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7-2
7-1 Identify the policy instruments used by governments to influence international trade flows.
7-3 Summarize and explain the arguments against strategic trade policy.
7-5 Explain the implications for managers of developments in the world trading system.
Chapter Summary
This chapter begins with a discussion of the main instruments of trade policy, including tariffs,
subsidies, import quotas, voluntary export restraints, local content requirements, antidumping
duties, and administrative policies. This section is followed by a discussion of the merits of
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2012. Under the new trade deal, the United States will end its tariffs on imported steel—tariffs
that violated World Trade Organization (WTO) rules—and South Korea will limit its steel
1. Donald Trump has famously said that “trade wars are good and easy to win.” In your opinion,
who won in the recent negotiations between the United States and South Korea? Explain your
2. How does the new trade agreement between South Korea and the United States benefit the
U.S. auto industry? Do you see any drawbacks?
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Lecture Note: To expand this discussion, consider exploring the new trade agreement between
South Korea and the United States in more depth at
https://www.nytimes.com/2018/09/24/us/politics/south-korea-trump-trade-deal.html.
subsidies, import quotas, voluntary export restraints, local content requirements, antidumping
policies, and administrative policies.
TARIFFS
B) A tariff is a tax levied on imports (or exports) that effectively raises the cost of imported (or
exported) products relative to domestic products. Specific tariffs are levied as a fixed charge for
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Did You Know Video Clip
The video clip asks: “Did you know that the high price of SUVs in the US is the result of the
“chicken tariff”?’
1. What is the “chicken tariff?” What does it have to do with light trucks and SUVs?
2. Who benefits from the “chicken tariff” on light trucks? Why do you think the tariff is still in
place?
3. What do you think about U.S. consumers paying more for light trucks and SUVs because of
this?
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thechicken-tax/2018/07/06/643624fa-796a-11e8-8df3-
007495a78738_story.html?utm_term=.ccb5889d9a8c.
CONNECT
Video Case
The Chicken Tariff
Summary
This activity focuses on instruments of trade policy, specifically tariffs and their impact on
stakeholders. While consumers often absorb much of the cost of tariffs in the form of higher
prices, companies also look for ways to circumvent them.
Activity
Students are asked to watch a video on tariffs and then respond to a series of questions related to
the video.
Class Discussion
Managers need to understand the instruments of trade policy and their impact on trade flows.
Ask students to identify who wins and who loses as a result of the chicken tariffs. Then, discuss
how the impact of the chicken tariffs on stakeholders might influence manager decision making.
SUBSIDIES
D) A subsidy is a government payment to a domestic producer. By lowering costs, subsidies
help domestic producers compete against low-cost foreign imports and gain export markets.
However, many subsidies are not that successful at increasing the international competitiveness
of domestic producers. Moreover, consumers typically absorb the costs of subsidies.
country FOCUS: Are the Chinese Illegally Subsidizing Auto
Exports?
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1. In your opinion, could U.S. complaints about China’s policies toward its auto exports actually
harm U.S. producers more than they help? Should the U.S. dismiss its complaint with the WTO?
2. As a U.S. consumer, do you support China’s subsidies on autos and auto parts? Does your
response change if you work for a U.S. automaker? Why or why not?
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G) An export tariff is a tax placed on the export of a good. The goal is to discriminate against
exporting to ensure a sufficient supply of a good is available within a country. An export ban is
a policy that partially or entirely restricts the export of a good.
production, or as selling goods in a foreign market at below their “fair” market value. Dumping
is viewed as a method by which firms unload excess production in foreign markets.
Alternatively, some dumping may be the result of predatory behavior, with producers using
substantial profits from their home markets to subsidize prices in a foreign market with a view to
driving indigenous competitors out of that market. Once this has been achieved the predatory
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Class Discussion
Understanding the various instruments of trade policy is important to managers of international
1. What is dumping? Were Chinese and Russian producers guilty of dumping? How did U.S.
Magnesium justify its claims against Russian and Chinese producers?
2. What does the ITC’s ruling mean for American consumers of magnesium? In your opinion,
was the ruling fair?
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emirates-usa-steel-tariffs/uae-will-defend-industries-after-u-s-dumping-accusations-
idUSKCN1BV10J.
Teaching Tip: U.S. Magnesium’s website is available at http://usmagnesium.com.
The Case for Government Intervention
A) In general, there are two types of arguments for government intervention: political and
economic. Political arguments for intervention are concerned with protecting the interests of
certain groups within a nation (normally producers), often at the expense of other groups
(normally consumers). Economic arguments for intervention are typically concerned with
boosting the overall wealth of a nation (to the benefit of all, both producers and consumers).
POLITICAL ARGUMENTS FOR INTERVENTION
B) Political arguments for government intervention cover a range of issues including protecting
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 protecting the human rights of individuals in exporting countries.
Video Note: To explore who wins and who loses from tariffs imposed by Donald Trump,
consider https://www.washingtonpost.com/news/wonk/wp/2018/03/06/winners-and-losers-from-
trumps-tariffs/?utm_term=.4cf8991b6b0a.
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barriers. But when threatened governments do not back down, tensions can escalate and new
trade barriers may be enacted.
Lecture Note: Many critics have accused Donald Trump of trying to start a trade war. To learn
more about Trump’s tactics, go to https://www.cnbc.com/2018/07/18/trump-trade-antics-
sabotaging-economy-and-markets-stephen-roach-warns.html, https://www-
m.cnn.com/2018/10/01/politics/donald-trump-trade-nafta-
usmca/index.html?r=https%3A%2F%2Fwww.google.com%2F, and
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K) A problem with the infant industry argument is determining when an industry "grows up."
Some industries that are just plain inefficient and noncompetitive and are still infants after 50
years. The other problem is that given the existence of global capital markets, if the country has
and politics.
RETALIATION AND TRADE WAR
B) Krugman argues that strategic trade policies aimed at establishing domestic firms in a
dominant position in a global industry are beggar-thy-neighbor policies that boost national
income at the expense of other countries. A country that attempts to use such policies will
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Students are asked to watch a video on trade issues between China and the United States and
then respond to a series of questions related to the video.
Class Discussion
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A) Many governments recognize the value of unrestricted free trade, but are hesitant to
unilaterally lower their trade barriers in case other countries do not follow suit. Since World War
II, an international trading framework has evolved that enables governments to negotiate a set of
D) After WWII, the United States and other nations realized the value of freer trade, and
established the General Agreement on Tariffs and Trade (GATT).
E) The approach of GATT (a multilateral agreement to liberalize trade) was to gradually
eliminate barriers to trade. Over 100 countries became members of GATT and worked together
to further liberalize trade.
G) Against the background of rising protectionist pressures, in 1986 GATT members embarked
on their eighth round of negotiations to reduce tariffs (called the Uruguay Round). This was the
most ambitious round to date.
The World Trade Organization
H) When the WTO was established in 1995, its creators hoped the WTO’s enforcement
