Chapter 7

Question 1

Describe import tariffs

Answer 1

Taxes levied on imports. Either:
- Specific tariffs are levied as a fixed charge for each unit of imported good.
- Ad valorem tariffs levied as a proportion of the value on an imported good

Question 2

What is the economic impact of import tariffs?

Answer 2

Pro-producer and anti-consumer.
Reduce overall efficiency of the world economy paid by the importer.

Question 3

What are export tariffs?

Answer 3

Tax placed on the export of a good.

Question 4

What are export bans?

Answer 4

Policy that partially or entirely restricts the export of a good

Question 5

What are subsidies? Give examples.

Answer 5

Government payment to a domestic producer. Ex: Cash grants, low-interest loans, tax breaks, government equity participation.
They help domestic producers compete against imports and gain export markets.

Question 6

What is the economic impact of subsidies?

Answer 6

Domestic producers gain while consumers absorb the costs

Question 7

What are import quotas?

Answer 7

Direct restrictions on quantity of some good that may be imported. Tariff rate quotas provide a lower tariff rate to imports within the quota than those over the quota.

Question 8

What are voluntary export restraints?

Answer 8

a quota on trade imposed by the exporting country.

Question 9

What is quota rent?

Answer 9

the extra profit producers make when supply is artificially limited by an import quota.

Question 10

What is local content requirements (LCR)

Answer 10

Some fraction of a good must be produced locally. Expressed in either physical or value terms. Protects domestic producers. Consumers face higher prices.

Question 11

What are administrative policies? What is their impact on consumers?

Answer 11

Bureaucratic rules designed to make it difficult for imports to enter a country.
Hurt consumers by limiting choice.

Question 12

What is dumping?

Answer 12

Dumping: companies sell goods in a foreign market at below costs of production or below “fair” market value.

Question 13

What are anti-dumping policies?

Answer 13

Countervailing-punish foreign firms practicing dumping

Question 14

What are the main political arguments for government intervention?

Answer 14

1. Protecting jobs and industries
   - most common reason
   - claims of unfair competition are overstated for political reasons
2. Protecting national security
   - Certain industries, like defense-related ones, must be protected.
3. Retaliating
   - bargaining tool to open new markets
   - may liberalize market and achieve economic gain
   - risky
4. Protecting consumers
   - protect from unsafe products
   - indirect effect is to limit or ban imports
5. Furthering
   - preferential trade terms to a country where it wants to build strong relations
   - trade policy can be used to punish “rogue states”
6. Protecting
   - used to improve human rights policies of trading partners

Question 15

What are the main economic arguments for government intervention?

Answer 15

1. The infant industry
   - support comes through tariffs, import quotas, subsidies
2. Strategic trade policy
   - raise national income when a domestic firm gains first-mover advantage.
   - helping domestic firms overcome the barriers to entry created by foreign firms that have already reaped first-mover advantages

Question 16

The revised case for free trade: what are the 2 main arguments against strategic trade policy?

Answer 16

1. Retaliation and trade war: Boost national income at the expense of other countries. Will probably provoke retaliation.
2. Domestic policies: governments don’t always act in the national interest. Political interest groups may influence policy.

Question 17

Economic arguments support unrestricted free trade. What is one fear from unrestricted free trade and what was created to solve that fear?

Answer 17

Governments unwilling to unilaterally lower trade barriers for fear others might not follow suit.
The General Agreement on Tariffs and Trafe (GATT) and the World Trade Organization (WTO) were created to give more insurance and a standard respected by the participating parties.

Question 18

When was free trade first embraced?

Answer 18

in 1846 by Great Britain with the repealing of Corn laws. However, major trading partners did not reciprocate in free trade

Question 19

What was the Smoot-Hawley act?

Answer 19

With the hopes of protecting unemployment by protecting domestic industries and diverting consumer demands away from foreign products, the US created a wall of tariff barriers against their imports. Had a damaging effect on unemployment abroad, or encouraged other countries to raise their own tariff barriers, sliding the world further away in the Great Depression.

Question 20

When and how did the GATT emerge?

Answer 20

between 1947-1979, the US embraced free trade and established the GATT in 1947. The GATT was a multilateral agreement designed to liberalize trade by eliminating tariffs, subsidies, import quotas, etc.

Question 21

Explain the Uruguay Round

Answer 21

One of the greatest rounds of negotiations from GATT to limit tariffs. Goal was to extend GATT rules to cover trade in services, to develop rules on intellectual properties, reduce agricultural subsidies and strengthen GATT’s monitoring and enforcement

Question 22

When, how and why was the World Trade Organization (WTO) created?

Answer 22

Created during Uruguay Round to implement the GATT agreement, as well as the General Agreement on Trade in Services (GATS) and the agreement on trade-related aspects of intellectual property rights (TRIPS)

Question 23

FITB: WTO experience to date
a) By 2021, 164 members accounting for __% of world trade
b) Since late 1990s, unable to get agreements to further reduce ___.
c) ___ ___ returned following global financial crisis of 2008-2009.
d) The Brexit vote and election of Donald Trump also suggest a move toward greater ____.
e) WTO as a global ___.
f) ___ trade agreements

Answer 23

a) 98%
b) barriers
c) Limited protectionism
d) Protectionism
e) police
f) Expanded

Question 24

What are the 5 current goals of the WTO?

Answer 24

1. Limit the rise of anti-dumping policies
2. Reduce protectionism in agriculture
3. Protection of intellectual property rights
4. Reduce barriers to cross-border investment
5. Increase market access for non agriculture products and services