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Chapter 8
mgt 302 exam 2
| Term | Definition |
|---|---|
| Free Trade | When the government does not use quotas, taxes or other means to restrict what its citizens can buy from or sell to another country, |
| The emergence of the modern international trading system is based on | General Agreement on Tariffs and Trade (GATT) |
| Trade policy uses seven main instruments: | tariffs, subsidies, import quotas, voluntary export restraints, local content requirements, administrative policies, and antidumping duties. |
| which is the oldest and simplest instrument of trade policy | Tariffs |
| a fall in tariff barriers in recent decades has been accomplished by a rise in | non-tariff barriers (subsidies, quotas, voluntary export restraints, antidumping duties) |
| A tariff is | A tax levied on imports or exports |
| Tariffs fall in two categories | Specific tariffs and Ad valorem tariffs |
| Specific tariffs | levied as a fixed charge for each unit of good imported. (ex: $3 per barrel of oil) |
| Ad valorem tariffs | levied as a proportion of the value of an imported good. |
| tariffs are placed on imports to | to protect domestic producers from foreign competition by raising the price of imported goods. |
| Import tariffs are paid by the | importer |
| export tariffs are paid by the | exporter |
| who gains with import tariffs | - The government because the tariff increases government revenues - Domestic producers because the tariff affords them some protection against foreign competitors by increasing the cost of imported goods |
| who suffers with import tariffs | - Consumers because they must pay more for certain imports - |
| one effect of import tariffs is that | they protect producers from foreign competitors but this restriction of supply raises domestic prices |
| why do tariffs reduce the efficiency of the world economy | a protective tariff encourages domestic firms to produce products at home that could be produced more efficiently abroad |
| objective of export tariffs | - to raise revenue for the government - to reduce exports from a sector, often for political reasons |
| Subsidies are | Government financial assistance to a domestic producer. |
| by lowering production costs, subsidies help domestic producers in two ways | - competing against foreign imports - gaining export markets |
| which is one of the largest beneficiaries of subsidies in most countries | agriculture |
| the main gain from subsidies accrue to | domestic producers, whose international competitiveness is increased as a result |
| a downside of subsidies is that they | must be paid for, typically by taxing individuals and corporations |
| import quota is | A direct restriction on the quantity of a good that can be imported into a country. It is more restrictive than tariffs because it limits products which may drive demand and prices up. |
| tariff rate quota | Lower tariff rates applied to imports within the quota than those over the quota. |
| voluntary export restraint (VER) | A quota on trade imposed from the exporting country’s side, instead of the importer’s; usually imposed at the request of the importing country’s government. |
| what is quota rent | Extra profit producers make when supply is artificially limited by an import quota. |
| quota rent simple difinition | The income earned by whoever has the right to import the good at world price and sell it in the domestic market at the higher quota price. The rent is the extra profit. |
| Export Tariff | A tax placed on the export of a good. |
| which tariffs are relatively rare | export tariffs |
| Export Tariff is | A tax placed on the export of a good. |
| the goal behind an export tariff is to | discriminate against exporting in order to ensure that there is sufficient supply of a good within a country |
| An export ban is | A policy that partially or entirely restricts the export of a good. |
| local content requirement (LCR) | A requirement that some specific fraction of a good be produced domestically. |
| just like import quota, local content regulations tend to | benefit producers and not consumers since prices are raised. |
| administrative trade policies | typically adopted by government bureaucracies, that can be used to restrict imports or boost exports. |
| dumping | Selling goods in a foreign market for less than their cost of production or below their “fair” market value. |
| 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 |
| antidumping policies | Designed to punish foreign firms that engage in dumping and thus protect domestic producers from unfair foreign competition. |
| Antidumping duties are often called | countervailing duties |
| Arguments for government intervention can take two paths | political and economic |
| Political arguments for intervention | are concerned with protecting interests of certain groups within a nation (normally producers), often at the expense of other groups (normally consumers, or also concerned with protecting the environment or human rights. |
| Economic arguments for intervention | typically concerned with boosting the overall wealth of a nation (to the benefit of all, both producers and consumers). |
| the most common political argument for government intervention is | protecting jobs and industries from unfair foreign competition |
| A second political argument for government intervention is | protecting certain industries because they are important for national security. (e.g. aerospace, advanced electronics, semiconductors) |
| A third political argument for government intervention is | Retaliation for unfair foreign competition - Governments should use 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" |
| A fourth political argument for government intervention is | Protecting consumers. Many governments have long had regulations to protect consumers from unsafe products |
| Infant industry argument | New industries in developing countries must be temporarily protected from international competition to help them reach a position where they can compete on world markets with the firms of developed nations. |
| why do economist remain critical of the infant industry argument? (first reason) | By protecting their manufacturing from foreign competition, it has led to the development of inefficient industries that have little hope of ever competing in the world market. |
| Which instrument of trade policy has been in use the longest? | tariffs |
| why do economists remain critical of the infant industry argument? (second reason) | relies on an assumption that firms are unable to make efficient long-term investments by borrowing money from the domestic or international capital market. |
| the only industries that would require government protection would be those___ | that are not worthwhile |
| what is the Strategic trade policy | Government policy aimed at improving the competitive position of a domestic industry and/or domestic firm in the world market. |
| One of the strategic trade policy arguments is that | 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 |
| The second argument of the strategic policy argument is that | it may 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. (it benefits national GDP) |
| 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 beggar-thy-neighbor policy will provoke | retaliation which results in a trade war between two or more interventionist governments which leaves all countries involved worse off than if a hands-off approach had been adopted. |
| how to respond when one's competitor's are already being supported by government subsudies? | by not engaging in retaliatory(retaliation) action but to help establish rules of the game that minimize the use of trade distorting subsidies. This is what the World Trade Organization seeks to do. |
| Governments do not always act in the ____ when they intervene in the economy, politically important interest groups often influence them | national interest |
| Common Agricultural Policy (CAP) | benefits inefficient farmers and the politicians who rely on the farm vote but not consumers in the EU, who end up paying more for their foodstuffs |
| According to Krugman, a reason not to embrace strategic trade policy is because | such policy is captured by special-interest groups within the economy, which will distort it to their own ends. |
| Both governments recognize that their respective nations will benefit from lower trade barriers between them, but neither government is willing to lower barriers for fear that the other might not follow. What is the essence of the problem? | lack of trust |
| A fifth political argument for government intervention is | Furthering foreign policy objectives. A government may grant preferential trade terms to a country with which it wants to build strong relations. Trade policy can also be used as punishment to those that don't abide by international law or norms. |
| A sixth political argument for government intervention is | protecting human rights of individuals in exporting countries. - trade affects the enjoyment of human rights. - The promotion and protection of human rights can be placed among the objectives of trade reform |
| As per the strategic trade policy, Governments should target technologies that may be important in the future and use subsidies to support development work aimed at commercializing technologies. True/False | True |
| How has the World Trade Organization (WTO) emerged? | as an effective advocate and facilitator of future trade deals, particularly in such areas as services |
| What are the four issues at the forefront agenda of the WTO | - antidumping policies - high level of protectionism in agriculture - the lack of strong protection for intellectual property rights in many nations - continued high tariff rates on nonagricultural goods and services in many nations |
| bound tariff rates are | the highest rate that can be charged, which is often, but not always the rate that is charged |
| multilateral or bilateral trade agreements | Reciprocal trade agreements between two or more partners. These are designed to capture gain from trade beyond the agreements currently attainable under WTO treaties. |
| one of the ways trade barriers affect a firm's strategy | They constrain a firm's ability to disperse its productive activities. This is because they raise the costs of exporting products to a country. This puts the firm at a competitive disadvantage relative to indigenous competitors. |
| what is another way trade barriers affect a firm's strategy | Quotas may limit a firm’s ability to serve a country from locations outside that country. Because of this, the response by the firm might be to set up production facilities in that country even though it may result in higher production costs. |
| what is a third way trade barriers affect a firm's strategy | forces a firm to conform to local content regulations. Meaning a firm may have to locate more production activities in a given market even though it is not the most efficient. This raises the firm's costs. |
| what is a fourth way trade barriers affect a firm's strategy | limits aggressive pricing strategies to gain market share in a country. This is because of the antidumping actions imposed by these barriers. |
| what is one of the drawbacks of government intervention | it can be self-defeating because it tends to protect the inefficient rather than help firms become efficient global competitors |
| what is the second drawback of government intervention | it may invite retaliation and trigger a trade war |
| what is a third drawback of government intervention | is unlikely to be well executed, given the opportunity for such a policy to be captured by special-interest groups |
| both strategic trade policy and infant industry argument suggest a _____ justification for government intervention in trade | economic |
| More specific definition of Voluntary Export Restraint (VER) | a self-imposed limit on the quantity of a good that an exporting country is allowed to export. It allows the exporting country to avoid tariffs or quotas imposed by importing countries, |
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