Chapter 07 The Political Economy of International Trade
True / False Questions
1.
Tariffs are unambiguously pro-consumer and anti-producer.
FALSE
Tariffs are generally pro-producer and anti-consumer. While they protect
producers from foreign competitors, this restriction of supply also raises
domestic prices.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01 Identify the policy instruments used by governments to influence international trade flows.
Topic: Instruments of Trade Policy
2.
Specific tariffs are levied as a proportion of the value of the imported good.
FALSE
Tariffs fall into two categories. Specific tariffs are levied as a fixed charge
for each unit of a good imported. Ad valorem tariffs are levied as a
proportion of the value of the imported good.
AACSB: Analytic
Topic: Instruments of Trade Policy
3.
Export tariffs are far less common than import tariffs.
TRUE
Export tariffs are far less common than import tariffs.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01 Identify the policy instruments used by governments to influence international trade flows.
Topic: Instruments of Trade Policy
4.
A subsidy helps domestic producers to compete against foreign imports.
TRUE
A subsidy is a government payment to a domestic producer. By lowering
production costs, subsidies help domestic producers in two ways: (1)
competing against foreign imports and (2) gaining export markets.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01 Identify the policy instruments used by governments to influence international trade flows.
Topic: Instruments of Trade Policy
5.
Under a tariff rate quota, a higher tariff rate is applied to imports within the
quota than those over the quota.
FALSE
Under a tariff rate quota, a lower tariff rate is applied to imports within the
quota than those over the quota.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01 Identify the policy instruments used by governments to influence international trade flows.
Topic: Instruments of Trade Policy
6.
A common hybrid of a quota and a rent is known as a quota rent.
FALSE
The extra profit that producers make when supply is artificially limited by an
import quota is referred to as a quota rent.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01 Identify the policy instruments used by governments to influence international trade flows.
Topic: Instruments of Trade Policy
7.
Unlike other trade policies, local content regulations tend to benefit
consumers and not producers.
FALSE
Local content regulations provide protection for a domestic producer of
parts in the same way an import quota does: by limiting foreign competition.
As with all trade policies, local content regulations tend to benefit producers
and not consumers.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01 Identify the policy instruments used by governments to influence international trade flows.
Topic: Instruments of Trade Policy
8.
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 disadvantage.
FALSE
A little-known law in the United States, 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.
Topic: Instruments of Trade Policy
9.
Bureaucratic rules designed to make it difficult for imports to enter a
country are called local content requirements.
FALSE
A local content requirement is a requirement that some specific fraction of
a good be produced domestically. Administrative trade policies are
bureaucratic rules designed to make it difficult for imports to enter a
country.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01 Identify the policy instruments used by governments to influence international trade flows.
Topic: Instruments of Trade Policy
10.
Local content regulations provide protection for a domestic producer of
parts by limiting foreign competition.
TRUE
Local content regulations provide protection for a domestic producer of
parts in the same way an import quota does: by limiting foreign competition.
The aggregate economic effects are also the same; domestic producers
benefit, but the restrictions on imports raise the prices of imported
Difficulty: 1 Easy
Learning Objective: 07-01 Identify the policy instruments used by governments to influence international trade flows.
Topic: Instruments of Trade Policy
11.
A company that sells its product in a foreign market below the cost of
production may be accused of dumping.
TRUE
In the context of international trade, dumping is variously 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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01 Identify the policy instruments used by governments to influence international trade flows.
Topic: Instruments of Trade Policy
12.
Antidumping policies are designed to punish foreign firms that are engaged
in dumping.
TRUE
Antidumping policies are designed to punish foreign firms that engage in
dumping. The ultimate objective is to protect domestic producers from
unfair foreign competition.
AACSB: Analytic
Blooms: Remember
Topic: Instruments of Trade Policy
13.
Antidumping policies vary drastically from country to country.
FALSE
Although antidumping policies vary somewhat from country to country, the
majority are similar to those used in the United States.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01 Identify the policy instruments used by governments to influence international trade flows.
Topic: Instruments of Trade Policy
14.
Protecting industries deemed important for national security, and retaliating
against unfair foreign competition are economic arguments for intervention.
FALSE
Political arguments for government intervention cover a range of issues,
including preserving jobs, protecting industries deemed important for
national security, retaliating against unfair foreign competition, protecting
consumers from “dangerous” products, furthering the goals of foreign
policy, and advancing the human rights of individuals in exporting countries.
AACSB: Analytic
15.
The Helms-Burton Act of 1996 was aimed at foreign companies that were
undermining U.S. trade sanctions against Libya and Iran.
FALSE
In 1996 the U.S. Congress passed the Helms-Burton Act. This act allows
Americans to sue foreign firms that use property in Cuba confiscated from
them after the 1959 revolution.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-02 Understand why governments sometimes intervene in international trade.
Topic: The Case for Government Intervention
16.
According to the infant industry argument, many developing countries have
a potential comparative advantage in manufacturing, but new
manufacturing industries cannot initially compete with established
industries in developed countries.
TRUE
The infant industry argument is by far the oldest economic argument for
government intervention. According to this argument, many developing
countries have a potential comparative advantage in manufacturing, but
new manufacturing industries cannot initially compete with established
Difficulty: 1 Easy
Learning Objective: 07-02 Understand why governments sometimes intervene in international trade.
Topic: The Case for Government Intervention
17.
The infant industry argument is the latest argument for government
intervention in trade.
FALSE
The infant industry argument is by far the oldest economic argument for
government intervention. Alexander Hamilton proposed it in 1792.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-02 Understand why governments sometimes intervene in international trade.
Topic: The Case for Government Intervention
18.
Strategic trade policy suggests that a government should use subsidies to
support promising firms that are active in newly emerging industries.
TRUE
It is argued that by appropriate actions, a government can help raise
national income if it can somehow ensure that the firm or firms that gain
first-mover advantages in an industry are domestic rather than foreign
enterprises. Thus, according to the strategic trade policy argument, a
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-02 Understand why governments sometimes intervene in international trade.
Topic: The Case for Government Intervention
19.
GATT has not recognized the infant industry argument as a legitimate
reason for protectionism.
FALSE
The infant industry argument has had substantial appeal for the
governments of developing nations during the past 50 years, and the GATT
has recognized the infant industry argument as a legitimate reason for
protectionism.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-02 Understand why governments sometimes intervene in international trade.
Topic: The Case for Government Intervention
20.
Krugman has suggested that trade policy designed to retaliate against
another country’s trade policy would hurt the citizens of both countries.
TRUE
Krugman argues that a 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. In
many cases, the resulting trade war between two or more interventionist
governments will leave all countries involved worse off than if a hands-off
approach had been adopted in the first place.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-03 Summarize and explain the arguments against strategic trade policy.
Topic: The Revised Case for Free Trade
21.
Governments do not always act in the national interest when they intervene
in the economy; politically important interest groups often influence them.
TRUE
Governments do not always act in the national interest when they intervene
in the economy; politically important interest groups often influence them.
22.
The Smoot-Hawley Act raised tariff barriers in the hope of protecting jobs
and diverting consumer demand away from foreign products.
TRUE
Aimed at avoiding rising unemployment by protecting domestic industries
and diverting consumer demand away from foreign products, the Smoot-
Hawley Act erected an enormous wall of tariff barriers.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-04 Describe the development of the world trading system and the current trade issues.
Topic: Development of the World Trading System
23.
The Great Depression had roots in the failure of the world economy to
mount a sustained economic recovery after the end of World War I in 1918.
TRUE
By the 1930s, the British attempt to stimulate free trade was buried under
the economic rubble of the Great Depression. The Great Depression had
roots in the failure of the world economy to mount a sustained economic
recovery after the end of World War I in 1918. Things got worse in 1929 with
the U.S. stock market collapse and the subsequent run on the U.S. banking
Learning Objective: 07-04 Describe the development of the world trading system and the current trade issues.
Topic: Development of the World Trading System
24.
During the 1980s and early 1990s, the world trading system erected by the
GATT gained momentum as protectionist demands generally decreased
across the world.
FALSE
During the 1980s and early 1990s, the world trading system erected by the
GATT came under strain as pressures for greater protectionism increased
around the world.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-04 Describe the development of the world trading system and the current trade issues.
Topic: Development of the World Trading System
25.
A key goal of the 1986 Uruguay Round was to extend GATT to cover trade in
commodities.
FALSE
In the Uruguay Round, member countries sought to extend GATT rules to
cover trade in services. They also sought to write rules governing the
protection of intellectual property, to reduce agricultural subsidies, and to
strengthen the GATT’s monitoring and enforcement mechanisms.
Difficulty: 1 Easy
Learning Objective: 07-04 Describe the development of the world trading system and the current trade issues.
Topic: Development of the World Trading System
26.
The World Trade Organization was created as part of the Uruguay Round.
TRUE
The Uruguay Round dragged on for seven years before an agreement was
reached December 15, 1993. It went into effect July 1, 1995. The World
Trade Organization was created to implement the GATT agreement.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-04 Describe the development of the world trading system and the current trade issues.
Topic: Development of the World Trading System
27.
The WTO does not have the power to impose trade sanctions.
FALSE
Arbitration panel reports on trade disputes between member countries are
automatically adopted by the WTO. Countries that have been found by the
arbitration panel to violate GATT rules may appeal to a permanent appellate
body, but its verdict is binding. If offenders fail to comply with the
recommendations of the arbitration panel, trading partners have the right to
Learning Objective: 07-04 Describe the development of the world trading system and the current trade issues.
Topic: Development of the World Trading System
28.
A key issue in the “millennium round” of the WTO was to increase barriers
to cross-border trade in agricultural products.
FALSE
At the end of November 1999, representatives from the WTO’s member
states met in Seattle, Washington. The goal of the meeting was to launch a
new round of talks—dubbed “the millennium round”—aimed at further
reducing barriers to cross-border trade and investment.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-04 Describe the development of the world trading system and the current trade issues.
Topic: Development of the World Trading System
29.
Human rights activists see WTO rules as outlawing the ability of nations to
stop imports from countries where child labor is used or working conditions
are hazardous.
TRUE
Human rights activists see WTO rules as outlawing the ability of nations to
stop imports from countries where child labor is used or working conditions
are hazardous.
Difficulty: 2 Medium
Learning Objective: 07-04 Describe the development of the world trading system and the current trade issues.
Topic: Development of the World Trading System
30.
The WTO has the ability to force any member nation to take an action to
which it is opposed.
FALSE
The WTO lacks the ability to force any member nation to take an action to
which it is opposed. The WTO can allow member nations to impose
retaliatory tariffs on countries that do not abide by WTO rules, but that is
the limit of its power.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-04 Describe the development of the world trading system and the current trade issues.
Topic: Development of the World Trading System
31.
One issue at the forefront of the current agenda of the WTO is the increase
in tariff rates on nonagricultural goods and services in many nations.
TRUE
Four issues at the forefront of the current agenda of 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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-04 Describe the development of the world trading system and the current trade issues.
Topic: Development of the World Trading System
32.
WTO rules do not allow countries to impose antidumping duties on foreign
goods that are being sold cheaper than at home, or below their cost of
production, even when domestic producers can show that they are being
harmed.
FALSE
WTO rules allow countries to impose antidumping duties on foreign goods
that are being sold cheaper than at home, or below their cost of production,
Difficulty: 1 Easy
Learning Objective: 07-04 Describe the development of the world trading system and the current trade issues.
Topic: Development of the World Trading System
33.
Antidumping actions are concentrated in certain sectors of the economy
such as basic metal industries, chemicals, plastics, and machinery and
electrical equipment.
TRUE
Antidumping actions seem to be concentrated in certain sectors of the
economy such as basic metal industries (e.g., aluminum and steel),
chemicals, plastics, and machinery and electrical equipment. These four
sectors since 1995 have been characterized by periods of intense
competition and excess productive capacity, which have led to low prices
and profits (or losses) for firms in those industries.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-04 Describe the development of the world trading system and the current trade issues.
Topic: Development of the World Trading System
34.
Free trade in agriculture could jump-start economic growth among the
world’s poorer nations and alleviate global poverty.
TRUE
Developing nations have been pushing hard for reforms that would allow
their producers greater access to the protected markets of the developed
nations. Free trade in agriculture could help to jump-start economic growth
among the world’s poorer nations and alleviate global poverty.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-04 Describe the development of the world trading system and the current trade issues.
Topic: Development of the World Trading System
35.
The TRIPS regulations oblige WTO members to grant and enforce patents
lasting at least 20 years and copyrights lasting 50 years.
TRUE
The TRIPS regulations oblige WTO members to grant and enforce patents
lasting at least 20 years and copyrights lasting 50 years. Rich countries had
to comply with the rules within a year. Poor countries, in which such
Topic: Development of the World Trading System
36.
Inadequate protections for intellectual property reduce the incentive for
innovation.
TRUE
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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-04 Describe the development of the world trading system and the current trade issues.
Topic: Development of the World Trading System
37.
Tariffs on industrial goods remain higher than tariffs on services.
FALSE
Tariffs on services remain higher than on industrial goods. The average
tariff on business and financial services imported into the United States, for
example, is 8.2 percent, into the EU it is 8.5 percent, and into Japan it is
19.7 percent. Given the rising value of cross-border trade in services,