Quick Study Questions
Quick Study 1
1. Q: Free trade is the pattern of imports and exports that occurs in the what?
A: It is the pattern of imports and exports that occurs in the absence of trade barriers.
2. Q: For what political reasons does a government intervene in trade?
A: (1) Practically every government restricts imports that threaten jobs in the domestic
economy. (2) Governments restrict certain imports for national security reasons because the
nation must have access to a domestic supply of certain items in the event of war. Agriculture is
3. Q: What are some economic reasons why a government intervenes in trade?
A: One economic motive for a nation to intervene in trade is protection of young (infant)
industries from competition. According to the infant industry argument, a country’s emerging
industries need protection from international competition during their development phase until
Consumers can wind up paying more if domestic companies are protected and do not become
highly competitive. (5) A main argument of this policy is that small businesses often cannot
obtain financing is less true today than in the past.
Supporters of strategic trade policy argue that strategic trade policies result in increased national
income. However, drawbacks of this strategy are: (1) because it fosters inefficiencies and high
4. Q: Some people see the products of what country as the greatest threat to local cultures around
the world?
A: Some people see the products of the United States as the greatest threat to local cultures
around the world. The main cultural motive for government intervention in trade is protection
similar. Governments also block imports of products they think might be harmful to the nation’s
Quick Study 2
1. Q: Financial assistance from a government to domestic producers is called what?
A: Governments employ the use of subsidies to assist domestic companies in fending off
international competitors. One drawback of subsidies is that they can cause companies to
become complacent about increasing efficiency and cutting costs. This can cause companies to
2. Q: What are the hoped-for outcomes of a foreign trade zone?
A: A foreign trade zone (FTZ) is a designated geographic region in which merchandise is
allowed to pass through with lower customs duties (taxes) or fewer customs procedures. FTZs
promote the most trade when they are established as low-cost assembly points for companies
3. Q: What are some of the ways that governments provide export financing?
A: Export financing can help a nation increase exports. A government can offer its companies
financing to expand their export activities—financing that they would otherwise be unable to
obtain. Governments can also offer to guarantee the loans of its domestic companies that will
Quick Study 3
1. Q: Why might a government impose a tariff on a product?
A: There are two main reasons why countries impose tariffs and they are: (1) to protect
domestic producers and (2) to generate revenues.
2. Q: Why might a government impose a quota on a product?
A: A government may impose an import quota to protect domestic producers by placing a limit
their market shares and prices because competitive forces are restrained.
3. Q: A stipulation that a portion of a product be sourced domestically is called what?
A: A local content requirement is a law that stipulates a specified amount of a good or service
employ local resources in production processes—particularly labor.
Quick Study 4
1. Q: The first system of multilateral agreements to promote free trade was called what?
A: The GATT was designed to promote free trade by reducing both tariff and nontariff barriers
to trade. The GATT was formed in 1947 and early success began to wane in the 1980s.
Between 1947 and 1988, it helped to reduce average tariffs from 40 percent to 5 percent and
2. Q: What are the main goals of the World Trade Organization?
A: The WTO is the international organization regulating trade among nations. WTO agreements
are essentially contracts among member nations that commit them to maintaining fair and open
trade policies. The Dispute Settlement Body goes to work as soon as a member nation files a
Dumping occurs when a company exports its product at a lower price than it normally charges
countries, not companies, give subsidies, the WTO regulates and rules on the actions of both
parties in a dispute over subsidies.
3. Q: Exporting a product at a price that is lower than that normally charged domestically or one
that is lower than production costs can expose a firm to charges of what?
A: Dumping is when a company exports a product at a price that is either lower than the price
Ethical Challenge
The National Foreign Trade Council (NFTC), a nonprofit trade and industry group based in
Washington DC, won a court battle against the state of Massachusetts. In a unanimous decision, the
U.S. Supreme Court sided with the NFTC and struck down a Massachusetts law that was designed to
deny state contracts to any company doing business in Myanmar. The Court ruled that the
Massachusetts law intruded on the federal government’s authority and was preempted by federal law
regarding Myanmar. In fact, the U.S. Constitution states that “foreign policy is exclusively reserved
for the federal government.” The NFTC says that it shares concern over human rights abuses in
Myanmar but believes that a coordinated, multinational effort would be most effective at instilling
change.
6-5 Do you think that companies should be penalized domestically based on where they do business
abroad? Explain.
A: Students will have opinions on this question, however, in addition to laws abroad, there are
some US laws that govern the conduct of activities of US companies in foreign countries. The
which prohibits directly or indirectly paying of offering to pay money to anything of values to a
individuals and entities with which one may not engage.
6-6 Do you foresee potential problems when the WTO gets involved in such political matters?
A: This is an opinion question, and student’s responses will vary.
6-7 How might domestic firms react if each state were to punish firms based on its own foreign
policy ideals?
A: Students will likely have strong opinions on this question because of the human rights issue.
Probably the biggest problem with such a policy is the cost of monitoring the activities of
companies around the world and making sure that deals are not just restructured so as to hide
their involvement. Even then, companies could create holding companies in offshore locations
Teaming Up
Imagine that the United States slapped an antidumping duty of 30 percent on aircraft parts imported
from China that it believed were being dumped in the U.S. market. Imagine that China then slapped a
35 percent countervailing duty on U.S. auto imports, saying a recent federal bailout amounts to an
unfair subsidy for U.S. automakers.
6-8 What political, economic, or cultural motives do you think are behind the U.S. antidumping
duty against China’s aircraft parts?
A: Students can review responses to the three Quick Study 1 questions and formulate their own
6-9 What motives do you think are behind China’s countervailing duty against U.S. autos?
A: The Chinese government is retaliating because they feel that their competitiveness is being
threatened.
6-10 Should countries experiencing economic difficulties be allowed to erect temporary tariff and
nontariff barriers? Explain.
A: International trade occurs primarily because of relative price differences among nations,
which stem from differences in production costs, which in turn result from:
1. Differences in the endowments of factors of production.
2. Differences in levels of technology
International trade theory states that nations will attain a higher standard of living by
In general, trade restrictions stop this free flow of goods and will harm the nation’s welfare. So
Practicing International Management Case
Down with Dumping
6-19 Q: People love finding a bargain on their favorite items while shopping. But few people would
likely want those items made in the home market (and expanding employment) if it meant
paying a higher price for them. Do you agree with this sentiment? Explain.
A: Many people would agree with the sentiment expressed in this statement. The attitude would
threatened by a cheap import being dumped on the domestic market.
6-20 Q: Do you think that people from different cultures would respond differently to the above
question? If so, identify which cultures.
A: People from individual-oriented cultures would probably be more likely to agree with the
statement than would people from very group-oriented cultures. For example, many Japanese
6-21 Q: The WTO cannot punish individual companies, but can only direct the actions toward
governments of countries. Why do you think the WTO was not given authority to charge
individual companies with dumping? Explain.
A: The task of investigating the actions of individual companies would no doubt overwhelm the
resources of an organization the size of the WTO even. Investigating each company against
which a complaint was brought would be very time consuming and expensive. Besides, the