INTERNATIONAL ECONOMICS, 7TH EDITION
Study Resources: Questions for Study & Review
Chapter 10
1. Does the chance for countries to free-ride on the concessions of others make the
principle of most-favored-nation status a weakness of the WTO? Do regional
agreements represent an effective way to exclude free riders?
2. Does the growth of regional trading blocs warrant WTO encouragement? If regional
groups had an open membership policy to accept all who applied, would that be more
desirable from a world standpoint?
3. Large countries are likely to have an advantage in any trade war. Why are those
countries still willing to join the WTO, which limits their ability to exploit their market
power?
4. The Swiss tariff-cutting formula proposed in the Doha Round negotiations was the
following:
t1 = a t0 / (a + t0), where t0 is the initial tariff expressed in percentage form, t1 is the new
tariff, and a is a parameter that must be agreed by the negotiators. One proposal
called for a = 5 for industrialized countries and a = 30 for developing countries.
Calculate what difference this treatment would imply for a tariff of 2 percent versus a
tariff of 60 percent. What benefit does this approach provide for developing countries?
5. Do international negotiations where countries count their gains in terms of greater
access to foreign markets represent misplaced attention to exports alone? Regardless
of the motive for such negotiations, in what ways do countries gain from cooperating
multilaterally?
6. Why does the WTO regard quantitative restrictions as less desirable policy
instruments than ad valorem tariffs? How is the current existence of tariff-rate quotas
consistent with this preference?
7. The WTO reports the following differences in average tariff rates on agricultural
products for those subject to ad valorem tariffs versus the ad valorem equivalent for
those subject to other tariffs:
Country Average ad valorem rate Average ad valorem equivalent rate % of tariff lines subject to non ad valorem rate
Canada 4.3 81.5 22.3
EC 7.7 30.4 46.3
Japan 9.8 65.6 17.2
U.S. 8.1 11.8 43.2
8. How do you expect these differences to affect the bargaining positions of these
countries in the Doha Round regarding the extent of exceptions for sensitive products
and the treatment of tariff peaks? Why may specific tariffs have a particularly adverse
effect on exports from developing countries?
9. When disputes over unfair trade practices arise, what standards should be applied to
non-market economies, and how different from those applied to firms in market
economies must they be to provide comparable treatment?
10. If there were no dispute settlement mechanism within the WTO, how would that
weaken the credibility of any multilateral agreements reached? If individual members
regard some issues as too important to be addressed by dispute resolution within the
WTO, what alternative do they have in responding to WTO panel rulings?
11. “When a small country reduces its tariffs as part of a WTO agreement, that is likely to
reduce inefficiencies in the country and make it better off, but if the country must
increase its payments to others for the right to use their intellectual property, that is
likely to make the country worse off.” Evaluate this claim by advocates from
developing countries who feel the Uruguay Round agreements were against their
interests.
INTERNATIONAL ECONOMICS, 7TH EDITION
Study Resources: Questions for Study & Review
Chapter 10: Answers
1. The chance to free ride on the concessions of others certainly is possible within
the WTO, and one indication of this possibility is the empirical observation that
there are no significant differences in the trade patterns of WTO members
compared to nonmembers. Countries that choose to make no concessions,
2. Article XXIV of the GATT allows for customs unions and free trade agreements
that do not apply the most-favored-nation principle and ensure non-
discrimination. This exception is allowed only for agreements that cover
“substantially all” of the trade between member countries. Restrictions imposed
against non-members are to be no more restrictive than prior to the customs union
being formed. However, the WTO is far behind schedule in reviewing the deluge
of new agreements. There is no clear indication of how much trade must be
covered – if agriculture and services are excluded, do the remaining categories
represent substantially all trade?
A clause allowing new members to accede to an agreement (termed open
3. Producers in large countries may face less elastic demand for their exports, because
they account for a larger share of the market. Large countries may forego using
this market power, because they recognize that it has not been exercised effectively
4. For a tariff of 2 percent, the Swiss formula t1 = a t0/(a+t0) would imply t1 = 10/7
=1.43 for a = 5, and t1 = 60/32 = 1.88 for a = 30. For a tariff of 60 percent, t1 =
300/65 = 4.6 for a = 5, and t1 = 1800/90 = 20 for a = 30. For a developing country
5. Countries typically calculate the reciprocity of concessions made and received,
based on the access they gain to foreign markets and the reduction in trade barriers
to which they are subject. They don’t tend to focus on the increase in consumers’
6. A quantitative restriction is generally less desirable than a tariff in competitive
markets because it eliminates any change in the quantity of trade and forces all the
adjustment into price effects when supply and demand conditions change. For
example, if income rises in the importing country and the demand for the
imported good rises, a quantitative restriction results in an increase in the price
7. Because Canada reports a low average ad valorem tariff rate but a high average ad
valorem equivalent rate, there appear to be a few items that receive exceptionally
high protection from tariff rate quotas and specific tariffs. Canada likely favors
the chance to exclude a few sensitive items from the application of any formula
8. Handling disputes that involve firms from non-market economies has proven
difficult because those producers cannot be presumed to face the same discipline
(revenues must exceed costs) as firms in market economies. Producers who face
no budget constraint and have none of their own capital at risk will make different
a. Is there government ownership or control of production?
b. Is there government control over the allocation of resources?
c. Is foreign investment allowed, are workers free to bargain collectively
over their wages, and is the currency convertible?
9. Without a dispute resolution mechanism under the WTO, countries could not count
on foreign concessions actually resulting in greater market access and increased
sales. In that case they would be less likely to offer concessions of their own,
10. For a small country, a tariff reduction results in a loss of tariff revenue to the
government, as well as a decline in domestic profits, but an even greater increase
in consumers’ surplus. The country is taking a step that may be politically
unpopular but which will increase its economic efficiency.
