International Trade Final

Quotas are a greater threat to competition than tariffs because:

quotas preclude additional imports at any price.

An example of a nontariff barrier (NTB) is:

a physical limit on imports.

Nontariff barriers (NTBs) include all of the following except:

tariffs.

Quotas:

a. are a form of protectionism. b. restrict imports of a product to a certain quantitative level. c. are banned under the WTO. *d. all of the above

Once a country joins the WTO:

quotas must be slowly eliminated over a given period of time.

Quotas exist because:

a. not all countries are members of the WTO. b. some countries that are members of the WTO are allowed to maintain quotas during a transition period. c. many industrial countries implement quotas in defiance of WTO rules. *d. all of the above

A VER is:

a voluntary quota imposed by the exporting country.

Which of the following is not an NTB?

MFN tariff

Nontariff barriers include all of the following except:

tariffs.

Nontariff barriers include all of the following except:

the corporate income tax.

Which of the following statements is true?

A VER is essentially the same thing as a quota.

A VER is imposed by:

the foreign government.

Which of the following countries has a quota on imports of sugar?

U.S.

Which of the following is true for the above quota?

The government would receive area C if it auctions the quota.

Suppose the government used a tariff to achieve the same level of protection as the quota illustrated above. Comparing the two outcomes (quota vs. tariff) we can conclude:

the government can collect the tariff or sell the quotas to receive area C

With no trade the amount of domestically produced PCs is:

Q3

With no trade the country's producer surplus is:

areas b + c + g.

With no trade the country''s consumer surplus is:

area a.

With free trade the country imports:

Q1 to Q5

With free trade the country's producer's surplus is:

area g.

With a quota imposed on PCs, the country imports:

Q2 to Q4

The loss of consumer surplus due to the quota is:

area c + d + e + f.

The amount of producer surplus domestic producers gain as a result of the quota is:

area c.

When a quota is imposed in a domestic market:

domestic producers capture all of any future increase in demand.

For the government, a quota is worse than a tariff because part of the lost _____ surplus is not transferred to the government.

consumer

Like tariffs, quotas result in:

a higher imported price.

When a quota is imposed, the losers include:

consumers

Suppose a quota on foreign-produced cars is enforced by the U.S. government. Which of the following groups is most like to oppose this action?

consumers

When a quota is imposed:

a. foreign firms may gain by selling the imported product at a higher price. b. foreign firms may lose by selling fewer imports. both a and b

Like tariffs, quotas generally lead to:

higher prices and fewer imports.

If a government auctions its quota:

foreign firms pay an additional cost.

To calculate a tariff equivalent for a quota one must:

take the difference between the world market price and the quota constrained domestic price and divide by the world market price.

When demand increases for a good subject to a quota:

imports would stay the same but the price would rise.

If imports are constrained by a quota and demand increases then:

prices will rise.

Which of the following statements is true?

If demand increases in the presence of a tariff, then prices will not increase because the amount of imports will increase.

With a quota, as the domestic demand for a product rises:

losses to society increase.

After a quota has been imposed in a market, suppose that the demand for the product increases, this would cause the quota price to _____ and the amount imported to _____ .

rise, remain the same

Which of the following statements is false?

The government always receives the same revenue with either a tariff or a quota.

In moving from free trade to a quota, _____ is likely to occur.

a quality upgrading of the traded good

Which of the following describes the use of government policy to enhance exports in specific industries?

Strategic trade policy

The U.S. policy that requires the government to buy from a domestic supplier unless the domestic supplier''s price is more than 6% higher than the foreign price is called:

the Buy American Act of 1933.

The Buy American Act of 1933 gives American suppliers a _____ percent margin of preference over foreign suppliers and a _____ percent margin of preference for military or defense related goods.

6 - 50

Which of the following is not one of the reasons countries have quotas?

a. Non- WTO member b. New WTO member c. Protection of agricultural production d. Membership in the UN ????

Using various government policies to increase exports is frequently called:

strategic trade policy.

Which of the following is a source of government regulation related to international trade?

a.Administrative regulations b.Technical regulations c.Industrial policy *d.All of the above

The impact of transportation costs on international trade causes:?

import prices to rise

The impact of transportation costs on international trade causes:?

imports to decrease

S.A.
Describe the various reasons that some countries still have quotas.

Quotas are considered such a harmful form of protectionism that they are banned by the WTO. Nevertheless, quotas still exist in various forms for four reasons. First, not all countries are members of the WTO. Countries that have not joined are free to impose quotas. Second, countries that are WTO members are allowed to maintain their previously existing quotas for a specified period of time. As such, all of the newly joined members are in the process of eliminating their quotas. Third, some countries implement quotas on some goods in defiance of WTO rules. The U.S. quota on sugar is an example. Fourth, international trade in textiles and apparel is profoundly distorted by the Multifibre Arrangement (MFA). For each developed country, the MFA manages trade in these two industries by enforcing a quota by product and by country for imports of textiles and apparel.

S.A.
Show why an ""auction quota"" would tend to raise an amount of government revenue equivalent to that generated by a tariff.

Because the supply of imported cloth is reduced, the price of cloth will begin to rise until a new equilibrium is reached. Domestic consumers are harmed as consumer surplus declines by areas ''a + b + c + d''. Domestic producers benefit as producer surplus rises by area 'a'. As in the case of a tariff, there are efficiency losses of areas 'bb' and 'd'. Who receives area 'c' is the only difference between a tariff and a quota. In the case of a tariff, area 'c' is the amount of tariff revenue the domestic government collects. In the case of a quota, area 'c' accrues to the foreign producers and makes them more profitable. The net welfare loss to the quota-imposing country is larger under a quota than a tariff. With a tariff, the domestic government gains revenue, area 'c.' With a quota, area 'c' is lost to the foreign producers. The government can capture area 'c' under a quota by auctioning the quotas to foreign producers in a free market. The advantage to this auction quota method is that the domestic government would gain area 'c' which now accrues to foreigners, and the limited quota supply would go to those importers most in need of the product who would pay the highest prices.

S.A.
You are the trade minister of a new member of the WTO. As a result, you must convert all of the quota protection in the country to tariff protection. How would you decide what the ad valorem tariff would be that would give an amount of protection equal to the quota?

Another method available to a government to capture area 'c' is to convert the quotas into an equivalent tariff. The conversion of quotas into a tariff is easy to do. To calculate a tariff equivalent, take the difference between the good''s world market price and the good''s quota constrained domestic price and divide that difference by the good''s world market price.

S.A.
Show why a quota is worse than a tariff if the demand for the product increases.

This is illustrated above, where we have assumed that the demand for the product increases from D to D'' after a quota has been placed in the market. As a result of the quota, the quantity imported cannot increase when there is an increase in demand. As a result, the price of the product continues to rise. In the case of a tariff, the price would remain constant at P'' and the additional demand for cloth would be supplied with additional imports of cloth. However, when a quota is present in the domestic market, the domestic producers supply the increase in domestic demand. The foreign producers of cloth also gain in this case as the price they receive for their product increases. The important point is that the losses for consumers and society are much larger in the case of a quota than in the case of a tariff when the demand increases. These losses are shown by the areas the shaded area, and as the figure indicates, losses to society increase as the demand for the product increases.

S.A.
Describe strategic trade policy. Does this type of policy actually increase exports?

In general, strategic trade policy refers to industrial policies that exporting countries pursue. Such policies are aimed at maximizing a country''s exports. A country''s strategic trade policy requires that the trade ministry of a country identify an industry in which the country has a comparative advantage. The country then nurtures this industry by subsidizing its development and protecting it from imports. Once the industry has developed, the industry can export the product to the world market devastating similar industries in the target countries. With foreign competition disposed of, the industry now has the monopoly power to raise prices and earn excess profits. The effective use of strategic trade policy is often applied to Japan and its Ministry of International Trade and Industry (MITI) during the 1980s, when Japanese imports of automobiles, steel, and semiconductors were flooding the U.S. market. In an article in The Economist, the authors show what economists have long suspected. Japanese industrial policy does not work much better in Japan than anywhere else. The empirical test to determine this was that there should be a positive correlation between how fast Japanese industries grow and the government''s support of the industry. In fact the authors found a negative correlation. Japanese trade bureaucrats do what most governments do, which is support industries that are having a hard time competing with imports.

S.A.
Explain the effects of transportation costs on trade.

With positive transportation costs, the quantity of goods traded declines as the price of imported goods increase and the price of exported goods falls.. In addition, in the importing country, the consumption of imports declines while the domestic production of import competing goods increases. For the exporting country, the consumption of the export good increases while the production of the exported good decreases. Thus, the effect of transportation costs is to move the price of cloth and the quantities traded partially back toward the no trade situation. As such, transportation costs act has a barrier to trade much like tariffs and other nontariff barriers.

International trade maximizes world welfare as the gains from trade cause:

A more efficient allocation of world resources.

Which of the following is not a benefit of international trade?

d. a re-distribution of income from scarce to abundant factors of production

Regulation of business by government is designed to aid in all of the following areas except:

d. concentrating the operation of the economy.

In economics the term policy usually means:

an action or actions taken by the government.

The theory of public choice is based on the premise that:

a. politicians attempt to maximize their utility.

The branch of economics that applies economic analysis to voting behavior is known as:

c. public choice.

The branch of economics that deals with governmental decision making is:

c. public choice.

The study of politics within a country like the U.S. by economists is called:

d. public choice.

The activity of a group that seeks to gain from changes in government policy is known as:

c. rentseeking.

The use of resources to convince a government to restrict trade in a particular product is called:

a. rentseeking.

The group that would most likely lobby to influence the international trade policy of a country is:

d. the industry group that has a comparative disadvantage.

The fact that there are very different tariffs on different products is known as:

a. the structure of protection.

Which of the following would mostly likely not receive protection?

d. Industries that have a large number of firms

Which of the following increases the likelihood of protectionism for a particular industry?

a. The industry produces an intermediate product.

Which of the following statements is false?

c. Intermediate products tend to get less protection than final products.

Which of the following is more likely to be protected by trade barriers in the U.S.?

d. steel

Which of the following industries are more likely to be protected?

a. industries with few firms b. industries that produce an intermediate product c. industries with a comparative disadvantage *d. all of the above

The benefits of a very detailed tariff schedule include:

c. the ability of government to provide protection on a specific product.

Which of the following is the only country in the world with a uniform tariff?

d. Chile

The Constitution of the U.S. stipulates that the authority to regulate commerce and tariffs is given to:

b. Congress.

Which of the following statements is false?

d. The Smoot-Hawley Tariff of 1930 led to a large reduction in the U.S. tariff.

The Tariff of Abominations:

c. led to a large increase in U.S. tariffs in 1828.

The Tariff of _____ was passed in _____ over the strong objections of the Southern states.

b. Abominations, 1828

The now infamous legislation of 1930 that imposed a very high tariff structure on goods imported into the U.S. was the:

d. Smoot-Hawley Tariff

The Smoot-Hawley Tariff of 1930:

b. increased tariffs to their highest levels of the twentieth century.

Which of the following pieces of legislation is the foundation of modern U.S. international trade policy?

c. The Reciprocal Trade Agreements Act of 1934

Which of the following pieces of legislation made MFN an integral part of U.S. international trade policy?

c. The Reciprocal Trade Agreements Act of 1934

The act which was passed to mitigate the Smoot-Hawley Tariff and which is still the cornerstone of American trade policy is:

d. the Reciprocal Trade Agreements Act.

Which of the following is not a key provision of the Reciprocal Trade Agreement Act?

d. Congress can amend a negotiated trade agreement.

Which of the following transferred power for trade negotiations from Congress to the President?

d. The Reciprocal Trade Agreements Act of 1934

Since World War II, tariffs in general have:

b. decreased.

The current average U.S. tariff rate is:

d. 4%.

The concept whereby all trading parties that were contracting parties to GATT or new members of the WTO are treated the same with respect to tariffs is known as:

d. MFN.

Which of the following is not a form of administered protection?

c. Specific duties

Which of the following is not a form of administered protection?

d. Offshore assembly

Dumping by a firm can be defined as:

a. a firm selling a product at a price below its cost of production in a foreign market. b. a firm selling a product in a foreign market at a price lower than the price charged in its home market. * d. both a and b

Which of the following is not a type of dumping?

c. Complex dumping

Dumping occurs when a firm:

d. sells in a foreign market at prices that are below the price charged in the home market.

Which of the following does not cause lasting damage to the domestic industry?

a. Sporadic dumping

Which of the following is the term that refers to a situation where a country exports a good at a lower price than it sells for domestically?

Dumping

Resolution of dumping cases in the U.S. involves investigations by:

d. the International Trade Administration and the International Trade Commission.

Antidumping duties:

a. are used to offset the effects of imports being sold at a price lower than that charged in the country of origin.

Which of the following statements is true?

In an antidumping case, the ITA determines if the foreign product is being dumped in the U.S. market.

Countervailing duty cases involve:

b. foreign subsidies.

Payment by government to a firm for each unit of output that it exports is known as a(n) _____.

a. export subsidy

A countervailing duty is a tariff that is levied to:

c. counteract subsidies given to foreign firms by their own governments.

Countervailing duty cases involve allegations of:

c. foreign export subsidies.

The application of countervailing duties against subsidized exports:

a. does not require evidence of international price discrimination.

The escape clause:

a. can be used to restrict the import of fairly traded goods.

In the U.S. raising tariffs on a fairly traded imported product that causes harm to a domestic industry is what type of action?

c. Escape clause

Which of the following companies filed a famous escape clause case in the early 1980s?

c. Harley-Davidson

When the Allied powers met at a conference in 1944, what international organizations were developed?

a. The International Monetary Fund b. The International Bank for Reconstruction and Development (World Bank) * d. Both a and b

GATT was:

d. the interim committee designed to implement the International Trade Organization.

From the late 1940s until the creation of the WTO, the treaty (organization) that was primarily responsible for conducting multilateral trade negotiations was the:

b. GATT.

Which of the following statements is false?

b. The ITO was a substitute for GATT.

A principle problem associated with GATT was that:

c. it had no enforcement mechanism.

Most favored nation (MFN) status means that a country treats another country:

b. the same as its other trading partners.

When using the most favored nation principle in international trade, this means that:

b. the lowest MFN negotiated tariff rate would apply to all WTO members countries.

The most favored nation principle of the WTO means that a tariff concession granted by one member country to another member country will:

b. be extended to all other countries that are WTO members.

Which of the following is an exception to the most favored nation principle?

c. A free-trade area or a customs union

Which of the following was not a multilateral trade negotiation conducted under GATT?

d. The NAFTA Round

Which of the following was not an MTN?

a. The Seattle Round

The international organization that serves as a forum for trade discussions and the development of trade rules is called the:

a. WTO.

The current round of multilateral trade negotiations is known as:

c. the Doha Round.

The WTO was established in which round of trade negotiations?

b. The Uruguay Round

The General Agreement of Trade in Services is:

c. an agreement among countries that trade in services should be regulated by agreed upon rules.

Both the WTO and GATT have worked to:

d. reduce trade barriers among countries on a multilateral basis.

Which organization has procedures for settling international trade disputes?

d. The World Trade Organization

Which of the following countries is not currently a member of the WTO?

d. Iraq

Why do domestic firms and foreign countries find it difficult to interact with U.S. trade policy?

c. No one agency or person is responsible for U.S. trade policy.

The goal of economic development is for the _____ countries to achieve a standard of living roughly equivalent to that of _____ countries.

b. developing, developed

In the low- and middle income countries _____ and _____ of the population respectively are illiterate.

d. 17%, 38%

GDP per capita in the high-income countries is approximately:

d. $26,964.

GDP per capita in low-income countries is less than _____ per year.

a. $500

Which of the following is a precondition for economic growth?

c. The rule of law

The rule of law is important to economic growth as it is necessary for the enforcement of _____ .

c. contracts

Which of the following is not one of the factors of production?

d. Property rights

Which of the following countries has a large amount of economic freedom?

a. Hong Kong

In order for GDP per capita to grow, it is necessary for _____ growth to be in excess of _____ growth.

c. GDP, population

The graphical relationship between real GDP and the size of the labor force is known as:

b. the production function.

The production function:

d. slopes upward to the right.

In the figure above, an increase in the labor force:

a. increases real GDP.

In the figure above, which of the following would cause an upward shift in the production function?

c. An increase in the capital stock.

In the figure above, which of the following would cause an increase in real GDP?

b. An improvement in technology

In the figure above, an increase in real GDP with an unchanged labor force could happen as a result of:

b. a higher level of technology.

An improvement in technology would tend to:

c. cause an upward shift in the production function.

The theory of comparative advantage indicates that international trade should increase the output of the economy by moving resources from _____ to _____ industries.

b. comparative disadvantage, comparative advantage

An increase in economic growth that cannot be accounted for by increases in either the labor force or the capital stock is known as an increase in:

b. total factor productivity.

FDI in a developing country would tend to cause:

c. an upward shift of the production function.

Which of the following is responsible for the largest movements of FDI into developing countries?

c. MNCs

Which of the following would not cause an upward shift in the production function in a developing country?

d. Immigration

Importing and exporting of goods and services can lead to increases in specialization and knowledge that can:

b. increase total factor productivity.

Which of the following refers to natural resources or the ability to produce certain agricultural products?

a. primary products

The possession of primary products in a developing country could:

a. provide a convenient source of revenue for the government.

In many cases, both the demand and supply of primary products are _____ .

b. inelastic

If primary products are a high percentage of a country's exports then large changes in the price of these commodities could influence the _____ .

b. terms of trade

Which of the following is a cartel that attempts to influence the world price of crude oil?

b. OPEC

The development strategy based on developing industries that will reduce imports is known as:

b. import substitution.

Which of the following is not associated with an import substitution development strategy?

d. Lower prices for consumers

An import substitution strategy tends to lead to:

d. more rent seeking behavior.

A development strategy based on developing industries in line with a country's comparative advantage is known as:

c. export promotion.

Which of the following regions has tended to grow fastest during the 1990s?

a. East Asia

Which of the following statements is incorrect?

a. Manufacturing requires very little infrastructure.

High tariffs are a feature of which of the following development strategies?

b. import substitution

Economies using an export promotion development strategy tend to:

b. create more jobs.

The correct term for "foreign aid" is:

d. official development assistance (ODA).

Which of the following is not part of basic infrastructure in a developing country?

d. UNIDO

ODA in the world economy is approximately:

b. $65 billion.

ODA is less than _____ percent of the collective GDPs of the developing countries.

a. 1

U.S. ODA is approximately _____ billion.

b. $16

ODA as a percentage of GDP for all developed countries is approximately _____ .

b. 0.26

A transfer of money from a developed country government to a developing country where there is no repayment involved is known as a _____ .

a. grant

ODA that involves restrictions on how and where the aid may be spent is known as:

c. tied aid.

Which of the following part of the World Bank primarily makes loans to middle-income countries for infrastructure?

a. IBRD

Which of the following part of the World Bank primarily makes loans to low-income countries?

b. IDA

Which part of the World Bank makes loans to private sector firms in developing countries

c. IFC

During the 1980s and 1990s, the World Bank was criticized for not taking _____ concerns into account when making loans.

c. environmental

The most recent World Bank initiatives involve the reduction of _____ in developing countries.

d. corruption

Which of the following UN agencies was established to assist developing countries in the process of integrating into the world economy?

b. UNCTAD

Which of the following UN agencies assists developing countries with problems associated with industrialization?

d. UNIDO

Which of the following UN agencies assists the developing countries with trade negotiations?

a. UNCTAD

Which of the following is not a UN agency?

d. IFC

S.A.
Describe what the term economic development means.

Economic development is defined as a goal that developing countries are attempting to achieve. The primary goal is for these countries to achieve a standard of living equivalent to that which prevails in the developed countries. This goal usually is defined in terms of GDP per capita. However, GDP per capita is really a proxy for a number of other conditions associated with the developed countries. These conditions include adequate food and housing; access to basic health care; access to basic amenities such as clean water; and basic education.

S.A.
List and describe the preconditions necessary for economic growth theory to work properly.

There are two preconditions necessary for economic growth theory to work properly: property rights and the rule of law. Property rights are essential to the workings of a market economy. For economic transactions to occur smoothly it must be clear exactly who owns what. If market participants cannot be sure of this, then a large number of economic transactions that enhance economic growth will not occur. Second, normal economic transactions frequently involve contractual obligations between parties. In the routine course of economic activity, disputes over contracts will occur. Market participants need to be certain that in the case of any disputes, the government provides mechanisms for dealing with these potential problems. Otherwise, the amount of total economic activity occurring will be reduced and damage the rate of economic growth.

S.A.
List and describe the factors of production.

The factors of production are land, labor, capital, and technology. Because land is difficult for a country to acquire, we usually assume that the amount of land is fixed. Labor refers to the size of a country's labor force. The labor force of a developing country usually is growing rapidly as a result of a high birth rate coupled with a declining mortality rate. The capital stock of a country is the amount of money invested in business structures and equipment. Part of the capital stock is in the public sector in terms of investments made in infrastructure such as roads and schools. Technology also is a factor of production. In economics, we define technology as the ability to produce more output with the same amount of inputs or the same output with fewer inputs. Improvements in technology can be attributable to either improvements in the capital stock or improvements in the quality of management

S.A.
Describe how the production function relates real GDP to the size of the labor force. How does the concept of diminishing returns affect the production function?

Along any given production function, the size of the capital stock and the level of technology remain constant. As a result, any variations in the size of the labor force cause a change in the level of real GDP. However, the relationship between the labor force and real GDP is not constant. Since the capital stock is a constant, increases in the size of the labor force subject the economy to the concept of diminishing returns. Initially, as the labor force increases real GDP grows rapidly. However, past some point adding additional workers leads to diminishing increases in real GDP.

S.A.
How do increases in the capital stock or improvements in technology affect real GDP?

A change in the capital stock will shift the production function upward. This means that for any given amount of labor, real GDP will be higher. The same effect occurs if there is an improvement in technology. Again, the production function would shift upward. For any given amount of labor, real GDP will increase. Both increases in the capital stock and improvements in technology would tend to increase real GDP.

S.A.
Describe how openness enhances economic growth.

The theory of comparative advantage indicates that an economy that trades should produce more output as resources are transferred from comparative disadvantage to comparative advantage industries. It has been shown empirically that this is the case by the positive correlation between openness and economic growth. More detailed studies of this correlation have found a positive relationship between openness and total factor productivity. Total factor productivity refers to increases in real GDP that are not accounted for by changes in the labor force or the capital stock. Because a number of studies have found this positive relationship, we can be fairly certain that the more an economy trades the faster will be its rate of economic growth.

S.A.
What role do MNCs play in the economic growth of developing countries?

MNCs provide two important factors in economic growth. First, increases in the capital stock increase real GDP. Since FDI increases a country's capital stock, it normally will increase the rate of economic growth. This addition to the capital stock is especially important in developing countries. Second, the level of technology in developing countries is usually below that which prevails in the developed countries. Most FDI in developing countries originates in the developed countries. Almost invariably, this FDI also transfers technology to the developing countries. This improvement in technology would cause an increase in the rate of economic growth.

S.A.
How can the possession of primary products enhance economic growth?

Primary products may be relatively cheap to produce and the production and export of these products may be quite profitable. In this case, primary products may be a reliable source of revenue that the government can use to enhance economic development. Second, these products may lead to the initial stages of industrialization that involves transforming the products into higher value added manufactures. Finally, the export of primary products may yield foreign exchange that can be used to purchase capital equipment for both the private and public sectors that would increase economic growth.

S.A.
What are the elements of an import substitution development policy? Why are many countries now abandoning this strategy?

An import substitution development strategy involves the attempt to increase the size of the manufacturing sector by replacing imports. This strategy usually involves a combination of high tariffs, quotas, low taxes, and other forms of government subsidies. However, this strategy has produced a number of economic problems. First, consumers and producers end up paying higher prices for locally produced goods that also may be of lower quality. Second, the expanding manufacturing sector is taking resources from other sectors that might be able to use them more efficiently. In turn, this may cause a reduction in the rate of economic growth and a loss of job opportunities. Finally, the strategy involves a substantial amount of protectionism. This leads to a large amount of rent seeking activity that is a further waste of resources.

S.A.
Describe an export promotion development strategy?

An export promotion development strategy fundamentally means allowing the economy to develop along the lines dictated by comparative advantage. In the case of developing countries, this usually means developing labor-intensive industries. The role of the government is to provide the necessary conditions that allow these industries to produce as much as possible. This means the provision of essential infrastructure in urban areas as the economy transfers resources from the agricultural sector to the manufacturing sector. The government also needs to provide a framework conducive to the transfer of capital and technology into the country from the developed countries. If executed properly, export promotion tends to improve the rate of economic growth and provide more job opportunities in a labor-abundant country.

S.A.
What is the relative importance of ODA in the economic development process?

ODA amounts to less than 1 percent of the collective GDPs of the developing countries. Although, this is a relatively small amount of money, it can be critical in the economic development process. In order to increase economic growth, the developing countries need to improve their economic infrastructure. ODA can be important in this process by providing capital that would be difficult to raise in local capital markets and providing long-term loans at reasonable rates of interest. Also, much of this investment requires capital equipment from the developed countries. ODA may provide the foreign exchange necessary for countries to purchase this capital equipment that may be in short supply in the developing countries.

S.A.
List and briefly describe the major multilateral development organizations.

The major multilateral development agencies are the World Bank and the United Nations agencies. The World Bank makes loans for economic infrastructure projects in both middle- and low-income countries. It also makes loans to private sector firms. The World Bank is involved in enhancing the flow of FDI to developing countries by providing insurance and arbitration procedures. The African, Asian, and Interamerican Development Banks supplement the activities of the World Bank by providing smaller loans for development projects in their respective regions. There are three UN agencies heavily involved with economic development. UNCTAD provides technical assistance to countries integrating into the world economy. UNIDO provides assistance to countries that are in the process of industrializing. The UNDP coordinates the activities of all the UN agencies that to a greater or lesser extent are involved with the process of economic development.

S.A.
Describe the market for government regulation.

Not all government regulation of industries and firms works to the benefit of society as a whole; some regulation favors one segment of society. Industries and firms that benefit from regulation favor it. For example, it's illegal for firms to conspire to fix or raise prices. However, firms can legally raise prices if the government regulates and enforces minimum prices for an industry. Firms within this industry may find it in their own interest to accept regulation if it can enhance their profits. Under these circumstances, industries and firms have a demand for government regulation, and that means that there is a market for government regulation. One area where a market for government regulation exists is international trade. Imports of goods and services have conflicting effects. Consumers want the benefits that come from free trade, but firms and workers in the industries that compete with imports want to restrict trade. In the U.S., special interest groups lobby for changes in laws and regulations that will benefit them, although not society as a whole. Lobbying to restrict trade has a long history in the U.S. and most other countries.

S.A.
How does collective action lead to protectionism?

In a democracy, individuals have an incentive to form groups designed to influence the government to pass laws that serve their collective interest. This behavior is called collective action. In the case of trade policy, while any country benefits from free trade, the gains to individual consumers are relatively small per good consumed. Because an individual consumer cannot quantitatively feel the gains, individuals don't form groups to lobby the government for free trade. The firms within the economy's industries that have a comparative advantage find it difficult to lobby their own government for freer trade since they are concerned about the trade policies of foreign governments. The group that will lobby the domestic government concerning free trade is the group that ineffectively competes with imports and lobbies for protection from imports. Although protection is not in the country's interest, it is in the interest of this special interest group. Activities that are designed to benefit a special interest group are called rent-seeking activities. Requesting that the government raise or not lower a tariff on a particular good is a form of rentseeking. A special interest group's rent-seeking behavior may also maximize the votes a politician receives in the next election. In addition, voting for protection may gain the politician a few additional votes from the industry, firms, and workers that receive the protection.

S.A.
Why is the tariff schedule of most countries so complicated?

Complexity in a country's tariff schedule provides two advantages. First, a producer of a good that competes with imports can focus its lobbying efforts for protection on a particular good. For example, it is easier to gain protection for a product like imported bacon than for all imported food. Second, a detailed tariff schedule makes it possible for a politician to pick up votes by protecting one specific good without inducing protests from the average consumer. This is why most countries have developed complicated tariff schedules, where tariffs on very similar goods may be dramatically different.

S.A.
List the factors that cause the tariff on some products to be higher than other products.

Researchers have studied why the tariff is low on one good and high on another. This analysis of variation in tariffs by product for a country is called the structure of protection. In general, this research indicates several results. First, large industries that are important to a country are more likely to receive protection than are small unimportant industries. Second, the more concentrated the industry, the more likely it is to have protection because it is easier for the firms to organize to lobby for protection when there are fewer firms in the industry. Third, it is easier for firms to obtain protection if they produce an intermediate product, such as steel, where the voters are unlikely to notice price increases. Fourth, the potential voting strength of the industry's employees seems to make a difference. In addition, if the industry is regionally concentrated and/or unionized, the workers are able to lobby more effectively. Finally, industries that have a comparative disadvantage are more likely to be protected. This research indicates that an industry characterized by one or more of these factors does not guarantee it will be protected. However, the research does indicate that an industry having one or more of these factors increases the probability that it will have a higher tariff.

S.A.
Describe the factors that tend to influence the structure of protection in the U.S.

The structure of protection in the U.S. is influenced by several factors. First, large industries that are important to the U.S. are more likely to receive protection than are small unimportant industries. Second, the more concentrated the industry, the more likely it is to have protection because it is easier for the firms to organize to lobby for protection when there are fewer firms in the industry. Third, it is easier for firms to obtain protection if they produce an intermediate product, such as steel, in which the voters are unlikely to notice price increases. Fourth, the potential voting strength of the industry's employees seems to make a difference. In addition, if the industry is regionally concentrated and/or unionized, the workers are able to lobby more effectively. Finally, industries that have a comparative disadvantage are more likely to be protected. This research indicates that an industry characterized by one or more of these factors does not guarantee it will be protected. However, the research does indicate that an industry having one or more of these factors increases the probability that it will have a higher tariff.

S.A.
Discuss the advantages of a country having a uniform tariff.

Economists have long advocated a uniform tariff that would solve a number of problems associated with a complicated tariff schedule. One, the tariff becomes easy to administer because customs officials would not have to worry about classifying a product into whatever category it might best fit. Two, a uniform tariff makes lobbying for protectionism much harder. If an import-competing industry wants an increase in the tariff, the tariff would have to increase on all imports. This is likely to create some resistance for several reasons: 1) a general increase in the tariff is unlikely to pass by consumers completely unnoticed; 2) other industries capable of lobbying the government would likely do so; 3) firms purchasing imported intermediate products would see the increase in the tariff as a direct increase in their costs and would complain to the government; 4) the same would be true of firms that are purchasing imports for final sale to the consumer; and 5) consumer preferences for lower tariffs would lead to the optimal public choice strategy for a politician to lower tariffs.

S.A.
What are the important components of the Reciprocal Trade Agreements Act? Why is this act so important?

Three provisions of this the Reciprocal Trade Agreement Act are still important today. First, tariff reciprocity means that the U.S. will negotiate tariff reductions only in return for tariff reductions by its trade partners. This reciprocity principle is based on the idea of fairness, as mutual tariff reductions benefit U.S. consumers and foreign producers through an increase in U.S. imports while the increase in exports benefit U.S. producers and foreign consumers. Reciprocity is still deeply embedded in current trade negotiations. Second, the Act transferred U.S. trade policy from Congress to the President by giving the President authorization to negotiate trade agreements. This provision allows other countries to negotiate with the Executive branch of the U.S. government without having to negotiate every detail of the agreement with Congress. Once an agreement has been negotiated, Congress votes to approve the agreement in total, meaning the agreement cannot be amended. Third, the Act, and all future trade legislation, is based on the Most Favored Nation (MFN) principle. This nondiscrimination principle means that any tariff cuts the U.S. agrees to with one country would apply to the products of all other trade partners that the U.S. government has granted most-favored-nation status. The MFN is a very old trading principle and the first trade treaty that the U.S. signed with France in 1778 contained this principle. MFN makes administering tariffs much easier as approximately 140 countries have MFN status. In addition, trade legislation based on MFN makes international trade far less risky for businesses when compared to a world where tariffs could be changed on a political whim.

S.A.
List and describe the three forms of administered protection.

There are three different forms of administered protection, but they all involve increasing the tariff on a particular good and these forms of administered protection are sanctioned by the WTO. The first type of administered protection is called the antidumping law. An antidumping law is a law that does not allow an international firm to sell its product in an export market for less than it is sold for in its home market or below its cost of production. The second form of administered protection is a countervailing duty. This is a tariff designed to offset foreign government export subsidies. Lastly, the escape clause allows a domestic industry to petition the government for temporary protection to allow the industry a chance to adjust their operations to compete with more intense import competition. The purpose of the escape clause is to protect domestic firms that might be profitable in the long run, from being driven out of business due to an increase in imports that has occurred in a short period of time.

S.A.
What is a countervailing duty case?

While countervailing duties are conceptually clear, determining the size of government subsidies is quite difficult in practice. There are two problems that arise in countervailing duty cases. First, there is the difficult issue of which government subsidies can be countervailed. This leads to the second problem with countervailing duty cases. The problem is one of trying to disentangle a country's trade policy from its industrial policy. For a variety of reasons governments subsidize one industry or another. This encouragement or industrial policy may take the form of direct subsidies, partial or total government ownership, and tax relief. However, there is a potential conflict between a government's ability to pursue active industrial policy and a level playing field in international markets. This conflict is not yet severe but it is unlikely to go away.

S.A.
What are the differences and similarities in the way the U.S. government handles antidumping and countervailing duty cases.

Generally, once a case is filed, a regulatory process is set in motion that can take from 20 days to over a year to complete. Simply put, there are two investigations that the U.S. government conducts. First, the International Trade Administration (ITA) conducts an investigation to determine if the imports in question are being "dumped" and if so, by how much. Second, the USITC conducts an investigation to determine if the alleged dumping is harming the domestic industry or firm. If an affirmative preliminary decision is reached by both investigations, then a tariff equivalent to the difference between the U.S. market price and the foreign market value (called the dumping margin) is ordered. Both agencies continue their investigations in order to make a final determination on the question of injury and the exact dumping margin. Many antidumping cases are "terminated" at one point or another in the process. What occurs, in many cases, is that the foreign firms have simply agreed to raise prices in order to avoid explicit tariffs. Alas the shoe is increasingly on the other foot. U.S. exporters are now finding that foreign governments are adopting similar antidumping laws and U.S. firms are increasingly having antidumping cases filed against them overseas.

S.A.
What is an escape clause case? Use the Harley-Davidson case to show how an escape clause case should work.

Occasionally a country's comparative advantage can shift more quickly than the domestic industry can adjust. This situation leads to the final type of administered protection, the escape clause. The escape clause allows a domestic industry to petition the government for temporary protection to allow the industry a chance to adjust their operations to compete with the more intense import competition. The purpose of the escape clause is to protect domestic firms, which might be profitable in the long run, from being driven out of business due to an increase in imports that has occurred in a short period of time. In the early 1980s, the classic American motorcycle firm, Harley-Davidson, was on the brink of bankruptcy. The firm was in dire straights due to a combination of adverse factors. First, by its own admission, Harley-Davidson had been poorly managed in the 1970s. Second, the firm was facing a flood of cheaper, higher-quality imports from Japan. Japanese firms were obviously intent on penetrating the U.S. market, but a Japanese recession was giving them even more incentive to export than usual. Third, the U.S. was also just emerging from a recession in the early 1980s, so domestic sales were below average even without imports. Finally, the dollar was becoming increasingly overvalued making it even easier for Japanese firms to sell in the U.S. market at very competitive prices. Harley-Davidson filed a petition for escape clause relief arguing that the firm could survive and compete with the Japanese given some time to adjust. In 1983 the USITC recommended to President Reagan that the firm be granted relief. Tariffs were increased to 45 percent from 4 percent the first year and were to decline progressively to 10 percent in 1987. A year ahead of schedule, Harley-Davidson notified the government that it was now competitive and did not need the final year of protection.

S.a.
Describe what the term GATT means.

The General Agreement on Tariffs and Trade (GATT) was an interim committee of the ITO that was authorized by an administrative agreement between the countries. This administrative agreement did not require U.S. Congressional ratification. As a result, GATT remained in existence for nearly 50 years. Headquartered in Geneva, Switzerland, GATT had a Director-General, a staff of 350 individuals, and an annual budget of $40 million. Its purpose was to operate as an interim committee until the ITO was established. Since GATT was not an official international organization, countries that joined GATT were called contracting parties.

S.A>
What is an MTN? How do these negotiations work to reduce trade barriers?

The first goal of GATT was to reduce the high levels of tariffs remaining since the 1930s. Over the next fifty years, a number of multilateral trade negotiations (MTNs) successfully reduced tariffs. A multilateral trade negotiation proceeds as follows. First, there would be a GATT ministerial meeting of the trade ministers from the contracting parties to set up a proposed agenda for what was to be negotiated. Next, the trade ministers of each country would then request authorization from their government to participate in the multilateral trade negotiations. The U.S. government's position concerning the multilateral trade negotiations was critical. Given the size of the U.S. economy, the negotiations could not proceed without U.S. participation. Also, the other contracting parties did not want to enter into negotiations with the U.S. government without assurances that it would honor the negotiated agreement. Embodied within the U.S. legislation was a statement that the U.S. Congress would vote to ratify the negotiated trade agreement without modifying or amending the trade agreement. This statement is called Congressional fast track approval. The multilateral trade negotiations between the contracting parties began and continued over a period of years. Several MTNs occurred from 1958 through 1994. Once a trade agreement was reached, the U.S. Congress would then decide whether to accept or reject the agreement without modification. The tariff cuts mandated by a multilateral trade negotiation would then be phased in over a number of years. To keep the process of tariff reductions moving forward, a subsequent multilateral trade negotiation would be planned and started as soon as possible.

S.A.
Describe who makes U.S. international trade policy.

Most countries have a ministry or department that is exclusively charged with setting international trade policy for the country. In the U.S. things work differently because there is no Department of International Trade. The closest equivalent in the U.S. is the Office of the United States Trade Representative (USTR). The Trade Expansion Act of 1962 created this office. As part of the Trade Act of 1974, the Office was established as a Cabinet-level agency within the Executive Office of the President. It has responsibility for coordinating and administering U.S. trade policy. The trade representative is a Cabinet-level official with the rank of Ambassador. The agency provides trade policy leadership and negotiating expertise in its major areas of responsibility. More than 17 federal agencies and offices are involved in international trade issues, not including input from Congress and representatives of various interests in the private sector. The combination of the U.S. form of government and the diffusion of responsibility on international trade issues around the government is what makes trade policy very complicated.

S.A.
In what respects is the WTO different from GATT?

The Uruguay Round's most important achievement was the creation of the World Trade Organization (WTO). Essentially the ITO's Interim Committee, GATT, simply became a reality. There is one very important difference between GATT and the WTO. Under GATT, a country could file a trade complaint against another country and the GATT Council would investigate the complaint. However, the investigation was slow and the GATT panel's findings were routinely ignored because GATT could not enforce them. Under the WTO, a country can file a trade complaint against another country and a WTO panel will investigate the complaint. The WTO panel will issue its findings within six months and the offended country will legally be able to retaliate against the other country. Thus, countries that are found to be guilty of breaking WTO rules can and will be legally penalized via restrictions placed on that country's exports.

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International Trade Final

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Quotas are a greater threat to competition than tariffs because:

quotas preclude additional imports at any price.

An example of a nontariff barrier (NTB) is:

a physical limit on imports.

Nontariff barriers (NTBs) include all of the following except:

tariffs.

Quotas:

a. are a form of protectionism. b. restrict imports of a product to a certain quantitative level. c. are banned under the WTO. *d. all of the above

Once a country joins the WTO:

quotas must be slowly eliminated over a given period of time.

Quotas exist because:

a. not all countries are members of the WTO. b. some countries that are members of the WTO are allowed to maintain quotas during a transition period. c. many industrial countries implement quotas in defiance of WTO rules. *d. all of the above

A VER is:

a voluntary quota imposed by the exporting country.

Which of the following is not an NTB?

MFN tariff

Nontariff barriers include all of the following except:

tariffs.

Nontariff barriers include all of the following except:

the corporate income tax.

Which of the following statements is true?

A VER is essentially the same thing as a quota.

A VER is imposed by:

the foreign government.

Which of the following countries has a quota on imports of sugar?

U.S.

Which of the following is true for the above quota?

The government would receive area C if it auctions the quota.

Suppose the government used a tariff to achieve the same level of protection as the quota illustrated above. Comparing the two outcomes (quota vs. tariff) we can conclude:

the government can collect the tariff or sell the quotas to receive area C

With no trade the amount of domestically produced PCs is:

Q3

With no trade the country’s producer surplus is:

areas b + c + g.

With no trade the country”s consumer surplus is:

area a.

With free trade the country imports:

Q1 to Q5

With free trade the country’s producer’s surplus is:

area g.

With a quota imposed on PCs, the country imports:

Q2 to Q4

The loss of consumer surplus due to the quota is:

area c + d + e + f.

The amount of producer surplus domestic producers gain as a result of the quota is:

area c.

When a quota is imposed in a domestic market:

domestic producers capture all of any future increase in demand.

For the government, a quota is worse than a tariff because part of the lost _____ surplus is not transferred to the government.

consumer

Like tariffs, quotas result in:

a higher imported price.

When a quota is imposed, the losers include:

consumers

Suppose a quota on foreign-produced cars is enforced by the U.S. government. Which of the following groups is most like to oppose this action?

consumers

When a quota is imposed:

a. foreign firms may gain by selling the imported product at a higher price. b. foreign firms may lose by selling fewer imports. both a and b

Like tariffs, quotas generally lead to:

higher prices and fewer imports.

If a government auctions its quota:

foreign firms pay an additional cost.

To calculate a tariff equivalent for a quota one must:

take the difference between the world market price and the quota constrained domestic price and divide by the world market price.

When demand increases for a good subject to a quota:

imports would stay the same but the price would rise.

If imports are constrained by a quota and demand increases then:

prices will rise.

Which of the following statements is true?

If demand increases in the presence of a tariff, then prices will not increase because the amount of imports will increase.

With a quota, as the domestic demand for a product rises:

losses to society increase.

After a quota has been imposed in a market, suppose that the demand for the product increases, this would cause the quota price to _____ and the amount imported to _____ .

rise, remain the same

Which of the following statements is false?

The government always receives the same revenue with either a tariff or a quota.

In moving from free trade to a quota, _____ is likely to occur.

a quality upgrading of the traded good

Which of the following describes the use of government policy to enhance exports in specific industries?

Strategic trade policy

The U.S. policy that requires the government to buy from a domestic supplier unless the domestic supplier”s price is more than 6% higher than the foreign price is called:

the Buy American Act of 1933.

The Buy American Act of 1933 gives American suppliers a _____ percent margin of preference over foreign suppliers and a _____ percent margin of preference for military or defense related goods.

6 – 50

Which of the following is not one of the reasons countries have quotas?

a. Non- WTO member b. New WTO member c. Protection of agricultural production d. Membership in the UN ????

Using various government policies to increase exports is frequently called:

strategic trade policy.

Which of the following is a source of government regulation related to international trade?

a.Administrative regulations b.Technical regulations c.Industrial policy *d.All of the above

The impact of transportation costs on international trade causes:?

import prices to rise

The impact of transportation costs on international trade causes:?

imports to decrease

S.A.
Describe the various reasons that some countries still have quotas.

Quotas are considered such a harmful form of protectionism that they are banned by the WTO. Nevertheless, quotas still exist in various forms for four reasons. First, not all countries are members of the WTO. Countries that have not joined are free to impose quotas. Second, countries that are WTO members are allowed to maintain their previously existing quotas for a specified period of time. As such, all of the newly joined members are in the process of eliminating their quotas. Third, some countries implement quotas on some goods in defiance of WTO rules. The U.S. quota on sugar is an example. Fourth, international trade in textiles and apparel is profoundly distorted by the Multifibre Arrangement (MFA). For each developed country, the MFA manages trade in these two industries by enforcing a quota by product and by country for imports of textiles and apparel.

S.A.
Show why an ""auction quota"" would tend to raise an amount of government revenue equivalent to that generated by a tariff.

Because the supply of imported cloth is reduced, the price of cloth will begin to rise until a new equilibrium is reached. Domestic consumers are harmed as consumer surplus declines by areas ”a + b + c + d”. Domestic producers benefit as producer surplus rises by area ‘a’. As in the case of a tariff, there are efficiency losses of areas ‘bb’ and ‘d’. Who receives area ‘c’ is the only difference between a tariff and a quota. In the case of a tariff, area ‘c’ is the amount of tariff revenue the domestic government collects. In the case of a quota, area ‘c’ accrues to the foreign producers and makes them more profitable. The net welfare loss to the quota-imposing country is larger under a quota than a tariff. With a tariff, the domestic government gains revenue, area ‘c.’ With a quota, area ‘c’ is lost to the foreign producers. The government can capture area ‘c’ under a quota by auctioning the quotas to foreign producers in a free market. The advantage to this auction quota method is that the domestic government would gain area ‘c’ which now accrues to foreigners, and the limited quota supply would go to those importers most in need of the product who would pay the highest prices.

S.A.
You are the trade minister of a new member of the WTO. As a result, you must convert all of the quota protection in the country to tariff protection. How would you decide what the ad valorem tariff would be that would give an amount of protection equal to the quota?

Another method available to a government to capture area ‘c’ is to convert the quotas into an equivalent tariff. The conversion of quotas into a tariff is easy to do. To calculate a tariff equivalent, take the difference between the good”s world market price and the good”s quota constrained domestic price and divide that difference by the good”s world market price.

S.A.
Show why a quota is worse than a tariff if the demand for the product increases.

This is illustrated above, where we have assumed that the demand for the product increases from D to D” after a quota has been placed in the market. As a result of the quota, the quantity imported cannot increase when there is an increase in demand. As a result, the price of the product continues to rise. In the case of a tariff, the price would remain constant at P” and the additional demand for cloth would be supplied with additional imports of cloth. However, when a quota is present in the domestic market, the domestic producers supply the increase in domestic demand. The foreign producers of cloth also gain in this case as the price they receive for their product increases. The important point is that the losses for consumers and society are much larger in the case of a quota than in the case of a tariff when the demand increases. These losses are shown by the areas the shaded area, and as the figure indicates, losses to society increase as the demand for the product increases.

S.A.
Describe strategic trade policy. Does this type of policy actually increase exports?

In general, strategic trade policy refers to industrial policies that exporting countries pursue. Such policies are aimed at maximizing a country”s exports. A country”s strategic trade policy requires that the trade ministry of a country identify an industry in which the country has a comparative advantage. The country then nurtures this industry by subsidizing its development and protecting it from imports. Once the industry has developed, the industry can export the product to the world market devastating similar industries in the target countries. With foreign competition disposed of, the industry now has the monopoly power to raise prices and earn excess profits. The effective use of strategic trade policy is often applied to Japan and its Ministry of International Trade and Industry (MITI) during the 1980s, when Japanese imports of automobiles, steel, and semiconductors were flooding the U.S. market. In an article in The Economist, the authors show what economists have long suspected. Japanese industrial policy does not work much better in Japan than anywhere else. The empirical test to determine this was that there should be a positive correlation between how fast Japanese industries grow and the government”s support of the industry. In fact the authors found a negative correlation. Japanese trade bureaucrats do what most governments do, which is support industries that are having a hard time competing with imports.

S.A.
Explain the effects of transportation costs on trade.

With positive transportation costs, the quantity of goods traded declines as the price of imported goods increase and the price of exported goods falls.. In addition, in the importing country, the consumption of imports declines while the domestic production of import competing goods increases. For the exporting country, the consumption of the export good increases while the production of the exported good decreases. Thus, the effect of transportation costs is to move the price of cloth and the quantities traded partially back toward the no trade situation. As such, transportation costs act has a barrier to trade much like tariffs and other nontariff barriers.

International trade maximizes world welfare as the gains from trade cause:

A more efficient allocation of world resources.

Which of the following is not a benefit of international trade?

d. a re-distribution of income from scarce to abundant factors of production

Regulation of business by government is designed to aid in all of the following areas except:

d. concentrating the operation of the economy.

In economics the term policy usually means:

an action or actions taken by the government.

The theory of public choice is based on the premise that:

a. politicians attempt to maximize their utility.

The branch of economics that applies economic analysis to voting behavior is known as:

c. public choice.

The branch of economics that deals with governmental decision making is:

c. public choice.

The study of politics within a country like the U.S. by economists is called:

d. public choice.

The activity of a group that seeks to gain from changes in government policy is known as:

c. rentseeking.

The use of resources to convince a government to restrict trade in a particular product is called:

a. rentseeking.

The group that would most likely lobby to influence the international trade policy of a country is:

d. the industry group that has a comparative disadvantage.

The fact that there are very different tariffs on different products is known as:

a. the structure of protection.

Which of the following would mostly likely not receive protection?

d. Industries that have a large number of firms

Which of the following increases the likelihood of protectionism for a particular industry?

a. The industry produces an intermediate product.

Which of the following statements is false?

c. Intermediate products tend to get less protection than final products.

Which of the following is more likely to be protected by trade barriers in the U.S.?

d. steel

Which of the following industries are more likely to be protected?

a. industries with few firms b. industries that produce an intermediate product c. industries with a comparative disadvantage *d. all of the above

The benefits of a very detailed tariff schedule include:

c. the ability of government to provide protection on a specific product.

Which of the following is the only country in the world with a uniform tariff?

d. Chile

The Constitution of the U.S. stipulates that the authority to regulate commerce and tariffs is given to:

b. Congress.

Which of the following statements is false?

d. The Smoot-Hawley Tariff of 1930 led to a large reduction in the U.S. tariff.

The Tariff of Abominations:

c. led to a large increase in U.S. tariffs in 1828.

The Tariff of _____ was passed in _____ over the strong objections of the Southern states.

b. Abominations, 1828

The now infamous legislation of 1930 that imposed a very high tariff structure on goods imported into the U.S. was the:

d. Smoot-Hawley Tariff

The Smoot-Hawley Tariff of 1930:

b. increased tariffs to their highest levels of the twentieth century.

Which of the following pieces of legislation is the foundation of modern U.S. international trade policy?

c. The Reciprocal Trade Agreements Act of 1934

Which of the following pieces of legislation made MFN an integral part of U.S. international trade policy?

c. The Reciprocal Trade Agreements Act of 1934

The act which was passed to mitigate the Smoot-Hawley Tariff and which is still the cornerstone of American trade policy is:

d. the Reciprocal Trade Agreements Act.

Which of the following is not a key provision of the Reciprocal Trade Agreement Act?

d. Congress can amend a negotiated trade agreement.

Which of the following transferred power for trade negotiations from Congress to the President?

d. The Reciprocal Trade Agreements Act of 1934

Since World War II, tariffs in general have:

b. decreased.

The current average U.S. tariff rate is:

d. 4%.

The concept whereby all trading parties that were contracting parties to GATT or new members of the WTO are treated the same with respect to tariffs is known as:

d. MFN.

Which of the following is not a form of administered protection?

c. Specific duties

Which of the following is not a form of administered protection?

d. Offshore assembly

Dumping by a firm can be defined as:

a. a firm selling a product at a price below its cost of production in a foreign market. b. a firm selling a product in a foreign market at a price lower than the price charged in its home market. * d. both a and b

Which of the following is not a type of dumping?

c. Complex dumping

Dumping occurs when a firm:

d. sells in a foreign market at prices that are below the price charged in the home market.

Which of the following does not cause lasting damage to the domestic industry?

a. Sporadic dumping

Which of the following is the term that refers to a situation where a country exports a good at a lower price than it sells for domestically?

Dumping

Resolution of dumping cases in the U.S. involves investigations by:

d. the International Trade Administration and the International Trade Commission.

Antidumping duties:

a. are used to offset the effects of imports being sold at a price lower than that charged in the country of origin.

Which of the following statements is true?

In an antidumping case, the ITA determines if the foreign product is being dumped in the U.S. market.

Countervailing duty cases involve:

b. foreign subsidies.

Payment by government to a firm for each unit of output that it exports is known as a(n) _____.

a. export subsidy

A countervailing duty is a tariff that is levied to:

c. counteract subsidies given to foreign firms by their own governments.

Countervailing duty cases involve allegations of:

c. foreign export subsidies.

The application of countervailing duties against subsidized exports:

a. does not require evidence of international price discrimination.

The escape clause:

a. can be used to restrict the import of fairly traded goods.

In the U.S. raising tariffs on a fairly traded imported product that causes harm to a domestic industry is what type of action?

c. Escape clause

Which of the following companies filed a famous escape clause case in the early 1980s?

c. Harley-Davidson

When the Allied powers met at a conference in 1944, what international organizations were developed?

a. The International Monetary Fund b. The International Bank for Reconstruction and Development (World Bank) * d. Both a and b

GATT was:

d. the interim committee designed to implement the International Trade Organization.

From the late 1940s until the creation of the WTO, the treaty (organization) that was primarily responsible for conducting multilateral trade negotiations was the:

b. GATT.

Which of the following statements is false?

b. The ITO was a substitute for GATT.

A principle problem associated with GATT was that:

c. it had no enforcement mechanism.

Most favored nation (MFN) status means that a country treats another country:

b. the same as its other trading partners.

When using the most favored nation principle in international trade, this means that:

b. the lowest MFN negotiated tariff rate would apply to all WTO members countries.

The most favored nation principle of the WTO means that a tariff concession granted by one member country to another member country will:

b. be extended to all other countries that are WTO members.

Which of the following is an exception to the most favored nation principle?

c. A free-trade area or a customs union

Which of the following was not a multilateral trade negotiation conducted under GATT?

d. The NAFTA Round

Which of the following was not an MTN?

a. The Seattle Round

The international organization that serves as a forum for trade discussions and the development of trade rules is called the:

a. WTO.

The current round of multilateral trade negotiations is known as:

c. the Doha Round.

The WTO was established in which round of trade negotiations?

b. The Uruguay Round

The General Agreement of Trade in Services is:

c. an agreement among countries that trade in services should be regulated by agreed upon rules.

Both the WTO and GATT have worked to:

d. reduce trade barriers among countries on a multilateral basis.

Which organization has procedures for settling international trade disputes?

d. The World Trade Organization

Which of the following countries is not currently a member of the WTO?

d. Iraq

Why do domestic firms and foreign countries find it difficult to interact with U.S. trade policy?

c. No one agency or person is responsible for U.S. trade policy.

The goal of economic development is for the _____ countries to achieve a standard of living roughly equivalent to that of _____ countries.

b. developing, developed

In the low- and middle income countries _____ and _____ of the population respectively are illiterate.

d. 17%, 38%

GDP per capita in the high-income countries is approximately:

d. $26,964.

GDP per capita in low-income countries is less than _____ per year.

a. $500

Which of the following is a precondition for economic growth?

c. The rule of law

The rule of law is important to economic growth as it is necessary for the enforcement of _____ .

c. contracts

Which of the following is not one of the factors of production?

d. Property rights

Which of the following countries has a large amount of economic freedom?

a. Hong Kong

In order for GDP per capita to grow, it is necessary for _____ growth to be in excess of _____ growth.

c. GDP, population

The graphical relationship between real GDP and the size of the labor force is known as:

b. the production function.

The production function:

d. slopes upward to the right.

In the figure above, an increase in the labor force:

a. increases real GDP.

In the figure above, which of the following would cause an upward shift in the production function?

c. An increase in the capital stock.

In the figure above, which of the following would cause an increase in real GDP?

b. An improvement in technology

In the figure above, an increase in real GDP with an unchanged labor force could happen as a result of:

b. a higher level of technology.

An improvement in technology would tend to:

c. cause an upward shift in the production function.

The theory of comparative advantage indicates that international trade should increase the output of the economy by moving resources from _____ to _____ industries.

b. comparative disadvantage, comparative advantage

An increase in economic growth that cannot be accounted for by increases in either the labor force or the capital stock is known as an increase in:

b. total factor productivity.

FDI in a developing country would tend to cause:

c. an upward shift of the production function.

Which of the following is responsible for the largest movements of FDI into developing countries?

c. MNCs

Which of the following would not cause an upward shift in the production function in a developing country?

d. Immigration

Importing and exporting of goods and services can lead to increases in specialization and knowledge that can:

b. increase total factor productivity.

Which of the following refers to natural resources or the ability to produce certain agricultural products?

a. primary products

The possession of primary products in a developing country could:

a. provide a convenient source of revenue for the government.

In many cases, both the demand and supply of primary products are _____ .

b. inelastic

If primary products are a high percentage of a country’s exports then large changes in the price of these commodities could influence the _____ .

b. terms of trade

Which of the following is a cartel that attempts to influence the world price of crude oil?

b. OPEC

The development strategy based on developing industries that will reduce imports is known as:

b. import substitution.

Which of the following is not associated with an import substitution development strategy?

d. Lower prices for consumers

An import substitution strategy tends to lead to:

d. more rent seeking behavior.

A development strategy based on developing industries in line with a country’s comparative advantage is known as:

c. export promotion.

Which of the following regions has tended to grow fastest during the 1990s?

a. East Asia

Which of the following statements is incorrect?

a. Manufacturing requires very little infrastructure.

High tariffs are a feature of which of the following development strategies?

b. import substitution

Economies using an export promotion development strategy tend to:

b. create more jobs.

The correct term for "foreign aid" is:

d. official development assistance (ODA).

Which of the following is not part of basic infrastructure in a developing country?

d. UNIDO

ODA in the world economy is approximately:

b. $65 billion.

ODA is less than _____ percent of the collective GDPs of the developing countries.

a. 1

U.S. ODA is approximately _____ billion.

b. $16

ODA as a percentage of GDP for all developed countries is approximately _____ .

b. 0.26

A transfer of money from a developed country government to a developing country where there is no repayment involved is known as a _____ .

a. grant

ODA that involves restrictions on how and where the aid may be spent is known as:

c. tied aid.

Which of the following part of the World Bank primarily makes loans to middle-income countries for infrastructure?

a. IBRD

Which of the following part of the World Bank primarily makes loans to low-income countries?

b. IDA

Which part of the World Bank makes loans to private sector firms in developing countries

c. IFC

During the 1980s and 1990s, the World Bank was criticized for not taking _____ concerns into account when making loans.

c. environmental

The most recent World Bank initiatives involve the reduction of _____ in developing countries.

d. corruption

Which of the following UN agencies was established to assist developing countries in the process of integrating into the world economy?

b. UNCTAD

Which of the following UN agencies assists developing countries with problems associated with industrialization?

d. UNIDO

Which of the following UN agencies assists the developing countries with trade negotiations?

a. UNCTAD

Which of the following is not a UN agency?

d. IFC

S.A.
Describe what the term economic development means.

Economic development is defined as a goal that developing countries are attempting to achieve. The primary goal is for these countries to achieve a standard of living equivalent to that which prevails in the developed countries. This goal usually is defined in terms of GDP per capita. However, GDP per capita is really a proxy for a number of other conditions associated with the developed countries. These conditions include adequate food and housing; access to basic health care; access to basic amenities such as clean water; and basic education.

S.A.
List and describe the preconditions necessary for economic growth theory to work properly.

There are two preconditions necessary for economic growth theory to work properly: property rights and the rule of law. Property rights are essential to the workings of a market economy. For economic transactions to occur smoothly it must be clear exactly who owns what. If market participants cannot be sure of this, then a large number of economic transactions that enhance economic growth will not occur. Second, normal economic transactions frequently involve contractual obligations between parties. In the routine course of economic activity, disputes over contracts will occur. Market participants need to be certain that in the case of any disputes, the government provides mechanisms for dealing with these potential problems. Otherwise, the amount of total economic activity occurring will be reduced and damage the rate of economic growth.

S.A.
List and describe the factors of production.

The factors of production are land, labor, capital, and technology. Because land is difficult for a country to acquire, we usually assume that the amount of land is fixed. Labor refers to the size of a country’s labor force. The labor force of a developing country usually is growing rapidly as a result of a high birth rate coupled with a declining mortality rate. The capital stock of a country is the amount of money invested in business structures and equipment. Part of the capital stock is in the public sector in terms of investments made in infrastructure such as roads and schools. Technology also is a factor of production. In economics, we define technology as the ability to produce more output with the same amount of inputs or the same output with fewer inputs. Improvements in technology can be attributable to either improvements in the capital stock or improvements in the quality of management

S.A.
Describe how the production function relates real GDP to the size of the labor force. How does the concept of diminishing returns affect the production function?

Along any given production function, the size of the capital stock and the level of technology remain constant. As a result, any variations in the size of the labor force cause a change in the level of real GDP. However, the relationship between the labor force and real GDP is not constant. Since the capital stock is a constant, increases in the size of the labor force subject the economy to the concept of diminishing returns. Initially, as the labor force increases real GDP grows rapidly. However, past some point adding additional workers leads to diminishing increases in real GDP.

S.A.
How do increases in the capital stock or improvements in technology affect real GDP?

A change in the capital stock will shift the production function upward. This means that for any given amount of labor, real GDP will be higher. The same effect occurs if there is an improvement in technology. Again, the production function would shift upward. For any given amount of labor, real GDP will increase. Both increases in the capital stock and improvements in technology would tend to increase real GDP.

S.A.
Describe how openness enhances economic growth.

The theory of comparative advantage indicates that an economy that trades should produce more output as resources are transferred from comparative disadvantage to comparative advantage industries. It has been shown empirically that this is the case by the positive correlation between openness and economic growth. More detailed studies of this correlation have found a positive relationship between openness and total factor productivity. Total factor productivity refers to increases in real GDP that are not accounted for by changes in the labor force or the capital stock. Because a number of studies have found this positive relationship, we can be fairly certain that the more an economy trades the faster will be its rate of economic growth.

S.A.
What role do MNCs play in the economic growth of developing countries?

MNCs provide two important factors in economic growth. First, increases in the capital stock increase real GDP. Since FDI increases a country’s capital stock, it normally will increase the rate of economic growth. This addition to the capital stock is especially important in developing countries. Second, the level of technology in developing countries is usually below that which prevails in the developed countries. Most FDI in developing countries originates in the developed countries. Almost invariably, this FDI also transfers technology to the developing countries. This improvement in technology would cause an increase in the rate of economic growth.

S.A.
How can the possession of primary products enhance economic growth?

Primary products may be relatively cheap to produce and the production and export of these products may be quite profitable. In this case, primary products may be a reliable source of revenue that the government can use to enhance economic development. Second, these products may lead to the initial stages of industrialization that involves transforming the products into higher value added manufactures. Finally, the export of primary products may yield foreign exchange that can be used to purchase capital equipment for both the private and public sectors that would increase economic growth.

S.A.
What are the elements of an import substitution development policy? Why are many countries now abandoning this strategy?

An import substitution development strategy involves the attempt to increase the size of the manufacturing sector by replacing imports. This strategy usually involves a combination of high tariffs, quotas, low taxes, and other forms of government subsidies. However, this strategy has produced a number of economic problems. First, consumers and producers end up paying higher prices for locally produced goods that also may be of lower quality. Second, the expanding manufacturing sector is taking resources from other sectors that might be able to use them more efficiently. In turn, this may cause a reduction in the rate of economic growth and a loss of job opportunities. Finally, the strategy involves a substantial amount of protectionism. This leads to a large amount of rent seeking activity that is a further waste of resources.

S.A.
Describe an export promotion development strategy?

An export promotion development strategy fundamentally means allowing the economy to develop along the lines dictated by comparative advantage. In the case of developing countries, this usually means developing labor-intensive industries. The role of the government is to provide the necessary conditions that allow these industries to produce as much as possible. This means the provision of essential infrastructure in urban areas as the economy transfers resources from the agricultural sector to the manufacturing sector. The government also needs to provide a framework conducive to the transfer of capital and technology into the country from the developed countries. If executed properly, export promotion tends to improve the rate of economic growth and provide more job opportunities in a labor-abundant country.

S.A.
What is the relative importance of ODA in the economic development process?

ODA amounts to less than 1 percent of the collective GDPs of the developing countries. Although, this is a relatively small amount of money, it can be critical in the economic development process. In order to increase economic growth, the developing countries need to improve their economic infrastructure. ODA can be important in this process by providing capital that would be difficult to raise in local capital markets and providing long-term loans at reasonable rates of interest. Also, much of this investment requires capital equipment from the developed countries. ODA may provide the foreign exchange necessary for countries to purchase this capital equipment that may be in short supply in the developing countries.

S.A.
List and briefly describe the major multilateral development organizations.

The major multilateral development agencies are the World Bank and the United Nations agencies. The World Bank makes loans for economic infrastructure projects in both middle- and low-income countries. It also makes loans to private sector firms. The World Bank is involved in enhancing the flow of FDI to developing countries by providing insurance and arbitration procedures. The African, Asian, and Interamerican Development Banks supplement the activities of the World Bank by providing smaller loans for development projects in their respective regions. There are three UN agencies heavily involved with economic development. UNCTAD provides technical assistance to countries integrating into the world economy. UNIDO provides assistance to countries that are in the process of industrializing. The UNDP coordinates the activities of all the UN agencies that to a greater or lesser extent are involved with the process of economic development.

S.A.
Describe the market for government regulation.

Not all government regulation of industries and firms works to the benefit of society as a whole; some regulation favors one segment of society. Industries and firms that benefit from regulation favor it. For example, it’s illegal for firms to conspire to fix or raise prices. However, firms can legally raise prices if the government regulates and enforces minimum prices for an industry. Firms within this industry may find it in their own interest to accept regulation if it can enhance their profits. Under these circumstances, industries and firms have a demand for government regulation, and that means that there is a market for government regulation. One area where a market for government regulation exists is international trade. Imports of goods and services have conflicting effects. Consumers want the benefits that come from free trade, but firms and workers in the industries that compete with imports want to restrict trade. In the U.S., special interest groups lobby for changes in laws and regulations that will benefit them, although not society as a whole. Lobbying to restrict trade has a long history in the U.S. and most other countries.

S.A.
How does collective action lead to protectionism?

In a democracy, individuals have an incentive to form groups designed to influence the government to pass laws that serve their collective interest. This behavior is called collective action. In the case of trade policy, while any country benefits from free trade, the gains to individual consumers are relatively small per good consumed. Because an individual consumer cannot quantitatively feel the gains, individuals don’t form groups to lobby the government for free trade. The firms within the economy’s industries that have a comparative advantage find it difficult to lobby their own government for freer trade since they are concerned about the trade policies of foreign governments. The group that will lobby the domestic government concerning free trade is the group that ineffectively competes with imports and lobbies for protection from imports. Although protection is not in the country’s interest, it is in the interest of this special interest group. Activities that are designed to benefit a special interest group are called rent-seeking activities. Requesting that the government raise or not lower a tariff on a particular good is a form of rentseeking. A special interest group’s rent-seeking behavior may also maximize the votes a politician receives in the next election. In addition, voting for protection may gain the politician a few additional votes from the industry, firms, and workers that receive the protection.

S.A.
Why is the tariff schedule of most countries so complicated?

Complexity in a country’s tariff schedule provides two advantages. First, a producer of a good that competes with imports can focus its lobbying efforts for protection on a particular good. For example, it is easier to gain protection for a product like imported bacon than for all imported food. Second, a detailed tariff schedule makes it possible for a politician to pick up votes by protecting one specific good without inducing protests from the average consumer. This is why most countries have developed complicated tariff schedules, where tariffs on very similar goods may be dramatically different.

S.A.
List the factors that cause the tariff on some products to be higher than other products.

Researchers have studied why the tariff is low on one good and high on another. This analysis of variation in tariffs by product for a country is called the structure of protection. In general, this research indicates several results. First, large industries that are important to a country are more likely to receive protection than are small unimportant industries. Second, the more concentrated the industry, the more likely it is to have protection because it is easier for the firms to organize to lobby for protection when there are fewer firms in the industry. Third, it is easier for firms to obtain protection if they produce an intermediate product, such as steel, where the voters are unlikely to notice price increases. Fourth, the potential voting strength of the industry’s employees seems to make a difference. In addition, if the industry is regionally concentrated and/or unionized, the workers are able to lobby more effectively. Finally, industries that have a comparative disadvantage are more likely to be protected. This research indicates that an industry characterized by one or more of these factors does not guarantee it will be protected. However, the research does indicate that an industry having one or more of these factors increases the probability that it will have a higher tariff.

S.A.
Describe the factors that tend to influence the structure of protection in the U.S.

The structure of protection in the U.S. is influenced by several factors. First, large industries that are important to the U.S. are more likely to receive protection than are small unimportant industries. Second, the more concentrated the industry, the more likely it is to have protection because it is easier for the firms to organize to lobby for protection when there are fewer firms in the industry. Third, it is easier for firms to obtain protection if they produce an intermediate product, such as steel, in which the voters are unlikely to notice price increases. Fourth, the potential voting strength of the industry’s employees seems to make a difference. In addition, if the industry is regionally concentrated and/or unionized, the workers are able to lobby more effectively. Finally, industries that have a comparative disadvantage are more likely to be protected. This research indicates that an industry characterized by one or more of these factors does not guarantee it will be protected. However, the research does indicate that an industry having one or more of these factors increases the probability that it will have a higher tariff.

S.A.
Discuss the advantages of a country having a uniform tariff.

Economists have long advocated a uniform tariff that would solve a number of problems associated with a complicated tariff schedule. One, the tariff becomes easy to administer because customs officials would not have to worry about classifying a product into whatever category it might best fit. Two, a uniform tariff makes lobbying for protectionism much harder. If an import-competing industry wants an increase in the tariff, the tariff would have to increase on all imports. This is likely to create some resistance for several reasons: 1) a general increase in the tariff is unlikely to pass by consumers completely unnoticed; 2) other industries capable of lobbying the government would likely do so; 3) firms purchasing imported intermediate products would see the increase in the tariff as a direct increase in their costs and would complain to the government; 4) the same would be true of firms that are purchasing imports for final sale to the consumer; and 5) consumer preferences for lower tariffs would lead to the optimal public choice strategy for a politician to lower tariffs.

S.A.
What are the important components of the Reciprocal Trade Agreements Act? Why is this act so important?

Three provisions of this the Reciprocal Trade Agreement Act are still important today. First, tariff reciprocity means that the U.S. will negotiate tariff reductions only in return for tariff reductions by its trade partners. This reciprocity principle is based on the idea of fairness, as mutual tariff reductions benefit U.S. consumers and foreign producers through an increase in U.S. imports while the increase in exports benefit U.S. producers and foreign consumers. Reciprocity is still deeply embedded in current trade negotiations. Second, the Act transferred U.S. trade policy from Congress to the President by giving the President authorization to negotiate trade agreements. This provision allows other countries to negotiate with the Executive branch of the U.S. government without having to negotiate every detail of the agreement with Congress. Once an agreement has been negotiated, Congress votes to approve the agreement in total, meaning the agreement cannot be amended. Third, the Act, and all future trade legislation, is based on the Most Favored Nation (MFN) principle. This nondiscrimination principle means that any tariff cuts the U.S. agrees to with one country would apply to the products of all other trade partners that the U.S. government has granted most-favored-nation status. The MFN is a very old trading principle and the first trade treaty that the U.S. signed with France in 1778 contained this principle. MFN makes administering tariffs much easier as approximately 140 countries have MFN status. In addition, trade legislation based on MFN makes international trade far less risky for businesses when compared to a world where tariffs could be changed on a political whim.

S.A.
List and describe the three forms of administered protection.

There are three different forms of administered protection, but they all involve increasing the tariff on a particular good and these forms of administered protection are sanctioned by the WTO. The first type of administered protection is called the antidumping law. An antidumping law is a law that does not allow an international firm to sell its product in an export market for less than it is sold for in its home market or below its cost of production. The second form of administered protection is a countervailing duty. This is a tariff designed to offset foreign government export subsidies. Lastly, the escape clause allows a domestic industry to petition the government for temporary protection to allow the industry a chance to adjust their operations to compete with more intense import competition. The purpose of the escape clause is to protect domestic firms that might be profitable in the long run, from being driven out of business due to an increase in imports that has occurred in a short period of time.

S.A.
What is a countervailing duty case?

While countervailing duties are conceptually clear, determining the size of government subsidies is quite difficult in practice. There are two problems that arise in countervailing duty cases. First, there is the difficult issue of which government subsidies can be countervailed. This leads to the second problem with countervailing duty cases. The problem is one of trying to disentangle a country’s trade policy from its industrial policy. For a variety of reasons governments subsidize one industry or another. This encouragement or industrial policy may take the form of direct subsidies, partial or total government ownership, and tax relief. However, there is a potential conflict between a government’s ability to pursue active industrial policy and a level playing field in international markets. This conflict is not yet severe but it is unlikely to go away.

S.A.
What are the differences and similarities in the way the U.S. government handles antidumping and countervailing duty cases.

Generally, once a case is filed, a regulatory process is set in motion that can take from 20 days to over a year to complete. Simply put, there are two investigations that the U.S. government conducts. First, the International Trade Administration (ITA) conducts an investigation to determine if the imports in question are being "dumped" and if so, by how much. Second, the USITC conducts an investigation to determine if the alleged dumping is harming the domestic industry or firm. If an affirmative preliminary decision is reached by both investigations, then a tariff equivalent to the difference between the U.S. market price and the foreign market value (called the dumping margin) is ordered. Both agencies continue their investigations in order to make a final determination on the question of injury and the exact dumping margin. Many antidumping cases are "terminated" at one point or another in the process. What occurs, in many cases, is that the foreign firms have simply agreed to raise prices in order to avoid explicit tariffs. Alas the shoe is increasingly on the other foot. U.S. exporters are now finding that foreign governments are adopting similar antidumping laws and U.S. firms are increasingly having antidumping cases filed against them overseas.

S.A.
What is an escape clause case? Use the Harley-Davidson case to show how an escape clause case should work.

Occasionally a country’s comparative advantage can shift more quickly than the domestic industry can adjust. This situation leads to the final type of administered protection, the escape clause. The escape clause allows a domestic industry to petition the government for temporary protection to allow the industry a chance to adjust their operations to compete with the more intense import competition. The purpose of the escape clause is to protect domestic firms, which might be profitable in the long run, from being driven out of business due to an increase in imports that has occurred in a short period of time. In the early 1980s, the classic American motorcycle firm, Harley-Davidson, was on the brink of bankruptcy. The firm was in dire straights due to a combination of adverse factors. First, by its own admission, Harley-Davidson had been poorly managed in the 1970s. Second, the firm was facing a flood of cheaper, higher-quality imports from Japan. Japanese firms were obviously intent on penetrating the U.S. market, but a Japanese recession was giving them even more incentive to export than usual. Third, the U.S. was also just emerging from a recession in the early 1980s, so domestic sales were below average even without imports. Finally, the dollar was becoming increasingly overvalued making it even easier for Japanese firms to sell in the U.S. market at very competitive prices. Harley-Davidson filed a petition for escape clause relief arguing that the firm could survive and compete with the Japanese given some time to adjust. In 1983 the USITC recommended to President Reagan that the firm be granted relief. Tariffs were increased to 45 percent from 4 percent the first year and were to decline progressively to 10 percent in 1987. A year ahead of schedule, Harley-Davidson notified the government that it was now competitive and did not need the final year of protection.

S.a.
Describe what the term GATT means.

The General Agreement on Tariffs and Trade (GATT) was an interim committee of the ITO that was authorized by an administrative agreement between the countries. This administrative agreement did not require U.S. Congressional ratification. As a result, GATT remained in existence for nearly 50 years. Headquartered in Geneva, Switzerland, GATT had a Director-General, a staff of 350 individuals, and an annual budget of $40 million. Its purpose was to operate as an interim committee until the ITO was established. Since GATT was not an official international organization, countries that joined GATT were called contracting parties.

S.A>
What is an MTN? How do these negotiations work to reduce trade barriers?

The first goal of GATT was to reduce the high levels of tariffs remaining since the 1930s. Over the next fifty years, a number of multilateral trade negotiations (MTNs) successfully reduced tariffs. A multilateral trade negotiation proceeds as follows. First, there would be a GATT ministerial meeting of the trade ministers from the contracting parties to set up a proposed agenda for what was to be negotiated. Next, the trade ministers of each country would then request authorization from their government to participate in the multilateral trade negotiations. The U.S. government’s position concerning the multilateral trade negotiations was critical. Given the size of the U.S. economy, the negotiations could not proceed without U.S. participation. Also, the other contracting parties did not want to enter into negotiations with the U.S. government without assurances that it would honor the negotiated agreement. Embodied within the U.S. legislation was a statement that the U.S. Congress would vote to ratify the negotiated trade agreement without modifying or amending the trade agreement. This statement is called Congressional fast track approval. The multilateral trade negotiations between the contracting parties began and continued over a period of years. Several MTNs occurred from 1958 through 1994. Once a trade agreement was reached, the U.S. Congress would then decide whether to accept or reject the agreement without modification. The tariff cuts mandated by a multilateral trade negotiation would then be phased in over a number of years. To keep the process of tariff reductions moving forward, a subsequent multilateral trade negotiation would be planned and started as soon as possible.

S.A.
Describe who makes U.S. international trade policy.

Most countries have a ministry or department that is exclusively charged with setting international trade policy for the country. In the U.S. things work differently because there is no Department of International Trade. The closest equivalent in the U.S. is the Office of the United States Trade Representative (USTR). The Trade Expansion Act of 1962 created this office. As part of the Trade Act of 1974, the Office was established as a Cabinet-level agency within the Executive Office of the President. It has responsibility for coordinating and administering U.S. trade policy. The trade representative is a Cabinet-level official with the rank of Ambassador. The agency provides trade policy leadership and negotiating expertise in its major areas of responsibility. More than 17 federal agencies and offices are involved in international trade issues, not including input from Congress and representatives of various interests in the private sector. The combination of the U.S. form of government and the diffusion of responsibility on international trade issues around the government is what makes trade policy very complicated.

S.A.
In what respects is the WTO different from GATT?

The Uruguay Round’s most important achievement was the creation of the World Trade Organization (WTO). Essentially the ITO’s Interim Committee, GATT, simply became a reality. There is one very important difference between GATT and the WTO. Under GATT, a country could file a trade complaint against another country and the GATT Council would investigate the complaint. However, the investigation was slow and the GATT panel’s findings were routinely ignored because GATT could not enforce them. Under the WTO, a country can file a trade complaint against another country and a WTO panel will investigate the complaint. The WTO panel will issue its findings within six months and the offended country will legally be able to retaliate against the other country. Thus, countries that are found to be guilty of breaking WTO rules can and will be legally penalized via restrictions placed on that country’s exports.

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