Chapter 02 – The Dynamic Environment of International Trade
Discussion Questions
1. Define:
GATT Protectionism
2. Discuss the globalization of the U.S. economy.
America’s involvement in the global economy has passed through two distinct periods: a
3. Differentiate among the current account, balance of trade, and balance of payments.
BALANCE OF PAYMENTS
When countries trade, financial transactions among businesses/consumers of different nations occur.
Products and services are exported and imported, monetary gifts are exchanged, investments are
CURRENT ACCOUNT
BALANCE OF TRADE
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Chapter 02 – The Dynamic Environment of International Trade
The relationship between merchandise imports and exports is referred to as the balance of merchandise
trade or trade balance. If a country exports more goods than it imports, it is said to have a favorable
balance of trade; if it imports more goods than it exports, as did the United States, it is said to have an
unfavorable balance of trade. Usually a country that has a negative balance of trade also has a negative
balance of payments. Both the balance of trade and the balance of payments do not have to be negative;
4. Explain the role of price as a free market regulator.
5. “Theoretically, the market is an automatic, competitive, self-regulating mechanism which
provides for the maximum consumer welfare and which best regulates the use of the factors of
production.” Explain.
6. Interview several local businessmen to determine their attitudes toward world trade. Further, learn if
they buy or sell goods produced in foreign countries. Correlate the attitudes and report on your
findings.
Independent project.
7. What is the role of profit in international trade? Does profit replace or complement the regulatory
function of pricing? Discuss.
8. Why does the balance of payments always balance even though the balance of trade does not?
9. Enumerate the ways in which a nation can overcome an unfavorable balance of trade.
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Dynamic Environment of International Trade
10. Support or refute each of the various arguments commonly used in support of tariffs.
Many arguments are commonly used in support of tariffs:
(1) Infant industry – theoretically this argument has a considerable degree of validity. However,
(2) Protection of the home market – this argument asserts that low costs of production in other
(5) Standard of living and real wage – this argument is parallel to number (4), except that the
(6) Conservation of natural resources – tariffs tend to cause extreme dependence on national
(7) Industrialization of low wage nation – quite pertinent to underdeveloped countries. However,
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Dynamic Environment of International Trade
11. France exports about 18 percent of its GDP, neighboring Belgium exports 46 percent. What areas of
economic policy are likely to be affected by such variations in exports?
12. Does widespread unemployment change the economic logic of protectionism?
13. Review the economic effects of major trade imbalances such as those caused by petroleum imports.
14. Discuss the main provisions of the Omnibus Trade and competitiveness Act of 1988.
1 U.S. Senate, “Foreign Economic Police: Report No. 2629 (84th Cong. 2nd session), 1956, p.28
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Dynamic Environment of International Trade
Two other issues addressed under the market access section of the law are government procurement
procedures and market access to telecommunications markets. Foreign government procurement
procedures must not discriminate against U.S. firms; if they do, the President has the authority to
impose a ban on U.S. Government procurement of goods and services from that country.
Export Expansion In addition to making foreign markets more accessible to U.S. goods, the 1988
Import Relief Export trade is a two way street; that is, we must be prepared to compete with imports
15. The Tokyo Round of GATT has emphasized the reduction of nontariff barriers. How does the
Uruguay Round differ?
Nontariff barriers are all the restrictions imposed on the importation of goods by a host government
with the exception of tariffs. Such things as standards, quotas, import licenses, countervailing duties,
border taxes can be classified as nontariff barriers. The Tokyo Round considered nontariff barriers as
having become one of the major deterrents to international trade. Earlier rounds of negotiations by
GATT members had been successful in reducing tariffs but nontariff barriers are considered to be
insidious protectionist devices and the Tokyo Round focused on the reduction of nontariff barriers.
16. Discuss the impact of GATS, TRIMS, AND TRIPS on global trade.
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Dynamic Environment of International Trade
An important objective of the United States in the Uruguay Round was to reduce or eliminate barriers
to international trade in services. While there is still much progress to be made before free trade in
services will exist throughout the world, the General Agreement on Trade in Services (GATS) is the
first multilateral, legally enforceable agreement covering trade and investment in services sector. It
provides a legal basis for future negotiations aimed at eliminating barriers that discriminate against
foreign services trade and deny them market access. For the first time, comprehensive multilateral
disciplines and procedures covering trade and investment in services have been established. Specific
market-opening concessions from a wide range of individual countries were achieved and provision
was made for continued negotiations to further liberalize telecommunications and financial services.
17. Discuss the evolution of world trade that has led to the formulation of the WTO.
Since the inception of GATT, there have been eight “rounds” of intergovernmental tariff negotiations.
The most recently completed was the Uruguay round which built on the success of the Tokyo Round,
the most comprehensive and far-reaching round undertaken by GATT up to that time. The Tokyo
18. Visit http://hts.usitc.gov/ (U.S. Customs tariff schedule) and look up the import duties on leather
footwear. You will find a difference in the duties on shoes of different value, material composition,
and quantity. Using what you have learned in this chapter, explain the reasoning behind these
differences. Do the same for frozen and/or concentrated orange juice.
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Dynamic Environment of International Trade
19. The GATT has had a long and eventful history. Visit http://www.wto.org/ and write a short report on
the various Rounds of GATT. What were the key issues addressed in each round?
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
GATT trade rounds
Year Place/name Subjects covered Countries
1947 Geneva Tariffs 23
1949 Annecy Tariffs 13
1951 Torquay Tariffs 38
1956 Geneva Tariffs 26
rules, services, intellectual
property, dispute settlement,
textiles, agriculture, creation of
WTO, etc