chapter 7

Question 1

free trade

Answer 1

refers to a situation in which a government does not attempt to restrict what its citizens can buy from or sell to another country. Smith, Ricardo, and Heckscher-Ohlin’s theories predict that consequences include static and dynamic economic gains.

Question 2

static economic gains

Answer 2

predicted consequence of free trade, because free trade supports a higher level of domestic consumption and more efficient utilisation of resources.

Question 3

dynamic economic gains

Answer 3

predicted consequence of free trade, because free trade stimulates economic growth and the creation of wealth.

Question 4

tariffs

Answer 4

the oldest and simplest instrument of trade policy. it is a tax levied on imports (or exports). they fall into two categories; specific tariffs or ad valorem tariffs.

Question 5

specific tariffs

Answer 5

levied as a fixed charge for each unit of a good import.

Question 6

ad valorem tariffs

Answer 6

levied as a proportion of the value of the imported goods.

Question 7

export tariffs

Answer 7

less common than import tariffs. they usually have two objectives; (1) raise revenue for the government, (2) reduce exports from a sector, often for political reasons.

Question 8

subsidy

Answer 8

a government payment to a domestic producer. it can take many forms, eg. cash grants, low-interest loans, and tax breaks. by lowering production costs, subsidies help domestic producers by (1) competing against foreign imports, and (2) gaining export markets. agriculture is one of the largest beneficiaries.

Question 9

import quota

Answer 9

a direct restriction on the quantity of some goods that may be imported into a country. it is usually enforced by issuing import licenses to a group of individuals or firms.

Question 10

tariff rate quota

Answer 10

a lower tariff rate is applied to imports within the quota than those over the quota. it is a common hybrid of a quota and a tariff.

Question 10

voluntary export restraint (VER)

Answer 10

a quota on trade imposed by the exporting country, typically at the request of the importing country’s government. it benefits domestic producers as it limits import competition. it is a variant on the import quota.

Question 11

quota rent

Answer 11

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

Question 12

export tariff

Answer 12

a tax placed on the export of a good. the goal is to discriminate against exporting in order to ensure that there is sufficient supply of goods within a country.

Question 13

export ban

Answer 13

a policy that partially or entirely restricts the export of a good.

Question 14

local content requirement (LCR)

Answer 14

a requirement that some specific fraction of a good be produced domestically. it can be expressed in physical or value terms. they 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. it protects domestic producers, while consumer pay higher prices.

Question 15

administrative policies

Answer 15

bureaucratic rules designed to make it difficult for imports to enter a country. they hurt consumers by limiting choice.

Question 16

dumping

Answer 16

variously defined as selling goods in a foreign market at below their costs of production, or selling goods in a foreign market at below their “fair” market value as a way to unload excess production. difference is that fair market value is usually judged to be greater than the costs of producing because it includes a “fair” profit margin.

Question 17

antidumping policies/countervailing duties

Answer 17

designed to punish foreign firms that engage in dumping. the objective to protect domestic producers from unfair foreign competition.

Question 18

infant industry argument

Answer 18

the oldest economic argument for government intervention, proposed by Alexander Hamilton in 1792. many developing countries have a potential comparative advantage in manufacturing, but new manufacturing industries cannot initially compete with established industries. to allow them to get a toehold, governments should temporarily support new industries with tariffs, import quotas, and subsidies, until they have grown strong enough to meet international competition.

Question 19

strategic trade policy argument

Answer 19

two components; (1) a government can help raise national income by ensuring that firms that gain first-mover advantages are domestic. so, a government should subside promising firms in emerging industries, eg. the R&D grants to Boeing. (2) a government can intervene in an industry by helping domestic firms overcome barriers to entry created by foreign firms that have already reaped first-mover advantages, eg. Airbus, Boeing’s competitior.

Question 20

Corn Laws

Answer 20

placed a high tariff on imports of foreign corn in Great Britain. the objective was to raise government revenue and protect British corn producers.

Question 21

Smooth-Hawley tariff

Answer 21

aimed at avoiding rising unemployment in the US by protecting domestic industries and diverting consumer demand away from foreign products. it erected an enormous wall of tariff barriers and had a damaging effect on employment abroad. other countries reacted by raising their own tariff barriers. US exports thus declined and the world slid further into the Great Depression.

Question 22

GATT

Answer 22

was established in 1947 under US leadership. it was a multilateral agreement whose objective was to liberalise trade by eliminating tariffs, subsidies and import quotas. it was superseded by the WTO and the tariff reduction was spread over eight rounds.

Question 23

Uruguay Round

Answer 23

eighth round of negotiations to reduce tariffs in 1986. it was the most ambitious round yet. it extended rules to cover trade in services, protection of intellectual property, reduction of agricultural subsidies, and strengthening of the GATT’s monitoring and enforcement mechanisms. until then the rules only applied to trade in manufactured goods and commodities.

Question 24

WTO’s General Agreement on Trade in Services (GATS)

Answer 24

has taken the lead to extending free trade agreements to services.

Question 25

WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)

Answer 25

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.

Question 26

WTO

Answer 26

has taken over responsibility for arbitrating trade disputes and monitoring the trade policies of member countries.

Question 27

multilateral and bilateral trade agreements

Answer 27

designed to capture gain from trade beyond those agreements currently attainable under WTO treaties. they are allowed under WTO rules, and countries entering into these agreements must notify the WTO.

Question 28

trade barriers

Answer 28

constrain a firm’s ability to disperse its productive activies in such a manner.

Question 29

retaliating

Answer 29

governments should use the threat of intervention as a bargaining tool to open foreign markets. it may liberalise trade and open foreign markets. however, it may be a risky strategy.

Question 30

furthering foreign policy objectives

Answer 30

a government may grant preferential trade terms to a country where it wants to build strong relations. trade policy can also be used to punish “rogue states”.

Question 31

protecting human rights

Answer 31

a government trade policy may be used to improve human rights policies of trading partners.