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Hill GBT 10e
Chapter 07 Test Bank
True / False Questions
1. Subsidies are a trade policy instrument.
TRUE
Trade policy uses seven main instruments: tariffs, subsidies, import quotas, voluntary export
restraints, local content requirements, administrative policies, and antidumping duties.
AACSB: Reflective Thinking

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01 Identify the policy instruments used by governments to influence international trade flows.
Topic: Instruments of Trade Policy
2. Import tariffs protect domestic producers against foreign competitors.
TRUE
Domestic producers gain, because the tariff affords them some protection against foreign
competitors by increasing the cost of imported foreign goods.

Blooms: Remember
Difficulty: 1 Easy
7-1
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3. By lowering production costs, subsidies help foreign competitors gain export markets.
FALSE
By lowering production costs, subsidies help domestic producers in two ways: (1) competing
against foreign imports and (2) gaining export markets.
AACSB: Analytical Thinking

Blooms: Understand
Difficulty: 2 Medium
4. In recent decades, a fall in subsidies, quotas, and voluntary export restraints has been
accompanied by a rise in tariff barriers.
FALSE
A fall in tariff barriers in recent decades has been accompanied by a rise in nontariff barriers,
such as subsidies, quotas, voluntary export restraints, and antidumping duties.

Blooms: Understand
5. Government intervention in international trade can take the form of reducing restrictions on
imports and adopting policies that promote exports.
TRUE
When governments intervene in international trade, they often do so by restricting imports of

goods and services into their nation, while adopting policies that promote domestic production
and exports.

Blooms: Remember
Difficulty: 1 Easy
7-2
6. Governments can protect consumers from unsafe products by issuing a limit or a ban on such
products.
TRUE
Many governments have long had regulations to protect consumers from unsafe products. The
indirect effect of such regulations often is to limit or ban the importation of such products.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-02 Understand why governments sometimes intervene in international trade.
Topic: The Case for Government Intervention
7. Some countries argue that government intervention to protect certain domestic industries can
compromise national security.
FALSE
Countries sometimes argue that it is necessary to protect certain industries because they are
important for national security.

Blooms: Remember
Difficulty: 1 Easy
8. The main gains from subsidies accrue to importers, whose international competitiveness is
increased as a result of these subsidies.
FALSE
The main gains from subsidies accrue to domestic producers, whose international
competitiveness is increased as a result.

Blooms: Understand
7-3
9. According to Alexander Hamilton, governments must temporarily support new industries until
they have grown strong enough to meet international competition.
TRUE
The infant industry argument is by far the oldest economic argument for government
intervention. Alexander Hamilton proposed it in 1792. According to this argument, many
developing countries have a potential comparative advantage in manufacturing, but new
manufacturing industries cannot initially compete with established industries in developed
countries. To allow manufacturing to get a toehold, the argument is that governments should
temporarily support new industries (with tariffs, import quotas, and subsidies) until they have
grown strong enough to meet international competition.

Blooms: Remember
Difficulty: 1 Easy
10. Both import quotas and voluntary export restraints (VERs) benefit domestic producers by
limiting import competition.
TRUE
As with tariffs and subsidies, both import quotas and VERs benefit domestic producers by
limiting import competition.

Blooms: Understand
11. Dumping is variously defined as selling goods in a foreign market at below their costs of
production, or as selling goods in a foreign market at below their "fair" market value.
TRUE
Dumping is defined as selling goods in a foreign market at below their costs of production or
"fair" market value. Dumping is viewed as a method by which firms unload excess production
in foreign markets.

Blooms: Remember
Difficulty: 1 Easy
7-4
12. Paul Krugman asserts that a strategic trade policy is almost certain to be captured by special-
interest groups within the economy, who will distort it to their own needs.
TRUE
A further reason for not embracing strategic trade policy, according to Krugman, is that such a
policy is almost certain to be captured by special-interest groups within the economy, which
will distort it to their own ends.

Blooms: Understand
Topic: The Revised Case for Free Trade
13. The strategic trade policy arguments of the new trade theorists suggest an economic
justification for government intervention in international trade and this justification challenges
the rationale for unrestricted free trade.
TRUE
The strategic trade policy arguments of the new trade theorists suggest an economic
justification for government intervention in international trade. This justification challenges the
rationale for unrestricted free trade found in the work of classic trade theorists such as Adam
Smith and David Ricardo.

Blooms: Understand
Learning Objective: 07-03 Summarize and explain the arguments against strategic trade policy.
14. Paul Krugman argues that although strategic trade policy looks unappealing in theory, in
practice it is most likely to be workable.
FALSE
In response to certain challenges to economic orthodoxy, a number of economists—including

some of those responsible for the development of the new trade theory, such as Paul
Krugman—point out that although strategic trade policy looks appealing in theory, in practice it
may be unworkable. This response to the strategic trade policy argument constitutes the
revised case for free trade.

Blooms: Remember
Difficulty: 1 Easy
7-5
15. Free trade as a government policy was first officially embraced by Germany in 1846, when the
Bundestag repealed the Corn Laws.
FALSE
Free trade as a government policy was first officially embraced by Great Britain in 1846, when
the British Parliament repealed the Corn Laws.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-04 Describe the development of the world trading system and the current trade issue.
Topic: Development of the World Trading System
16. The Smoot-Hawley Act aimed to liberalize trade by eliminating tariffs, subsidies, and import
quotas.
FALSE
Aimed at avoiding rising unemployment by protecting domestic industries and diverting

consumer demand away from foreign products, the Smoot-Hawley Act erected an enormous
wall of tariff barriers. Almost every industry was rewarded with its "made-to-order" tariff.

Blooms: Remember
Difficulty: 1 Easy
17. Pressures for greater protectionism increased around the world during the 1980s and early
1990s due to the strain caused by the persistent trade deficit in the world's largest economy,
Japan.
FALSE
During the 1980s and early 1990s, the world trading system erected by the GATT came under
strain as pressures for greater protectionism increased around the world. There were several
reasons for the rise in such pressures during the 1980s. For instance, the world trading
system was strained by the persistent trade deficit in the world's largest economy, the United
States.

Blooms: Understand
7-6
18. One of the reasons for the trend toward greater protectionism during the 1980s and 1990s
was that many countries found ways to get around GATT regulations.
TRUE
strain as pressures for greater protectionism increased around the world. There were several
reasons for the rise in such pressures during the 1980s. A reason for the trend toward greater
protectionism was that many countries found ways to get around GATT regulations.

Blooms: Understand
19. In the Uruguay Round of the WTO, member countries sought to exempt trade in services from
GATT rules.
FALSE
Against the background of rising pressures for protectionism, in 1986 GATT members
embarked on their eighth round of negotiations to reduce tariffs, the Uruguay Round. Until
then, GATT rules had applied only to trade in manufactured goods and commodities. In the
Uruguay Round, member countries sought to extend GATT rules to cover trade in services.

Blooms: Remember
Difficulty: 1 Easy
20. Since strong economic arguments support unrestricted free trade, governments of developed
nations are setting an example by unilaterally lowering their trade barriers.
FALSE
Strong economic arguments support unrestricted free trade. While many governments have
recognized the value of these arguments, they have been unwilling to unilaterally lower their
trade barriers for fear that other nations might not follow suit.

Blooms: Understand
7-7
21. Antidumping actions seem to be concentrated in certain sectors of the economy such as basic
metal industries (e.g., aluminum and steel), chemicals, plastics, and machinery and electrical
equipment.
TRUE
Antidumping actions seem to be concentrated in certain sectors of the economy such as basic
metal industries (e.g., aluminum and steel), chemicals, plastics, and machinery and electrical
equipment. These sectors account for some 70 percent of all antidumping actions reported to
the WTO.

Blooms: Remember
Difficulty: 1 Easy
22. Trade barriers encourage firms to disperse their productive activities—design, production, and
assembly—to foreign nations.
FALSE
It may make sense for a firm to design and engineer its product in one country, to manufacture
components in another, to perform final assembly operations in yet another country, and then
export the finished product to the rest of the world. However, trade barriers constrain a firm's
ability to disperse its productive activities in such a manner.

Blooms: Understand
Learning Objective: 07-05 Explain the implications for managers of developments in the world trading system.
Topic: Focus on Managerial Implications
23. A firm may set up production activities in a foreign country, where trade barriers do not
currently exist, to reduce the threat of trade barriers being imposed later.
TRUE
Even when trade barriers do not exist, the firm may still want to locate some production
activities in a given country to reduce the threat of trade barriers being imposed in the future.

Blooms: Understand
7-8
24. The threat of antidumping action enhances the ability of a firm to use aggressive pricing to
gain market share in a country.
FALSE
The threat of antidumping action limits the ability of a firm to use aggressive pricing to gain
market share in a country. Firms in a country also can make strategic use of antidumping
measures to limit aggressive competition from low-cost foreign producers.

Blooms: Understand
25. Government intervention can be self-defeating because it tends to protect the inefficient rather
than help firms become efficient global competitors.
TRUE
Government intervention can be self-defeating because it tends to protect the inefficient rather
than help firms become efficient global competitors. Intervention is dangerous; it may invite
retaliation and trigger a trade war. Intervention is unlikely to be well executed, given the
opportunity for such a policy to be captured by special-interest groups.

Blooms: Understand
Multiple Choice Questions
7-9
26. Which of the following is a trade policy instrument that the GATT and WTO have been most
successful in limiting?
A. local content requirements

B. tariffs
C. subsidies
D. voluntary export restraints
E. import quotas
Tariffs are the oldest and simplest instrument of trade policy. Tariffs are also the instrument
that the GATT and WTO have been most successful in limiting.

Blooms: Remember
Difficulty: 1 Easy
27. Which of the following groups benefits the most from the imposition of tariffs?
A. domestic producers
B. consumers
C. exporters and importers
D. foreign producers
E. international bodies such as WTO
The important thing to understand about an import tariff is who suffers and who gains. The
government gains, because the tariff increases government revenues. Domestic producers
gain, because the tariff affords them some protection against foreign competitors by increasing
the cost of imported foreign goods. Consumers lose because they must pay more for certain
imports.

Blooms: Understand
7-10
28. A charge of 15-20% was levied by the government of Cadmia on the value of automobile
accessories imported from a neighboring country. This increased the price of those imported
car accessories for the consumers in Cadmia. Which of the following instruments of trade
policy is being used by the government of Cadmia?
A. local content tariff

B. ad valorem tariff
C. subsidies
D. import quotas
E. antidumping duties
Ad valorem tariffs are levied as a proportion of the value of the imported good. In most cases,
tariffs are placed on imports to protect domestic producers from foreign competition by raising
the price of imported goods.

Blooms: Apply
Difficulty: 3 Hard
29. The Republic of Zander is a member of the European Union (EU). As an EU member, the
Republic of Zander gives cash grants to domestic agricultural producers. Which of the
following instruments of trade policy is being used by the government of The Republic of
Zander?
A. local content tariff

B. ad valorem tariff
C. subsidies
D. import quotas
A subsidy is a government payment to a domestic producer. Subsidies take many forms,

including cash grants, low-interest loans, tax breaks, and government equity participation in
domestic firms .

Blooms: Apply
Difficulty: 3 Hard
7-11
30. The country of Nunrovia imposes a fixed charge of $3 per barrel of oil imported into the
country. Which of the following instruments of trade policy is used by Nunrovia?
A. specific tariff
B. GATT tariff
C. subsidies
D. import quotas
Specific tariffs are levied as a fixed charge for each unit of a good imported. In most cases,
tariffs are placed on imports to protect domestic producers from foreign competition by raising
the price of imported goods.

Blooms: Apply
Difficulty: 3 Hard
32. Which of the following is most likely to be an objective of export tariffs?
A. abiding by the rules enforced by the WTO

B. curbing the competition offered by foreign firms to domestic firms
C. reducing exports from a sector, often for political reasons
D. maintaining a positive trade deficit
E. increasing the flow of capital in the international market
Sometimes tariffs are levied on exports of a product from a country in order to raise revenue
for the government and reduce exports from a sector, often for political reasons. For example,
in 2004, China imposed a tariff on textile exports to moderate the growth in exports of textiles
from China, thereby alleviating tensions with other trading partners.

Blooms: Understand
7-12
33. By lowering production costs, subsidies help domestic producers to
A. gain export markets.

B. meet import quotas.
C. meet voluntary export restraints.
D. meet the local content requirement.
E. compete in the domestic market against local producers.
By lowering production costs, subsidies help domestic producers in two ways: (1) competing
against foreign imports and (2) gaining export markets.

Blooms: Understand
34. Which of the following groups would benefit the most from receiving subsidies?
A. governments
B. international organizations such as the WTO
C. domestic producers
D. importers
E. foreign competitors
The main gains from subsidies accrue to domestic producers, whose international
competitiveness is increased as a result. Advocates of strategic trade policy favor subsidies to
help domestic firms achieve a dominant position in those industries in which economies of
scale are important and the world market is not large enough to profitably support more than a
few firms.

Blooms: Remember
Difficulty: 1 Easy
7-13
35. Which of the following statements is true about import quotas?
A. Import quotas benefit domestic producers by limiting import competition.

B. Import quotas always lower the prices for domestically produced goods.
C. Higher tariff rates are usually applied to imports within the quota than those over the quota.
D. Import quotas benefit consumers by decreasing the domestic price of an imported good.
E. Import quotas help foreign producers gain a competitive advantage.
An import quota is a direct restriction on the quantity of some good that may be imported into a
country. The restriction is usually enforced by issuing import licenses to a group of individuals
or firms. Import quotas benefit domestic producers by limiting import competition. An import
quota always raises the domestic price of an imported good. If a domestic industry lacks the
capacity to meet demand, an import quota can raise prices for both the domestically produced
and the imported good.

Blooms: Understand
36. The tiny South Pacific island country of Maroji produces a lot of milk and milk-based products.
To protect this industry, Maroji mandates that only designated trading companies can import
cheese, each of which is allocated the right to import a maximum number of pounds of cheese
each year. By doing this, Maroji controls the amount of imported cheese. This is an example
of a(n)
A. import quota.
B. subsidy.
C. import tariff.
D. local content requirement.
E. import duty.
An import quota is a direct restriction on the quantity of some good that may be imported into a
country. The restriction is usually enforced by issuing import licenses to a group of individuals
or firms. Import quotas benefit domestic producers by limiting import competition.

Blooms: Apply
Difficulty: 3 Hard
7-14
37. Which of the following is the term for when a lower tariff rate is applied to imports within the
quota than those over the quota?
A. tariff rate quota

B. voluntary import restraint
C. import duty
D. quota rent
E. import quota
A common hybrid of a quota and a tariff is known as a tariff rate quota. Under a tariff rate
quota, a lower tariff rate is applied to imports within the quota than those over the quota.

Blooms: Remember
Difficulty: 1 Easy
38. The country of Argonia imposes an ad valorem tariff of 10 percent on 1 million tons of rice
imports, after which an out-of-quota tariff of 80 percent is applied. Which of the following trade
policy instruments is Argonia using?
A. subsidy
B. tariff rate quota
C. voluntary export restraint
D. tariff ceiling
E. local content requirement
A common hybrid of a quota and a tariff is known as a tariff rate quota. Under a tariff rate
quota, a lower tariff rate is applied to imports within the quota than those over the quota.

Blooms: Apply
Difficulty: 3 Hard
7-15
39. Maroji is a major exporter of dairy products. Mipon is a major exporter of heavy machinery but
also has a sizeable domestic dairy industry. Since it imports a sizeable amount of heavy
machinery from Mipon, Maroji, at the request of Mipon, limited the amount of dairy products it
exports to Mipon each year. This is an example of
A. tariff rate quota

B. quota rent
C. voluntary export restraint (VER)
D. quota share
E. export embargo
A voluntary export restraint (VER) is a quota on trade imposed by the exporting country,
typically at the request of the importing country's government.

Blooms: Apply
Difficulty: 3 Hard
40. Which of the following statements is true about voluntary export restraints (VERs)?
A. VERs benefit consumers by limiting import competition.

B. VERs reduce the domestic price of an imported good.
C. When imports are limited to a low percentage of the market by a VER, the price is bid up
for that limited foreign supply.
D. Foreign producers agree to VERs because they fear economic instability in the world
economy.
E. VERs negatively affect domestic producers by increasing import competition.
VERs always raise the domestic price of an imported good. When imports are limited to a low
percentage of the market by a quota or VER, the price is bid up for that limited foreign supply.

Blooms: Understand
7-16
41. Because Maroji limits the annual export of dairy products to Mipon, Mipon’s dairy producers
reap extra annual profits of $500 million. The extra profit is referred to as
A. net profit.
B. quota rent.
C. trade surplus.
D. profit margin.
E. quota share.
The extra profit that producers make when supply is artificially limited by an import quota is
referred to as a quota rent.

Blooms: Apply
Difficulty: 3 Hard
42. For years, the world had used the country of Votnam as a place to assemble goods because
of the country’s availability of cheap labor. To shift its manufacturing base from simple
assembly to full-fledged manufacture of components and finished goods, Votnam introduced a
policy that 35 percent of the value of a product must be produced locally. This is an example
of a(n)
A. international allocation requirement

B. local content requirement
C. specific quota requirement
D. ad valorem portion requirement
E. domestic sales requirement
A local content requirement is a requirement that some specific fraction of a good be produced
domestically. The requirement can be expressed either in physical terms or in value terms.

Blooms: Apply
Difficulty: 3 Hard
7-17
43. Animax Limited got an order to sell 50,000 central processing units (CPUs) to Palladia, but the
Palladian government stipulated that 15 percent of the component parts of those CPUs must
be produced in Palladia. This stipulation by the Palladian government would be example of
a(n)
A. voluntary export restraint.

B. quota rent.
C. import quota.
D. local content requirement.
E. antidumping policy.
domestically. The requirement can be expressed either in physical terms (e.g., 15 percent of
component parts for this product must be produced locally) or in value terms (e.g., 15 percent
of the value of this product must be produced locally).

Blooms: Apply
Difficulty: 3 Hard
44. Which of the following specifies that U.S. government agencies must give preference to U.S.
products when putting contracts for equipment out to bid unless the foreign products have a
significant price advantage?
A. Export Administration Act

B. Helms-Burton Act
C. Hawley-Burton Act
D. Buy America Act
E. Volcker Rule
A little-known law in the United States, the Buy America Act, specifies that government
agencies must give preference to American products when putting contracts for equipment out
to bid unless the foreign products have a significant price advantage. The law specifies a
product as "American" if 51 percent of the materials by value are produced domestically.

Blooms: Remember
Difficulty: 1 Easy
7-18
45. The Bureau of Natural Resources, a U.S. government agency, put out a contract for 45,000
document copiers. It stipulated in the contract letter that preference would be given to a
bidder for whom at least 51 percent of the materials by value in the copier were produced in
the U.S. This contract provision is covered by the
A.
..
Export Administration Act.
B. Helms-Burton Act.
C. Hawley-Burton Act.
D. Buy America Act.
E. Volcker Rule.
A little-known law in the United States, the Buy America Act, specifies that government
agencies must give preference to American products when putting contracts for equipment out
to bid unless the foreign products have a significant price advantage. The law specifies a
product as "American" if 51 percent of the materials by value are produced domestically.

Blooms: Apply
Difficulty: 3 Hard
46. Which of the following are bureaucratic rules designed to make it difficult for imports to enter a
country?
A. voluntary export restraints

B. consumer regulations
C. subsidies
D. administrative trade policies
E. public sector regulations
Administrative trade policies are bureaucratic rules designed to make it difficult for imports to
enter a country.

Blooms: Remember
Difficulty: 1 Easy
7-19
47. The Palladian government required that all imported products that came from Lovaskiya be
checked by Palladian customs inspectors. The inspection was done at a container freight
station that was both remote and poorly staffed. This delayed the Lovaskiyan consignment
from reaching the consumers in Palladia. The inspection strategy adopted by the customs
officers in Palladia is an example of a(n)
A. antidumping policy.
B. voluntary export restraint policy.
C. administrative trade policy.
D. monopolistic competition policy.
E. tariff rent policy.
Administrative trade policies are bureaucratic policies designed to make it difficult for imports
to enter a country. The Palladian policy mentioned above effectively made it difficult for
Lovaskiyan products to enter Palladian markets.

Blooms: Apply
Difficulty: 3 Hard
48. If Argonia exports vast quantities of cheap toys to Cadmia, selling them at below their costs of
production, it would constitute
A. monopolism.
B. dumping.
C. offshoring.
D. nearshoring.
E. subsidizing.
In the context of international trade, dumping is variously defined as selling goods in a foreign
market at below their costs of production or as selling goods in a foreign market at below their
"fair" market value.

Blooms: Understand
7-20
49. Dumping takes place when foreign producers
A. attempt hostile takeovers of domestic firms and usurp the available resources for
production.
B. indiscriminately exploit the natural resources of a foreign country to create a later demand
that can be met only by imports.
C. eliminate competition by subsidizing prices in a foreign market with home market profits
and eventually raising prices to earn substantial profits.
D. capture the niche market rather than the masses.
E. export only a small quantity of their products into an importing country.
Dumping is viewed as a method by which firms unload excess production in foreign markets.
Some dumping may be the result of predatory behavior, with producers using substantial
profits from their home markets to subsidize prices in a foreign market with a view to driving
indigenous competitors out of that market. Once this has been achieved, so the argument
goes, the predatory firm can raise prices and earn substantial profits.

Blooms: Understand
50. Which of the following best indicates the motive for foreign firms to engage in dumping?
A. unloading excess production in foreign markets

B. cutting labor costs to reduce the costs of production
C. providing a wider range of products for consumers in foreign markets
D. meeting the voluntary export requirements imposed on it
E. obtaining subsidies from the importing country
Dumping is viewed as a method by which firms unload excess production in foreign markets.
For example, two South Korean manufacturers of semiconductors, LG Semicon and Hyundai
Electronics, were accused of selling dynamic random access memory chips (DRAMs) in the
U.S. market at below their costs of production. This action occurred in the middle of a
worldwide glut of chip-making capacity. It was alleged that the firms were trying to unload their
excess production in the United States.

Blooms: Understand
7-21
51. Which of the following is considered to be the ultimate objective of antidumping policies?
A. protecting consumers from high prices

B. preventing domestic firms from unloading their excess production in domestic markets
C. protecting domestic producers from unfair foreign competition
D. protecting consumers from substandard and hazardous products
E. preventing foreign products from entering domestic market
Antidumping policies are designed to punish foreign firms that engage in dumping. The
ultimate objective is to protect domestic producers from unfair foreign competition.

Blooms: Remember
Difficulty: 1 Easy
52. Which of the following is the most common political argument for government intervention in
international trade?
A. decreasing the prices of products in the domestic market

B. promoting strategic trade policy
C. protecting jobs and industries from unfair foreign competition
D. improving efficiency of domestic labor
E. protecting human rights
The most common political argument for government intervention is that it is necessary for
protecting jobs and industries from unfair foreign competition. Political arguments for
government intervention cover a range of issues, including preserving jobs, protecting
industries deemed important for national security, retaliating against unfair foreign competition,
protecting consumers from "dangerous" products, furthering the goals of foreign policy, and
advancing the human rights of individuals in exporting countries.

Blooms: Remember
Difficulty: 1 Easy
7-22
53. The country of Cadmia, which is a leading producer of bauxite, had to impose trade sanctions
on Cerian soda cans in order to get the government of Ceria to enforce export restraints. This
imposition by the Cadmian government was undertaken to protect domestic producers of soda
cans. Which of the following government intervention is being used by Cadmia?
A. diversification
B. deregulation
C. retaliation
D. liberalization
E. monopolization
Some argue that governments should use the threat to intervene in trade policy as a
bargaining tool to help open foreign markets and force trading partners to "play by the rules of
the game." The U.S. government has used the threat of punitive trade sanctions to try to get
the Chinese government to enforce its intellectual property laws.

Blooms: Apply
Difficulty: 3 Hard
54. Why is retaliation by government intervention a risky strategy?
A. It encourages dumping by foreign companies.

B. It could result in increased tariff barriers by the country that is being pressured.
C. It may expose certain industries that are important for national security to foreign
competition.
D. It allows firms to sell goods in the foreign market at below their fair market value.
E. It makes it difficult for domestic firms to make any investments by borrowing money from
the domestic capital market.
Retaliation is a risky strategy. A country that is being pressured may not back down and
instead may respond to the imposition of punitive tariffs by raising trade barriers of its own.

Blooms: Understand
7-23
55. Cadmia banned imports of Mattel toys with high levels of toxic lead, manufactured in Argonia.
The underlying motive for such a move could be
A. protecting domestic businesses from unfair pricing.

B. protesting the pricing of toys below their costs of production.
C. protecting consumers from unsafe products.
D. increasing the trade surplus of the United States.
E. reducing dumping of cheap toys.
Many governments have long had regulations to protect consumers from unsafe products. The
indirect effect of such regulations often is to limit or ban the importation of such products.

Blooms: Understand
56. The principal function of the trade sanctions the U.S. has in place against Cuba is to
A. prevent other countries from trading with Cuba.

B. aid Cuba in creating a direct trade route to the U.S.
C. create a nearby dumping site for large businesses.
D. impoverish Cuba to lead to the downfall of the communist government.
E. force Cuba to enter into the NATO agreement.
The principal function of the long-running trade sanctions the U.S. has against Cuba is to
create economic hardship in Cuba which will lead to the downfall of Cuba’s communist
government and replace it with a more democratically-inclined regime.

Blooms: Understand
7-24
57. Many developing countries have a potential comparative advantage in manufacturing, but new
manufacturing industries cannot initially compete with well-established industries in developed
countries, according to
A. economic development argument.

B. comparative advantage theory.
C. national security argument.
D. infant industry argument.
E. mixed economy theory.
According to the infant industry argument, many developing countries have a potential
comparative advantage in manufacturing, but new manufacturing industries cannot initially
compete with established industries in developed countries. To allow manufacturing to get a
toehold, the argument is that governments should temporarily support new industries (with
tariffs, import quotas, and subsidies) until they have grown strong enough to meet international
competition.

Blooms: Understand
58. Maroji, a developing country, has a potential comparative advantage in manufacturing

electronic goods but is unable to compete with China, at least for the near future. Maroji’s
predicament is best explained by the
A. economic development argument.

B. comparative advantage theory.
C. national security argument.
D. infant industry argument.
E. mixed economy theory.
According to the infant industry argument, many developing countries have a potential
comparative advantage in manufacturing, but new manufacturing industries cannot initially
compete with established industries in developed countries. To allow manufacturing to get a
toehold, the argument is that governments should temporarily support new industries (with
tariffs, import quotas, and subsidies) until they have grown strong enough to meet international
competition.

Blooms: Apply
Difficulty: 3 Hard
7-25
59. One of the main reasons why many economists remain critical of the infant industry argument
is its reliance on the assumption that
A. protection of manufacturing from foreign competition is harmful.

B. absolute advantage cannot sustain productivity of an industry.
C. foreign firms too come under the definition of infant industry when they newly enter a
foreign market.
D. firms are unable to make efficient long-term investments by borrowing money from the
domestic or international capital markets.
E. foreign competition will eventually cause domestic firms to improve the quality of their
products.
In spite of GATT recognizing the infant industry argument as a legitimate reason for
protectionism, many economists remain critical of this argument as it relies on the assumption
that firms are unable to make efficient long-term investments by borrowing money from the
domestic or international capital market.

Blooms: Understand
60. Which of the following is a major reason why many economists remain critical of the infant
industry argument?
A. It makes the domestic industry inefficient.

B. It does not provide guaranteed employment for the citizens.
C. It affects the standards of living and per capita income of the people.
D. It promotes foreign direct investment.
E. It leads to reduced prices in domestic markets.
Protection of manufacturing from foreign competition does no good unless the protection helps
make the industry efficient. In case after case, however, protection seems to have done little
more than foster the development of inefficient industries that have little hope of ever
competing in the world market.

Blooms: Understand
7-26
61. A government should use subsidies to support promising firms that are active in newly
emerging industries, according to
A. strategic trade policy.

B. public policy.
C. absolute advantage.
D. product life-cycle.
E. industrialization.
The strategic trade policy argument has two components. First, it is argued that by appropriate
actions, a government can help raise national income if it can somehow ensure that the firm or
firms that gain first-mover advantages in an industry are domestic rather than foreign
enterprises. Thus, according to the strategic trade policy argument, a government should use
subsidies to support promising firms that are active in newly emerging industries.

Blooms: Understand
62. According to Paul Krugman, a country that attempts to use strategic trade policy to establish a
domestic firm in a dominant position in a global industry, is most likely to
A. dominate the industry.

B. move away from protectionism.
C. provoke retaliation.
D. incur huge financial debts.
E. upset the special-interest groups within the economy.
Paul Krugman argues that a strategic trade policy aimed at establishing domestic firms in a
dominant position in a global industry is a beggar-thy-neighbor policy that boosts national
income at the expense of other countries. A country that attempts to use such policies will
probably provoke retaliation.

Blooms: Understand
7-27
63. According to Krugman, which of the following best indicates the dangers of a strategic trade
policy?
A. decrease in subsidies
B. decrease in protectionism
C. occurrence of a trade war
D. huge financial debts for the countries involved
E. occurrence of a global recession
Paul Krugman argues that a strategic trade policy aimed at establishing domestic firms in a
dominant position in a global industry is a beggar-thy-neighbor policy that boosts national
income at the expense of other countries. A country that attempts to use such policies will
probably provoke retaliation. In many cases, the resulting trade war between two or more
interventionist governments will leave all countries involved worse off than if a hands-off
approach had been adopted in the first place.

Blooms: Remember
Difficulty: 1 Easy
64. According to Krugman, the ideal way for a country to respond, when the foreign competitors of
its companies are already being supported by government subsidies, is probably not to
engage in retaliatory action, but to
A. help establish rules that minimize the use of trade-distorting subsidies.

B. adopt the strategic trade policy as a way to establish domestic firms in a dominant position
in the global industry.
C. provide a subsidy to a new industry where the foreign competitors have not had the benefit
of such strategic trade policies.
D. use a combination of home-market protection and export-promoting subsidies.
E. provide high levels of subsidies to the oldest industry in the country.
Krugman may be right about the danger of a strategic trade policy leading to a trade war. The
problem, however, is how to respond when one's competitors are already being supported by
government subsidies. According to Krugman, the answer is probably not to engage in
retaliatory action but to help establish rules of the game that minimize the use of trade-
distorting subsidies.

Blooms: Understand
7-28
65. Which of the following is an argument against embracing strategic trade policy?
A. It hampers the chances of a country's firms to effectively exploit the first-mover

advantages.
B. It is certain to be captured by special-interest groups within the economy, which will distort
it to their own ends.
C. It increases the prices of the products for the domestic consumers.
D. It hampers the abilities of the domestic firms to achieve a dominant position in the global
industry.
E. It leads to a compromise in national sovereignty.
Governments do not always act in the national interest when they intervene in the economy;
politically important interest groups often influence them. Thus, a further reason for not
embracing strategic trade policy, according to Krugman, is that such a policy is almost certain
to be captured by special-interest groups within the economy, who will distort it to their own
ends.

Blooms: Understand
66. The economically damaging effects of the Great Depression were worsened in 1929 by the
A. first World War.

B. U.S. stock market collapse.
C. spread of communism through Europe.
D. Cold War between the world's superpowers.
E. harvest failure in Great Britain and famine in Ireland.
The Great Depression had roots in the failure of the world economy to mount a sustained
economic recovery after the end of World War I in 1918. Things got worse in 1929 with the
U.S. stock market collapse and the subsequent run on the U.S. banking system.

Blooms: Remember
7-29
67. The Smoot-Hawley Act had a damaging effect on
A. the balance-of-payment of the United States.

B. cash flow in the domestic economy of the United States.
C. prices of natural resources in the United States.
D. employment abroad.
E. accrued liabilities of the United States.
A particularly odd aspect of the Smoot-Hawley tariff-raising binge was that the United States
was running a balance-of-payment surplus at the time and it was the world's largest creditor
nation. The Smoot-Hawley Act had a damaging effect on employment abroad.

Blooms: Understand
Difficulty: 1 Easy
68. Which of the following multilateral agreements was established under U.S. leadership in 1947,
with the objective to liberalize trade by eliminating tariffs, subsidies, import quotas, and the
like?
A. General Agreement on Tariffs and Trade (GATT)

B. North American Free Trade Agreement (NAFTA)
C. Central American Free Trade Agreement (CAFTA)
D. Free Trade Areas of the Americas (FTAA)
E. North Atlantic Treaty Organization (NATO)
Under U.S. leadership, the GATT was established in 1947. The GATT was a multilateral
agreement whose objective was to liberalize trade by eliminating tariffs, subsidies, import
quotas, and the like.

Blooms: Remember
Difficulty: 1 Easy
7-30
69. Which of the following statements is true regarding GATT?
A. GATT attempted to liberalize trade restrictions in one go.

B. In its early years, GATT was unsuccessful and hence was superseded by the World Bank.
C. GATT regulations were mostly enforced by the EU nations rather than by a mutual
monitoring mechanism.
D. Tariff reductions through negotiations were completed in three rounds.
E. The last round for tariff reduction, the Uruguay Round, was launched in 1986 and
completed in December 1993.
The GATT did not attempt to liberalize trade restrictions in one fell swoop. Rather, tariff
reduction was spread over eight rounds. GATT regulations were enforced by a mutual
monitoring mechanism. The last, the Uruguay Round, was launched in 1986 and completed in
December 1993.

Blooms: Understand
70. One of the reasons why protectionist pressures arose around the world during the 1980s was
A. the different ways many countries found to get around GATT regulations.
B. the opening up of national markets to cheap products from China.
C. the fall of the Soviet Union.
D. the persistent trade lead taken by the United States.
E. the Japanese failure in industries such as automobiles and semiconductors that strained
the world trading system.
strain as pressures for greater protectionism increased around the world. One of the reasons
for this was that many countries found ways to get around GATT regulations. Bilateral
voluntary export restraints, or VERs, circumvent GATT agreements, because neither the
importing country nor the exporting country complain to the GATT bureaucracy in Geneva—
and without a complaint, the GATT bureaucracy can do nothing.

Blooms: Understand
7-31
71. Which of the following best explains the reason for the rise in protectionist pressures around
the world during the 1980s?
A. strict GATT bureaucracy in Geneva controlling trade regulations

B. opening up of international markets to cheap products from China
C. fall of the Soviet Union
D. persistent trade deficit in the world's largest economy, the United States
E. economic failure of Japan which hampered the global economy
strain as pressures for greater protectionism increased around the world. One of the reasons
for this was the strained world trading system due to the persistent trade deficit in the world's
largest economy, the United States.

Blooms: Understand
72. Bilateral voluntary export restraints, or VERs, circumvented GATT agreements, because
A. these nations withdrew their membership to the GATT.

B. the member nations had ceased to recognize GATT as a regulatory body for international
trade.
C. VERs were not a recognized trade barrier under the GATT constitution.
D. neither the importing country nor the exporting country complained to the GATT
bureaucracy for it to take action.
E. member nations erected a wall of tariff barriers.
Bilateral voluntary export restraints, or VERs, circumvent GATT agreements, because neither
the importing country nor the exporting country complains to the GATT bureaucracy in
Geneva—and without a complaint, the GATT bureaucracy can do nothing.

Blooms: Understand
7-32
73. Which of the following is a provision of the Uruguay Round Agreement?
A. A wide range of services were to be excluded from GATT fair trade and market access
rules.
B. Tariffs on industrial goods were to be raised by more than one-third, and tariffs were to be
scrapped on more than 50 percent on a wide range of services.
C. The International Monetary Fund (IMF) was to be created to implement the GATT
agreement.
D. Barriers on trade in textiles were to be significantly reduced over 10 years.
E. Average tariff rates imposed by developed nations on manufactured goods were to be
raised by 20 percent of the value, the highest level in modern history.
Some of the provisions of the Uruguay Round included the following: Tariffs on industrial
goods were to be reduced by more than one-third, and tariffs were to be scrapped on more
than 40 percent of manufactured goods. Average tariff rates imposed by developed nations on
manufactured goods were to be reduced to less than 4 percent of value, the lowest level in
modern history. Agricultural subsidies were to be substantially reduced. GATT fair trade and
market access rules were to be extended to cover a wide range of services. Barriers on trade
in textiles were to be significantly reduced over 10 years.

Blooms: Remember
74. The United States accused Libya and Iran of supporting terrorist action and building weapons
of mass destruction. The U.S. government, therefore, imposed trade sanctions against the two
countries. Which of the following political arguments does this exemplify?
A. retaliation and trade war

B. furthering foreign policy objectives
C. strategic trade policy
D. corporate security
E. protecting infant industries
Established in 1995 under the provisions of the Uruguay Round, the WTO acts as an umbrella
organization that encompasses the GATT and has taken over responsibility for arbitrating
trade disputes and monitoring the trade policies of member countries.

Blooms: Apply
Difficulty: 3 Hard
7-33
75. The WTO's Agreement on which of the following is an attempt to narrow the gaps in the way
intellectual property rights are protected around the world and to bring them under common
international rules?
A. Intellectual Property Rights Enforcement Directive (IPRED)

B. Court of Arbitration of Intellectual Property (CAIP)
C. Trade-Related Aspects of Intellectual Property Rights (TRIPS)
D. Intellectual Property Rights Enforcement and Resolution (IPER)
E. International Body on Intellectual Property (IBIP)
The WTO acts as an umbrella organization that encompasses the GATT along with two new
sister bodies, one on services and the other on intellectual property. The WTO's Agreement on
Trade-Related Aspects of Intellectual Property Rights (TRIPS) is an attempt to narrow the
gaps in the way intellectual property rights are protected around the world and to bring them
under common international rules.

Blooms: Remember
Difficulty: 1 Easy
76. Which of the following indicates the difference between GATT and WTO?
A. WTO has strict time limits unlike GATT.

B. WTO operates on the basis of consensus unlike GATT.
C. GATT gives trading partners the right to compensation or, in the last resort, to impose
(commensurate) trade sanctions unlike WTO.
D. GATT's verdict is binding unlike that of WTO's.
E. WTO allows member-countries to block adoption of arbitration reports unlike GATT.
WTO has taken over responsibility for arbitrating trade disputes and monitoring the trade
policies of member countries. While the WTO operates on the basis of consensus as the
GATT did, in the area of dispute settlement, member-countries are no longer able to block
adoption of arbitration reports. Every stage of the procedure is subject to strict time limits.
Thus, the WTO has something that the GATT never had—teeth.

Blooms: Understand
7-34
77. Which of the following is true regarding the difference between GATT and WTO?
A. The WTO was encouraged to extend its reach to encompass regulations governing foreign
direct investment unlike GATT.
B. WTO operates on the basis of consensus unlike GATT.
C. GATT gives trading partners the right to compensation or, in the last resort, to impose
(commensurate) trade sanctions unlike WTO.
D. GATT's verdict is binding unlike that of WTO's.
E. WTO allows member-countries to block adoption of arbitration reports unlike GATT.
The Uruguay Round of GATT negotiations extended global trading rules to cover trade in
services. The WTO was given the role of brokering future agreements to open up global trade
in services. The WTO was also encouraged to extend its reach to encompass regulations
governing foreign direct investment, something the GATT had never done. Two of the first
industries targeted for reform were the global telecommunication and financial services
industries.

Blooms: Understand
7-35
78. Why did telecommunications companies welcome the telecommunication deal brokered by
WTO in 1997?
A. It enhanced protection of patents, copyrights, and trademarks (intellectual property).

B. It helped resolve deadlock situations arising out of the unwillingness to lower trade barriers
between neighboring countries.
C. It offered a greater ability for companies to offer a global, seamless service for all their
corporate needs.
D. It liberalized trade policies by eliminating tariffs, subsidies, import quotas, antidumping
duties, and local content requirements.
E. It reduced the export of pirated imitations of patented innovations pioneered in a different
country.
In February 1997, the WTO brokered a deal to get countries to agree to open their
telecommunication markets to competition, allowing foreign operators to purchase ownership
stakes in domestic telecommunication providers and establishing a set of common rules for
fair competition. Most of the world's biggest markets—including the United States, European
Union, and Japan—were fully liberalized by January 1, 1998, when the pact went into effect.
All forms of basic telecommunication service are covered, including voice telephony, data, and
satellite and radio communications. Many telecommunication companies responded positively
to the deal, pointing out that it would give them a much greater ability to offer their business
customers one-stop shopping—a global, seamless service for all their corporate needs and a
single bill.

Blooms: Understand
79. The WTO was encouraged to extend its reach to encompass regulations governing foreign
direct investment, something the GATT had never done. Two of the first industries targeted for
this reform were
A. global telecommunication and financial services industries.

B. scientific research and defense sector.
C. pharmaceuticals and heavy metal industry.
D. pharmaceuticals and biotechnology.
E. scientific research and global telecommunication.
The WTO was encouraged to extend its reach to encompass regulations governing foreign
direct investment, something the GATT had never done. Two of the first industries targeted for
reform were the global telecommunication and financial services industries.

Blooms: Remember
Difficulty: 1 Easy
7-36
80. Which of the following is NOT a constraint on a firm's ability to disperse its productive activities
to foreign countries?
A. tariff barriers raising the costs of exporting products to a country

B. quotas restricting the quantity of a good that can be imported into a country
C. local content requirements demanding a specific fraction of domestic production
D. increasing integration of the world economy
E. antidumping policies limiting the ability of a firm to use aggressive pricing
We live in a world where many firms of all national origins increasingly depend for their
competitive advantage on globally dispersed production systems. Such systems are the result
of freer trade. Freer trade has brought great advantages to firms that have exploited it and to
consumers who benefit from the resulting lower prices.

Blooms: Understand
81. Which of the following is a loophole in antidumping laws that is being exploited by many
countries to pursue protectionism?
A. slackness of enforcement agencies

B. WTO's noncommittal approach to antidumping laws
C. bilateral VERs which subvert antidumping laws
D. vague definition of what constitutes "dumping"
E. lack of consensus among member nations
WTO rules allow countries to impose antidumping duties on foreign goods that are being sold
cheaper than at home, or below their cost of production, when domestic producers can show
that they are being harmed. Unfortunately, the rather vague definition of what constitutes
"dumping" has proved to be a loophole that many countries are exploiting to pursue
protectionism.

Blooms: Understand
7-37
82. Myra is a firm producing premium handbags for women. These bags are manufactured and
patented in the country of Ceria. Manufacturers in the country of Argonia create counterfeit
Myra bags and sell them in the local markets of Argonia. These bags are sold at almost similar
prices to the original in other countries. Which of the following is likely to happen?
A. expansion of world market for Cerian products

B. reduction in the export opportunities for Myra's hand bags in Argonia
C. reduction in import of all Argonian goods
D. increase in the prices of handbags produced by Myra in Argonia
E. reduction in opportunities of export from Argonia to other countries
Inadequate protections for intellectual property reduce the incentive for innovation. Because
innovation is a central engine of economic growth and rising living standards, the argument
has been that a multilateral agreement is needed to protect intellectual property. Without such
an agreement it is feared that producers in a country might market imitations of patented
innovations pioneered in a different country. This can affect international trade in two ways.
First, it reduces the export opportunities in Argonia for the original innovator in Ceria. Second,
to the extent that the Argonian producer is able to export its pirated imitation to additional
countries, it also reduces the export opportunities in those countries for the Cerian inventor.

Blooms: Apply
Difficulty: 3 Hard
83. Which of the following does NOT reinforce that the best interests of international business are
served by a free trade stance?
A. increasing integration of the world economy

B. internationalization of production
C. trend toward greater protectionism
D. drawbacks of government intervention
E. dispersion of production activities
Given the danger of retaliatory action, business firms that lobby their governments to engage
in protectionism must realize that by doing so they may be denying themselves the opportunity
to build a competitive advantage by constructing a globally dispersed production system. By
encouraging their governments to engage in protectionism, their own activities and sales
overseas may be jeopardized if other governments retaliate. This does not mean a firm should
never seek protection in the form of antidumping actions and the like, but it should review its
options carefully and think through the larger consequences.

Blooms: Understand
7-38
84. Which of the following has been excluded from the agenda for the Doha round of WTO talks
that began in 2001?
A. reducing barriers to cross-border investment

B. phasing out subsidies to agricultural producers
C. limiting the use of antidumping laws
D. attempts to tie trade to labor standards in a country
E. cutting tariffs on industrial goods and services
The agenda for the Doha round of WTO talks that began in late 2001 includes cutting tariffs on
industrial goods and services, phasing out subsidies to agricultural producers, reducing
barriers to cross-border investment, and limiting the use of antidumping laws. Excluded from
the agenda is any language pertaining to attempts to tie trade to labor standards in a country.

Blooms: Remember
85. What is the result of the threat of antidumping action?
A. helps the firm raise capital in the primary market

B. limits the ability of a firm to raise prices in response to high demand
C. enhances the firm's ability to disperse its productive activities in an efficient manner
D. limits the ability of a firm to use aggressive pricing to gain market share in a country
E. enhances a firm's competitive advantage to indigenous competitors in that country
The threat of antidumping action limits the ability of a firm to use aggressive pricing to gain
market share in a country. Firms in a country also can make strategic use of antidumping
measures to limit aggressive competition from low-cost foreign producers.

Blooms: Understand
Essay Questions
7-39
86. Define local content requirements. Explain how this helps domestic firms.
domestically. The requirement can be expressed either in physical terms (e.g., 75 percent of
component parts for this product must be produced locally) or in value terms (e.g., 75 percent
of the value of this product must be produced locally). Local content regulations have been
widely used by developing countries to shift their manufacturing base from the simple
assembly of products whose parts are manufactured elsewhere into the local manufacture of
component parts. They have also been used in developed countries to try to protect local jobs
and industry from foreign competition.
Local content regulations provide protection for a domestic producer of parts in the same way
an import quota does: by limiting foreign competition. The aggregate economic effects are also
the same; domestic producers benefit, but the restrictions on imports raise the prices of
imported components. In turn, higher prices for imported components are passed on to
consumers of the final product in the form of higher final prices. So as with all trade policies,
local content regulations tend to benefit producers and not consumers.

Blooms: Understand
87. What conclusions can be derived from economic analysis of the effect of import tariffs?
In general, two conclusions can be derived from economic analysis of the effect of import
tariffs. First, tariffs are generally pro-producer and anti-consumer. While they protect
producers from foreign competitors, this restriction of supply also raises domestic prices.
Second, import tariffs reduce the overall efficiency of the world economy. They reduce
efficiency because a protective tariff encourages domestic firms to produce products at home
that, in theory, could be produced more efficiently abroad. The consequence is an inefficient
utilization of resources.

Blooms: Understand
7-40
88. What is a voluntary export restraint? Why do exporting countries agree to VERs? Explain with
an example.
A voluntary export restraint is a quota on trade imposed by the exporting country, typically at
the request of the importing country's government. One of the most famous historical
examples is the limitation on auto exports to the United States enforced by Japanese
automobile producers in 1981. A response to direct pressure from the U.S. government, this
VER limited Japanese imports to no more than 1.68 million vehicles per year. The agreement
was revised in 1984 to allow 1.85 million Japanese vehicles per year. The agreement was
allowed to lapse in 1985, but the Japanese government indicated its intentions at that time to
continue to restrict exports to the United States to 1.85 million vehicles per year. Foreign
producers agree to VERs because they fear more damaging punitive tariffs or import quotas
might follow if they do not. Agreeing to a VER is seen as a way to make the best of a bad
situation by appeasing protectionist pressures in a country.

Blooms: Apply
Difficulty: 3 Hard
89. Explain with an example the administrative trade policies used by governments in addition to
the formal instruments of trade policy.
In addition to the formal instruments of trade policy, governments of all types sometimes use
informal or administrative policies to restrict imports and boost exports. Administrative trade
policies are bureaucratic rules designed to make it difficult for imports to enter a country. It has
been argued that the Japanese are the masters of this trade barrier. In recent decades,
Japan's formal tariff and nontariff barriers have been among the lowest in the world. However,
critics charge that the country's informal administrative barriers to imports more than
compensate for this. For example, at one point the Netherlands exported tulip bulbs to almost
every country in the world except Japan. In Japan, customs inspectors insisted on checking
every tulip bulb by cutting it vertically down the middle, and even Japanese ingenuity could not
put them back together. Federal Express also initially had a tough time expanding its global
express shipping services into Japan because Japanese customs inspectors insist on opening
a large proportion of express packages to check for pornography, a process that delayed an
"express" package for days. As with all instruments of trade policy, administrative instruments
benefit producers and hurt consumers, who are denied access to possibly superior foreign
products.

Blooms: Apply
Difficulty: 3 Hard
7-41
90. What are the political arguments for government intervention into international trade? Give
examples.
Political arguments for government intervention are concerned with protecting the interests of
certain groups within a nation (normally producers), often at the expense of other groups
(normally consumers), or with achieving some political objective that lies outside the sphere of
economic relationships, such as protecting the environment or human rights. They cover a
range of issues, including preserving jobs, protecting industries deemed important for national
security, retaliating against unfair foreign competition, protecting consumers from "dangerous"
products, furthering the goals of foreign policy, and advancing the human rights of individuals
in exporting countries.
1. For example, the CAP was designed to protect the jobs of Europe's politically powerful
farmers by restricting imports and guaranteeing prices.
2. Those in favor of protecting the U.S. semiconductor industry from foreign competition, for
example, argue that semiconductors are now such important components of defense products
that it would be dangerous to rely primarily on foreign producers for them.
3. The U.S. government has used the threat of punitive trade sanctions to try to get the
Chinese government to enforce its intellectual property laws.
4. In 2003 several countries, including Japan and South Korea, decided to ban imports of
American beef after a single case of mad cow disease was found in Washington State.
5. Iraq labored under extensive trade sanctions after the UN coalition defeated the country in
the 1991 Gulf War until the 2003 invasion of Iraq by U.S.-led forces.
6. In late 2012 the United States said that it would ease trade sanctions against Myanmar in
response to democratic reforms in that country.

Blooms: Apply
Difficulty: 3 Hard
7-42
91. Describe briefly, with examples, the use of trade policies by governments to support their
foreign policy objectives.
Governments sometimes use trade policy to support their foreign policy objectives. A
government may grant preferential trade terms to a country with which it wants to build strong
relations. Trade policy has also been used several times to pressure or punish "rogue states"
that do not abide by international law or norms. Iraq labored under extensive trade sanctions
after the UN coalition defeated the country in the 1991 Gulf War until the 2003 invasion of Iraq
by U.S.-led forces. The theory is that such pressure might persuade the rogue state to mend
its ways, or it might hasten a change of government. In the case of Iraq, the sanctions were
seen as a way of forcing that country to comply with several UN resolutions. The United States
has maintained long-running trade sanctions against Cuba. Their principal function is to
impoverish Cuba in the hope that the resulting economic hardship will lead to the downfall of
Cuba's Communist government and its replacement with a more democratically inclined (and
pro-U.S.) regime. The United States has also had trade sanctions in place against Libya and
Iran, both of which were accused of supporting terrorist action against U.S. interests and
building weapons of mass destruction. In late 2003, the sanctions against Libya seemed to
yield some returns when that country announced it would terminate a program to build nuclear
weapons. The U.S. government responded by relaxing those sanctions. Similarly, the U.S.
government used trade sanctions to pressure the Iranian government to halt its alleged
nuclear weapons program, with limited success as of 2013.
Other countries can undermine unilateral trade sanctions. The U.S. sanctions against Cuba,
for example, has not stopped other Western countries from trading with Cuba. The U.S.
sanctions have done little more than help create a vacuum into which other trading nations,
such as Canada and Germany, have stepped.

Blooms: Apply
Difficulty: 3 Hard
7-43
92. What is the "infant industry argument"? What are its implications for the world economy? What
are the criticisms of this argument?
The infant industry argument is by far the oldest economic argument for government
intervention. Alexander Hamilton proposed it in 1792. According to this argument, many
developing countries have a potential comparative advantage in manufacturing, but new
manufacturing industries cannot initially compete with established industries in developed
countries. To allow manufacturing to get a toehold, the argument is that governments should
temporarily support new industries (with tariffs, import quotas, and subsidies) until they have
grown strong enough to meet international competition.
This argument has had substantial appeal for the governments of developing nations during
the past 50 years, and the GATT has recognized the infant industry argument as a legitimate
reason for protectionism. Nevertheless, many economists remain critical of this argument for
two main reasons.
First, protection of manufacturing from foreign competition does no good unless the protection
helps make the industry efficient. In case after case, however, protection seems to have done
little more than foster the development of inefficient industries that have little hope of ever
competing in the world market.
Second, the infant industry argument relies on an assumption that firms are unable to make
efficient long-term investments by borrowing money from the domestic or international capital
market. Consequently, governments have been required to subsidize long-term investments.
Given the development of global capital markets over the past 20 years, this assumption no
longer looks as valid as it once did.

Blooms: Understand
7-44
93. Briefly describe the implications of the strategic trade policy as applied to international trade.
The strategic trade policy argument has two components. First, it is argued that by appropriate
actions, a government can help raise national income if it can somehow ensure that the firm or
firms that gain first-mover advantages in an industry are domestic rather than foreign
enterprises. Thus, according to the strategic trade policy argument, a government should use
subsidies to support promising firms that are active in newly emerging industries. The second
component of the strategic trade policy argument is that it might pay a government to
intervene in an industry by helping domestic firms overcome the barriers to entry created by
foreign firms that have already reaped first-mover advantages. If these arguments are correct,
they support a rationale for government intervention in international trade. Governments
should target technologies that may be important in the future and use subsidies to support
development work aimed at commercializing those technologies. Furthermore, government
should provide export subsidies until the domestic firms have established first-mover
advantages in the world market. Government support may also be justified if it can help
domestic firms overcome the first-mover advantages enjoyed by foreign competitors and
emerge as viable competitors in the world market.

Blooms: Understand
94. What constitutes the revised case for free trade?
The strategic trade policy arguments of the new trade theorists suggest an economic
justification for government intervention in international trade. This justification challenges the
rationale for unrestricted free trade found in the work of classic trade theorists such as Adam
Smith and David Ricardo. In response to this challenge to economic orthodoxy, a number of
economists—including some of those responsible for the development of the new trade
theory, such as Paul Krugman—point out that although strategic trade policy looks appealing
in theory, in practice it may be unworkable. This response to the strategic trade policy
argument constitutes the revised case for free trade.

Blooms: Remember
Difficulty: 1 Easy
7-45
95. Give a brief description of the origin, functions, and successes of GATT from 1947 to 1979,
before protectionist trends gained momentum across the world.
Under U.S. leadership, the GATT was established in 1947. The GATT was a multilateral
agreement whose objective was to liberalize trade by eliminating tariffs, subsidies, import
quotas, and the like. From its foundation in 1947 until it was superseded by the WTO, the
GATT's membership grew from 19 to more than 120 nations. The GATT did not attempt to
liberalize trade restrictions in one fell swoop. Rather, tariff reduction was spread over eight
rounds.
In its early years, the GATT was by most measures very successful. For example, the average
tariff declined by nearly 92 percent in the United States between the Geneva Round of 1947
and the Tokyo Round of 1973-79. Consistent with the theoretical arguments first advanced by
Ricardo, the move toward free trade under the GATT appeared to stimulate economic growth.

Blooms: Understand
7-46
96. During the 1980s and early 1990s, why did the world trade system, erected by GATT, come
under strain due to increased pressures for greater protectionism?
During the 1980s and early 1990s, the trading system erected by the GATT came under strain
as pressures for greater protectionism increased around the world. There were three reasons
for the rise in such pressures during the 1980s.
First, the economic success of Japan during that time strained the world trading system.
Japan was in ruins when the GATT was created. By the early 1980s, however, it had become
the world's second largest economy and its largest exporter. Japan's success in such
industries as automobiles and semiconductors might have been enough to strain the world
trading system. Things were made worse by the widespread perception in the West that
despite low tariff rates and subsidies, Japanese markets were closed to imports and foreign
investment by administrative trade barriers.
Second, the world trading system was strained by the persistent trade deficit in the world's
largest economy, the United States. The consequences of the U.S. deficit included painful
adjustments in industries such as automobiles, machine tools, semiconductors, steel, and
textiles, where domestic producers steadily lost market share to foreign competitors. The
resulting unemployment gave rise to renewed demands in the U.S. Congress for protection
against imports.
A third reason for the trend toward greater protectionism was that many countries found ways
to get around GATT regulations. Bilateral voluntary export restraints, or VERs, circumvent
GATT agreements, because neither the importing country nor the exporting country complains
to the GATT bureaucracy in Geneva—and without a complaint, the GATT bureaucracy can do
nothing. Exporting countries agreed to VERs to avoid more damaging punitive tariffs. One of
the best-known examples is the automobile VER between Japan and the United States, under
which Japanese producers promised to limit their auto imports into the United States as a way
of defusing growing trade tensions. According to a World Bank study, 16 percent of the
imports of industrialized countries in 1986 were subjected to nontariff trade barriers such as
VERs.

Blooms: Understand
7-47
97. Explain the organizational structure and the key functions of the WTO.
The WTO acts as an umbrella organization that encompasses the GATT along with two new
sister bodies, one on services and the other on intellectual property. The WTO's General
Agreement on Trade in Services (GATS) has taken the lead to extending free trade
agreements to services. The WTO's Agreement on Trade-Related Aspects of Intellectual
Property Rights (TRIPS) is an attempt to narrow the gaps in the way intellectual property rights
are protected around the world and to bring them under common international rules. WTO has
taken over responsibility for arbitrating trade disputes and monitoring the trade policies of
member countries. While the WTO operates on the basis of consensus as the GATT did, in
the area of dispute settlement, member countries are no longer able to block adoption of
arbitration reports. Arbitration panel reports on trade disputes between member countries are
automatically adopted by the WTO unless there is a consensus to reject them. Countries that
have been found by the arbitration panel to violate GATT rules may appeal to a permanent
appellate body, but its verdict is binding. If offenders fail to comply with the recommendations
of the arbitration panel, trading partners have the right to compensation or, in the last resort, to
impose (commensurate) trade sanctions. Every stage of the procedure is subject to strict time
limits.

Blooms: Remember
Difficulty: 1 Easy
98. What are the issues that are at the forefront of the current agenda of the WTO?
Four issues at the forefront of the current agenda of the WTO are antidumping policies, the
high level of protectionism in agriculture, the lack of strong protection for intellectual property
rights in many nations, and continued high tariff rates on nonagricultural goods and services in
many nations. The WTO is clearly worried by the use of antidumping policies, suggesting that
it reflects persistent protectionist tendencies and pushing members to strengthen the
regulations governing the imposition of antidumping duties. WTO argues that removing tariff
barriers and subsidies could significantly boost the overall level of trade, lower prices to
consumers, and raise global economic growth by freeing consumption and investment
resources for more productive uses.

Blooms: Remember
Difficulty: 1 Easy
7-48
99. How do trade barriers constrain a firm's ability to disperse its productive activities?
First and most obvious, tariff barriers raise the costs of exporting products to a country (or of
exporting partly finished products between countries). This may put the firm at a competitive
disadvantage to indigenous competitors in that country. In response, the firm may then find it
economical to locate production facilities in that country so that it can compete on an even
footing. Second, quotas may limit a firm's ability to serve a country from locations outside of
that country. Again, the response by the firm might be to set up production facilities in that
country—even though it may result in higher production costs.

Blooms: Understand
100. How does the increasing integration of the world economy and internationalization of
production affect the selection of a trade policy?
We live in a world where many firms of all national origins increasingly depend for their
competitive advantage on globally dispersed production systems. Such systems are the result
of freer trade. Freer trade has brought great advantages to firms that have exploited it and to
consumers who benefit from the resulting lower prices. Given the danger of retaliatory action,
business firms that lobby their governments to engage in protectionism must realize that by
doing so they may be denying themselves the opportunity to build a competitive advantage by
constructing a globally dispersed production system. By encouraging their governments to
engage in protectionism, their own activities and sales overseas may be jeopardized if other
governments retaliate.

Blooms: Understand
7-49

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Solution Manual for Global Business Today 10th Edition

by Hill Hult ISBN 1259686698 9781259686696

Test bank: https://testbankpack.com/p/test-bank-for-global-business-today-

Hill GBT 10e

Chapter 07 Test Bank

True / False Questions

1. Subsidies are a trade policy instrument.

AACSB: Reflective Thinking

2. Import tariffs protect domestic producers against foreign competitors.

AACSB: Reflective Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

When governments intervene in international trade, they often do so by restricting imports of

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Analytical Thinking

AACSB: Reflective Thinking

AACSB: Analytical Thinking

AACSB: Reflective Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

In response to certain challenges to economic orthodoxy, a number of economists—including

AACSB: Reflective Thinking

AACSB: Reflective Thinking

Aimed at avoiding rising unemployment by protecting domestic industries and diverting

AACSB: Reflective Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Reflective Thinking

AACSB: Analytical Thinking

AACSB: Reflective Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

Multiple Choice Questions

A. local content requirements

AACSB: Reflective Thinking

AACSB: Analytical Thinking

A. local content tariff

AACSB: Analytical Thinking

A. local content tariff

A subsidy is a government payment to a domestic producer. Subsidies take many forms,

AACSB: Analytical Thinking

AACSB: Analytical Thinking

32. Which of the following is most likely to be an objective of export tariffs?

A. abiding by the rules enforced by the WTO

AACSB: Analytical Thinking

A. gain export markets.

AACSB: Analytical Thinking

AACSB: Analytical Thinking

A. Import quotas benefit domestic producers by limiting import competition.

AACSB: Analytical Thinking

AACSB: Analytical Thinking

A. tariff rate quota

AACSB: Reflective Thinking

AACSB: Analytical Thinking

A. tariff rate quota

AACSB: Reflective Thinking

A. VERs benefit consumers by limiting import competition.

AACSB: Analytical Thinking

AACSB: Analytical Thinking

A. international allocation requirement