bureaucratic rules that
are designed to make it difficult for imports to enter a country are referred to as:
A. regional trade inhibitors.
B. back-door trade policies.
C. domestic trade hurdles.
D. administrative trade policies.
Administrative trade policies are bureaucratic rules designed to make it difficult for imports to
enter a country.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-61
67. (p. 211) At one time, the French government required that all imported videotape recorders
arrive in France through a small customs entry point that was both remote and poorly staffed.
This is an example of a(n):
A. regional trade inhibitor.
B. domestic business hurdle.
C. administrative trade policy.
D. ad hoc red tape.
Administrative trade policies are bureaucratic policies designed to make it difficult for
imports to enter a country. The French policy mentioned above effectively made it impractical
for a foreign company to export videotape recorders to France.

Bloom's: Understand
Difficulty: Medium
68. (p. 211) _____ are specific duties representing a special tariff for punishing foreign firms
engaged in dumping, which can be fairly substantial and stay in place for up to five years.
A. Punitive damages
B. Civil duties
C. Import damages
D. Countervailing duties
Antidumping laws punish foreign firms that engage in selling goods in a foreign market at
below their costs of production or "fair" market value. Erring foreign firms are imposed with
duties (countervailing duties) on the offending foreign imports. These duties, which represent
a special tariff, can be fairly substantial and stay in place for up to five years.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-62
69. (p. 211) In the context of international trade, _____ is defined as selling goods in a foreign
market at a price below their costs of production or as selling goods in a foreign market at
below their "fair" market price.
A. monopolizing
B. dumping
C. slashing
D. subsidizing
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. There is a difference between these two definitions; the fair
market value of a good is normally judged to be greater than the costs of producing that good
because the former includes a "fair" profit margin.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
70. (p. 211) If China were to export vast quantities of cheap toys to India, selling them at below
their costs of production, it would constitute:
A. monopolism.
B. dumping.
C. slashing.
D. safeguarding.

below their "fair" market value.

Bloom's: Apply
Difficulty: Medium
6-63
71. (p. 211) In the context of dumping, predatory behavior can be described as foreign
producers:
A. attempting hostile takeovers of domestic firms and usurping the available resources for
production.
B. indiscriminately exploiting the natural resources of a foreign country to create a later
demand that can be met only by imports.
C. eliminating competition by subsidizing prices in a foreign market with home market profits
and eventually raising prices to earn substantial profits.
D. buying goods of competing domestic firms and hoarding them to create an artificial
demand, and exporting those goods at higher prices.
Dumping is viewed as a method by which firms unload excess production in foreign markets.
Some dumping may be the result of predatory behavior, with producers using substantial
profits from their home markets to subsidize prices in a foreign market with a view to driving
indigenous competitors out of that market. Once this has been achieved, so the argument goes,
the predatory firm can raise prices and earn substantial profits.
AACSB: Analytic
Bloom's: Remember
Difficulty: Medium
72. (p. 211) One of the motives for foreign firms engaged in dumping may be:
A. unloading excess production in foreign markets.
B. cutting labor costs to reduce the costs of production.
C. offering a wider range of products for consumers in foreign markets.
D. offering competitive pricing for goods that are not produced in foreign countries.
Dumping is viewed as a method by which firms unload excess production in foreign markets.
For example, 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. This action occurred in the middle of a
worldwide glut of chip-making capacity. It was alleged that the firms were trying to unload
their excess production in the United States.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-64
73. (p. 211) An alleged example of _____ occurred in 1997, when two Korean manufacturers of
semiconductors, LG Semicon and Hyundai Electronics, were accused of selling dynamic
random access memory chips in the U.S. market at below their costs of production.
A. dumping
B. monopolizing
C. slicing
D. subsidizing

below their "fair" market value. Since LG Semicon and Hyundai Electronics were accused of
selling their products at below their costs of production, it refers to a case of dumping.

Bloom's: Understand
Difficulty: Medium
74. (p. 211) The two US agencies that deal with antidumping complaints are the:
A. Economic Offences Wing and Conciliation Services.
B. International Trade Commission and the Industry Council.
C. Commerce Department and the International Trade Commission.
D. Federal Trade Commission and the Economic Council.
If a domestic producer believes that a foreign firm is dumping production in the U.S. market,
it can file a petition with two government agencies, the Commerce Department and the
International Trade Commission which investigate the complaint, and if found to have merit,
the Commerce Department may impose an antidumping duty on the offending foreign
imports.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-65
75. (p. 211) Which of the following is considered to be the ultimate objective of antidumping
policies?
A. Protect consumers from competitive pricing
B. Prevent domestic firms from unloading their excess production in domestic markets
C. Protect domestic producers from unfair foreign competition
D. Protect consumers from substandard and hazardous products
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
Bloom's: Remember
Difficulty: Easy
76. (p. 212) In general, what are the two paths of arguments for government intervention into the
free flow of trade?
A. Political and cultural
B. Economic and legal
C. Political and economic
D. Legal and social
Arguments for government intervention take two paths: political and economic. Political
arguments for intervention are concerned with protecting the interests of certain groups within
a nation, often at the expense of other groups, or with achieving some political objective that
lies outside the sphere of economic relationships. Economic arguments for intervention are
typically concerned with boosting the overall wealth of a nation.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-66
77. (p. 213) Furthering the goals of foreign policy and advancing the human rights of individuals
in exporting countries are examples of issues covered by _____ for government intervention.
A. political arguments
B. humanitarian arguments
C. legal arguments
D. economic arguments
Political arguments for government intervention cover a range of issues, including preserving
jobs, 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.

Bloom's: Understand
Difficulty: Medium
78. (p. 212) _____ arguments for government intervention into international trade are typically
concerned with boosting the overall wealth of a nation.
A. Economic
B. Political
C. Legal
D. Commercial
Economic arguments for intervention are typically concerned with boosting the overall wealth
of a nation (to the benefit of all, both producers and consumers).
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-67
79. (p. 213) Which of the following is perhaps the most common political argument for
government intervention into the free flow of trade?
A. Protecting national identity
B. Protecting national sovereignty from being usurped by supranational organizations
C. Protecting jobs and industries from unfair foreign competition
D. Improving efficiency of domestic labor
Perhaps the most common political argument for government intervention is that it is
necessary for protecting jobs and industries from unfair foreign competition.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
80. (p. 213) At times, countries contend that it is necessary to protect industries such as those
related to defense—aerospace, advanced electronics, and semiconductors—because these
industries are important for:
A. retaining innovation.
B. national entrepreneurial spirit.
C. national security.
D. diplomatic reasons.
Countries sometimes argue that it is necessary to protect certain industries because they are
important for national security. Defense-related industries often get this kind of attention (e.g.,
aerospace, advanced electronics, semiconductors, etc.)

Bloom's: Understand
Difficulty: Medium
6-68
81. (p. 213) Some argue that governments should use the threat of _____ 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."
A. free trade
B. deregulation
C. retaliation
D. liberalization
Some argue that governments should use the threat of retaliation 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."
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
82. (p. 213, 214) Why is retaliation by government intervention a risky strategy?
A. It may liberalize trade and bring with it resulting economic gains.
B. A country that is being pressured may respond by raising trade barriers of its own.
C. It may expose certain industries that are important for national security to foreign
competition.
D. It allows firms to sell goods in foreign market at below their fair market value.
If it works, a politically motivated rationale for government intervention may liberalize trade
and bring with it resulting economic gains. It is a risky strategy, however a country that is
being pressured may not back down and instead may respond to the imposition of punitive
tariffs by raising trade barriers of its own.

Bloom's: Understand
Difficulty: Medium
6-69
83. (p. 214) In 2006, several countries of the European Union and U.S. banned imports of Mattel
toys with high levels of lead, manufactured in China. The underlying motive for such a move
could be:
A. protecting domestic businesses from unfair pricing.
B. protesting the pricing of toys below their costs of production.
C. protecting consumers from unsafe products.
D. increasing the trade surplus of the U.S.
Many governments have long had regulations to protect consumers from unsafe products. The
indirect effect of such regulations often is to limit or ban the importation of such products.
The EU and the U.S. banned toxic lead based toys from entering their markets to protect
domestic consumers from potential danger to their health.

Bloom's: Apply
Difficulty: Medium
84. (p. 215, 216) Which of the following would be a likely action motivated by the desire of
governments to protect their consumers from unsafe products?
A. Placing tariffs on imports of foreign steel, by the Bush administration in 2002
B. Threatening 100 percent tariffs on a range of Chinese products violating intellectual
property laws
C. Outlawing importation, sale, or use of genetically modified organisms by Austria and
Luxembourg
D. Passing legislations such as the D'Amato Act and the Helms-Burton Act targeting products
from Libya, Iran, and Cuba
Many governments have long had regulations to protect consumers from unsafe products. The
indirect effect of such regulations often is to limit or ban the importation of such products.
Concerns that the widespread use of genetically altered seeds could have unanticipated and
harmful effects on human health and may result in "genetic pollution" have led Austria and
Luxembourg to outlaw the importation, sale, or use of genetically altered organisms.

Bloom's: Apply
Difficulty: Hard
6-70
85. (p. 216) Which of the following actions reflect the use of trade policies by governments to
further their foreign policy objectives?
A. Pressuring "rogue states" that do not abide by international law or norms
B. Enforcing tougher intellectual property regulations
C. Threatening high tariffs and quotas
D. Limiting or banning imports of unsafe or substandard products
Governments sometimes use trade policy to support their foreign policy objectives. A
government may grant preferential trade terms to a country with which it wants to build
strong relations. Trade policy has also been used several times to pressure or punish "rogue
states" that do not abide by international law or norms.

Bloom's: Understand
Difficulty: Medium
86. (p. 216) U.S. trade sanctions against Cuba, Libya, and Iran are examples of:
A. governments protecting domestic consumers from unsafe products.
B. governments using trade policy to support their foreign policy objectives.
C. governments protecting local businesses from international competition.
D. governments punishing foreign companies for dumping products in their markets.
Trade policy has been used several times to pressure or punish "rogue states" that do not abide
by international law or norms. The theory is that such pressure might persuade the rogue state
to mend its ways, or it might hasten a change of government. The United States has
maintained long-running trade sanctions against Cuba. Their principal function is to
impoverish Cuba in the hope that the resulting economic hardship will lead to the downfall of
Cuba's Communist government and its replacement with a more democratically inclined (and
pro-U.S.) regime.

Bloom's: Understand
Difficulty: Medium
6-71
87. (p. 216) Legislation that allows Americans to sue foreign firms that use property in Cuba
confiscated from them after the 1959 revolution is known as the:
A. Frederick-Peterson Act.
B. D'Amato-Perkins Act.
C. Perkins-Dole Act.
D. Helms-Burton Act.
To further tighten the screws on Cuba, the U.S. Congress passed the Helms-Burton Act in
1996. 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
Bloom's: Remember
Difficulty: Easy
88. (p. 216) Which one of the following Acts represents U.S. legislation that is similar to the
Helms-Burton Act, but is aimed at Libya and Iran?
A. Perkin's Act
B. D'Amato Act
C. Williams Act
D. Cato 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
Bloom's: Remember
Difficulty: Easy
6-72
89. (p. 216, 217) _____ status allows countries to export goods to the U.S. under favorable terms.
A. Most favored nation
B. Preferred trade partner
C. Strategic ally
D. Friendly state
MFN status allows countries to export goods to the United States under favorable terms. An
annual debate in the United States exists over whether to grant most favored nation (MFN)
status to China, which would lower the average tariff on Chinese goods imported into the
United States to 8 percent from about 40 percent without the MFN status.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
90. (p. 217) China did not join the WTO until 2001, so historically the decision of whether to
grant MFN status to China was a real one. The decision was made more difficult by the
perception that China had a(n) _____.
A. unskilled and unemployable population
B. high-cost labor structure
C. poor human rights record
D. large population
MFN status allows countries to export goods to the United States under favorable terms.
Trading partners who are signatories of the World Trade Organization, as most are,
automatically receive MFN status. However, China did not join the WTO until 2001, so
historically the decision of whether to grant MFN status to China was a real one. The decision
was made more difficult by the perception that China had a poor human rights record.
AACSB: Analytic
Bloom's: Remember
Difficulty: Medium
6-73
91. (p. 217) Environmental organizations pushing for greater regulation of international trade
argue that there is a strong relationship between _____ and environmental pollution and
degradation.
A. dumping
B. trade sanctions
C. income levels
D. factor endowments
One argument frequently made by environmental organizations is that there is a strong

relationship between income levels and environmental pollution and degradation (i.e.,
industrial development leads to more pollution). Thus, to the extent that international trade
leads to higher income levels, it can also be expected to lead to a decline in environmental
quality.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
92. (p. 218) Empirical evidence suggests the relationship between income levels and pollution is
not a linear one—rather it is an inverted U-shaped relationship—implying that international
trade, and the growth that results from it, may not be damaging to the environment. Important
exceptions to this trend are:
A. pollution levels evidenced in burgeoning economies like China and India.
B. incidents like the Chernobyl disaster and Tokaimura nuclear accident.
C. results revealing rise in carbon dioxide emissions with rise in income levels.
D. frequent oil spills occurring in various seas across the world.
In developed nations such as the United States and United Kingdom, the air is much cleaner
than it was half a century ago. This data suggests that international trade, and the growth that
results from it, may not be damaging to the environment. However, carbon dioxide emissions
do rise with income levels. Thus, the country with the highest income per capita, the United
States, also produces the greatest carbon dioxide emissions per capita.

Bloom's: Understand
Difficulty: Medium
6-74
93. (p. 218) Which of the following is one of the reasons offered to explain the high levels of
carbon dioxide emissions in developed countries like the U.S.?
A. Richer societies are more energy intensive and use carbon dioxide rich hydrocarbons
extensively.
B. Developed countries tend to be more densely populated than other countries and hence
reflect higher carbon dioxide emissions.
C. Companies in developed countries are less likely to take up social responsibility initiatives
than those in developing countries.
D. Developed countries generally have environmental pollution regulations less stringent than
those in developing countries.
The country with the highest income per capita, the United States, also produces the greatest
carbon dioxide emissions per capita as carbon dioxide emissions are a by-product of energy
use (i.e., oil, gas, or coal burning). Richer societies are more energy intensive, and to the
extent that they use hydrocarbons to produce that energy, this leads to higher carbon dioxide
emissions.

Bloom's: Understand
Difficulty: Medium
94. (p. 218) If countries do not meet their targets for reducing carbon emissions specified in
international treaties, they may find themselves the targets of _____.
A. dumping
B. inflation
C. economic crisis
D. retaliatory action
Adherence to targets regarding carbon emissions might start to factor into trade agreements.
Specifically, if countries do not meet their targets for reducing carbon emissions specified in
international treaties, they may find themselves the targets of retaliatory action. The EU, for
example, might respond to the failure of the United States to meet its treaty commitments by
placing a carbon tariff on the import of certain goods from the United States.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-75
95. (p. 219) According to the text, which of the following factors is likely to be the least
important in determining location decisions for businesses?
A. Labor productivity
B. Transportation costs
C. Pollution abatement costs
D. Access to technological know-how
Economists have studied the issue but have found little evidence that firms do move
production in response to changes in pollution regulations. Their findings suggest that
pollution abatement costs are a relatively small component of the cost structure of most
enterprises, and other factors, such as labor productivity, access to technological know-how,
and transportation costs are far more important in determining location decisions.

Bloom's: Understand
Difficulty: Medium
96. (p. 219) With the development of the _____ and _____, the economic arguments for
government intervention have undergone a renaissance in recent years.
A. technology; WTO
B. free trade; democratic governments
C. new trade theory; strategic trade policy
D. democratic governments; anti-globalization movement
With the development of the new trade theory and strategic trade policy, the economic
arguments for government intervention have undergone a renaissance in recent years. Until
the early 1980s, most economists saw little benefit in government intervention and strongly
advocated a free trade policy. This position has changed at the margins with the development
of strategic trade policy.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-76
97. (p. 219) Which of the following is by far, the oldest economic argument for government
A. Impoverished industry argument
B. Infant industry argument
C. Sick industry argument
D. National security-related industry argument
Proposed by Alexander Hamilton in 1792, 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
Bloom's: Remember
Difficulty: Easy
98. (p. 219) According to _____, many developing countries have a potential comparative
advantage in manufacturing, but new manufacturing industries cannot initially compete with
well-established industries in developed countries.
A. mercantilism
B. comparative advantage theory
C. product life-cycle theory
D. infant industry argument
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. To allow manufacturing to get a
toehold, the argument is that governments should temporarily support new industries (with
tariffs, import quotas, and subsidies) until they have grown strong enough to meet
international competition.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-77
99. (p. 219) _____ has recognized the infant industry argument as a legitimate reason for
protectionism.
A. GATT
B. North Atlantic Treaty Organization
C. United Nations
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
Bloom's: Remember
Difficulty: Easy
100. (p. 219) One of the main reasons why many economists remain critical of the infant
industry argument is its assumption that:
A. protection of manufacturing from foreign competition is harmful.
B. absolute advantage cannot sustain productivity of an industry.
C. foreign firms too come under the definition of infant industry when they newly enter a
foreign market.
D. firms are unable to make efficient long-term investments through domestic or international
capital markets.
In spite of GATT recognizing the infant industry argument as a legitimate reason for
protectionism, many economists remain critical of this argument as it relies on the assumption
that firms are unable to make efficient long-term investments by borrowing money from the
domestic or international capital market.

Bloom's: Understand
Difficulty: Medium
6-78
101. (p. 219) Protection of manufacturing from foreign competition does no good unless the
protection:
A. helps make the industry efficient.
B. provides guaranteed employment for the citizens.
C. affects the standards of living and per capita income of the people.
D. promotes foreign direct investment.
Protection of manufacturing from foreign competition does no good unless the protection
helps make the industry efficient. In case after case, however, protection seems to have done
little more than foster the development of inefficient industries that have little hope of ever
competing in the world market.
AACSB: Analytic
Bloom's: Remember
Difficulty: Medium
102. (p. 220) Given financial support, firms based in countries with a potential comparative
advantage have an incentive to endure the necessary initial losses in order to make long-run
gains without requiring _____.
A. good governance
B. latest technology
C. government protection
D. regular monitoring
Given financial support, firms based in countries with a potential comparative advantage have
an incentive to endure the necessary initial losses in order to make long-run gains without
requiring government protection. Many Taiwanese and South Korean firms did this in
industries such as textiles, semiconductors, machine tools, steel, and shipping.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-79
103. (p. 220) According to the text, given efficient global capital markets, the only industries that
would require government protection would be:
A. those that are not worthwhile.
B. defense-related, such as aerospace and semiconductors.
C. chemical and processing industries.
D. those that require efficient administration.
Many textiles, semiconductors, steel, and other firms from Taiwan and South Korea have
demonstrated that, given financial support, they have an incentive to endure the necessary
initial losses in order to make long-run gains without requiring government protection. Thus,
given efficient global capital markets, the only industries that would require government
protection would be those that are not worthwhile.

Bloom's: Understand
Difficulty: Medium
104. (p. 220) A government should use subsidies to support promising firms that are active in
newly emerging industries, according to the _____ argument.
B. infant industry
C. absolute advantage
D. product life-cycle
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
Bloom's: Remember
Difficulty: Easy
6-80
105. (p. 220) According to the text, governments should target technologies that may be
important in the future and use _____ to support development work aimed at commercializing
those technologies.
A. subsidies
B. sanctions
C. factor endowments
D. personnel
Governments should target technologies that may be important in the future and use subsidies
to support development work aimed at commercializing those technologies. Furthermore,
government should provide export subsidies until the domestic firms have established first-
mover advantages in the world market.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
106. (p. 220) An important component of strategic trade policy is 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 _____.
A. all available profits
B. first-mover advantages
C. comparative advantage
D. foreign direct investment
The strategic trade policy argument suggests 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. This argument underlies government support
of Airbus, which benefited from a $15 billion subsidy from the governments of Britain, Spain,
Germany, and France to become Boeing's major competitor.
AACSB: Analytic
Bloom's: Remember
Difficulty: Medium
6-81
107. (p. 220) To try and establish Airbus as a global competitor against Boeing, the governments
of Britain, France, Germany, and Spain:
A. threatened 100% tariffs on the import of Boeing aircraft.
B. drafted legislations that required 25% of Boeing's aircraft by value to be manufactured in
Europe.
C. imposed import quotas on American-manufactured Boeing aircraft.
D. pooled in subsidies worth $15 billion.
Formed in 1966 as a consortium of four companies from Great Britain, France, Germany, and
Spain, Airbus had less than 5 percent of the world commercial aircraft market when it began
production in the mid-1970s. By 2009, it had increased its share to 45 percent by virtue of a
$15 billion subsidy from the governments of Great Britain, France, Germany, and Spain,
threatening Boeing's long-term dominance of the market.
AACSB: Analytic
Bloom's: Understand
Difficulty: Medium
108. (p. 221) The strategic trade policy arguments of the new trade theorists challenge the
rationale for unrestricted free trade found in the work of classic trade theorists. In response to
this challenge to economic orthodoxy, a number of economists—including some of those
responsible for the development of the new trade theory, such as Paul Krugman are:
A. advocating a world-wide swing toward mixed economies.
B. debunking assertions made by Adam Smith and David Ricardo.
C. making a revised case for free trade.
D. pointing out that in practice free trade may be unworkable.
The strategic trade policy arguments of the new trade theorists suggest an economic
justification for government intervention in international trade, thus challenging the rationale
for unrestricted free trade found in the work of classic trade theorists such as Adam Smith and
David Ricardo. In response to this challenge to economic orthodoxy, a number of
economists—including some of those responsible for the development of the new trade
theory, such as Paul Krugman—point out that although strategic trade policy looks appealing
in theory, in practice it may be unworkable. This response to the strategic trade policy
argument constitutes the revised case for free trade.
AACSB: Analytic
Bloom's: Remember
Difficulty: Medium
6-82
109. (p. 221) According to Paul Krugman, a country that attempts to use strategic trade policy to
establish a domestic firm in a dominant position in a global industry will probably:
A. dominate the industry.
B. move away from protectionism.
C. provoke retaliation.
D. incur huge financial debts.
Paul 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. A country that attempts to use such policies will
probably provoke retaliation.
AACSB: Analytic
Bloom's: Understand
Difficulty: Medium
110. (p. 221) According to Krugman, the ideal way for a country to respond when one's
competitors are already being supported by government subsidies is probably not to engage in
retaliatory action but to:
A. help establish rules that minimize the use of trade-distorting subsidies.
B. adopt the strategic trade policy as a way to establish domestic firms in a dominant position
in the global industry.
C. move to an industry where the competitors have not had the benefit of such strategic trade
policies.
D. use a combination of home-market protection and export-promoting subsidies.
Krugman may be right about the danger of a strategic trade policy leading to a trade war. The
problem, however, is how to respond when one's competitors are already being supported by
government subsidies. According to Krugman, the answer is probably not to engage in
retaliatory action but to help establish rules of the game that minimize the use of trade-
distorting subsidies.

Bloom's: Understand
Difficulty: Medium
6-83
111. (p. 221) According to Krugman, one of the reasons for not embracing strategic trade policy
is that such a policy might:
A. hamper the chances of a country's firms to effectively exploit first-mover advantages.
B. be captured by special-interest groups within the economy for personal benefits.
C. be used to establish rules of the game that minimize use of trade-distorting subsidies.
D. divert attention from the need to establish domestic firms in a dominant position in the
global industry.
Governments do not always act in the national interest when they intervene in the economy;
politically important interest groups often influence them. Thus, a further reason for not
embracing strategic trade policy, according to Krugman, is that such a policy is almost certain
to be captured by special-interest groups within the economy, who will distort it to their own
ends.
AACSB: Analytic
Bloom's: Remember
Difficulty: Medium
112. (p. 222) Which of the following historical events signified the first official embracing of
free trade as a government policy by Great Britain?
A. The Union of the Crowns in 1603
B. The repeal of the Corn Laws by the British Parliament in 1846
C. The Treaty of American Independence in 1783
D. The Industrial Revolution of the 18th and 19th centuries
Free trade dates to the late eighteenth century and the work of Adam Smith and David
Ricardo. Free trade as a government policy was first officially embraced by Great Britain in
1846, when the British Parliament repealed the Corn Laws.
AACSB: Analytic
Bloom's: Remember
Difficulty: Medium
6-84
113. (p. 222) Which of the following represents the reason for the British Parliament repealing
the Corn Laws in 1846?
A. Opium wars that polarized world opinion against Great Britain
B. Prospect of harvest failure in Britain and famine in Ireland
C. Imminent threat of rebellions in most of its colonies
D. Labor party taking over the government from the Liberal Conservatives
In Great Britain, agricultural protection was withdrawn, in the form of repealing of the Corn
Laws, only as a result of a protracted debate when the effects of a harvest failure in Great
Britain were compounded by the imminent threat of famine in Ireland. Faced with
considerable hardship and suffering among the populace, Parliament narrowly reversed its
long-held position.

Bloom's: Understand
Difficulty: Medium
114. (p. 222) According to the text, the only reason Great Britain pushed the case for trade
liberalization for as long as 80 years in the 19th century was that:
A. it was starting to lose the military stranglehold over much of its colonies.
B. the emergence of the U.S. threatened its position as the most industrialized nation.
C. it stood to lose the most from a trade war.
D. it had experienced severe famines and droughts in the earlier part of the 19th century.
After officially embracing free trade as a government policy in 1846, Great Britain, as one of
the world's dominant trading powers, pushed the case for trade liberalization. Its major trading
partners did not reciprocate the British policy of unilateral free trade. The only reason Britain
kept this policy for so long was that as the world's largest exporting nation, it had far more to
lose from a trade war than did any other country.

Bloom's: Understand
Difficulty: Medium
6-85
115. (p. 222) The economically damaging effects of the Great Depression were worsened in
1929 by the _____.
A. First World War
B. U.S. stock market collapse
C. spread of communism through Europe
D. Cold War between the world's superpowers
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
Bloom's: Remember
Difficulty: Medium
116. (p. 223) Which one of the following aimed at avoiding rising unemployment by protecting
domestic industry and diverting consumer demand away from foreign products, erected an
enormous wall of tariff barriers?
A. Smoot-Hawley Act
B. D'Amato Act
C. Helms-Burton Act
D. Buy America Act

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
Bloom's: Remember
Difficulty: Easy
6-86
117. (p. 223) A particularly odd aspect of the Smoot-Hawley tariff-raising binge was that the
United States was running a balance-of-payment surplus at the time and it was the world's
largest _____ nation.
A. debtor
B. free-trade
C. importing
D. creditor

consumer demand away from foreign products, the Smoot-Hawley Act rewarded almost every
industry with its "made-to-order" tariff. A particularly odd aspect of the Smoot-Hawley tariff-
raising binge was that the United States was running a balance-of-payment surplus at the time
and it was the world's largest creditor nation. The Smoot-Hawley Act had a damaging effect
on employment abroad.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
118. (p. 223) Established under U.S. leadership in 1947, which of the following was a
multilateral agreement whose objective was to liberalize trade by eliminating tariffs,
subsidies, import quotas, and the like?
A. General Agreement of Tariffs and Trade (GATT)
B. North American Free Trade Agreement (NAFTA)
C. Central American Free Trade Agreement (CAFTA)
D. Free Trade Areas of the Americas (FTAA)
Under U.S. leadership, the GATT was established in 1947. The GATT was a multilateral
quotas, and the like.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-87
119. (p. 223) Which of the following statements regarding GATT is true?
A. GATT attempted to liberalize trade restrictions in one go.
B. In its early years, GATT was unsuccessful and hence was superseded by the WTO.
C. GATT regulations failed as they were enforced by an unshared monitoring mechanism.
D. Tariff reductions through negotiations were spread over eight rounds.
The GATT did not attempt to liberalize trade restrictions in one fell swoop. Rather, tariff
reduction was spread over eight rounds. GATT regulations were enforced by a mutual
monitoring mechanism. The Uruguay Round of GATT negotiations in 1993 provided for the
World Trade Organization to be created to implement the GATT agreement.

Bloom's: Understand
Difficulty: Medium
120. (p. 224) One of the reasons that protectionist pressures arose around the world during the
1980s was:
A. that many countries found ways to get around GATT regulations.
B. the opening up of national markets to cheap products from China.
C. the fall of the Soviet Union.
D. the persistent trade lead taken by the United States.
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. One of the reasons
for this was that many countries found ways to get around GATT regulations. Bilateral
voluntary export restraints, or VERs, circumvent GATT agreements, because neither the
importing country nor the exporting country complain to the GATT bureaucracy in Geneva—
and without a complaint, the GATT bureaucracy can do nothing.

Bloom's: Understand
Difficulty: Medium
6-88
121. (p. 224) _____ is one of the ways in which countries can circumvent GATT regulations and
is exemplified by the agreement between Japan and America under which Japanese producers
promised to limit their auto imports into the United States.
A. Voluntary export restraint
B. Import quota
C. Specific tariff
D. Quota rent
Bilateral voluntary export restraints, or VERs, circumvent GATT agreements, because neither
the importing country nor the exporting country complains to the GATT bureaucracy in
Geneva. One of the best-known examples of voluntary export restraint is the agreement
between Japan and the United States, under which Japanese producers promised to limit their
auto imports into the United States as a way of defusing growing trade tensions.

Bloom's: Understand
Difficulty: Medium
122. (p. 224) Bilateral voluntary export restraints, or VERs, circumvented GATT agreements,
because:
A. these nations withdrew their membership to the GATT.
B. the member nations had ceased to recognize GATT as a regulatory body for international
trade.
C. VERs were not a recognized trade barrier under the GATT constitution.
D. neither the importing country nor the exporting country complained to the GATT
bureaucracy.
Bilateral voluntary export restraints, or VERs, circumvent GATT agreements, because neither
the importing country nor the exporting country complains to the GATT bureaucracy in
Geneva—and without a complaint, the GATT bureaucracy can do nothing.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-89
123. (p. 224) The main effect of the Uruguay Round Agreement on agricultural products was
that:
A. caps were imposed on textile exports.
B. farm subsidies were reduced.
C. tariffs on industrial goods were increased.
D. a wide range of agricultural services were exempted from GATT rules.
The Uruguay Round contained provisions for reduction in agricultural subsidies, tariffs on
industrial goods, manufactured goods, and lowering barriers to textile exports, among others.

Bloom's: Understand
Difficulty: Medium
124. (p. 224) All of the following were provisions of the Uruguay Round Agreement EXCEPT:
A. clearer and stronger GATT rules.
B. extension of GATT fair trade and market access rules to cover a wider range of services.
C. substantial reduction in agricultural subsidies.
D. increase in tariffs on industrial goods in lieu of the reduction in agricultural subsidies.
The Uruguay Round contained provisions for reduction in agricultural subsidies, tariffs on
industrial goods, manufactured goods, and lowering barriers to textile exports, among others.

Bloom's: Understand
Difficulty: Medium
6-90
125. (p. 225) Which of the following has taken over responsibility to arbitrate trade disputes and
monitor the trade policies of member countries and resulted because of the Uruguay Round
agreement?
A. World Bank
B. World Trade Organization
C. International Trade Commission
Established in 1993 under the provisions of the Uruguay Round, the WTO acts as an umbrella
organization that encompasses the GATT and has taken over responsibility for arbitrating
trade disputes and monitoring the trade policies of member countries.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
126. (p. 225) The WTO's Agreement on _____ is an attempt to narrow the gaps in the way
intellectual property rights are protected around the world and to bring them under common
international rules.
A. International Body on Intellectual Property (IBIP)
B. Court of Arbitration of Intellectual Property (CAIP)
C. Trade-Related Aspects of Intellectual Property Rights (TRIPS)
D. Intellectual Property Rights Enforcement and Resolution (IPER)
The WTO acts as an umbrella organization that encompasses the GATT along with two new
sister bodies, one on services and the other on intellectual property. The WTO's Agreement on
Trade-Related Aspects of Intellectual Property Rights (TRIPS) is an attempt to narrow the
gaps in the way intellectual property rights are protected around the world and to bring them
under common international rules.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-91
127. (p. 225) Countries that have been found by the arbitration panel to violate GATT rules may
appeal to _____ of the World Trade Organization, but its verdict is binding.
A. human rights commission
B. permanent appellate body
C. International Court of Justice
D. Security Council
Arbitration panel reports on trade disputes between member countries are automatically
adopted by the WTO unless there is a consensus to reject them. 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.
AACSB: Analytic
Bloom's: Remember
Difficulty: Medium
128. (p. 226) The millennium round of talks of WTO attempted to get the assembled countries to
agree to work toward:
A. agreeing on raising barriers to cross-border trade.
B. strengthening their defense ties and carry on with their war against terror.
C. reducing barriers to cross-border trade in agricultural products and trade and investment in
services.
D. increasing average tariff rates imposed by developing nations on manufactured goods to
more than four percent of value, the highest level in modern history.
The WTO talks in Seattle, Washington in November 1999—dubbed "the millennium

round"—aimed at further reducing barriers to cross-border trade and investment. Prominent
on the agenda was an attempt to get the assembled countries to agree to work toward the
reduction of barriers to cross-border trade in agricultural products and trade and investment in
services.
AACSB: Analytic
Bloom's: Remember
Difficulty: Medium
6-92
129. (p. 226) Two of the first industries targeted for reform by the WTO with a view to
encompass regulations governing foreign direct investment were:
A. global telecommunication and financial services industries.
B. scientific research and defense sector.
C. pharmaceuticals and heavy metal industry.
D. agriculture and biotechnology.
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
Bloom's: Remember
Difficulty: Easy
130. (p. 226) Which of the following countries, with minor exceptions, is fully open to inward
investment by foreign banks, insurance, and security companies?
A. Russia
B. Cuba
C. Venezuela
D. The United States
The United States and the European Union, with minor exceptions, are fully open to inward
investment by foreign banks, insurance, and securities companies.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-93
131. (p. 227) Human rights activists see WTO rules as _____ the ability of nations to stop
imports from countries where child labor is used or working conditions are hazardous.
A. enabling
B. outlawing
C. supplementing
D. facilitating
For various reasons, several groups oppose free trade. All these organizations argued that the
WTO is an undemocratic institution that was usurping the national sovereignty of member
states and making decisions of great importance behind closed doors. 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.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
132. (p. 228) One of the loopholes in antidumping laws that is being exploited by many countries
to pursue protectionism is the:
A. toothlessness of the enforcement agencies.
B. WTO's non-committal approach to antidumping laws.
C. bilateral VERs which subvert antidumping laws.
D. rather vague definition of what constitutes "dumping."
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. Unfortunately, the rather vague definition of what constitutes
"dumping" has proved to be a loophole that many countries are exploiting to pursue
protectionism.
AACSB: Analytic
Bloom's: Remember
Difficulty: Medium
6-94
133. (p. 230) Which of the following is NOT true about agricultural subsidies?
A. They clear distortions in the production and international trade of agricultural products.
B. They encourage countries to overproduce heavily subsidized agricultural products.
C. They reduce international trade in agricultural products.
D. They raise the prices of agricultural products to consumers.
The net effect of agricultural subsidies is to raise prices to consumers, reduce the volume of
agricultural trade, and encourage the overproduction of products that are heavily subsidized
(with the government typically buying the surplus).

Bloom's: Understand
Difficulty: Medium
134. (p. 231) _____ are the highest rate that can be charged, which is often, but not always, the
rate that is charged.
A. Ceiling rates
B. Specific tariffs
C. Bound tariff rates
D. Ad maximum rates
Bound tariff rates are the highest rate that can be charged, which is often, but not always, the
rate that is charged. While average tariffs on non-agricultural goods are low, high tariff rates
persist on certain imports into developed nations, which limit market access and economic
growth.

Bloom's: Remember
Difficulty: Easy
6-95
135. (p. 233) Which of the following has been excluded from the agenda for the Doha round of
WTO talks that began in 2001?
A. Reducing barriers to cross-border investment
B. Phasing out subsidies to agricultural producers
C. Limiting the use of antidumping laws
D. Attempts to tie trade to labor standards in a country
The agenda for the Doha round of WTO talks that began in late 2001includes 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. Excluded from
the agenda is any language pertaining to attempts to tie trade to labor standards in a country.
AACSB: Analytic
Bloom's: Remember
Difficulty: Medium
136. (p. 235) The threat of antidumping action limits the ability of a firm to:
A. raise capital in the primary market.
B. raise prices in response to high demand.
C. disperse its productive activities in an efficient manner.
D. use aggressive pricing to gain market share in a country.
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
Bloom's: Remember
Difficulty: Easy
6-96
137. (p. 236) According to the text, most economists would probably argue that the best interests
of international business are served by a free trade stance, but not a _____ stance.
A. facilitating
B. open market
C. laissez-faire
D. ad valorem
Most economists would probably argue that the best interests of international business are
served by a free trade stance, but not a laissez-faire stance. Business probably has much more
to gain from government efforts to open protected markets to imports and foreign direct
investment than from government efforts to support certain domestic industries in a manner
consistent with the recommendations of strategic trade policy.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
Essay Questions
138. (p. 206) What is a tariff? Describe the difference between specific tariffs and ad valorem
tariffs, illustrating each with an example.
A tariff is a tax levied on imports. Specific tariffs are levied as a fixed charge for each unit of
a good imported, for example, $500 for each automobile. Ad valorem tariffs are levied as a
proportion of the value of the imported good. An example of an ad valorem tariff is the 25
percent tariff that the U.S. government placed on imported light trucks including pickup
trucks, four-wheel-drive vehicles, and minivans in the late 1980s.

Bloom's: Understand
Difficulty: Medium
6-97
139. (p. 206) Who gains and who loses from the imposition of a tariff on imported goods? How
can it be determined whether the net gain from the tariff exceeds the net loss?
From the imposition of a tarrif on imported goods government gains, because the tariff
increases government revenues. Domestic producers also gain, because the tariff gives them
some protection against foreign competitors by increasing the cost of imported foreign goods.
Consumers lose because they must pay more for certain imports. Whether the gains to the
government and domestic producers exceeds the loss to consumers depends on various factors
such as the amount of the tariff, the importance of the imported good to domestic consumers,
the number of jobs saved in the protected industry, and so on.

Bloom's: Understand
Difficulty: Medium
140. (p. 207) What is a subsidy? Provide some examples of the forms that subsidies take. How
do subsidies help domestic producers?
A subsidy is a government payment to a domestic producer. Subsidies take many forms

domestic firms. By lowering production costs, subsidies help domestic producers in two
ways: to compete against foreign imports and to gain export markets.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-98
141. (p. 209) What is a voluntary export restraint? Why do exporting countries agree to VERs?
Explain with an example.
A voluntary export restraint is a "voluntary" 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. Agreeing to a VER is seen as a way to make the best of a bad situation by appeasing
protectionist pressures in a country. One of the most famous examples is the limitation on
auto exports to the United States enforced by the Japanese automobile producers in 1981. In
response to direct pressure from the U.S. government, this voluntary export restraint limited
Japanese automobile imports to no more than 1.68 million vehicles per year.

Bloom's: Understand
Difficulty: Medium
142. (p. 210) What is local content requirement? How can local content requirements typically
be expressed? How have local content requirements been used as trade barriers?
Local content requirement calls for a specific fraction of a good (produced by a multinational
firm in a foreign country) to be produced locally. These requirements can be expressed in
physical terms (e.g., 75 percent of component parts must be produced locally) or in value
terms (e.g., 75 percent of the value of this product must be produced locally). Local content
regulations have been widely used by developing countries to shift their manufacturing base
from the simple assembly of products whose parts are manufactured elsewhere into the local
manufacture of component parts. They have also been used in developed countries to try to
protect local jobs and industry from foreign competition.

Bloom's: Understand
Difficulty: Medium
6-99
143. (p. 213-217) What are the principle political arguments for government intervention into
international trade?
Political arguments for government intervention into international trade cover a range of
issues, including protecting jobs, protecting industries deemed important for national security,
and retaliating against unfair foreign competition. Protecting jobs and industries from unfair
competition is the most common political argument for government intervention. For
example, the Japanese quotas on rice imports are aimed at protecting jobs in that country's
agricultural sector. In terms of protecting industries deemed important for national security,
countries sometimes argue that it is necessary to protect certain industries (like aerospace,
steel, advanced electronics, etc.) because they are important for national security. Finally,
with regard to retaliating against foreign competition, some people 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." In addition to these,
political arguments for government intervention might also be motivated by the desire of
governments to protect consumers from unsafe products, further its foreign policy objectives,
protect human rights in trade partner nations, and protect the environment from pollution and
degradation arising from growth of international trade.

Bloom's: Understand
Difficulty: Medium
6-100
144. (p. 216) Describe briefly, with examples, the use of trade policies by governments to
support their foreign policy objectives.
Governments sometimes use trade policy to support their foreign policy objectives. A
government may grant preferential trade terms to a country with which it wants to build
strong relations. Trade policy has also been used several times to pressure or punish "rogue
states" that do not abide by international law or norms. Iraq labored under extensive trade
sanctions after the UN coalition defeated the country in the 1991 Gulf War until the 2003
invasion of Iraq by U.S.-led forces. The theory is that such pressure might persuade the rogue
state to mend its ways, or it might hasten a change of government. In the case of Iraq, the
sanctions were seen as a way of forcing that country to comply with several UN resolutions.
The United States has maintained long-running trade sanctions against Cuba. Their principal
function is to impoverish Cuba in the hope that the resulting economic hardship will lead to
the downfall of Cuba's Communist government and its replacement with a more
democratically inclined (and pro-U.S.) regime. The United States also has had trade sanctions
in place against Libya and Iran, both of which it accuses of supporting terrorist action against
U.S. interests and building weapons of mass destruction.
In addition to such trade sanctions, the U.S. has passed laws such as the Helms-Burton Act,
which allows Americans to sue foreign firms that use property in Cuba confiscated from them
after the 1959 revolution, and the D'Amato Act (similar to Helms-Burton Act but aimed at
Iran and Libya).
AACSB: Analytic
Bloom's: Remember
Difficulty: Medium
6-101
145. (p. 219, 220) What is the "infant industry argument"? What are its implications for the world
economy? What are the criticisms of this argument?
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. To allow manufacturing to get a
toehold, the argument is that governments should temporarily support new industries (with
tariffs, import quotas, and subsidies) until they have grown strong enough to meet
international competition.
This 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. Nevertheless, many economists remain critical of this argument for
two main reasons. First, protection of manufacturing from foreign competition does no good
unless the protection helps make the industry efficient. In case after case, however, protection
seems to have done little more than foster the development of inefficient industries that have
little hope of ever competing in the world market. Second, 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. Given the development of global capital
markets over the past 20 years, this assumption no longer looks as valid as it once did.

Bloom's: Understand
Difficulty: Medium
6-102
146. (p. 220) Briefly describe the implications of the strategic trade policy as applied to
international trade.
The strategic trade policy argument has two components. First, 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. Advocates
of this argument point out that the substantial R & D grants that the U.S. government gave
Boeing in the 1950s and 1960s probably helped tilt the field of competition in the newly
emerging market for passenger jets in Boeing's favor. Similar arguments have been made with
regard to Japan's dominance in the production of liquid crystal display screens. Although
these screens were invented in the United States, the Japanese government, in cooperation
with major electronics companies, targeted this industry for research support in the late 1970s
and early 1980s. The result was that Japanese firms, not U.S. firms, subsequently captured
first-mover advantages in this market. 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. This argument underlies government support of Airbus, Boeing's major
competitor. Formed in 1966 as a consortium of four companies from Great Britain, France,
Germany, and Spain, Airbus had less than 5 percent of the world commercial aircraft market
when it began production in the mid-1970s. By 2009, it had increased its share to 45 percent
by virtue of a $15 billion subsidy from the governments of Great Britain, France, Germany,
and Spain. Without this subsidy, Airbus would never have been able to break into the world
market, threatening Boeing's long-term dominance of the market.
AACSB: Analytic
Bloom's: Understand
Difficulty: Medium
6-103
147. (p. 223) Give a brief description of the origin, functions, and successes of GATT from 1947
to 1979, before protectionist trends gained momentum across the world.
Under U.S. leadership, the GATT was established in 1947. The GATT was a multilateral
quotas, and the like. The GATT did not attempt to liberalize trade restrictions in one fell
swoop. Rather, tariff reduction was spread over eight rounds. The last, the Uruguay Round,
was launched in 1986 and completed in December 1993. In these rounds, mutual tariff
reductions were negotiated among all members, who then committed themselves not to raise
import tariffs above negotiated rates. GATT regulations were enforced by a mutual
monitoring mechanism. If a country believed that one of its trading partners was violating a
GATT regulation, it could ask the Geneva-based GATT bureaucracy to investigate. If the
complaints were found to be valid, member countries could be asked to pressure the offending
party to change its policies. In general, such pressure was sufficient to get an offending
country to change its policies. If it were not, the offending country could be expelled from the
GATT.
In its early years, the GATT was by most measures very successful. For example, the average
tariff declined by nearly 92 percent in the United States between the Geneva Round of 1947
and the Tokyo Round of 1973-79. Consistent with the theoretical arguments first advanced by
Ricardo, the move toward free trade under the GATT appeared to stimulate economic growth.
From 1953 to 1973, world trade and world income grew at healthy annual rates.
AACSB: Analytic
Bloom's: Remember
Difficulty: Medium
6-104
148. (p. 223, 224) Describe how the world trade system erected by GATT came under strain from
protectionist trends that dominated the world economy from 1980 to 1993.
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. Three reasons caused
the rise in such pressures during the 1980s.
First, the economic success of Japan strained the world trading system. Japan was in ruins
when the GATT was created. By the early 1980s, however, it had become the world's second
largest economy and its largest exporter. Japan's success in such industries as automobiles and
semiconductors might have been enough to strain the world trading system. Things were
made worse by the widespread perception in the West that despite low tariff rates and
subsidies, Japanese markets were closed to imports and foreign investment by administrative
trade barriers.
Second, the world trading system was strained by the persistent trade deficit in the world's
largest economy, the United States, particularly with Japan. The consequences of the U.S.
deficit included painful adjustments in industries such as automobiles, machine tools,
semiconductors, steel, and textiles, where domestic producers steadily lost market share to
foreign competitors. The resulting unemployment gave rise to renewed demands in the U.S.
Congress for protection against imports.
A third reason for the trend toward greater protectionism was that many countries found ways
to get around GATT regulations. Bilateral voluntary export restraints, or VERs, circumvent
GATT agreements, because neither the importing country nor the exporting country complain
to the GATT bureaucracy in Geneva—and without a complaint, the GATT bureaucracy can
do nothing. Exporting countries agree to VERs to avoid more damaging punitive tariffs. One
of the best-known examples is the automobile VER between Japan and the United States,
under which Japanese producers promised to limit their auto imports into the United States as
a way of defusing growing trade tensions.
AACSB: Analytic
Bloom's: Remember
Difficulty: Medium
6-105
149. (p. 224) State the provisions that were formed after the completion of the Uruguay Round
of talks.
The Uruguay Round contained the following provisions:

1. Tariffs on industrial goods were to be reduced by more than one-third, and tariffs were to
be scrapped on more than 40 percent of manufactured goods.
2. Average tariff rates imposed by developed nations on manufactured goods were to be
reduced to less than 4 percent of value, the lowest level in modern history.
3. Agricultural subsidies were to be substantially reduced.
4. GATT fair trade and market access rules were to be extended to cover a wide range of
services.
5. GATT rules also were to be extended to provide enhanced protection for patents,
copyrights, and trademarks (intellectual property).
6. Barriers on trade in textiles were to be significantly reduced over 10 years.
7. The World Trade Organization was to be created to implement the GATT agreement.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-106
150. (p. 225) Explain the organizational structure of the WTO and mention the functions of its
key organs.
The WTO acts as an umbrella organization that encompasses the GATT along with two new
sister bodies, one on services and the other on intellectual property. The WTO's General
Agreement on Trade in Services (GATS) has taken the lead to extending free trade
agreements to services. The WTO's Agreement on Trade-Related Aspects of Intellectual
Property Rights (TRIPS) is an attempt to narrow the gaps in the way intellectual property
rights are protected around the world and to bring them under common international rules.
WTO has taken over responsibility for arbitrating trade disputes and monitoring the trade
policies of member countries. While the WTO operates on the basis of consensus as the
GATT did, in the area of dispute settlement, member countries are no longer able to block
adoption of arbitration reports. Arbitration panel reports on trade disputes between member
countries are automatically adopted by the WTO unless there is a consensus to reject them.
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 (commensurate) trade sanctions. Every stage of the procedure is
subject to strict time limits.
AACSB: Analytic
Bloom's: Remember
Difficulty: Medium
6-107
Test Bank for Global Business Today, 7th Edition: Charles W. L. Hill
151. (p. 228) Why is the WTO meeting in Seattle considered a watershed?
The WTO meeting in Seattle is notable because, in the past, previous trade talks were pursued
in relative obscurity with only interested economists, politicians, and businesspeople paying
much attention. Seattle demonstrated that the issues surrounding the global trend toward free
trade have moved to center stage in the popular consciousness, and they have remained there
since. The debate on the merits of free trade and globalization has become mainstream.
Whether further liberalization occurs, therefore, may depend on the importance that popular
opinion in countries such as the United States attaches to issues such as human rights and
labor standards, job security, environmental policies, and national sovereignty. It will also
depend on the ability of advocates of free trade to articulate in a clear and compelling manner
the argument that, in the long run, free trade is the best way of promoting adequate labor
standards, of providing more jobs, and of protecting the environment.

Bloom's: Understand
Difficulty: Medium
152. (p. 228) List the fours issues at the forefront of the current agenda of the WTO.
Four issues at the forefront of the current agenda of the WTO are:
(1) Increase in antidumping policies.
(2) High level of protectionism in agriculture.
(3) Lack of strong protection for intellectual property rights in many nations.
(4) Continued high tariff rates on nonagricultural goods and services in many nations.
AACSB: Analytic
Bloom's: Remember
Difficulty: Easy
6-108
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he had ever had, and was depressed by the utter failure of the only
two business enterprises in which he had ever engaged.
He made another effort, and started a weekly paper called the
Atlanta Capital. This, however, soon went the sorrowing way of his
other hopes.
While those failures and disappointments seemed cruel set-backs
in that day, looked at now they may be counted to have been no
more than healthful discipline to him. They served to stir his spirit the
deeper, and fill him with nobler resolve. Bravely he trampled
misfortune under his feet, and climbed to the high place of honor and
usefulness for which he was destined.
In the day of his extreme poverty, instead of despairing he took on
new strength and courage that equipped him well for future triumphs.
When it is remembered that his vast accomplishments and national
reputation were compassed within the next fourteen years, the
record is simply amazing.
Fourteen years ago, Henry W. Grady stood in Atlanta, Georgia,
bankrupt and almost broken-hearted. Everything behind him was
blotted by failure, and nothing ahead of him was lighted with
promise. In that trying day he borrowed fifty dollars, and giving
twenty of it to his faithful wife, took the balance and determined to
invest it in traveling as far as it would carry him from the scene of his
discouragements. He had one offer then open to him, namely, the
editorial management of the Wilmington (North Carolina) Star, at a
salary of twelve hundred dollars a year. It was the only thing that
seemed a guarantee against actual want, and he had about
determined to accept it, when yielding to the influence of pure
presentiment, instead of buying a ticket to Wilmington with his thirty
dollars, he bought one to New York City.
He landed here with three dollars and seventy-five cents, and
registered at the Astor House in order to be in easy reach of
Newspaper Row.
He used to tell the story of his experience on that occasion in this
way: “After forcing down my unrelished breakfast on the morning of
my arrival in New York, I went out on the sidewalk in front of the
Astor House, and gave a bootblack twenty-five cents, one-fifth of
which was to pay for shining my shoes, and the balance was a fee
for the privilege of talking to him. I felt that I would die if I did not talk
to somebody. Having stimulated myself at that doubtful fountain of
sympathy, I went across to the Herald office, and the managing
editor was good enough to admit me to his sanctum. It happened
that just at that time several of the Southern States were holding
constitutional conventions. The Herald manager asked me if I knew
anything about politics, I replied that I knew very little about anything
else. ‘Well,’ said he, ‘sit at this desk and write me an article on State
conventions in the South.’ With these words he tossed me a pad and
left me alone in the room. When my task-master returned, I had
finished the article and was leaning back in the chair with my feet up
on the desk. ‘Why, Mr. Grady, what is the matter?’ asked the
managing editor. ‘Nothing,’ I replied, ‘except that I am through.’ ‘Very
well, leave your copy on the desk, and if it amounts to anything I will
let you hear from me. Where are you stopping?’ ‘I am at the Astor
House.’ Early the next morning before getting out of bed, I rang for a
hall-boy and ordered the Herald. I actually had not strength to get up
and dress myself, until I could see whether or not my article had
been used. I opened the Herald with a trembling hand, and when I
saw that ‘State Conventions in the South’ was on the editorial page, I
fell back on the bed, buried my face in the pillow, and cried like a
child. When I went back to the Herald office that day the managing
editor received me cordially and said, ‘You can go back to Georgia,
Mr. Grady, and consider yourself in the employ of the Herald.’”
Almost immediately after his return to Atlanta, he was tendered,
and gladly accepted, a position on the editorial staff of the Atlanta
Constitution. He worked vigorously for the New York Herald for five
years as its Southern correspondent, and in that time did some of
the most brilliant work that has ever been done for that excellent
journal.
Notable among his achievements were the graphic reports he
made of the South Carolina riots in 1876. But the special work which
gave him greatest fame was his exposure of the election frauds in
Florida that same year. He secured the memorable confession of
Dennis and his associates, and his report of it to the Herald was
exclusive. For that piece of work alone, Mr. Bennett paid him a
thousand dollars. His attachment to the editorial staff of the Atlanta
Constitution gave him an opportunity to impress himself upon the
people of Georgia, which he did with great rapidity and power.
In 1879, he came to New York, partly for recreation and partly for
the purpose of writing a series of topical letters from Gotham. While
here he was introduced by Governor John B. Gordon to Cyrus W.
Field. Mr. Field was instantly impressed by him, and liked him so
much that he loaned him twenty thousand dollars with which to buy
one-fourth interest in the Atlanta Constitution. He made the purchase
promptly, and that for which he paid twenty thousand dollars in 1880,
was at the time of his death in 1889 worth at least one hundred and
fifty thousand dollars. The enormous increase in the value of the
Constitution during his identification with it shows nothing more
plainly than the value of his marvelous work in its service.
Securing an interest in the Atlanta Constitution may be said to
have fixed his noble destiny. It emancipated his genius from the
bondage of poverty, quickened his sensitive spirit with a new
consciousness of power for good, and inspired him to untiring
service in the widest fields of usefulness. He saw the hand of God in
the favor that had blessed him, and in acknowledgment of the Divine
providence dedicated his life to the cause of truth, and the uplifting of
humanity. Atlanta was his home altar, and there he poured out the
best libations of his heart. That thriving city to-day has no municipal
advantage, no public improvement, no educational institution, no
industrial enterprise which does not either owe its beginning to his
readiness of suggestion, or its mature development to his sustaining
influence. Its streets are paved with his energy and devotion, its
houses are built in the comeliness and fashion that he inspired, and
its vast business interests are established in the prosperity and
strength that he foretold.
Georgia was the pride of his life, and for the increase of her peace
and prosperity, the deepening brotherhood of her people, the
development of her vast mineral resources, and the enrichment of
her varied harvests, he wrote, and talked, and prayed.
The whole South was to him sacred ground, made so both by the
heroic death of his father and the precious birth of his children. By
the former, he felt all the memories and traditions of the Old South to
have been sanctified, and by the latter he felt all the hopes and
aspirations of the New South to have been beautified. And thus with
a personality altogether unique, and a genius thoroughly rare, he
stood like a magical link between the past and the future. Turning
toward the days that were gone, he sealed them with a holy kiss;
and then looking toward the time that had not yet come, he conjured
it with a voice of prophecy.
In politics he was an undeniable leader, and yet never held office.
High places were pressed for his acceptance times without number,
but he always resolutely put them away from him, insisting that office
had no charm for him. He could have gone to Congress, as
representative from the State at large, if he would only have
consented to serve. His name was repeatedly suggested for the
governorship of Georgia, but he invariably suppressed the idea
promptly, urging his friends to leave him at peace in his private
station.
In spite of his indifference to all political preferment, it is universally
believed in Georgia, that had he lived, he would have soon been
sent to the United States Senate. Although he had no love of office
for himself, he was the incomparable Warwick of his day. He was
almost an absolute dictator in Georgia politics. No man cared to
stand for election to any place, high or low, unless he felt Grady was
with him. He certainly was the most powerful factor in the election of
two Governors, and practically gave more than one United States
Senator his seat. His power extended all over the State.
Such a man could not be held within the narrow limits of local
reputation. It mattered not how far he traveled from home, he made
himself quickly known by the power of his impressive individuality, or
by some splendid exhibition of his genius.
By two speeches, one made at a banquet of the New England
Society in New York City, and the other at a State fair at Dallas,
Texas, he achieved for himself a reputation which spanned the
continent. The most magnificent effort of eloquence which he ever
made was the soul-stirring speech delivered in Boston on “The Race
Problem,” just ten days before he died. These three speeches were
enough to confirm and perpetuate his fame as a surpassing orator.
It is impossible to give any adequate idea of Henry Grady’s
largeness of heart, nobility of soul, and brilliancy of mind. Those
three elements combined in royal abundance to make his princely
nature.
When Georgia’s great triumvirate died, their spirits seemed to
linger on earth in the being of Henry W. Grady. While he lived he
perpetuated the political sagacity of Alexander H. Stephens, the
consummate genius of Robert Toombs, and the impassioned
eloquence of Benjamin H. Hill.
True greatness is immortal. Real patriotic purposes are never
swallowed up in death. Good works well begun live long after their
praiseworthy originators have ascended in glory. If there is any truth
in these reflections, they are precious and priceless to all who mourn
the untimely taking off of Henry Woodfin Grady.
His sudden death struck grief to all true-hearted American citizens.
In him was combined such breadth of usefulness and brilliancy of
genius, that he illumined the critical period of American history in
which he lived, and set the firmament of our national glory with many
a new and shining star of promise. This century, though old in its last
quarter, has given birth to but one Henry Woodfin Grady, and it will
close its eyes long before his second self is seen.
A hundred years hence, when sweet charity is stemming the tides
of suffering in the world, if truth is not dumb, she will say: This
blessed work is an echo from Henry Grady’s life on earth. A hundred
years hence, when friendship is building high her altars of self-
sacrifice in the name of love and loyalty, if truth is not dumb, she will
say: This beautiful service is going on as a perpetual memorial to
Henry Grady’s life on earth. A hundred years hence, when all the
South shall have been enriched by the development of her vast
natural resources, if truth is not dumb, she will say: This is the
legitimate fruit of Henry Grady’s labor of love while he lived on earth.
A hundred years hence, when patriotism shall have beaten down all
sectional and partisan prejudice, and the burning problems that
press upon our national heart to-day shall have been “solved in
patience and fairness,” if truth is not dumb, she will say: This is the
glorious verification of Henry Grady’s prophetic utterances while on
earth. And when in God’s own appointed time this nation shall lead
all other nations of the earth in the triumphal march of prosperous
peoples under perfect governments, if truth is not dumb, she will say:
This is the free, full and complete answer to Henry Grady’s
impassioned prayer while on earth.
SPEECHES.
THE NEW SOUTH.
O N the 21st of December, 1886, Mr. Grady, in response to an

urgent invitation, delivered the following Address at the
Banquet of the New England Club, New York:
“There was a South of slavery and secession—that South is dead.

There is a South of union and freedom—that South, thank God, is
living, breathing, growing every hour.” These words, delivered from
the immortal lips of Benjamin H. Hill, at Tammany Hall, in 1866, true
then and truer now, I shall make my text to-night.
Mr. President and Gentlemen: Let me express to you my
appreciation of the kindness by which I am permitted to address you.
I make this abrupt acknowledgment advisedly, for I feel that if, when I
raise my provincial voice in this ancient and august presence, I could
find courage for no more than the opening sentence, it would be well
if in that sentence I had met in a rough sense my obligation as a
guest, and had perished, so to speak, with courtesy on my lips and
grace in my heart. Permitted, through your kindness, to catch my
second wind, let me say that I appreciate the significance of being
the first Southerner to speak at this board, which bears the
substance, if it surpasses the semblance, of original New England
hospitality—and honors the sentiment that in turn honors you, but in
which my personality is lost, and the compliment to my people made
plain.
I bespeak the utmost stretch of your courtesy to-night. I am not
troubled about those from whom I come. You remember the man
whose wife sent him to a neighbor with a pitcher of milk, and who,
tripping on the top step, fell with such casual interruptions as the
landings afforded into the basement, and, while picking himself up,
had the pleasure of hearing his wife call out: “John, did you break the
pitcher?”
“No, I didn’t,” said John, “but I’ll be dinged if I don’t.”
So, while those who call me from behind may inspire me with
energy, if not with courage, I ask an indulgent hearing from you. I
beg that you will bring your full faith in American fairness and
frankness to judgment upon what I shall say. There was an old
preacher once who told some boys of the Bible lesson he was going
to read in the morning. The boys, finding the place, glued together
the connecting pages. The next morning he read on the bottom of
one page, “When Noah was one hundred and twenty years old he
took unto himself a wife, who was”—then turning the page—“140
cubits long—40 cubits wide, built of gopher wood—and covered with
pitch inside and out.” He was naturally puzzled at this. He read it
again, verified it, and then said: “My friends, this is the first time I
ever met this in the Bible, but I accept this as an evidence of the
assertion that we are fearfully and wonderfully made.” If I could get
you to hold such faith to-night I could proceed cheerfully to the task I
otherwise approach with a sense of consecration.
Pardon me one word, Mr. President, spoken for the sole purpose
of getting into the volumes that go out annually freighted with the rich
eloquence of your speakers—the fact that the Cavalier as well as the
Puritan was on the continent in its early days, and that he was “up
and able to be about.” I have read your books carefully and I find no
mention of that fact, which seems to me an important one for
preserving a sort of historical equilibrium if for nothing else.
Let me remind you that the Virginia Cavalier first challenged
France on the continent—that Cavalier, John Smith, gave New
England its very name, and was so pleased with the job that he has
been handing his own name around ever since—and that while
Myles Standish was cutting off men’s ears for courting a girl without
her parents’ consent, and forbade men to kiss their wives on
Sunday, the Cavalier was courting everything in sight, and that the
Almighty had vouchsafed great increase to the Cavalier colonies, the
huts in the wilderness being as full as the nests in the woods.
But having incorporated the Cavalier as a fact in your charming
little books, I shall let him work out his own salvation, as he has
always done, with engaging gallantry, and we will hold no
controversy as to his merits. Why should we? Neither Puritan nor
Cavalier long survived as such. The virtues and good traditions of
both happily still live for the inspiration of their sons and the saving of
the old fashion. But both Puritan and Cavalier were lost in the storm
of the first Revolution, and the American citizen, supplanting both
and stronger than either, took possession of the republic bought by
their common blood and fashioned to wisdom, and charged himself
with teaching men government and establishing the voice of the
people as the voice of God.
My friends, Dr. Talmage has told you that the typical American has
yet to come. Let me tell you that he has already come. Great types,
like valuable plants, are slow to flower and fruit. But from the union of
these colonists, Puritans and Cavaliers, from the straightening of
their purposes and the crossing of their blood, slow perfecting
through a century, came he who stands as the first typical American,
the first who comprehended within himself all the strength and
gentleness, all the majesty and grace of this republic—Abraham
Lincoln. He was the sum of Puritan and Cavalier, for in his ardent
nature were fused the virtues of both, and in the depths of his great
soul the faults of both were lost. He was greater than Puritan, greater
than Cavalier, in that he was American, and that in his honest form
were first gathered the vast and thrilling forces of his ideal
government—charging it with such tremendous meaning and
elevating it above human suffering that martyrdom, though
infamously aimed, came as a fitting crown to a life consecrated from
the cradle to human liberty. Let us, each cherishing the traditions and
honoring his fathers, build with reverent hands to the type of this
simple but sublime life, in which all types are honored, and in our
common glory as Americans there will be plenty and to spare for
your forefathers and for mine.
Dr. Talmage has drawn for you, with a master’s hand, the picture
of your returning armies. He has told you how, in the pomp and
circumstance of war, they came back to you, marching with proud
and victorious tread, reading their glory in a nation’s eyes! Will you
bear with me while I tell you of another army that sought its home at
the close of the late war—an army that marched home in defeat and
not in victory—in pathos and not in splendor, but in glory that
equaled yours, and to hearts as loving as ever welcomed heroes
home! Let me picture to you the footsore Confederate soldier, as
buttoning up in his faded gray jacket the parole which was to bear
testimony to his children of his fidelity and faith, he turned his face
southward from Appomattox in April, 1865. Think of him as ragged,
half-starved, heavy-hearted, enfeebled by want and wounds, having
fought to exhaustion, he surrenders his gun, wrings the hands of his
comrades in silence, and lifting his tear-stained and pallid face for
the last time to the graves that dot old Virginia hills, pulls his gray
cap over his brow and begins the slow and painful journey. What
does he find—let me ask you who went to your homes eager to find,
in the welcome you had justly earned, full payment for four years’
sacrifice—what does he find when, having followed the battle-
stained cross against overwhelming odds, dreading death not half so
much as surrender, he reaches the home he left so prosperous and
beautiful? He finds his house in ruins, his farm devastated, his
slaves free, his stock killed, his barns empty, his trade destroyed, his
money worthless, his social system, feudal in its magnificence,
swept away; his people without law or legal status; his comrades
slain, and the burdens of others heavy on his shoulders. Crushed by
defeat, his very traditions are gone. Without money, credit,
employment, material, or training; and beside all this, confronted with
the gravest problem that ever met human intelligence—the
establishing of a status for the vast body of his liberated slaves.
What does he do—this hero in gray with a heart of gold? Does he
sit down in sullenness and despair? Not for a day. Surely God, who
had stripped him of his prosperity, inspired him in his adversity. As
ruin was never before so overwhelming, never was restoration
swifter. The soldier stepped from the trenches into the furrow; horses
that had charged Federal guns marched before the plow, and fields
that ran red with human blood in April were green with the harvest in
June; women reared in luxury cut up their dresses and made
breeches for their husbands, and, with a patience and heroism that
fit women always as a garment, gave their hands to work. There was
little bitterness in all this. Cheerfulness and frankness prevailed. “Bill
Arp” struck the key-note when he said: “Well, I killed as many of
them as they did of me, and now I’m going to work.” Of the soldier
returning home after defeat and roasting some corn on the roadside,
who made the remark to his comrades: “You may leave the South if
you want to, but I am going to Sandersville, kiss my wife and raise a
crop, and if the Yankees fool with me any more, I’ll whip ’em again.” I
want to say to General Sherman, who is considered an able man in
our parts, though some people think he is a kind of careless man
about fire, that from the ashes he left us in 1864 we have raised a
brave and beautiful city; that somehow or other we have caught the
sunshine in the bricks and mortar of our homes, and have builded
therein not one ignoble prejudice or memory.
But what is the sum of our work? We have found out that in the
summing up the free negro counts more than he did as a slave. We
have planted the schoolhouse on the hilltop and made it free to white
and black. We have sowed towns and cities in the place of theories,
and put business above politics. We have challenged your spinners
in Massachusetts and your iron-makers in Pennsylvania. We have
learned that the $400,000,000 annually received from our cotton
crop will make us rich when the supplies that make it are home-
raised. We have reduced the commercial rate of interest from 24 to 6
per cent., and are floating 4 per cent. bonds. We have learned that
one northern immigrant is worth fifty foreigners; and have smoothed
the path to southward, wiped out the place where Mason and
Dixon’s line used to be, and hung out latchstring to you and yours.
We have reached the point that marks perfect harmony in every
household, when the husband confesses that the pies which his wife
cooks are as good as those his mother used to bake; and we admit
that the sun shines as brightly and the moon as softly as it did before
the war. We have established thrift in city and country. We have
fallen in love with work. We have restored comfort to homes from
which culture and elegance never departed. We have let economy
take root and spread among us as rank as the crabgrass which
sprung from Sherman’s cavalry camps, until we are ready to lay
odds on the Georgia Yankee as he manufactures relics of the battle-
field in a one-story shanty and squeezes pure olive oil out of his
cotton seed, against any down-easter that ever swapped wooden
nutmegs for flannel sausage in the valleys of Vermont. Above all, we
know that we have achieved in these “piping times of peace” a fuller
independence for the South than that which our fathers sought to win
in the forum by their eloquence or compel in the field by their swords.
It is a rare privilege, sir, to have had part, however humble, in this
work. Never was nobler duty confided to human hands than the
uplifting and upbuilding of the prostrate and bleeding South—
misguided, perhaps, but beautiful in her suffering, and honest, brave
and generous always. In the record of her social, industrial and
political illustration we await with confidence the verdict of the world.
But what of the negro? Have we solved the problem he presents
or progressed in honor and equity toward solution? Let the record
speak to the point. No section shows a more prosperous laboring
population than the negroes of the South, none in fuller sympathy
with the employing and land-owning class. He shares our school
fund, has the fullest protection of our laws and the friendship of our
people. Self-interest, as well as honor, demand that he should have
this. Our future, our very existence depend upon our working out this
problem in full and exact justice. We understand that when Lincoln
signed the emancipation proclamation, your victory was assured, for
he then committed you to the cause of human liberty, against which
the arms of man cannot prevail—while those of our statesmen who
trusted to make slavery the corner-stone of the Confederacy doomed
us to defeat as far as they could, committing us to a cause that
reason could not defend or the sword maintain in sight of advancing
civilization.
Had Mr. Toombs said, which he did not say, “that he would call the
roll of his slaves at the foot of Bunker Hill,” he would have been
foolish, for he might have known that whenever slavery became
entangled in war it must perish, and that the chattel in human flesh
ended forever in New England when your fathers—not to be blamed
for parting with what didn’t pay—sold their slaves to our fathers—not
to be praised for knowing a paying thing when they saw it. The
relations of the southern people with the negro are close and cordial.
We remember with what fidelity for four years he guarded our
defenseless women and children, whose husbands and fathers were
fighting against his freedom. To his eternal credit be it said that
whenever he struck a blow for his own liberty he fought in open
battle, and when at last he raised his black and humble hands that
the shackles might be struck off, those hands were innocent of
wrong against his helpless charges, and worthy to be taken in loving
grasp by every man who honors loyalty and devotion. Ruffians have
maltreated him, rascals have misled him, philanthropists established
a bank for him, but the South, with the North, protests against
injustice to this simple and sincere people. To liberty and
enfranchisement is as far as law can carry the negro. The rest must
be left to conscience and common sense. It must be left to those
among whom his lot is cast, with whom he is indissolubly connected,
and whose prosperity depends upon their possessing his intelligent
sympathy and confidence. Faith has been kept with him, in spite of
calumnious assertions to the contrary by those who assume to
speak for us or by frank opponents. Faith will be kept with him in the
future, if the South holds her reason and integrity.
But have we kept faith with you? In the fullest sense, yes. When
Lee surrendered—I don’t say when Johnson surrendered, because I
understand he still alludes to the time when he met General
Sherman last as the time when he determined to abandon any
further prosecution of the struggle—when Lee surrendered, I say,
and Johnson quit, the South became, and has since been, loyal to
this Union. We fought hard enough to know that we were whipped,
and in perfect frankness accept as final the arbitrament of the sword
to which we had appealed. The South found her jewel in the toad’s
head of defeat. The shackles that had held her in narrow limitations
fell forever when the shackles of the negro slave were broken. Under
the old régime the negroes were slaves to the South; the South was
a slave to the system. The old plantation, with its simple police
regulations and feudal habit, was the only type possible under
slavery. Thus was gathered in the hands of a splendid and chivalric
oligarchy the substance that should have been diffused among the
people, as the rich blood, under certain artificial conditions, is
gathered at the heart, filling that with affluent rapture but leaving the
body chill and colorless.
The old South rested everything on slavery and agriculture,
unconscious that these could neither give nor maintain healthy
growth. The new South presents a perfect democracy, the oligarchs
leading in the popular movement—a social system compact and
closely knitted, less splendid on the surface, but stronger at the core
—a hundred farms for every plantation, fifty homes for every palace
—and a diversified industry that meets the complex need of this
complex age.
The new South is enamored of her new work. Her soul is stirred
with the breath of a new life. The light of a grander day is falling fair
on her face. She is thrilling with the consciousness of growing power
and prosperity. As she stands upright, full-statured and equal among
the people of the earth, breathing the keen air and looking out upon
the expanded horizon, she understands that her emancipation came
because through the inscrutable wisdom of God her honest purpose
was crossed, and her brave armies were beaten.
This is said in no spirit of time-serving or apology. The South has
nothing for which to apologize. She believes that the late struggle
between the States was war and not rebellion; revolution and not
conspiracy, and that her convictions were as honest as yours. I
should be unjust to the dauntless spirit of the South and to my own
convictions if I did not make this plain in this presence. The South
has nothing to take back. In my native town of Athens is a monument
that crowns its central hill—a plain, white shaft. Deep cut into its
shining side is a name dear to me above the names of men—that of
a brave and simple man who died in brave and simple faith. Not for
all the glories of New England, from Plymouth Rock all the way,
would I exchange the heritage he left me in his soldier’s death. To
the foot of that I shall send my children’s children to reverence him
who ennobled their name with his heroic blood. But, sir, speaking
from the shadow of that memory which I honor as I do nothing else
on earth, I say that the cause in which he suffered and for which he
gave his life was adjudged by higher and fuller wisdom than his or
mine, and I am glad that the omniscient God held the balance of
battle in His Almighty hand and that human slavery was swept
forever from American soil, the American Union was saved from the
wreck of war.
This message, Mr. President, comes to you from consecrated
ground. Every foot of soil about the city in which I live is as sacred as
a battle-ground of the republic. Every hill that invests it is hallowed to
you by the blood of your brothers who died for your victory, and
doubly hallowed to us by the blow of those who died hopeless, but
undaunted, in defeat—sacred soil to all of us—rich with memories
that make us purer and stronger and better—silent but staunch
witnesses in its red desolation of the matchless valor of American
hearts and the deathless glory of American arms—speaking an
eloquent witness in its white peace and prosperity to the indissoluble
union of American States and the imperishable brotherhood of the
American people.
Now, what answer has New England to this message? Will she
permit the prejudice of war to remain in the hearts of the conquerors,
when it has died in the hearts of the conquered? Will she transmit
this prejudice to the next generation, that in their hearts which never
felt the generous ardor of conflict it may perpetuate itself? Will she
withhold, save in strained courtesy, the hand which straight from his
soldier’s heart Grant offered to Lee at Appomattox? Will she make
the vision of a restored and happy people, which gathered above the
couch of your dying captain, filling his heart with grace; touching his
lips with praise, and glorifying his path to the grave—will she make
this vision on which the last sigh of his expiring soul breathed a
benediction, a cheat and delusion? If she does, the South, never
abject in asking for comradeship, must accept with dignity its refusal;
but if she does not refuse to accept in frankness and sincerity this
message of good will and friendship, then will the prophecy of
Webster, delivered in this very society forty years ago amid
tremendous applause, become true, be verified in its fullest sense,
when he said: “Standing hand to hand and clasping hands, we
should remain united as we have been for sixty years, citizens of the
same country, members of the same government, united, all united
now and united forever.” There have been difficulties, contentions,
and controversies, but I tell you that in my judgment,
“Those opened eyes,

Which like the meteors of a troubled heaven,
All of one nature, of one substance bred,
Did lately meet in th’ intestine shock,
Shall now, in mutual well beseeming ranks,
March all one way.”
THE SOUTH AND HER PROBLEMS.
A T the Dallas, Texas, State Fair, on the 26th of October,

1887, Mr. Grady was the Orator of the Day. He said:
“Who saves his country, saves all things, and all things saved will bless
him. Who lets his country die, lets all things die, and all things dying curse
him.”
These words are graven on the statue of Benjamin H. Hill in the

city of Atlanta, and in their spirit I shall speak to you to-day.
Mr. President and Fellow-Citizens: I salute the first city of the
grandest State of the greatest government on this earth. In paying
earnest compliment to this thriving city, and this generous multitude,
I need not cumber speech with argument or statistics. It is enough to
say that my friends and myself make obeisance this morning to the
chief metropolis of the State of Texas. If it but holds this pre-
eminence—and who can doubt in this auspicious presence that it will
—the uprising tides of Texas’s prosperity will carry it to glories
unspeakable. For I say in soberness, the future of this marvelous
and amazing empire, that gives broader and deeper significance to
statehood by accepting its modest naming, the mind of man can
neither measure nor comprehend.
I shall be pardoned for resisting the inspiration of this presence
and adhering to-day to blunt and rigorous speech—for there are
times when fine words are paltry, and this seems to me to be such a

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True / False Questions

1. Subsidies are a trade policy instrument.

2. Tariffs are the most complex instrument of trade policy.

8. Tariffs are largely pro-producer and anti-consumer.

14. Quotas benefit consumers the most.

Multiple Choice Questions

44. One of the objectives of export tariffs is to:

45. Which of the following is a government payment to a domestic producer?

47. By lowering production costs, subsidies help domestic producers in:

50. Governments typically pay for subsidies by:

56. Foreign producers agree to VERs because they fear:

75. Which of the following is considered to be the ultimate objective of antidumping

82. Why is retaliation by government intervention a risky strategy?

119. Which of the following statements regarding GATT is true?

122. Bilateral voluntary export restraints, or VERs, circumvented GATT agreements,

133. Which of the following is NOT true about agricultural subsidies?

151. Why is the WTO meeting in Seattle considered a watershed?

Chapter 06 The Political Economy of International Trade Answer Key

True / False Questions

1. (p. 205) Subsidies are a trade policy instrument.

Tariffs are the oldest and simplest instrument of trade policy.

AACSB: Reflective Thinking

AACSB: Reflective Thinking

8. (p. 206) Tariffs are largely pro-producer and anti-consumer.

14. (p. 209, 210) Quotas benefit consumers the most.

AACSB: Reflective Thinking

Aimed at avoiding rising unemployment by protecting domestic industries and diverting

AACSB: Reflective Thinking

Multiple Choice Questions

AACSB: Reflective Thinking

43. (p. 206) Tariffs:

AACSB: Reflective Thinking

44. (p. 207) One of the objectives of export tariffs is to:

A subsidy is a government payment to a domestic producer. Subsidies take many forms,

A subsidy is a government payment to a domestic producer. Subsidies take many forms,

Agriculture tends to be one of the largest beneficiaries of subsidies in most countries.

50. (p. 207) Governments typically pay for subsidies by:

AACSB: Reflective Thinking

A local content requirement is a requirement that some specific fraction of a good be

A local content requirement is a requirement that some specific fraction of a good be

A local content requirement is a requirement that some specific fraction of a good be

AACSB: Reflective Thinking

AACSB: Reflective Thinking

In the context of international trade, dumping is variously defined as selling goods in a

In the context of international trade, dumping is variously defined as selling goods in a

AACSB: Reflective Thinking

In the context of international trade, dumping is variously defined as selling goods in a

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking