79.
_____ are the highest rate that can be charged, which is often, but not
always, the rate that is charged.
A.
Ad valorem tariff rates
B.
Tariff rents
C.
Specific tariff rates
D.
Bound tariff rates
Bound tariff rates are the highest rate that can be charged, which is often,
but not always, the rate that is charged. Australia and South Korea, both
OECD countries, still have bound tariff rates of 15.1 percent and 24.6
percent, respectively, on imports of transportation equipment.
80.
Identify the INCORRECT statement about trade barriers.
A.
They raise the costs of exporting products to a country.
B.
They may put a firm at a competitive advantage to indigenous
competitors.
C.
They may limit a firm’s ability to serve a country from locations outside of
that country.
D.
To conform to local content regulations, a firm may have to locate more
production activities in a given market than it would otherwise.
Tariff barriers raise the costs of exporting products to a country (or of
exporting partly finished products between countries). This may put the firm
at a competitive disadvantage to indigenous competitors in that country.
Essay Questions
81.
Compare and contrast import quotas and voluntary export restraints.
An import quota is a direct restriction on the quantity of some good that
may be imported into a country. The restriction is normally enforced by
issuing import licenses to a group of individuals or firms. In contrast, 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. Foreign producers agree to VERs because they fear more
damaging punitive tariffs or import quotas might follow if they do not. Both
import quotas and VERs benefit domestic producers, but hurt consumers
through higher prices.
82.
What is a quota rent? Provide an example of how an import quota affects
price.
The extra profit that producers make when supply is artificially limited by an
import quota is referred to as a quota rent. If a domestic industry lacks the
capacity to meet demand, an import quota can raise prices for both the
domestically produced and the imported good. This happened in the U.S.
sugar industry, in which a tariff rate quota system has long limited the
amount foreign producers can sell in the U.S. market. According to one
study, import quotas have caused the price of sugar in the United States to
be as much as 40 percent greater than the world price.
83.
Discuss the Buy America Act and its connection with local content
requirements.
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 being “American” if 51 percent of the materials
by value are produced domestically. This amounts to a local content
requirement that calls for a specific fraction of a good to be produced
locally.
84.
Explain how governments use administrative trade policies to boost exports
and restrict imports. Provide an example of an administrative trade policy.
Administrative trade policies are bureaucratic rules that are almost always
deliberately designed to restrict the flow of a particular import into a
country. The Japanese are considered masters of this trade barrier.
Students will probably use the example of tulip bulbs when discussing this
question. The Netherlands exports tulip bulbs to almost every country of the
world except Japan. The reason is that Japanese customs inspectors insist
on checking every tulip bulb by cutting it vertically down the middle, which
in effect ruins the bulb.
85.
What is dumping? How do governments respond to charges of dumping?
Dumping is 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. If a firm is found to be dumping, countervailing
duties may be imposed. These duties can be fairly substantial and stay in
place for up to five years.
86.
Explain the notion of predatory behavior with regard to dumping.
A firm that is dumping is selling its product in a foreign market at below
their costs of production, or is selling goods in a foreign market at below
their “fair” market value. Dumping may be the result of predatory behavior,
with producers using substantial profits from their home markets to
subsidize profits in a foreign market with a goal of driving indigenous
competitors out of that market. Once the firm achieves its goal, the
87.
What are the political reasons for governments to intervene in markets?
There are a number of political reasons why governments intervene in
markets. The most common reason for intervention is to protect jobs and
industries. Governments may also intervene to protect national security, to
threaten punitive retaliatory actions, to protect consumers or to protect
human rights, and to further foreign policy objectives.
88.
Discuss the economic reasons for government intervention in markets.
The economic reasons for government intervention have undergone a
renaissance in recent times as more economists support economic reasons
for intervention. The oldest argument for intervention is the infant industry
argument. 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.
Strategic trade policy is the other main reason given for economic
government intervention in markets.
89.
Discuss the infant industry argument for intervention in markets. What is
GATT’s position on the argument?
Alexander Hamilton proposed the infant industry argument for intervention
in markets in 1792. 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 until they have grown strong enough to meet international
competitors. GATT has recognized the infant industry argument as a
legitimate reason for protectionism.
90.
What is strategic trade policy? Provide an example.
Strategic trade policy suggests that in industries where the existence of
substantial scale economies implies that the world will profitably support
only a few firms, countries may predominate in the export of certain
products simply because they had firms that were able to capture first-
mover advantages. Boeing’s dominance in the aerospace industry has been
attributed to these types of factors. According to strategic trade policy, a
government can help raise national incomes if it can ensure that the firms
that gain first-mover advantages in such industries are domestic rather
foreign. Further, the theory argues 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 first-mover
advantages.
91.
What is Paul Krugman’s position on strategic trade policy?
Paul Krugman suggests that 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. Consequently, a country that uses this type of policy will probably
draw retaliatory action. The resulting trade war would leave both countries
worse off than if a free trade approach had been implemented to start.
Krugman suggests that to avoid the disruptions a trade war would create,
countries should instead help establish the rules of the game that minimize
the use of trade-distorting subsidies.
92.
Discuss the establishment of GATT. What was GATT’s objective?
The GATT was a multilateral agreement whose objective was to liberalize
trade by eliminating tariffs, subsidies, import quotas, and other trade
barriers. GATT was established in 1947 with 19 members. Membership
increased to more than 120 nations by the time it was superseded by the
WTO. Under GATT, tariff reduction was spread over eight rounds. The last
round, the Uruguay Round, resulted in the establishment of the WTO which,
among other things took over the role of GATT in the global economy.
93.
What happened to GATT during the 1980s and early 1990s?
During the 1980s and early 1990s, the world trading system established by
GATT came under significant strain as pressures for greater protectionism
mounted around the world. Three issues in particular were important. First,
the economic success of Japan strained the world trading system. Second,
the world’s trading system was further strained by the persistent trade
deficit in the world’s largest economy, the United States. Finally, many
countries found ways to get around GATT regulations.
94.
What has been the experience of the WTO to date? What does the future
look like for the organization?
By 2011, the WTO had 153 members with more in the application process.
The WTO has remained at the forefront of efforts to promote free trade. So
far, it appears that its policing and enforcement mechanisms are having a
positive effect. Countries are using the WTO to settle trade disputes, which
represents an important vote of confidence in the organization’s dispute
resolution procedures. So far, the users of the system have included both
developed and developing countries, which is also a promising
development. In addition, some powerful developed countries, including the
United States, have been willing to accept WTO rulings that have gone
against them, which attest to the organization’s legitimacy.
95.
What are the central issues facing the WTO at the present time?
Four issues at the top of the agenda for the WTO are the increase in
antidumping policies, the high level of protectionism in agriculture, the lack
of strong protection for intellectual property rights in many nations, and
continued high tariff rates on nonagricultural goods and services in many
nations.
96.
Why are tariff rates on agricultural products generally higher than tariff
rates on manufactured products or services?
Tariff rates on agricultural products are typically higher than tariffs on
manufactured products. High tariff rates on agricultural products were
designed to protect domestic agriculture and traditional farming
communities from foreign competition. IMF estimates indicate that
removing the tariffs and subsidies could raise global economic welfare by
$128 billion annually.
97.
What is the TRIPS agreement? Why was it established?
The 1995 Uruguay agreement that established the WTO also contained an
agreement to protect intellectual property (the Trade-Related Aspects of
Intellectual Property Rights, or TRIPS, agreement). The TRIPS regulations
oblige WTO members to grant and enforce patents lasting at least 20 years
and copyrights lasting 50 years. The basis for this agreement was a strong
belief among signatory nations that the protection of intellectual property
through patents, trademarks, and copyrights must be an essential element
of the international trading system. Inadequate protections for intellectual
property reduce the incentive for innovation. Because innovation is a central
engine of economic growth and rising living standards, the argument has
been that a multilateral agreement is needed to protect intellectual
property.
98.
Discuss the Doha Round of trade talks.
The Doha Round began in 2001. Its agenda focused on 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. Estimates suggest that a successful Doha Round
would raise global incomes by as much as $300 billion annually, with 60
percent of the gain going to the world’s poorer nations, which would help to
pull 150 million people out of poverty. As of early 2011, the goal was to
reduce tariffs for manufactured and agricultural goods by 60 to 70 percent,
and to cut subsidies to half of their current level, but getting nations to
agree to these goals was proving exceedingly difficult.
99.
Explain how trade barriers affect a firm’s strategy.
There are four main ways trade barriers affect a firm’s strategy. First, tariffs
raise the cost of exporting, putting the firm at a competitive disadvantage.
Second, quotas may limit a firm’s ability to serve a country from outside of
that country. Third, to conform to local content regulations, a firm may have
to locate more production activities in a given market than it would
otherwise. Finally, the threat of antidumping actions limits the firm’s ability
to use aggressive pricing to gain market share in a country.
100.
What are the drawbacks of government intervention?
Government intervention has three drawbacks. 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. Finally, intervention is unlikely to be well
executed, given the opportunity for such a policy to be captured by special-