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Chapter Eighteen:
The Political Economy of International Trade Policy
True/False Questions:
1) The Smith-Hatch Act of 1930 contributed to the depth and duration of the great
depression by increasing tariffs dramatically.
2) Trade policy consists of agreements among countries, domestic laws pertaining to
international trade, and procedures for administering those laws and resolving
disputes.
3) International trade is a result of cultural and social forces.
4) A number of regional trade agreements such as the North American Free Trade
Agreement (NAFTA) and the treaties that brought about the European Union
have reduced barriers and increased trade.
5) International trade policy consists primarily of the agreements among countries. It
has nothing to do with domestic laws.
6) The competitive theory of international trade is based on the gains from trade and
the advantage that can be demonstrated when two countries either determine the
level of their trade through bargaining or trade goods in a competitive market.
7) The law of competitive advantage is valid if there are differences in the price of
labor, namely wages between two or more countries.
8) According to the comparative advantage law, the United States, with its high cost
of labor, would be better off concentrating on labor-intensive industry.
9) With its abundance of labor and low wages, China would be better off
specializing in capital-intensive industries in order to benefit from the law of
comparative advantage.
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10) The assumptions of perfectly competitive markets are prerequisites for the
validity of the economic theory of comparative advantage.
11) The economic theory of international trade and the law of comparative advantage
project a decrease in the aggregate welfare if governments interfere in
international or domestic markets.
12) The domestic politics of international trade are asymmetric due to the magnitude
and concentration of the consequences of trade liberalization.
13) There is compelling evidence that a strategic trade policy, which allows
government intervention in domestic and international markets, is warranted
under conditions of imperfect competition.
14) The domestic politics of international trade are typically symmetric.
15) At the conclusion of World War I, a group of countries led by the United States
established the International Trade Organization (ITO).
16) After World War II, the US Senate approved the International Trade Organization
by the 2/3 margin it required to be ratified.
17) The focus of the Tokyo Round of GATT was agriculture, a set of issues that were
addressed and settled.
18) The central principle of the WTO agreements is manifested in the most favored
nation (MFN) requirement that each signatory accord all the other signatories the
most favorable terms for trade provided to any country.
19) The General Agreement on Trade in Services (GATS) covers all services and
provides for MFN and national treatment.
20) TRIPS, or Trade Reasonable Interest Program Standards, provides narrow
protection, but is included in the WTO dispute settlement systems over property
rights.
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21) The automotive industry has been the sector with the greatest distortions in trade.
22) The Kennedy Round of GATT negotiations incorporated provisions allowing
domestic laws to include antidumping measures.
23) A major achievement of the Uruguay Round was to establish the WTO
Deregulation Systems Body (DSB) to hear disputes and issue binding orders to
resolve them.
24) To continue to improve world trade, the EU does not give favor to overseas
territories and former colonies of its member nations.
25) Unfortunately, the Uruguay Round and the follow-up agreements were not
successful and the WTO dispute settlement process has been unproductive.
26) In 2004, the United States concluded a free trade agreement with Costa Rica.
27) Latin America has four regional trading areas.
28) The U.S .Constitution gives the President the power “to regulate commerce with
foreign nations” and to “lay and collect duties.”
29) The major components of U.S. trade law are embodied in the Trade Act of 1974
and the Tariff Act of 1930.
30) The politics of protectionism is client-centered and, in the case of the WTO
negotiations and NAFTA, the politics of protectionism is embedded in minority
politics.
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Multiple Choice Questions:
31) The United States has supported reductions in tariffs and trade barriers at least
since the:
a) Establishment of the United Nations in 1945.
b) Korean War of the 1950’s.
c) Vietnam War of the 1960’s.
d) Smoot-Hawley Act of 1930.
32) After World War II, the reductions in trade barriers were primarily the result of
which country’s dominance?
a) Great Britain
b) Sweden
c) USSR
d) United States
33) Trade policy consists of what?
a) United Nations charter and regulations
b) International agreements among the countries involved
c) Domestic laws pertaining to international trade
d) Both international agreements among countries and domestic laws pertaining
to international trade
34) The competitive theory of international trade is based on what?
a) Capitalism and Adam Smith’s theories
b) Gains from domestic production
c) Gains from trade
d) Gains from investments
35) Gains from international trade are possible when:
a) One country can produce Good A more efficiently than another country, which
can produce another good more efficiently than the first country can.
b) One country is absolutely more efficient than the other in producing both goods
c) The law of comparative advantage applies
d) All of the above conditions would generate gains
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36) In the United States, with its high cost of labor, the law of comparative advantage
would be beneficial for the USA under what conditions?
a) USA imports labor intensive goods from China
b) USA imports capital-intensive goods from Japan
c) Both labor-intensive goods from China and capital-intensive goods from Japan
are imported
d) Stop producing capital-intensive goods locally
37) The theory of competitive advantage is built on which of the following
assumptions?
a) Incomplete information
b) Differentiated goods
c) Perfectly competitive markets
d) Only consumers act as if they were price-takers
38) What is the politics of international trade driven by?
a) Domestic politics
b) International trade agreements
c) International political in fights
d) Results of prior relationships such as war
39) If the costs from trade policy are widely distributed and the benefits from trade
policy are widely distributed, the results are what?
a) Trade liberalization and entrepreneurial politics
b) Protectionism and client politics
c) Trade policy and majoritarian politics
d) Interest group politics and protectionism
40) Approximately how many countries are members of the WTO?
a) 45
b) 87
c) 103
d) 152
41) The central principle of the WTO agreements is embodied in which requirement?
a) Most Favored Nation
b) Advanced Nation Status
c) Developed Nation Status
d) Democratic Free Nation Status
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42) In which sector has there been the greatest distortion in trade?
a) Transportation
b) Steel
c) Electronics
43) Which of the following is not a regional trading area in Latin America?
a) Central American Common Market
b) Caricom
c) Mercour
d) Belladonna
44) In US trade policy, all but which of the following are the institutional arenas?
a) The Office of the President
b) The cabinet departments
c) The Supreme Court
d) The regulatory agencies
45) What are the two kinds of conditions that protection applies to?
a) Predatory trade practices and undue competition
b) Predatory trade practices and countries that have horrible human rights policies
c) Relative efficiency and unfair labor laws
d) Predatory practices and relative efficiency
46) Who bears the cost of protectionism?
a) Businesses
b) Consumers
c) Governments
d) National trade organizations
47) What was the focus of ‘unfair’ dumping when there was a worldwide
overcapacity of this product, causing the loss of 325,000 jobs in the U.S.?
a) Rice
b) Corn
c) Steel
d) Cars
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48) Which of the following is not a member of the North American Free Trade
Agreement?
a) Mexico
b) Canada
c) Costa Rica
d) U.S.
49) Which of the following is the only correct statement about the provisions of
NAFTA?
a) It is a free trade agreement
b) It is a market integration agreement
c) It covers the movement of people
d) It covers the harmonization of domestic laws
50) What are the two commissions that were established by NAFTA to monitor
environmental and labor developments?
a) War on Polluters and Free Labor Movement
b) Negotiation on the Environment and the Union Cooperation
c) Retaliation for Dumping on the Environment and Labor Movement
d) Environmental Cooperation and Labor Cooperation
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Essay and Review Questions:
1) Explain diagrammatically the international trade policy process. Trace a trade
situation through the process.
2) Compare the competitive theory and the strategic trade theory. What are: premises
of each? Similarities? Differences. How might these premises change in the 21st
century by 2010?
3) Discuss the topic of international trade from the perspective of the developing
nations.
4) Despite the efforts of GATT and the other Rounds of discussions among the
member countries, there remain some serious issues up for debate. Describe the
four basic outstanding issues, such as:
a) Trade in services
b) Intellectual property rights
c) Agriculture
d) Steel
What could and should be done about each of these issues?
5) NAFTA has now been operating for a number of years. Other nations from
Central and South America will be joining soon. What impact would the
expansion of NAFTA have on domestic and international politics?
6) Evaluate the future of international trade until the year 2010. What do you think
will be the continuing issues and why? What countries do you think will be the
leaders and why? What will be the role of the United States, China, and others?
7) Describe, discuss, critique and evaluate the U.S. trade policy in some detail,
including Sections 201, the Escape Clause, Section 301, Presidential Retaliation
and Section 731, Antidumping.
8) Discuss and analyze the case Cemex and Antidumping. What are the major issues?
What trade agreement is involved? How would you describe the U.S. Cement
industry? Compare and contrast Mexico’s cement industry to the U.S.’s. What
legal issues are involved? What were Cemex’s market and nonmarket strategies?
How would you resolve the problems and why?
9) Discuss the Compulsory Licensing, Thailand, and Abbott Laboratories case
covering who, what, where, when, and why.
10) Describe, analyze, evaluate and critique the case, Sophis Networks and
Encryption Export Controls (A). Apply the knowledge and skill you have learned
from the chapter in your analysis.