International Economics, 7e (Gerber)
Chapter 7 Commercial Policy
7.1 Introduction: Commercial Policy, Tariffs, and Arguments for Protection
1) Sixty years after the signing of GATT and following eight completed round of trade
negotiations,
A) trade barriers are no longer an issue.
B) trade barriers have been successfully reduced.
C) trade barrier have actually increased.
D) there has been no real change in trade barrier.
2) Which of the following is NOT a true statement?
A) Trade barriers are usually a good way of protecting jobs.
B) There have been significant reductions in trade barriers over the last 60 years.
C) Economists generally favor further reductions in trade barriers.
D) There are diminishing returns to trade negotiations.
3) The system of trade rounds under GATT and the WTO has been successful at creating trade
rules and reducing trade barriers.
4) Since there are diminishing returns to the removal of further trade barriers, economists do not
favor further negotiations.
7.2 Tariff Rates in the World’s Major Traders
1) The pattern of protection in industrial countries is particularly harmful to the interests of
A) low-income developing countries.
B) high-income industrial countries.
C) Asian nations.
D) European nations.
2) High-income industrial nations such as the United States and Japan tend to have their highest
tariffs in
A) newer, high-technology manufacturing industries.
B) capital-intensive, diversified manufacturing.
C) agriculture, clothing, and textiles
D) automobiles.
3) At the end of World War II,
A) tariffs around the world fell substantially.
B) agricultural subsidies were significantly reduced.
C) most nations began to apply tariffs uniformly across all industries.
D) tariffs increased in low-income countries and fell a small percentage in high-income
countries.
4) Tariffs are highest in which sector internationally?
A) Agriculture
B) Energy
C) Technology
D) Automobiles
5) Developed countries have lost comparative advantage in
A) high-tech industries.
B) labor-intensive industries.
C) capital-intensive industries.
D) agricultural industries.
6) At this point, potential gains from further tariff reductions worldwide are
A) still very large.
B) equal to zero.
C) relatively small.
D) not worth the cost of negotiations.
7) Countries like Argentina and Australia protect agriculture less heavily than other agricultural
producers because
A) they have a large comparative advantage in production.
B) it is illegal under WTO rules.
C) they do not have significant agricultural sectors.
D) they are trying to help other countries.
8) The average agricultural tariff in the U.S. is about
A) 3 percent.
B) 5 percent.
C) 9 percent.
D) 15 percent.
9) The average nonagricultural tariff in the U.S. is about
A) 3 percent.
B) 5 percent.
C) 9 percent.
D) 15 percent.
10) The WTO’s Doha Development Agenda is only considering market access issues in
agriculture, such as tariffs and quotas, because export subsidies and production subsidies are
considered less harmful and have not been part of the GATT or WTO agenda.
11) Tariffs are higher in agriculture than any other sector in most countries.
12) Large and efficient agricultural producers like Argentina and Australia protect that sector
heavily.
13) Developed countries have lost comparative advantage in textiles and apparel.
14) Explain how potential gains from further reductions in tariff levels are different from the
gains of the past.
15) Why do both developed and less-developed countries protect clothing and textiles heavily?
1) One reason why consumers are unlikely to be too upset about tariffs is because
A) most consumers benefit from protection.
B) tariffs are an inexpensive way to create jobs.
C) consumer losses are not real losses.
D) the costs are so spread out that no one pays a big share of the total.
2) One reason why producers have an incentive to organize in favor of protection is because
A) producer gains are spread across so many firms that no one gets a large share of the benefits.
B) producer gains are relatively concentrated.
C) there is no real cost to the economy.
D) producer gains outweigh consumer losses.
3) Which of the following is FALSE?
A) The analysis of agriculture, textiles, and clothing in the EU, the United States, and Japan
supports the proposition that older sectors of the economy are most protected, particularly in
cases where the nation has lost a substantial part of its comparative advantage.
B) Even when tariffs are relatively low, the cost per job saved tends to be high.
C) Commercial policy is grossly inefficient at achieving the objective of job preservation.
D) Trade barriers in high-income countries do not cause unintended consequences in low-income
countries because most of their trade is with other industrialized countries.
4) Agriculture, clothing, and textiles are singled out for treatment in the chapter because
A) they tend to be the most highly protected sectors of industrial economies.
B) they tend to be the most-protected sectors internationally.
C) the policies of high-income nations in these sectors may have beneficial effects in low-income
countries.
D) they are more important to job creation than other sectors.
5) Which of the following is NOT a reason people tolerate tariffs and quotas?
A) Their jobs depend on tariffs and quotas.
B) Costs may be hidden and hard to quantify.
C) Costs of the policy are spread over a large number of people.
D) The marginal expenses to fight the protection outweigh the personal marginal costs of the
protection.
6) Which of the following describes the asymmetry Mancur Olson observed in the incentives to
support and oppose trade policy?
A) The benefits of those seeking protection outweigh the costs imposed by the protection.
B) The benefits of protection are spread out over a large number of firms and industries, but the
costs are concentrated on consumers.
C) The benefits of policy are concentrated, and the costs are spread out over a large number of
participants.
D) The costs of protection are concentrated on a few firms, and the benefits of protection are
spread out over a large number of consumers.
7) During the 1930s, countries closed markets. The effect of these policies was that
A) export industries were better off in most countries.
B) import-competing industries did not gain.
C) the reduction in trade worsened the Great Depression.
D) consumers were better off.
8) Economists believe that there are many nonmonetary gains from further trade opening. Which
of the following is NOT one of those potential gains?
A) Economies of scale from increased production decreases costs.
B) Intensified competition lowers prices.
C) Governments will be less reliant on tariff revenue.
D) Diversification of production lowers risks.
9) Deadweight losses from tariffs and quotas in high-income countries
A) are small enough to be ignored.
B) have been reduced since the mid-1990s.
C) are greater than consumer losses from tariffs and quotas.
D) can be justified by jobs protected.
10) During the 1990s, deadweight losses per job saved through tariffs and quotas in the apparel
industry
A) were greater than the wages earned in apparel jobs.
B) were small enough to ignore.
C) were less than the value of the jobs saved.
D) increased net national welfare.
11) Which of the following is NOT an issues in the reduction of trade protection in agriculture?
A) consumption subsidies.
B) tariffs and quotas.
C) export subsidies.
D) production subsidies.
12) Direct subsidies to agriculture, whether they are export subsidies or production subsides, are
viewed as harmful because of all the following reasons EXCEPT
A) they lead to overproduction.
B) they crowd out imports.
C) they can lead to dumping of surplus production.
D) they encourage overconsumption through low market prices.
13) Some economists argue that free trade is beneficial regardless of the actions of a country’s
trading partners, including trading partners that heavily protect their home markets.
14) Australia has one of the most heavily subsidized agricultural sectors as a percentage of
domestic GDP.
15) Trade barriers are an expensive and inefficient way to reach most of the goals for which they
are used.
16) There are asymmetric incentives to support and to oppose protectionist trade policies, with
the stronger incentives going to those that would seek protection.
17) In the global recession of 2007-2009, world trade declined because nations closed their
markets to trading partners.
18) Further trade opening is beneficial even if the monetary value of the gains is not high.
19) U.S. sugar quotas cost each person in the U.S. thousands of dollars per year due to higher
prices.
20) How did the Uruguay Round of GATT impact agriculture?
21) Describe some of the gains from lowering trade barriers that may be difficult to measure.
22) Carefully explain why agricultural subsidies are viewed as harmful.
23) Agricultural subsidies are known to cause overproduction and create other problems. Are
there benefits from such subsidies? Explain.
1) To be effective, infant industry protection requires
A) a national security externality.
B) to be extended indefinitely.
C) to be fair to existing producers.
D) a technology externality.
2) Historically, one of the most common reasons for countries to impose tariffs was
A) to protect their national security.
B) to raise revenue for the government.
C) to eliminate unemployment.
D) to counter inflation.
3) The biggest flaw in the logic of the labor argument is the failure to consider
A) the needs of developing countries.
B) the impact of tariffs on inflation.
C) the differences in national productivity levels.
D) the impact on employment levels.
4) When comparing the U.S. and Mexican car assembly industries, the disadvantage of higher
U.S. wages is offset by
A) Mexican trade barriers.
B) trade adjustment assistance in the United States.
C) higher productivity in the United States.
D) a lower opportunity cost in Mexico.
5) If a nation protects an industry because it believes that there are positive externalities in the
production process, it is asserting that the free market will
A) produce less than is optimal from society’s point of view.
B) produce more than is optimal from society’s point of view.
C) produce the correct amount but charge too high a price.
D) produce the correct amount but charge too low a price.
6) A major difficulty with the infant industry argument for protection is that
A) government revenue will fall with a tariff.
B) it requires the nation to fall into the large country case for tariff protection.
C) effective rates of protection are usually greater than nominal rates.
D) the measurement of production externalities is difficult and uncertain.
7) Some economists suggest the optimal way for a nation to protect its access to a strategic
mineral is with
A) an infant industry tariff.
B) a high rate of effective protection to keep local mines in business.
C) a quota on imports of the mineral.
D) a stockpile.
8) Economic sanctions
A) usually work to create policy change in the targeted country.
B) are more likely to work if the international community supports them.
C) are more likely to work if military force is not used.
D) never work to create policy change in the targeted country.
9) If a large percentage of economic activity in developing countries is unrecorded, then the
countries are likely to rely on which of the following taxes to provide government revenue?
A) Sales taxes
B) Property taxes
C) Income taxes
D) Tariffs
10) “Cheap foreign wages” is a poor argument for protection because it fails to recognize the
importance of productivity. Which of the following does NOT contribute to increasing
productivity?
A) Education and training
B) Government subsidies
C) Infrastructure
D) Capital
11) Television programming might be targeted for protection in a country using which of the
following arguments?
A) Infant industry
B) National security
C) Labor argument
D) Cultural protection
12) It seems likely that economic sanctions ultimately would have led to regime change in Iraq.
13) The more difficult the goal, the more likely military force is going to be needed to back up
economic sanctions.
14) Because low tariffs have a high ratio of benefits to costs, they are an especially efficient way
for nations to achieve full employment and growth.
15) Protection in the form of tariffs or quotas is a very inefficient tool for job creation and
preservation.
16) Choose one of the arguments countries generally use to justify protection for a particular
industry. Describe the argument and any inherent problems with it. Is the argument primarily an
economic or a noneconomic one?
17) Critique the infant industry or the labor argument for protection.
18) Describe traditional knowledge and how it relates to current trade issues about intellectual
property rights protection.
7.5 The Politics of Protection in the United States
1) A countervailing duty is a tariff that is levied to counteract
A) the dumping of goods in the domestic market by foreign firms.
B) a sudden surge of imports which hurt a domestic industry.
C) subsidies given to foreign firms by their own governments.
D) low prices for imported goods that are made in countries with low wages.
2) Dumping occurs when a firm
A) sells too much of a good in a foreign country.
B) sells in a foreign country at prices that are below fair value.
C) sells in its home market at prices that are below the average price charged by its competitors.
D) sells in a foreign market at prices that are below the prices charged by firms based in the
foreign market.
3) If a country faces action under Section 301 of the U.S. Trade Act of 1974, it means that the
country has
A) exceeded average export growth by more than 50 percent.
B) tariffs that are above the legal limit.
C) been charged by the United States with systematically engaging in unfair trade practices.
D) been charged by the WTO with violating its trade obligations.
4) Predatory dumping occurs when
A) foreign firms sell below cost with the intent to drive firms out of the domestic market.
B) foreign firms sell below cost because the product is perishable.
C) foreign firms sell at a price that is below the price of domestic firms.
D) foreign firms sell at a price that covers the cost of their variable inputs.
5) Which of the following is an example of a countervailing duty?
A) A tariff is granted because foreign firms are selling below cost.
B) A temporary tariff is granted to allow for adjustment of the domestic industry.
C) A tariff is granted to an industry because foreign firms are subsidized by their governments.
D) A tariff is granted to an industry because another nation persistently uses unfair trade
practices.
6) Which of the following is an example of an antidumping duty?
A) A tariff is granted because foreign firms are selling below cost.
B) A temporary tariff is granted to allow for adjustment of the domestic industry.
C) A tariff is granted to an industry because foreign firms are subsidized by their governments.
D) A tariff is granted to an industry because another nation persistently uses unfair trade
practices.
7) Which of the following is an example escape clause relief?
A) A tariff is granted because foreign firms are selling below cost.
B) A temporary tariff is granted to allow for adjustment of the domestic industry.
C) A tariff is granted to an industry because foreign firms are subsidized by their governments.
D) A tariff is granted to an industry because another nation persistently uses unfair trade
practices.
8) Which of the following is NOT a true statement about economic sanctions?
A) Economic sanctions are aimed at broad policy objectives, such as the end of apartheid.
B) Economic sanctions can seriously harm the economy of a country on which they are imposed.
C) Economic sanctions are usually effective in achieving policy goals.
D) Economic sanctions may not be sufficient to achieve policy goals without military force or
other measures.
9) Section 301 actions are more frequently used as a tool of trade policy, especially since the
formation of the World Trade Organization.
10) The most common form of tariff is a countervailing duty.
11) Antidumping duties cannot be levied when the harm to domestic industries is very small.
12) The fair value of a good is not a subjective measure.
13) In the United States, which part of government investigates claims of subsidies or dumping?
14) In the United States, which agency determines whether domestic firms have been harmed by
subsidies and dumping or by a sudden surge in imports and whether protection is warranted?
15) Under Special 301, what is the U.S. government required to do?
16) Describe the four legal procedures available to U.S. firms to seek protection from foreign
competition. What circumstances would warrant a request under each? How frequently is each
used? What would be the result if the firm won?
17) Why is it difficult to determine whether a country is dumping? Explain fully.
18) Carefully explain why political pressure to protect industry has often been intense in the
United States.
19) Are economic sanctions usually effective in achieving policy goals? Explain.