Chapter 3

Trade and Investment Policies

True/False Questions

1. National Sovereignty provides a government with the right and burden to shape
the environment of the country and its citizens.

ANS: T PAGE: 70

2. If a country accumulates large amounts of debt, the present and future standard of
living will be improved.

ANS: F PAGE: 70

3. The General Agreement of Tariffs and Trade started out as a set of rules to ensure
nondiscrimination, transparent procedures, the settlement of disputes, and the
participation of the lesser developed countries in international trade.

ANS: T PAGE: 71

4. The International Trade Organization was never implemented.

ANS: T PAGE: 71

5. The Uruguay Round took place in 2001 and is still in progress.

ANS: F PAGE: 72

6. The ITO clause of GATT calls for each member country to grant every other
country with the same most favorable treatment that it accords to any other
country with respect to imports and exports.

ANS: F PAGE: 72

7. The GATT became the governing body for settling international trade disputes
since ITO never came into being.

ANS: T PAGE: 72

8. The MFN clause of the GATT was created for the industrialized nations of
Western Europe.

ANS: F PAGE: 72

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9. The MFN clause effectively allows a nation to provide preferential treatment to its
best trading partners.

ANS: F PAGE: 72

10. GATT was supplanted by the World Trade Organization (WTO).

ANS: T PAGE: 72

11. The IMF administers international trade and investment accords.

ANS: F PAGE: 73

12. GATS stands for the General Agreement on Tariffs and Systems.

ANS: F PAGE: 73

13. The Doha Round is named after a city in Qatar.

ANS: T PAGE: 73

14. Trade flows determine currency flows and therefore the exchange rate.

ANS: F PAGE: 74

15. Historically, a key focus of the WTO’s predecessor was on enhancing tariffs.

ANS: F PAGE: 77

16. The International Monetary Fund, in recent years, has not had the funds available to
help South Korea, Russia, and Indonesia with their financial needs.

ANS: T PAGE: 78

17. A major weakness of the WTO may result from the desire of some of its members
to introduce “social causes” into trade decisions.

ANS: T PAGE: 78

18. The 146 governments participating in the WTO have similar perspectives,
histories, relations, economies, and ambitions.

ANS: F PAGE: 78

19. The World Bank successfully met its goal of aiding the reconstruction of Europe,
but it has been less successful in furthering the economic goals of the developing
world and the newly emerging market economies in the former Soviet Bloc.

ANS: T PAGE: 78

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20. The WTO has been successful in eliminating the debt and other economic
problems of the Latin American countries.

ANS: F PAGE: 79

21. Lately, an increase in environmental awareness has contributed to agreement

between industrialized and developing nations.

ANS: F PAGE: 79

22. Antidumping laws are designed to help domestic industries that are injured by
unfair competition from abroad due to products being dumped on them.

ANS: T PAGE: 83

23. Dumping may involve selling goods overseas at prices lower than those in the
exporter’s home market.

ANS: T PAGE: 83

24. Selling goods overseas at prices above the cost of production is considered
dumping.

ANS: F PAGE: 83

25. A major method by which imports have been restricted is nontariff barriers.

ANS: T PAGE: 84

26. Nontariff barriers are easy to detect and quantify.

ANS: F PAGE: 84

27. Being an advanced industrialized nation, the United States regards trade as a right
or a necessity of the firm.

ANS: F PAGE: 85

28. National security controls focus on weapons exports or high-technology exports

that might adversely affect the safety of a nation.

ANS: T PAGE: 85

29. Corporations can circumvent import restrictions by shifting their activities to

foreign direct investment.

ANS: T PAGE: 85

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30. Export promotion programs are designed to help domestic firms enter and
maintain their position in international markets and to match or counteract similar
export promotion efforts by other nations.

ANS: T PAGE: 86

31. U.S. exporters are the recipients of one of the highest levels of export support.

ANS: F PAGE: 86

32. Reducing governmental red tape is used to discourage exporting.

ANS: F PAGE: 86

33. Mixed aid credits are loans composed partially of commercial interest rates and
partially of highly subsidized developmental aid interest rates.

ANS: T PAGE: 87

34. The Export-Import Bank of the United States provides U.S. firms with long-term
loans and guarantees so that they can bid on contracts where financing is a key
issue.

ANS: T PAGE: 87

35. Japan often uses import promotion to lower its balance-of-trade surplus.

ANS: T PAGE: 87

36. The role of foreign direct investment has primarily been to protect technology
from being transferred.

ANS: F PAGE: 89

37. An integral part of technology transfer is managerial skills, which are the most
significant labor component of foreign direct investment.

ANS: T PAGE: 89

38. Foreign direct investment can be used effectively in developing a geographical

region or particular industry sector.

ANS: T PAGE: 89

39. The major impact of foreign direct investment on the balance of payments is short
term.

ANS: F PAGE: 90

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40. A multinational firm is only subject to the laws of the host country.

ANS: F PAGE: 91

41. Multinational companies, by definition, are protectors of local culture.

ANS: F PAGE: 91

42. Many of the aspects of foreign direct investment that concern host countries apply
to the home country as well.

ANS: T PAGE: 92

43. Incentives used by policymakers to facilitate investments are mainly of three

types: physical, natural, and human.

ANS: F PAGE: 93

44. If passed and signed into law, protectionist legislation in the U.S. can result in the
destruction of the international trade and investment framework.

ANS: T PAGE: 95

45. Trade promotion authority gives Congress the right to accept or reject trade
treaties and agreements.

ANS: T PAGE: 96

46. Multilateral negotiations are only carried out between developed nations.

ANS: F PAGE: 96

Multiple/Choice Questions

1. The domestic policy actions of most governments aim to _______________.

a. increase the standard of living of the country’s citizens

b. improve to the quality of life
c. stimulate national development
d. achieve full employment
e. All of the above

ANS: e PAGE: 70

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2. Foreign policy measures are designed _______.

a. with service concerns in mind, but not the manufacturing firm’s concerns
b. to specifically increase imports
c. to limit exports
d. with domestic concerns in mind, but often explicitly aim to influence trade
and investment flows
e. with the safety of domestic firms abroad in mind

ANS: e PAGE: 70

3. Which of these provides a government with the right and burden to shape the
environment of the country and its citizens?

a. National sovereignty
b. Foreign policy
c. GATT
d. Domestic policy
e. International trade policy

ANS: a PAGE: 70

4. The United States awarded Marshall Plan funds for the reconstruction of Europe
because:

a. European countries demanded it.

b. the United States was stealing from European countries.
c. the United States wanted to develop new markets abroad.
d. the United States wanted to decrease their sphere of influence.
e. European countries were exporting high quality products to the U.S.

ANS: c PAGE: 70

5. The beef hormone dispute involves:

a. France and England

b. Russia and China
c. Canada and the European Union
d. the United States and the European Union
e. the United States and Argentina

ANS: d PAGE: 71

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6. The International Trade Organization (ITO) was designed to cover all of the
following EXCEPT

a. international commercial policies.

b. restrictive business practices.
c. commodity agreements.
d. a constitution for a new Warsaw Pact.
e. employment and reconstruction.

ANS: d PAGE: 71

7. GATT started out as a set of rules to ensure ________ in international trade.

a. nondiscrimination
b. transparent procedures
c. the settlement of disputes
d. the participation of lesser developed countries
e. all of the above

ANS: e PAGE: 71

8. All of the following are true of GATT EXCEPT

a. GATT used tariff concessions.

b. GATT was part of the ITO.
c. GATT used the MFN clause.
d. GATT supported rounds of international trade negotiations.
e. GATT relied on moral suasion to achieve its goals.

ANS: b PAGE: 71

9. GATT stands for _______________.

a. General Agreement on Tariffs and Technology

b. General Agreement on Technology and Trade
c. General Agreement on Tariffs and Trade
d. General Agreement on Technology and Transit
e. General Agreement on Tariffs and Transit

ANS: c PAGE: 71

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10. The Most Favored Nation clause ________.

a. provides for equal rather than special treatment

b. allows a nation to reward its allies
c. was part of the ITO
d. is a unilateral agreement
e. none of the above

ANS: a PAGE: 72

11. GATT was supplanted by the __________.

a. ITO
b. WTO
c. CTO
d. IMF
e. CIA

ANS: b PAGE: 72

12. The General Agreement on Tariffs and Trade is headquartered in

a. Tokyo, Japan.
b. Geneva, Switzerland.
c. Doha, Qatar.
d. Washington, DC.
e. Paris, France.

ANS: b PAGE: 72

13. Which organization now administers international trade and investment accords?

a. ITO
b. CIA
c. IMF
d. WTO
e. The World Bank

ANS: d PAGE: 73

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14. Which of these represent a major change that has occurred over time in the global
policy environment?

a. A enhanced domestic policy influence

b. A strengthening of traditional international institutions
c. A sharpening of the conflict between industrialized and developing
nations
d. Elimination of WTO’s influence over GATT
e. None of the above

ANS: c PAGE: 73

15. United States services exports support approximately U.S. services

and manufacturing jobs.

a. 100,000
b. 1 million
c. 4 million
d. 10 million
e. 40 million

ANS: c PAGE: 74

16. Recently, the value of exchange rates is being set by independent

of trade.

a. currency flows
b. trade flows
c. the WTO
d. GATT
e. capital flight

ANS: a PAGE: 74

17. The engine of a Boeing 777 is made by

a. Boeing.
b. Japanese suppliers.
c. German suppliers.
d. Mexican suppliers.
e. U.S. suppliers.

ANS: e PAGE: 76

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18. To regain the power to influence policies, governments have sought to restrict the
influence of world trade by erecting barriers, implementing import regulations,
and

a. paying tariffs.
b. charging tariffs.
c. dumping domestic products in foreign countries.
d. providing subsidies.
e. reducing governmental red tape.

ANS: b PAGE: 77

19. The International Monetary Fund was able to provide funding for which of the
following countries?

a. Brazil
b. Malaysia
c. Russia
d. Indonesia
e. South Korea

ANS: a PAGE: 78

20. Which of these represent a major weakness of the WTO?

a. No members ever agree on any issues.

b. It has power over IMF but not the World Bank.
c. The desire of some of its members to introduce “social causes” into trade
decisions.
d. Inability of WTO to reduce the tariff barriers evidenced by unprecedented
high tariff levels today in the world markets between nations.
e. None of these.

ANS: c PAGE: 78

21. The World Bank __________.

a. never met its goal of aiding the reconstruction of Europe

b. has been completely successful in furthering the economic goals of the
developing world
c. has not been completely successful in furthering the economic goals of the
newly emerging market economies of the former Soviet Bloc
d. was eliminated in the Uruguay Round negotiations
e. All of these

ANS: c PAGE: 78

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22. Which of the following statements is true regarding policymakers?

a. Policymakers are not concerned about current issues.

b. Policymakers tend to overlook the larger picture.
c. Policymakers are in office too long a time.
d. Policymakers overlook what is politically salable to multiple
constituencies.
e. None of the above are true.

ANS: b PAGE: 79

23. The five-year tariff on Japanese heavy motorcycles at the request of Harley-
Davidson showed that:

a. antidumping laws were unprofitable for domestic and foreign firms.

b. antidumping laws hurt consumers.
c. antidumping laws may not have an effect on the profits of domestic firms.
d. domestic firms can use antidumping laws to obtain strategic shelter from
foreign competitors.
e. domestic motorcycles are inferior to Japanese motorcycles.

ANS: d PAGE: 83

24. When Tech Products Ltd., from London, U.K., sells it products in the U.S. at
prices below the cost of production, it is engaging in a practice called

a. competitive survival.
b. corporate espionage.
c. dumping.
d. voluntary restraint agreements.
e. nontariff barriers.

ANS: c PAGE: 83

25. Which of the following IS NOT considered a nontariff barrier?

a. Preferential treatment
b. Buy-domestic campaigns
c. Bureaucratic hurdles
d. Duties
e. All of these are nontariff barriers

ANS: d PAGE: 84

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26. Import restrictions tend to _______ the price of imported goods.

a. raise
b. lower
c. facilitate
d. recapture
e. none of the above

ANS: a PAGE: 84

27. When a country gives preferential treatment to domestic bidders compared with
foreign bidders, it is engaging in which of these?

a. Nontariff barriers
b. Voluntary restraint agreements
c. Quotas
d. Tariffs
e. IOUs

ANS: a PAGE: 84

28. Nontariff barriers are often the most insidious obstacles to free trade because
________.

a. they are difficult to detect

b. they are hard to quantify
c. demands for their removal are often blocked by references to a nation’s
cultural heritage
d. demands for their removal are often blocked by references to a nation’s
historical heritage
e. all of the above

ANS: e PAGE: 84

29. Which of the following statements is false?

a. Import controls effectively lower prices for consumers.

b. Import controls may cause the downstream composition of imports to
change.
c. Import controls may cause an industry to lag behind in technological
developments.
d. Import controls may mean the most efficient sources of supply are not
available.
e. Import controls may exact a huge price from domestic consumers.

ANS: a PAGE: 84

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30. Prolonged investigation of foreign merchandise at a customs station in the effort
to stop or reduce the importation of foreign merchandise is an example of

a. tariff barriers.
b. nontariff barriers.
c. antidumping measures.
d. tax credits.
e. involved procedures and inspections.

ANS: e PAGE: 84

31. Which of the following statements is false?

a. Corporations faced with import controls can encourage their governments

to erect similar barriers to protect them at home.
b. Corporations can make strategic use of import barriers by incorporating
them into their business plans and exploiting them to gain market share.
c. Corporations may substitute adroit handling of government relations for
innovation and competitiveness.
d. Corporations cannot circumvent import restrictions by shifting their
activities.
e. All of these statements are false.

ANS: d PAGE: 85

32. All of the following are reasons to control exports except _____________.

a. excess supply
b. national security
c. foreign policy reasons
d. the desire to retain capital
e. all of the above

ANS: a PAGE: 85

33. Governments may support exporting firms through all of these except:

a. knowledge transfer.
b. expenditure support.
c. subsidization.
d. reducing governmental red tape.
e. HR functional support.

ANS: e PAGE: 86

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34. U.S. policymakers can best promote the activities of U.S. exporters by _____.

a. non-intervention
b. the use of tariffs and protectionist measures favoring U.S. companies’
international trade positions
c. removing all U.S. import trade barriers and exerting pressure on foreign
governments to do the same
d. keeping domestic and international trade policies separate
e. formulating domestic policies that will improve the position of U.S. firms
internationally

ANS: e PAGE: 86

35. Which of these is false about import promotion measures?

a. Import promotion measures gradually redirect trade flows.

b. Import promotion measures are primarily implemented by nations that
have accumulated and maintained large balance-of-trade deficits.
c. Import promotion measures are being implemented primarily by nations
that have accumulated and maintained large balance-of-trade surpluses.
d. Import promotion measures are designed to allay other nations’ fears of
continued imbalances.

ANS: b PAGE: 87

36. In response to actions by foreign competitors, the has, on

occasion resorted to offering mixed aid credits.

a. World Bank
b. IMF
c. GATT
d. Export-Import Bank
e. ITO

ANS: d PAGE: 87

37. In the United States, major foreign investments can be reviewed by the:

a. World Bank
b. Export-Import Bank
c. Committee on Foreign Investments in the United States
d. GATT
e. IMF

ANS: c PAGE: 88

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38. All of the following are positive results of foreign direct investment on host
countries except ________.

a. capital formation
b. industrial dominance
c. increased employment
d. regional and sectoral development
e. internal competition and entrepreneurship

ANS: b PAGE: 88

39. Negative results of foreign direct investment include _________.

a. increased employment
b. internal competition and entrepreneurship
c. capital formation
d. technology and management skills transfer
e. technological dependence

ANS: e PAGE: 88

40. Positive results of foreign direct investment include _________.

a. technology and management skills transfer

b. technological dependence
c. cultural change
d. change of economic plans
e. industrial dominance

ANS: a PAGE: 88

41. All of the following are negative results of foreign direct investment on host
countries except ________.

a. industrial dominance
b. cultural change
c. internal competition and entrepreneurship
d. technological dependence
e. disturbance of economic plans

ANS: c PAGE: 88

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42. Multinational firms often contribute to ______ by attracting scientists from host
countries to its central research facility.

a. national sovereignty
b. brain drain
c. voluntary restraint agreements
d. mixed aid credits
e. capital flight

ANS: b PAGE: 90

43. Foreign companies directly employ million Americans, or about 7

percent of the private sector workforce.

a. 2.0
b. 3.5
c. 4.0
d. 6.5
e. 9.0

ANS: d PAGE: 90

44. From the home country perspective, foreign direct investment ________.

a. means a lower GDP

b. means reduced export opportunities
c. depresses economic growth
d. may result in job loss
e. all of the above

ANS: d PAGE: 92

45. In situations where countries lack necessary foreign exchange reserves,

governments are likely to restrict exports of capital because of:

a. currency flows
b. currency flight
c. capital flight
d. protectionist legislation
e. monetary drain

ANS: c PAGE: 92

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46. Policy measures to attract foreign direct investment may be implemented
_______.

a. using tariffs
b. to eliminate jobs
c. using fiscal incentives
d. using nontariff barriers
e. using brain drain incentives

ANS: c PAGE: 93

47. Nonfiscal incentives for foreign direct investment include __________.

a. guaranteed government purchases

b. special protection from competition through tariffs
c. investments in infrastructure facilities
d. special protection from competition through import quotas
e. all of the above

ANS: e PAGE: 93

48. Fiscal incentives to attract foreign direct investment include all of the following
EXCEPT __________.

a. land or buildings
b. special depreciation allowances
c. special deductions for capital expenditures
d. tax holidays
e. tax credits

ANS: a PAGE: 93

49. ______ offer special funding for the investor by providing land or buildings,
loans, and loan guarantees.

a. Quotas
b. Financial incentives
c. Capital flight
d. Nonfinancial incentives
e. Fiscal incentives

ANS: b PAGE: 93

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50. The multinational corporation wields the greatest bargaining power ________.

a. before the investment is actually made

b. in the negotiation period
c. in the divestment period
d. in the discriminatory requirements period
e. none of the above

ANS: a PAGE: 95

51. The multinational corporation can maintain its bargaining strength by ________.

a. developing a local support system through local financing, procurement,

and business contacts
b. offering control over access to technology
c. giving up control over access to markets
d. eliminating support from local market entities
e. all of the above

ANS: a PAGE: 95

52. U.S. international trade policy in recent years has been directed mostly toward
___________.

a. improving conditions for U.S. exporters

b. voluntary import restraints
c. supporting the dollar exchange rate
d. creating a positive rather than reactive trade policy
e. direct quotas and tariffs

ANS: d PAGE: 95

53. In order for U.S. trade policy to become more domestically oriented and domestic
policy to become more international in vision, all of the following should occur
EXCEPT:

a. An improvement in the quality and amount of information government

and businesses share.
b. Policy must discourage collaboration among companies in such areas as
goods and process technologies.
c. The U.S. industry collectively must overcome its export reluctance and its
short term financial orientation.
d. The United States must invest in its people.
e. The Executive Branch must be given authority to negotiate international
agreements.

ANS: b PAGE: 96

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54. Negotiations with a better chance for long-term success are ___________.

a. those established and implemented by the ITO

b. voluntary agreements
c. multi-lateral agreements
d. bilateral agreements
e. none, all have the same chance for success

ANS: c PAGE: 97

Short Answer

1. Discuss the notion of national sovereignty and its effect on the international
marketplace.

ANS: National sovereignty is a government’s right and burden to shape the

environment of its nation and its citizens. Governments use national sovereignty
to regulate, stimulate, direct, and protect national activities.

PAGE: 70

2. What are the major goals of foreign policy?

ANS: Some of the more common goals of foreign policy include the protection of
national security, the improvement of trade and investment opportunities, and the
safety and security of a nation’s firms doing business abroad.

PAGE: 70

3. What is the International Trade Organization, and what happened to it?

ANS: The International Trade Organization (ITO) was signed into place in 1948
in Havana, Cuba. It represented a series of agreements among 53 countries and
was designed to cover international commercial policies, restrictive business
practices, commodity agreements, employment and reconstruction, economic
development and international investment, and a constitution for a new United
Nations agency to administer the whole. Most nations refused to ratify its
provisions, and as a result, the ITO was never implemented.

PAGE: 71

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4. Explain the origin and function of the World Trade Organization.

ANS: In early 1995, the GATT was supplanted by a new institution called the
World Trade Organization (WTO). The WTO administers international trade and
investment accords. These accords will gradually reduce government subsidies to
industries and will convert nontariff barriers into more transparent tariff barriers.
The latest round of negotiations started in 2001 in Dola, Qatar, and is still in
progress.

PAGE: 73

5. What are the major changes that have occurred over time in the global policy
environment?

ANS: There are three major changes in the global policy environment: (1) a
reduction of domestic policy influence, (2) a weakening of traditional
international institutions, and (3) a sharpening of the conflict between
industrialized nations and developing nations.

PAGE: 73

6. What is the current effect of the World Bank on International Relations?

ANS: Recently there has been a weakening of international institutions in

international relations, and the World Bank has experienced this phenomenon.
The World Bank has met its goal of aiding the reconstruction of Europe but has
been less successful in furthering the economic goals of the developing world and
the newly emerging market economies in the former Soviet bloc. Some claim that
instead of alleviating poverty, misguided bank policies have created poverty.

PAGE: 78

7. Discuss the impact of foreign direct investment on the home country.

ANS: Foreign direct investment means addition to the home country’s GDP. In
addition, intracompany transfers may bring about additional export opportunities.
Similarly, foreign direct investment may stimulate economic growth. However,
many unions point not only to outright job loss but also to the effect on imports
and exports.

PAGE: 82

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8. What are the effects of import restrictions?

ANS: Import controls may mean that the most efficient sources of supply are not
available. Import controls may also change the composition of downstream
imports. Finally, import controls may change the productivity of an industry, and
cause it to lag behind in technological advancements. So, in general, it can be
argued that import controls exact a huge price from consumers.

PAGE: 84

9. Why do nations control exports?

ANS: Nations control exports when products are in short supply, to protect
national security, for foreign policy reasons, and in order to retain capital.

PAGE: 85

10. Discuss the use of export promotion.

ANS: Export promotion programs are designed to assist a nation’s exporters.

However, questions have been raised as to why public funds are used for an
activity that should be profit driven. In addition, concerns have been raised as to
the capability of governments to provide such support, and the effect of
competitive export promotion.

PAGE: 86

11. What types of countries take part in import promotion? Give an example of one.

ANS: Import promotion measures are implemented primarily by nations that have
accumulated and maintained large balance-of-trade surpluses. They hope to allay
other nations’ fears of continued imbalances and to gradually redirect trade flows.
The Japanese organization JETRO, or the Japan External Trade Organization, has
begun to focus on the promotion of imports to Japan.

12. What are some key positive and negative effects of foreign direct investment?

ANS: Foreign direct investment contributes to world economic development

through the transfer of capital, transfer of technology and managerial skills,
diversification of the industrial base, and intensification of competition. It may
also introduce new products/choices, lower prices, decrease the need for imports,
create jobs, and enhance the standard of living.
Foreign direct investment may also, however, result in low levels of research and
development, foreign domination of local industry, and comprise national
security. It makes a nation more dependent, and results in long term capital
outflows, increases imports, and may result in monopolies. In addition, foreign
investors may be less attuned to domestic needs.

PAGE: 88

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13. What is meant by the term “brain drain”? What are some countries doing to
alleviate this problem?

ANS: Brain drain is considered a negative impact of foreign direct investment for
the host country. The multinational firm may contribute to brain drain by
attracting scientists from host countries to its central research facility. Many
countries have demanded and received research facilities on their soil, where they
can better control results.

14. What are the three major ways investments can be promoted?

ANS: Investments can be promoted through fiscal incentives, financial incentives,

and nonfinancial incentives. Fiscal incentives are specific tax measures designed
to serve as an attraction to the foreign investor. They include special depreciation
allowances, tax credits or rebates, and special deductions for capital expenditures.
Financial incentives offer special funding for the investors by providing land or
buildings, loans, or loan guarantees. Nonfinancial incentives can consist of
guaranteed government purchases, special protection from competition, and
investments in infrastructure facilities.

PAGE: 93

15. What are the drawbacks of investment promotion programs?

ANS: While investment promotion programs may succeed in luring new

industries to a location and creating jobs, they may also result in a competition for
foreign investment, and even place established domestic firms at a disadvantage if
they do not receive any support.

PAGE: 94

16. How can a multinational company maintain its bargaining power with the host
country?

ANS: The multinational corporation can maintain its bargaining power by

developing a local support system through local financing, procurement, and
business contracts, as well as by maintaining control over access to technology
and markets.

PAGE: 95

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Essay

1. In your opinion, will the institutions governing international trade and investment
have a changed role in the future? Explain.

ANS: While responses to this question will reflect student opinion, responses
should clearly demonstrate and understanding of the roles of the WTO, the IMF,
the World Bank, and so on; their current roles in international trade and
investment; and an explanation of how and why these institutions might play a
greater or lesser or changed role in the global marketplace.

PAGE: 71

2. How have currency flows contributed to the reduction of domestic policy

influences?

ANS: Trade flows used to determine currency flows, and therefore the exchange
rate. In the recent past, currency flows have taken on a life of their own,
increasing from an average daily trading volume of $18 billion in 1980 to $1.2
trillion per day in 2001. As a result, they have begun to set the value of exchange
rates independent of trade. These exchange rates in turn have now begun to
determine the level of trade. The interactions between global and domestic
financial flows have severely limited the freedom for governmental influence on
domestic policy.

PAGE: 74

3. Explain the reasons why the WTO grown weaker as an international institution?

ANS: The WTO is confronted with many difficulties that weaken its position as
an international institution. One reason is the result of the organization’s success.
Because the WTO’s predecessor GATT has reduced tariff levels to unprecedented
levels, the focus is now on nontariff barriers, which are more complex and
indigenous to nations. As a consequence, any emerging dispute is likely to be
more heatedly contested and more difficult to resolve. Another problem area
results from the fact that many disagreements were set aside for the sake of
concluding the negotiations. If the WTO’ dispute settlement mechanism is
applied to resolve a conflict, outcries in favor of national sovereignty may cause
nations to withdraw from the agreement whenever a country loses a dispute. A
final weakness may result from the desire of some of its members to introduce
“social clauses” into trade discussions. Many countries fear that social clauses
can be used to devise new rules of protectionism against their exports.

PAGE: 77

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4. What are antidumping laws, and how can domestic firms use them to obtain
strategic shelter from foreign competitors? Give an example.

ANS: Antidumping laws are designed to help domestic industries that are injured
by unfair competition from abroad due to products being dumped on them.
Dumping may involve selling goods at prices lower than those in the exporter’s
home market, or at a price below the cost of production, or both. In 1983, Harley
Davidson used antidumping laws to obtain strategic shelter from its foreign
competitors. The International Trade Commission imposed a five-year tariff on
Japanese heavy motorcycles imported into the United States because Harley-
Davidson could no longer compete with companies like Honda and Kawasaki.
During those five years, Harley-Davidson enacted new management strategies,
and within four years, it was back on its feet with the highest market share in the
heavyweight class of bikes.

PAGE: 83

5. From an international perspective, what are the two main types of negotiations?
What are the disadvantages and advantages for each?

ANS: Trade and investment negotiations can take either a multilateral or bilateral
approach. Bilateral negotiations are carried out mainly between two nations,
while multilateral negotiations are carried out among a number of nations. The
approach can be broad, or narrow. In order to address narrowly defined trade
issues, bilateral negotiations and a specific approach are most appealing.
However, such negotiations have less chance for long-term success, because
narrow-based negotiations require that there be a clearly defined winner and loser.
Broad-based multilateral negotiations make it possible for all participants to
emerge as winners. The difficulty lies in devising enough incentives to bring the
appropriate and desirable partners to the bargaining table.

PAGE: 96

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