Chapter 06 - The Political Economy of International Trade

Chapter 06 The Political Economy of International Trade

/ Questions

1. (p. 206) A situation where a go ernment does not attempt to restrict what its citi!ens can "uy from another country or what they can sell to another country is #nown as free trade.

Difficulty: Easy

$. (p. 207) Tariffs are unam"iguously pro-consumer and anti-producer.

Difficulty: Medium

%. (p. 207) E&port tariffs are far less common than import tariffs.

Difficulty: Medium

'. (p. 207) (pecific tariffs are le ied as a proportion of the alue of the imported good.

Difficulty: Medium

). (p. 208) *y lowering production costs+ su"sidies help domestic producers compete against foreign imports and gain e&port mar#ets.

Difficulty: Medium

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Chapter 06 - The Political Economy of International Trade

6. (p. 209) ,nder a tariff rate -uota+ a higher tariff rate is applied to imports within the -uota than those o er the -uota.

Difficulty: Medium

.. (p. 210) A common hy"rid of a -uota and a rent is #nown as a -uota rent.

Difficulty: Easy

/. (p. 211) ,nli#e other trade policies+ local content regulations tend to "enefit consumers and not producers.

Difficulty: Medium

0. (p. 211) 1e-uirements that some specific fraction of a good "e produced domestically are #nown as local content re-uirements.

Difficulty: Easy

10. (p. 211) *ureaucratic rules designed to ma#e it difficult for imports to enter a country are local content re-uirements.

Difficulty: Easy

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Chapter 06 - The Political Economy of International Trade

11. (p. 211) A company that sells its product in a foreign mar#et "elow the cost of production may "e accused of dumping.

Difficulty: Easy

1$. (p. 212) Antidumping polices are designed to punish firms that are engaged in dumping.

Difficulty: Easy

1%. (p. 213) Antidumping policies ary drastically from country to country.

Difficulty: Easy

1'. (p. 214) The ,.(. go ernment has used the threat of puniti e trade sanctions to try to get the Chinese go ernment to enforce its intellectual property laws.

Difficulty: Medium

1). (p. 214) 2any go ernments ha e long had regulations to protect consumers from unsafe products.

Difficulty: Easy

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Chapter 06 - The Political Economy of International Trade

16. (p. 216) The 3elms-*urton Act of 1006 was aimed at foreign companies that were undermining ,.(. trade sanctions against 4i"ya and Iran.

Difficulty: Medium

1.. (p. 217) The infant industry argument is the latest argument for go ernment inter ention in trade.

Difficulty: Medium

1/. (p. 218) (trategic trade policy suggests that a go ernment should use su"sidies to support promising firms that are acti e in newly emerging industries.

Difficulty: Medium

10. (p. 218) 5ATT has not recogni!ed the infant industry argument as a legitimate reason for protectionism.

Difficulty: Medium

$0. (p. 219) 6rugman has suggested that trade policy designed to retaliate against another country7s trade policy would hurt the citi!ens of "oth countries.

Difficulty: Ha d

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Chapter 06 - The Political Economy of International Trade

$1. (p. 220) 5o ernments do not always act in the national interest when they inter ene in the economy8 politically important interest groups often influence them.

Difficulty: Medium

$$. (p. 221) The (moot-3awley Act raised tariff "arriers in the hope of protecting 9o"s and di erting consumer demand away from foreign products.

Difficulty: Medium

$%. (p. 222) A #ey goal of the 10/6 ,ruguay 1ound was to e&tend 5ATT to co er trade in ser ices.

Difficulty: Medium

$'. (p. 222) :uring the 10/0s and early 1000s+ the world trading system erected "y the 5ATT gained momentum as protectionist demands generally decreased across the world.

Difficulty: Easy

$). (p. 223) The ;orld Trade <rgani!ation was created as part of the ,ruguay 1ound.

Difficulty: Medium

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Chapter 06 - The Political Economy of International Trade

$6. (p. 223) The ;T< does not ha e the power to impose trade sanctions.

Difficulty: Medium

$.. (p. 224) To date+ the ;T<7s policing efforts ha e "een a ma9or failure.

Difficulty: Medium

$/. (p. 22!) A #ey issue in the 2illennium 1ound of the ;T< was to reduce "arriers to cross"order trade in agricultural products.

Difficulty: Medium

$0. (p. 226) 3uman rights acti ists see ;T< rules as outlawing the a"ility of nations to stop imports from countries where child la"or is used or wor#ing conditions are ha!ardous.

Difficulty: Medium

%0. (p. 226) The ;T< has the a"ility to force any mem"er nation to ta#e an action to which it is opposed.

Difficulty: Medium

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Chapter 06 - The Political Economy of International Trade

%1. (p. 227) The ma9ority of antidumping actions are concentrated in 9ust a few industries.

Difficulty: Medium

%$. (p. 227) ;T< rules do not allow countries to impose antidumping duties on foreign goods that are "eing sold cheaper than at home or "elow their cost of production+ e en when domestic producers can show that they are "eing harmed.

Difficulty: Medium

%%. (p. 228) Tariff rates on agricultural products are generally much lower than tariff rates on manufactured products or ser ices.

Difficulty: Medium

%'. (p. 228) =ree trade in agriculture could 9ump-start economic growth among the world7s poorer nations and alle iate glo"al po erty.

Difficulty: Medium

%). (p. 229) The T1IP( regulations o"lige ;T< mem"ers to grant and enforce patents lasting at least $0 years and copyrights lasting )0 years.

Difficulty: Easy

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Chapter 06 - The Political Economy of International Trade

%6. (p. 229) Inade-uate protections for intellectual property reduce the incenti e for inno ation.

Difficulty: Easy

%.. (p. 230) Tariffs on industrial goods remain higher than tariffs on ser ices.

Difficulty: Medium

%/. (p. 233) Tariff "arriers lower the costs of e&porting products to a country.

Difficulty: Easy

%0. (p. 233) The threat of antidumping action limits the a"ility of a firm to use aggressi e pricing to gain mar#et share in a country.

Difficulty: Medium

'0. (p. 233) To conform to local content regulations+ a firm may ha e to locate more production acti ities in a gi en mar#et than it would otherwise.

Difficulty: Medium

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Chapter 06 - The Political Economy of International Trade

Multiple Choice Questions '1. (p. 206) =ree trade A. 1efers to a situation in which a go ernment does not attempt to restrict what its citi!ens can "uy from or sell to another country *. 1educes the o erall efficiency of the world economy. C. :escri"es the range of policy instruments that go ernments use to inter ene in international trade :. Is a go ernment payment to a domestic producer

Difficulty: Easy

'$. (p. 206) ;hich of the following is not one of the main instruments of trade policy> A. Tariffs B. Credit portfolios C. 4ocal content re-uirements :. Administrati e policies

Difficulty: Medium

'%. (p. 207) In recent decades+ tariff "arriers ha e "een ????? while non tariff "arriers ha e "een ?????. A. =alling+ rising *. 1ising+ falling C. 4e eling+ rising :. =alling+ le eling

Difficulty: Medium

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Chapter 06 - The Political Economy of International Trade

''. (p. 207) (pecific tariffs are A. 4e ied as a proportion of the alue of the imported good B. 4e ied as a fi&ed charge for each unit of a good imported C. In the form of manufacturing or production re-uirements of goods. :. 5o ernment payment to domestic producers

Difficulty: Medium

'). (p. 207) This is le ied as a proportion of the alue of the imported good. A. (pecial tariff *. Ad alorem tariff C. Tariff -uota . (pecific tariff

Difficulty: Medium

'6. (p. 207) Tariffs do not "enefit A. Consumers B. :omestic producers C. 5o ernments :. :omestic firms

Difficulty: Medium

'.. (p. 207) All of the following are of tariffs+ e&cept A. They reduce the re enue for the go ernment *. They can "e le ied as a proportion of the alue of the imported good C. They can "e le ied as a fi&ed charge for each unit of a good imported :. They impose significant costs on domestic consumers

Difficulty: Ha d

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Chapter 06 - The Political Economy of International Trade

'/. (p. 208) *y lowering production costs+ ????? help domestic producers compete against foreign imports. A. Tariffs *. :uties C. @uotas . (u"sidies

Difficulty: Medium

'0. (p. 208) ;hich of the following o"ser ations pertaining to go ernment su"sidies is incorrect> A. They must "e paid for+ typically "y ta&ing indi iduals and corporations *. They mainly "enefit domestic producers+ whose international competiti eness is increased C. ;hether they generate national "enefits that e&ceed their national costs is de"ata"le . They help foreign producers gain a competiti e ad antage o er domestic producers

Difficulty: Medium

)0. (p. 208) (u"sidies ha e "een critici!ed for all of the following reasons e&cept A. They allow inefficient farmers stay in "usiness *. They encourage to o erproduce hea ily su"sidi!ed agricultural products C. They encourage countries to produce products that could "e grown more cheaply elsewhere and imported . They increase international trade in agricultural products

Difficulty: Ha d

)1. (p. 208) According to the ????? policy+ su"sidies can help a firm achie e a first-mo er ad antage in an emerging industry. A. (trategic trade *. Antidumping C. Tariff -uota :. =ree trade

Difficulty: Ha d

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Chapter 06 - The Political Economy of International Trade

)$. (p. 208) This is a direct restriction on the -uantity of some good that may "e imported into a country. A. (pecific tariff B. Import -uota C. (u"sidy :. Ad alorem tariff

Difficulty: Easy

)%. (p. 208"209) In the ,nited (tates only firms allowed to import cheese are certain trading companies+ each of which is allocated the right to import a ma&imum num"er of pounds of cheese each year. Identify the trade restriction "eing imposed "y the ,.(. here. A. Import -uota *. (u"sidy C. Ad alorem tariff :. (pecific tariff

Difficulty: Ha d

)'. (p. 209) A common hy"rid of a -uota and a tariff is #nown as a A. @uota rent *. Aoluntary e&port restraint C. Ad alorem tariff . Tariff rate -uota

Difficulty: Easy

)). (p. 210) A -uota on trade imposed "y the e&porting country+ typically at the re-uest of the importing country7s go ernment is referred to as aBnC A. Aoluntary e&port restraint *. (pecific tariff -uota C. Trade reconciliation :. Ad alorem tariff

Difficulty: Easy

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Chapter 06 - The Political Economy of International Trade

)6. (p. 210) A -uota rent is A. A -uota on trade imposed "y the e&porting country *. 4e ied as a fi&ed charge for each unit of a good imported C. 4e ied as a proportion of the alue of the imported good . The e&tra profit producers ma#e when supply is artificially limited "y an import -uota

Difficulty: Easy

).. (p. 210) =oreign producers typically agree to oluntary e&port restrictions "ecause A. Their manufacturing capacity is limited *. They can di ert their e&ports to other countries and charge more for their products C. They fear far more damaging puniti e tariffs or import -uotas might follow if they do not :. They are re-uired to "y the ;orld Trade <rgani!ation

Difficulty: Medium

)/. (p. 210) ;hich of the following statements concerning a oluntary e&port restraint is not > A. It "enefits domestic producers "y limiting import competition B. In most cases+ it "enefits consumers. C. It raises the domestic price of an imported good :. It is a ariant of the import -uota

Difficulty: Medium

)0. (p. 211) These are re-uirements that some specific fraction of a good "e produced domestically. A. Import -uotas B. Aoluntary e&port restraints C. 4ocal content re-uirements :. Antidumping duties

Difficulty: Easy

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Chapter 06 - The Political Economy of International Trade

60. (p. 211) The ????? specifies that go ernment agencies must gi e preference to American products when putting contracts for e-uipment out to "id unless the foreign products ha e a significant price ad antage. A. *uy America Act *. Anti-:umping Act C. 3elms-*urton Act :. :7Amato Act

Difficulty: Medium

61. (p. 211) Administrati e trade policies are A. 1e-uirements that some specific fraction of a good "e produced domestically *. @uotas on trade imposed "y the e&porting country C. *ureaucratic rules designed to ma#e it difficult for imports to enter a country :. :esigned to punish foreign firms that engage in dumping

Difficulty: Easy

6$. (p. 211"212) ;hich of the following is ariously defined as selling goods in a foreign mar#et at "elow their costs of production or as selling goods in a foreign mar#et at "elow their DfairD mar#et alue> A. E&port restraint B. :umping C. 4ocal content re-uirement :. Ad alorem

Difficulty: Easy

6%. (p. 212) Antidumping duties are often called A. (pecial circumstance duties *. Positi e duties C. 1etroacti e duties . Counter ailing duties

Difficulty: Easy

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Chapter 06 - The Political Economy of International Trade

6'. (p. 214) The ,.(. go ernment using the threat of puniti e trade sanctions to try to get the Chinese go ernment to enforce its intellectual property laws is an e&ample of go ernment inter ention "ased on A. 3uman rights protection *. Eational security C. Consumer protection . 1etaliation

Difficulty: Medium

6). (p. 216) If a go ernment grants preferential trade terms to a country it wants to "uild strong relations with+ the go ernment is employing a policy A. <f retaliation *. <f human rights protection C. To protect national security . To further foreign policy o"9ecti es

Difficulty: Medium

66. (p. 216) This act allows Americans to sue foreign firms that use property in Cu"a confiscated from them after the 10)0 re olution. A. *uy America Act *. Anti-:umping Act C. 3elms-*urton Act :. :7Amato Act

Difficulty: Ha d

6.. (p. 218) According to the ????? argument+ go ernments should temporarily support new industries until they ha e grown strong enough to meet international competition. A. 1etaliatory action *. 3uman rights C. Infant industry :. Anti-dumping

Difficulty: Easy

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Chapter 06 - The Political Economy of International Trade

6/. (p. 218) ????? suggests that a go ernment should use su"sidies to support promising firms that are acti e in newly emerging industries. A. The infant industry argument B. (trategic trade policy C. 1etaliation policy :. The national security argument

Difficulty: Medium

60. (p. 219) ????? argues that a strategic trade policy aimed at esta"lishing domestic firms in a dominant position in a glo"al industry is a "eggar-thy-neigh"or policy that "oosts national income at the e&pense of other countries. A. :a id 1icardo *. Adam (mith C. 2ichael Porter . Paul 6rugman

Difficulty: Ha d

.0. (p. 220) The E,7s Common Agricultural Policy is an e&ample of a ta& policy designed to A. *enefit consumers *. *enefit ta&payers C. *enefit special interest politics :. *enefit free trade in a de eloped country

Difficulty: Ha d

.1. (p. 221) Economic pro"lems during the 5reat :epression were compounded in 10%0 when the ,.(. Congress passed the ?????+ aimed at a oiding rising unemployment "y protecting domestic industries and di erting consumer demand away from foreign products. A. (mootF3awley Act *. AntiF:umping Act C. 3elmsF*urton Act :. :7Amato Act

Difficulty: Ha d

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Chapter 06 - The Political Economy of International Trade

.$. (p. 222) ;hich of the following is not a reason for the pressure for greater protectionism that occurred during the 10/0s and early 1000s> A. The growing ,.(. trade surplus with Gapan strained the world trading system *. Gapanese economic success strained the world trading system C. The persistent trade deficit in the ,.(. strained the world trading system :. 2any countries found ways to get around 5ATT regulations

Difficulty: Ha d

.%. (p. 222) In the 10/6 ,ruguay 1ound+ 5ATT mem"ers sought to write rules for promoting all of the following e&cept A. Intellectual property protection B. Agricultural su"sidies C. 5ATT7s monitoring and enforcement mechanisms :. 5ATT rules to co er trade in ser ices

Difficulty: Medium

.'. (p. 223) ,ntil 100)+ 5ATT rules applied to all of the following+ e&cept A. 2anufactured goods B. (er ices C. Te&tiles :. Agricultural products

Difficulty: Medium

.). (p. 223) According to the 10/6 ,ruguay 1ound ????? was to "e created to implement the 5ATT agreement. A. ;orld Trade <rgani!ation *. International 2onetary fund C. ,nited Eations :. ;orld *an#

Difficulty: Medium

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Chapter 06 - The Political Economy of International Trade

.6. (p. 224) After the ,ruguay 1ound of 5ATT e&tended glo"al trading rules to co er trade in ser ices+ the first two industries targeted for reform "y the ;T< were A. Te&tiles and technology B. Telecommunications and financial ser ices C. Automoti es and aerospace :. Agriculture and consulting ser ices

Difficulty: Medium

... (p. 22!) The 2illennium 1ound ended in 1000 with A. A successful record on agricultural products *. A new agenda for the ne&t round focusing on financial ser ices C. Eo agreement on the reduction of "arriers to cross-"order trade in agricultural products and trade and in estment in ser ices :. A decision to a oid =:I

Difficulty: Medium

./. (p. 226) ;hich of the following is not a reason why ;T< is "eing critici!ed "y those opposing free trade> A. Its trade laws allow imports from low-wage countries and result in a loss of 9o"s in highwage countries *. Its rules outlawing the a"ility of nations to stop imports from countries where wor#ing conditions are ha!ardous C. The ad erse impact that some of its rulings ha e had on en ironmental policies . Its lac# of a"ility to force any mem"er nation to ta#e an action to which it is opposed.

Difficulty: Medium

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Chapter 06 - The Political Economy of International Trade

.0. (p. 227) ????? has occurred when foreign goods are "eing sold cheaper than at home or "elow their cost of production. A. 2ar#et saturation *. Price elasticity C. Production efficiency . :umping

Difficulty: Medium

/0. (p. 228) The ;T< argues that "y remo ing all tariff "arriers and su"sidies to agriculture all of the following would occur+ e&cept A. The o erall le el of trade would increase B. There would "e o erproduction of products that are hea ily su"sidi!ed C. Prices would fall for consumers :. 5lo"al economic growth would rise

Difficulty: Ha d

/1. (p. 229) The T1IP( regulations esta"lished at the 100) ,ruguay 1ound A. Esta"lished regulations on patents and copyrights *. (et a new le el of agriculture su"sidies C. <rgani!ed <EC: countries to eliminate tariffs on te&tiles :. Esta"lished new tariff le els on technology

Difficulty: Medium

/$. (p. 229) T1IP( regulations o"lige ;T< mem"ers to all of the following e&cept A. 5rant and enforce patents lasting at least $0 years. *. 5rant and enforce copyrights lasting )0 years. C. Comply with the rules within ) years in the case of rich countries :. Comply with the rules within 10 years in the case of the poorest countries

Difficulty: Medium

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Chapter 06 - The Political Economy of International Trade

/%. (p. 230) ????? are the highest rate that can "e charged+ which is often+ "ut not always+ the rate that is charged. A. Ad alorem tariff rates *. Tariff rents C. (pecific tariff rates . *ound tariff rates

Difficulty: Medium

/'. (p. 233) Identify the incorrect statement pertaining to trade "arriers. A. They raise the costs of e&porting products to a country B. They may put a firm at a competiti e ad antage to indigenous competitors C. They may limit a firm7s a"ility to ser e a country from locations outside of that country :. To conform to local content regulations+ a firm may ha e to locate more production acti ities in a gi en mar#et than it would otherwise

Difficulty: Ha d

Essay Questions /). (p. 207) :iscuss the different types of tariff "arriers. Consider the "eneficiaries of tariff "arriers and the losers. There are two types of tariffs+ specific tariffs that are le ied as a fi&ed charge for each unit of a good imported and ad alorem tariffs that are le ied as a proportion of the alue of the imported product. The go ernment gains from tariffs in the form of increased re enues. :omestic producers also "enefit from the protection against foreign competition. Consumers lose "ecause they must pay more for products that ha e "een affected "y tariffs.

Difficulty: Medium

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Chapter 06 - The Political Economy of International Trade

/6. (p. 208) :iscuss the different types of su"sidies. 3ow do su"sidies help domestic producers> (u"sidies are essentially a go ernment payment to a producer. There are many forms of su"sidies including cash grants+ low-interest loans+ ta& "rea#s and go ernment e-uity participation in domestic firms. (u"sidies "enefit domestic producers in two waysH they help them compete against low-cost foreign imports and they help them gain e&port mar#ets.

Difficulty: Medium

/.. (p. 208"210) Compare and contrast import -uotas and oluntary e&port restraints. An import -uota is a direct restriction on the -uantity of some good that may "e imported into a country. The restriction is normally enforced "y issuing import licenses to a group of indi iduals or firms. In contrast+ a oluntary e&port restraint BAE1C is a -uota imposed "y the e&porting country+ typically at the re-uest of the importing country7s go ernment. =oreign producers agree to AE1s "ecause they fear more damaging puniti e tariffs or import -uotas might follow if they do not. *oth import -uotas and AE1s "enefit domestic producers+ "ut hurt consumers through higher prices.

Difficulty: Medium

//. (p. 210) ;hat is a -uota rent> Pro ide an e&ample of how an import -uota affects price. The e&tra profit that producers ma#e when supply is artificially limited "y an import -uota is referred to as a -uota rent. If a domestic industry lac#s the capacity to meet demand+ an import -uota can raise prices for "oth the domestically produced and the imported good. (tudents will pro"a"ly use the e&ample of the ,.(. sugar industry when discussing the -uestion.

Difficulty: Medium

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Chapter 06 - The Political Economy of International Trade

/0. (p. 211) :iscuss the *uy America Act and its connection with local content re-uirements. The *uy America Act specifies that go ernment agencies must gi e preference to American products when putting contracts for e-uipment out to "id unless the foreign products ha e a significant price ad antage. The law specifies a product as "eing American if )1 percent of the materials "y alue are produced domestically. This amounts to a local content re-uirement that calls for a specific fraction of a good to "e produced locally.

Difficulty: Ha d

00. (p. 211) E&plain how go ernments use administrati e trade policies to "oost e&ports and restrict imports. Pro ide an e&ample of an administrati e trade policy. Administrati e trade policies are "ureaucratic rules that are almost always deli"erately designed to restrict the flow of a particular import into a country. The Gapanese are considered masters of this trade "arrier. (tudents will pro"a"ly use the e&ample of tulip "ul"s when discussing this -uestion. The Eetherlands e&ports tulip "ul"s to almost e ery country of the world e&cept Gapan. The reason is that Gapanese customs inspectors insist on chec#ing e ery tulip "ul" "y cutting it ertically down the middle+ which in effect ruins the "ul".

Difficulty: Medium

01. (p. 211"212) ;hat is dumping> 3ow do go ernments respond to charges of dumping> :umping is defined as selling goods in a foreign mar#et at "elow their costs of production or as selling goods in a foreign mar#et at "elow their DfairD mar#et alue. Antidumping policies are designed to punish foreign firms that engage in dumping. If a firm is found to "e dumping+ counter ailing duties may "e imposed. These duties can "e fairly su"stantial and stay in place for up to fi e years.

Difficulty: Medium

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Chapter 06 - The Political Economy of International Trade

0$. (p. 212) E&plain the notion of predatory "eha ior with regard to dumping. A firm that is dumping is selling its product in a foreign mar#et at "elow their costs of production or as selling goods in a foreign mar#et at "elow their DfairD mar#et alue. :umping may "e the result of predatory "eha ior with producers using su"stantial profits from their home mar#ets to su"sidi!e profits from their home mar#ets to su"sidi!e prices in a foreign mar#et with a goal of dri ing indigenous competitors out of that mar#et. <nce the firm achie es its goal+ the company will raise prices and earn su"stantial profits.

Difficulty: Medium

0%. (p. 212"17) ;hat are the political reasons for go ernments to inter ene in mar#ets> There are a num"er of political reasons why go ernments inter ene in mar#ets. The most common reason for inter ention is to protect 9o"s and industries. 5o ernments may also inter ene to protect national security+ to threaten puniti e retaliatory actions+ to protect consumers or to protect human rights and to further foreign policy o"9ecti es.

Difficulty: Medium

0'. (p. 217"19) :iscuss the economic reasons for go ernment inter ention in mar#ets. The economic reasons for go ernment interaction ha e undergone a renaissance in recent times as more economists support economic reasons for inter ention. The oldest argument for inter ention is the infant industry argument. (trategic trade policy is the other main reason gi en for economic go ernment inter ention in mar#ets.

Difficulty: Medium

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Chapter 06 - The Political Economy of International Trade

0). (p. 217"218) :iscuss the infant industry argument for inter ention in mar#ets. ;hat is 5ATT7s position on the argument> Ale&ander 3amilton proposed the infant industry argument for inter ention in mar#ets in 1.0$. According to this argument+ many de eloping countries ha e a potential comparati e ad antage in manufacturing+ "ut new manufacturing industries cannot initially compete with esta"lished industries in de eloped countries. To allow manufacturing to get a toehold+ the argument is that go ernments should temporarily support new industries until they ha e grown strong enough to meet international competitors. 5ATT has recogni!ed the infant industry argument as a legitimate reason for protectionism.

Difficulty: Medium

06. (p. 218"219) ;hat is strategic trade policy> Pro ide an e&ample. (trategic trade policy suggests that in industries where the e&istence of su"stantial scale economies implies that the world will profita"ly support only a few firms+ countries may predominate in the e&port of certain products simply "ecause they had firms that were a"le to capture first-mo er ad antages. *oeing7s dominance in the aerospace industry has "een attri"uted to these types of factors. According to strategic trade policy+ a go ernment can help raise national incomes if it can ensure that the firms that gain first-mo er ad antages in such industries are domestic rather foreign. =urther the theory argues that it might pay go ernments to inter ene in an industry if it helps domestic firms o ercome the "arriers to entry created "y foreign firms that ha e already reaped first-mo er ad antages.

Difficulty: Medium

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Chapter 06 - The Political Economy of International Trade

0.. (p. 219) ;hat is Paul 6rugman7s position on strategic trade policy> Paul 6rugman suggests that strategic trade policy aimed at esta"lishing domestic firms in a dominant position in a glo"al industry is a "eggar-thy-neigh"or policy that "oosts national income at the e&pense of other countries. Conse-uently+ a country that uses this type of policy will pro"a"ly draw retaliatory action. The resulting trade war would lea e "oth countries worse off than if a free trade approach had "een implemented to start. 6rugman suggests that to a oid the disruptions a trade war would create+ countries should instead help esta"lish the rules of the game that minimi!e the use of trade-distorting su"sidies.

Difficulty: Ha d

0/. (p. 221) :iscuss the esta"lishment of 5ATT. ;hat was 5ATT7s o"9ecti e> The 5ATT was a multilateral agreement whose o"9ecti e was to li"erali!e trade "y eliminating tariffs+ su"sidies+ import -uotas and other trade "arriers. 5ATT was esta"lished in 10'. with 10 mem"ers. 2em"ership increased to more than 1$0 nations "y the time it was superseded "y the ;T<. ,nder 5ATT+ tariff reduction was spread o er eight rounds. The last round+ the ,ruguay 1ound resulted in the esta"lishment of the ;T< which+ among other things too# o er the role of 5ATT in the glo"al economy.

Difficulty: Medium

00. (p. 222) ;hat happened to 5ATT during the 10/0s and early 1000s> :uring the 10/0s and early 1000s+ the world trading system esta"lished "y 5ATT came under significant strain as pressures for greater protectionism mounted around the world. Three issues in particular were important. =irst+ the economic success of Gapan strained the world trading system. (econd+ the world7s trading system was further strained "y the persistent trade deficit in the world7s largest economy+ the ,nited (tates. =inally+ many countries found ways to get around 5ATT regulations.

Difficulty: Ha d

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Chapter 06 - The Political Economy of International Trade

100. (p. 223"224) ;hat has "een the e&perience of the ;T< to date> ;hat does the future loo# li#e for the organi!ation> *y $00)+ the ;T< had 1'/ mem"ers with more in the application process. The ;T< has remained at the forefront of efforts to promote free trade. (o far+ it appears that its policing and enforcement mechanisms are ha ing a positi e effect. Countries are using the ;T< to settle trade disputes+ which represents an important ote of confidence in the organi!ation7s dispute resolution procedures. (o far+ the users of the system ha e included "oth de eloped and de eloping countries+ which is also a promising de elopment. In addition+ some powerful de eloped countries+ including the ,nited (tates+ ha e "een willing to accept ;T< rulings that ha e gone against them+ which attest to the organi!ation7s legitimacy.

Difficulty: Medium

101. (p. 227) ;hat are the central issues facing the ;T< at the present time> =our issues at the top of the agenda for the ;T< are the increase in antidumping policies+ the high le el of protectionism in agriculture+ the lac# of strong protection for intellectual property rights in many nations and continued high tariff rates on nonagricultural goods and ser ices in many nations. These issues were a #ey focus at the :oha 1ound which "egan in $001.

Difficulty: Medium

10$. (p. 228) ;hy are tariff rates on agricultural products generally higher than tariff rates on manufactured products or ser ices> Tariff rates on agricultural products are typically higher than tariffs on manufactured products. 3igh tariff rates on agricultural products were designed to protect domestic agriculture and traditional farming communities from foreign competition. I2= estimates indicate that remo ing the tariffs and su"sidies could raise glo"al economic welfare "y I1$/ "illion annually.

Difficulty: Medium

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Chapter 06 - The Political Economy of International Trade

10%. (p. 231"232) :iscuss the :oha 1ound of trade tal#s> The :oha 1ound "egan in $001. Its agenda focused on cutting tariffs on industrial goods and ser ices+ phasing out su"sidies to agricultural producers+ reducing "arriers to cross-"order in estment and limiting the use of antidumping laws. The agenda agreed upon at :oha should "e seen as a game plan for negotiations o er the ne&t few years.

Difficulty: Medium

10'. (p. 233) E&plain how trade "arriers affect a firm7s strategy. There are four main ways trade "arriers affect a firm7s strategy. =irst+ tariffs raise the cost of e&porting+ putting the firm at a competiti e disad antage. (econd+ -uotas may limit a firm7s a"ility to ser e a country from outside of that country. Third+ to conform to local content regulations+ a firm may ha e to locate more production acti ities in a gi en mar#et than it would otherwise. =inally+ the threat of antidumping actions limits the firm7s a"ility to use aggressi e pricing to gain mar#et share in a country.

Difficulty: Medium

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