chapter 5.2.2 Flashcards
THIS also help avoid a
trade war between countries, where each
country enacts trade restrictions.
Multilateral negotiations
In 1930, the United States passed a remarkably
irresponsible tariff law,
the Smoot-Hawley Act.
In 1995, the ____, was established as a formal organization
for implementing multilateral trade negotiations
(and policing them).
World Trade Organization, or
WTO
WTO negotiations address trade
restrictions in at least 3 ways:
- Reducing tariff rates through multilateral
negotiations. - Binding tariff rates: a tariff is “bound” by
having the imposing country agree not to raise it
in the future. - Eliminating nontariff barriers: quotas and
export subsidies are changed to tariffs because
the costs of tariff protection are more apparent
and easier to negotiate.
tariff is “bound” by
having the imposing country agree not to raise it
in the future.
Binding tariff rates:
quotas and
export subsidies are changed to tariffs because
the costs of tariff protection are more apparent
and easier to negotiate.
Eliminating nontariff barriers:
The World Trade Organization is based on a
number of agreements:
General Agreement on Tariffs and Trade:
covers trade in goods.
General Agreement on Tariffs and Services:
covers trade in services (ex., insurance,
consulting, legal services, banking).
Agreement on Trade-Related Aspects of
Intellectual Property: covers international
property rights (ex., patents and copyrights).
a formal
procedure where countries in a trade dispute
can bring their case to a panel of WTO experts
to rule upon.
dispute settlement procedure:
are trade
agreements between countries in which they lower
tariffs for each other but not for the rest of the
world.
Preferential trading agreements
There are two types of preferential trading
agreements in which tariff rates are set at or
near zero:
- A free trade area:
- customs union:
an agreement that allows
free trade among members, but each member
can have its own trade policy towards
non-member countries.
An example is the North America Free Trade Agreement
(NAFTA).
- A free trade area:
an agreement that allows
free trade among members and requires a
common external trade policy towards
non-member countries.
An example is the European Union.
customs union:
Are preferential trading agreements necessarily
good for national welfare?
No, it is possible that national welfare decreases
under a preferential trading agreement.
How? Rather than gaining tariff revenue from
inexpensive imports from world markets, a
country may import expensive products from
member countries but not gain any tariff revenue.
T OR F
Preferential trading agreements increase national
welfare when new trade is created, but not when
existing trade from the outside world is diverted to
trade with member countries.
T
occurs when high-cost domestic production is replaced by
low-cost imports from other members.
Trade creation
occurs when low-cost imports from nonmembers are
diverted to high-cost imports from member nations.
Trade diversion
