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CHAPTER I. Introduction II. The Political Economy of Protectionism A. Protectionism and Public Choice public choice rent seeking B. The Structure of Protection industry size industry concentration intermediate products number of employees unionization regional concentration comparative disadvantage PASSPORT: The Complexity of Fruit Juice Table 8.1 PASSPORT: Uniform Tariffs in Chile III. The Evolution of U.S. Trade Policy tariff history Figure 8.1 infant industry protection Tariff of Abominations Table 8.2 revenue tariffs Figure 8.2 Smoot-Hawley Tariff 1930 Reciprocal Trade Agreements Act 1934 reciprocity Congress to President most favored nation (MFN) IV. Antidumping, Countervailing Duties, and the Escape Clause A. Antidumping 1. Types of Dumping 2. History of Antidumping Law in the United States B. Countervailing Duties C. The Escape Clause PASSPORT: Harley-Davidson and the Escape Clause V. The General Agreement on Tariffs and Trade (GATT) A. GATT and Multilateral Trade Negotiations (MTNs) Table 8.3 PASSPORT: Who Makes U.S. Trade Policy
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The World Trade Organization (WTO) The Future of Trade Negotiations: The Doha Round A. The Future of MTNs
TEACHING NOTES AND TIPS I. Introduction
Notes Chapters 6 and 7 show the effects of tariffs and NTBs. Chapter 8 does three things. First, the reason for the existence of barriers to trade is covered. This is followed by a history of protectionism in the U.S. and administered protection. This leads to the relationship of the U.S. to the WTO and the role of the latter in the world economy. Teaching Tip Ask your students how often they have heard terms like WTO, fast track, Seattle, Doha, trade negotiations, etc. Now ask them to explain what any of these terms mean. There is a reason they need to learn this material. II. The Political Economy of Protectionism
Notes The section starts by defining the role of special interest groups in protectionism. From there the section moves to showing how public choice would lead certain groups to engage in rent-seeking behavior. The final part of the section shows how rentseeking coupled with vote maximization behavior leads to the complicated tariff schedule illustrated in Table 8.1. Teaching Tip The chapter talks about public choice and rentseeking just in terms of protectionism. Point out that what the students have learned will help them understand a lot of what goes on in Washington. III. The Evolution of U.S. Trade Policy
Notes Current U.S. trade policy did not just materialize but has been a work in progress for nearly 200 years. Figure 8.1 synthesizes the ebb and flow of U.S. trade policy from the late eighteenth century to the present. The second part of the section shows how the Reciprocal Trade Agreements Act fundamentally changed U.S. policy with the introduction of MFN. The boxed feature "PASSPORT: Who Makes U.S. Trade Policy" is a useful way to wrap up the discussion. Teaching Tip Ask the students to consider a world without MFN. Tariffs could be changed by product and by country at the whim of any government. There would be far less trade in such a world.
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Antidumping, Countervailing Duties, and the Escape Clause
Notes Industries find it impossible to get the tariff raised without some excuse. This section describes the three major forms of administered protection: antidumping, countervailing duties, and the escape clause. The main focus of the section is on antidumping, which is the biggest problem in the U.S. and is spreading in the world economy. Teaching Tip The U.S. is the world's highest income country and tradable goods command higher prices there than in many other countries. What would be the implications for U.S. exporters if a large number of our trading partners adopted price-based antidumping laws? By the way, this is already starting to occur. V. The General Agreement on Tariffs and Trade (GATT)
Notes This section covers the history of GATT and considers how successful it really was over its 50 years of existence. Teaching Tip Part of the reason the U.S. government declined to participate in the original ITO was that it covered trade in agricultural products as well as manufactured products. The U.S. government was fearful that U.S. farmers could not compete with "low-wage" foreign farmers. It is ironic that now one of the U.S. government's top priorities is to get agriculture included in trade negotiations. VI. The World Trade Organization
Notes This short section shows the WTO as a continuation of GATT. Teaching Tip It is important to discuss how the dispute settlement mechanism has changed under the WTO versus GATT. VII. The Future of Trade Negotiations: The Doha Round
Notes This section discusses the Agenda for the Doha Round and challenges and opportunities of future MTNs. Teaching Tip It is important to discuss the areas for potential future trade negotiations, like agriculture and trade in services while at the same time MTNs are a very slow process.
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BRIEF ANSWERS TO PROBLEMS AND QUESTIONS FOR REVIEW 1. Public choice is the analysis of the government decision-making process in allocating resources or developing economic policy. The premise underlying the theory of public choice is that politicians attempt to maximize their utility. For a politician, utility maximization may be congruent with maximizing the number of votes he or she will receive in the next election. Politicians generally favor programs having immediate and clear-cut benefits with vague, difficult to measure or deferred costs. They do not support programs having future benefits that are vague and difficult to measure and have immediate and easily identifiable costs. In a democracy, individuals have an incentive to form groups to attempt to influence the government to pass laws that serve their collective interest. This behavior on the part of individuals is called collective action. In our case, while any country benefits from free trade, the gains to individual consumers per good consumed are relatively small. Because an individual consumer cannot quantitatively feel the gains, they as a group do not lobby the government for free trade. The firms in industries that have a comparative advantage are attempting to influence the trade policy of foreign countries. The group that will lobby the government concerning free trade is the group that ineffectively competes with imports. This rent-seeking behavior by the import competing group may also maximize the votes a politician receives in the next election. Voting for protection may gain the politician a few additional votes from the industry, firms, and workers that receive the protection. In the U.S. and in virtually all other countries, the tariff imposed on goods varies considerably from one good to another. In fact, the tariff schedule of the U.S. is an extremely complicated document. This occurs because tariffs are levied on very specific goods or product categories. Details like this in a country's tariff schedule provides two advantages: (1) A producer of a good that competes with imports can focus its lobbying efforts for protection on a particular good. For example, it is easier to gain protection for a product like imported bacon than for all imported food. The reason why it's easier to obtain protection is that consumers would most likely not notice a small increase in the price of bacon due to a tariff. (2) A very detailed tariff schedule makes it possible for a politician to pick up votes by protecting one specific good without inducing a protest from the average consumer. This is why most countries have developed complicated tariff schedules where the tariffs on very similar goods are dramatically different. The research does indicate that an industry having one or more of these factors has a higher probability of having a higher tariff. First, large industries that are important to a country are more likely to be protected than small unimportant industries. Second, the more concentrated the industry the more likely it is to have protection. Third, it is easier for firms to obtain protection if they produce an intermediate product, such as steel, where the voters are unlikely to notice price increases. Fourth, industries that have a larger number of employees are more likely to gain protection than those that have fewer employees. If the industry is regionally concentrated and/or unionized the workers are
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able to lobby more effectively. Lastly, industries that have a comparative disadvantage are more likely to be protected. 5. Economists have long advocated a uniform tariff that would solve a number of problems associated with a complicated tariff schedule. A uniform tariff becomes easy to administer. Moreover, a uniform tariff makes lobbying for protectionism much harder for several reasons: (1) A general increase in the tariff is unlikely to pass by consumers completely unnoticed; (2) other industries with the capability to lobby the government would likely spring into action. (3) Firms purchasing imported products would see the increase in the tariff as a direct increase in their costs and would complain to the government. The net result is that more firms may lose from the higher tariff than firms that gain from it. Some industries have greater protection than others because of their relative size, concentration, the type of product they produce, the number of workers within the industry, and the degree to which the industry has a comparative disadvantage. Large industries that are important to a country are more likely to be protected than small unimportant industries. The more concentrated the industry the more likely it is to have protection. If firms produce an intermediate product it is more likely to have protection. Industries that have a larger number of employees are more likely to gain protection than those that have fewer employees. Industries that have a comparative disadvantage are more likely to be protected. Arguments justifying protection in the U.S. have resulted in several periods of very high tariffs. Alexander Hamilton's "Report on Manufactures" recommended high tariffs on manufactured goods as a means of developing U.S. industry capable of competing with the British. This policy of infant-industry protection was gradually adopted and tariffs in the U.S. were increased. Because the tariff was a major source of revenue for the U.S. government, tariffs increased dramatically to finance the Civil War and remained high until 1913. In the early 1920s Congress quickly raised tariffs to protect domestic industry. Congress passed the famous Smoot-Hawley Tariff of 1930. This tariff law resulted in the highest general tariff structure in U.S. history with average tariffs of approximately 60 percent on dutiable imports. Other nations retaliated by raising their tariffs against goods imported from the U.S. As a result of the Great Depression and the tariff increases, the volume of world trade declined from nearly $3 billion in 1929 to less than $500 million in 1933. In 1933, the Roosevelt Administration persuaded Congress to transfer the authority to negotiate tariff reductions to the President of the U.S. In 1934 Congress passed the Reciprocal Trade Agreements Act. This Act is the basis for current U.S. trade policy. Three provisions of this Act are still important today. First, tariff reciprocity means that the U.S. will negotiate tariff reductions only in return for tariff reductions by its trade partners. Second, the Act transferred U.S. trade policy from Congress to the President by giving the President authorization to negotiate trade agreements. Once an agreement has been negotiated, Congress votes to approve the agreement in total, meaning the agreement cannot be amended. Third, the Act, and all future trade legislation, is based on the Most Favored Nation (MFN) principle, now called normal trade relations. This
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nondiscrimination principle means that any tariff cuts the U.S. agrees to with one country would apply to the products of all other trade partners that the U.S. government has granted most-favored-nation status. 9. This nondiscrimination principle means that any tariff cuts the U.S. agrees to with one country would apply to the products of all other trade partners that the U.S. government has granted most-favored-nation status. MFN is a very old trading principle and the first trade treaty that the U.S. signed with France in 1778 contained this principle. MFN makes administering tariffs much easier, and a world where tariffs could be changed on a political whim would be a far riskier place to do business. The different forms of administered protection are the antidumping law, countervailing duties, and the escape clause. The antidumping law does not allow an international firm to sell its product in an export market for less than it is sold for in its home market. A countervailing duty action is a tariff imposed by a country that is designed to increase the price of the imported good by a certain amount. The escape clause is a provision in the U.S. law that allows temporary protection for U.S. industries that are under pressure from imports. The GATT began in 1947 with 23 contracting parties and grew until it comprised more than 100 contracting parties. In total, the contracting parties (countries) covered more than 90 percent of world trade. To become a contracting party of GATT, a country had to give most-favored-nation status to all other contracting parties and had to eliminate any quotas (quantitative restrictions on imports) that restricted international trade. GATT primary objective was to reduce the high levels of tariffs remaining since the 1930s. Over the next fifty years, a number of multilateral trade negotiations (MTNs) successfully reduced tariff and nontariff barriers to trade. See Table 8.3 on page 195 of the text for a complete listing of the MTNs and the major issues negotiated. There is one very important difference between GATT and the WTO. Under GATT, a country could file a trade complaint against another country and the GATT Council would investigate the complaint. However, the investigation was slow and the GATT panels' findings were routinely ignored because GATT could not enforce them. Under the WTO, a country can file a trade complaint against another country and a WTO panel will investigate the complaint. The WTO panel will issue its findings within six months and the offended country will legally be able to retaliate against the other country. Thus, countries that are found to be guilty of breaking WTO rules can and will be legally penalized via restrictions placed on that country's exports. The agenda for the Doha Round is complex. However, the agenda effectively provides a roadmap of what remains to be completed in terms of modernizing WTO rules to fit the more modern aspects of international trade. The following is a list of the major issues facing the negotiators. International Trade in Agricultural Products, Market Access, International Trade in Services, Trade Related Intellectual Property (TRIPS), and Trade Related Investment Measures (TRIMS).
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MULTIPLE-CHOICE QUESTIONS 1. * International trade maximizes world welfare as the gains from trade cause: a. A more efficient allocation of world resources. b. A decrease in price of nontradeable goods. c. More democracy in foreign countries. d. A decrease in overall world production. Which of the following is not a benefit of international trade? a. a larger selection of products b. increased production efficiencies c. more efficient allocation of resources d. a re-distribution of income from scarce to abundant factors of production Regulation of business by government is designed to aid in all of the following areas except: a. strengthening the operation of the economy. b. modifying the operation of the economy. c. enhancing the operation of the economy. d. concentrating the operation of the economy. In economics the term policy usually means: a. the action that is taken by each specific company during its term. b. the duration of a specific action for which goods are traded internationally. c. an action or actions taken by the government. d. none of the above The theory of public choice is based on the premise that: a. politicians attempt to maximize their utility. b. politicians attempt to maximize the country's utility. c. politicians attempt to keep neutral on unpopular subjects. d. politicians attempt to minimize their utility. The branch of economics that applies economic analysis to voting behavior is known as: a. public finance. b. negative political science. c. public choice. d. economic analysis of DUP. The branch of economics that deals with governmental decisionmaking is: a. civics. b. public finance. c. public choice. d. economic/politics.
* 4. * 5. *
6. * 7. *
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The study of politics within a country like the U.S. by economists is called: a. public economy. b. political economy. c. political choice. d. public choice. The activity of a group that seeks to gain from changes in government policy is known as: a. public policy. b. directly productive activities. c. rentseeking. d. broad focus tariff policy. The use of resources to convince a government to restrict trade in a particular product is called: a. rentseeking. b. rent takers. c. monopolizing the market. d. monopoly power. The group that would most likely lobby to influence the international trade policy of a country is: a. the industry group that has a comparative advantage. b. foreign investors. c. individual private citizens, as they benefit from trade through lower product prices. d. the industry group that has a comparative disadvantage. The fact that there are very different tariffs on different products is known as: a. the structure of protection. b. public choice. c. positive choice. d. rent seeking. Which of the following would mostly likely not receive protection? a. Industries with a comparative disadvantage b. Industries that are regionally concentrated c. Industries that employ a large number of workers d. Industries that have a large number of firms Which of the following increases the likelihood of protectionism for a particular industry? a. The industry produces an intermediate product. b. The industry consists of many small firms. c. The industry is not unionized. d. The industry is geographically dispersed.
* 10. *
* 12. *
* 14. *
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Which of the following statements is false? a. Large industries tend to get more protection than small ones. b. Concentrated industries tend to get more protection than industries that have a large number of small firms. c. Intermediate products tend to get less protection than final products. d. Industries that are not very concentrated geographically tend to receive lower levels of protection than industries that are regionally concentrated. Which of the following is more likely to be protected by trade barriers in the U.S.? a. jump ropes b. apple juice c. wheat d. steel Which of the following industries are more likely to be protected? a. industries with few firms b. industries that produce an intermediate product c. industries with a comparative disadvantage d. all of the above The benefits of a very detailed tariff schedule include: a. the uniformity of tariffs for all products. b. an increased public awareness of price changes caused by changes in tariffs. c. the ability of government to provide protection on a specific product. d. the ability of government to provide a transparent level of protection for domestic producers. Which of the following is the only country in the world with a uniform tariff? a. Switzerland b. Mexico c. Nigeria d. Chile The Constitution of the U.S. stipulates that the authority to regulate commerce and tariffs is given to: a. the President. b. Congress. c. the individual States. d. the U.S. Supreme Court. Which of the following statements is false? a. The Tariff of Abominations of 1828 led to a large increase in the U.S. tariff. b. Tariffs were increased in the 1860s to help the government pay for the Civil War. c. Before the Civil War tariff policy was a source of friction between the Northern and Southern parts of the U.S. d. The Smoot-Hawley Tariff of 1930 led to a large reduction in the U.S. tariff.
* 18. *
* 20. *
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22. * 23. *
The Tariff of Abominations: a. led to the Revolutionary War. b. led to World War I. c. led to a large increase in U.S. tariffs in 1828. d. led to a large increase in U.S. tariffs in 1930. The Tariff of _____ was passed in _____ over the strong objections of the Southern states. a. Waste, 1840 b. Abominations, 1828 c. Revenue, 1870 d. New York, 1990 The now infamous legislation of 1930 that imposed a very high tariff structure on goods imported into the U.S. was the: a. Reciprocal Trade Agreements Act. b. Trade and Tariff Act. c. Omnibus Trade and Competitiveness Act. d. Smoot-Hawley Tariff The Smoot-Hawley Tariff of 1930: a. restricted the President to negotiate tariff reductions. b. increased tariffs to their highest levels of the twentieth century. c. provided a stimulus to the U.S. economy. d. began the process of the worldwide lowering of tariffs. Which of the following pieces of legislation is the foundation of modern U.S. international trade policy? a. The Tariff Act of 1828 b. The Smoot-Hawley Tariff of 1930 c. The Reciprocal Trade Agreements Act of 1934 d. The Trade and Tariff Act of 1958 Which of the following pieces of legislation made MFN an integral part of U.S. international trade policy? a. The Tariff of Abominations Act of 1834 b. The Smoot-Hawley Tariff of 1930 c. The Reciprocal Trade Agreements Act of 1934 d. The Dillon Act of 1958
* 25. *
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The act which was passed to mitigate the Smoot-Hawley Tariff and which is still the cornerstone of American trade policy is: a. the GATT Act. b. the Omnibus Trade and Competitiveness Act. c. the Smoot-Hawley Tariff. d. the Reciprocal Trade Agreements Act. Which of the following is not a key provision of the Reciprocal Trade Agreement Act? a. The president is allowed to negotiate tariff reductions without Congressional involvement. b. The tariff reductions are made on a most favored nation basis. c. The U.S. would reduce tariffs for tariff reductions by other countries. d. Congress can amend a negotiated trade agreement. Which of the following transferred power for trade negotiations from Congress to the President? a. Smoot-Hawley Act b. The Trade Expansion Act of 1962 c. The Trade Expansion Act of 1974 d. The Reciprocal Trade Agreements Act of 1934 Since World War II, tariffs in general have: a. increased. b. decreased. c. remained constant. d. disappeared. The current average U.S. tariff rate is: a. 15%. b. 24%. c. 42%. d. 4%. The concept whereby all trading parties that were contracting parties to GATT or new members of the WTO are treated the same with respect to tariffs is known as: a. ITO. b. CIF. c. FOB. d. MFN. Which of the following is not a form of administered protection? a. Antidumping duties b. Countervailing duties c. Specific duties d. Escape clause actions
* 31. *
* 34. *
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Which of the following is not a form of administered protection? a. Antidumping duties b. Countervailing duties c. The escape clause d. Offshore assembly Dumping by a firm can be defined as: a. a firm selling a product at a price below its cost of production in a foreign market. b. a firm selling a product in a foreign market at a price lower than the price charged in its home market. c. the discharge of waste products into the environment. d. both a and b Which of the following is not a type of dumping? a. Sporadic dumping b. Predatory dumping c. Complex dumping d. Persistent dumping Dumping occurs when a firm: a. sells too much of a good in a foreign country. b. sells in a foreign country at prices that are below true value. c. sells in its home market at prices that are below the average price charged by its competitors. d. sells in a foreign market at prices that are below the price charged in the home market. Which of the following does not cause lasting damage to the domestic industry? a. Sporadic dumping b. Persistent dumping c. Predatory dumping d. All of the above Which of the following is the term that refers to a situation where a country exports a good at a lower price than it sells for domestically? a. Voluntary export restraint b. International commodity agreements c. Dumping d. Autarky Resolution of dumping cases in the U.S. involves investigations by: a. the Justice Department and the International Trade Commission. b. the Justice and Commerce Departments. c. the Justice Department only. d. the International Trade Administration and the International Trade Commission.
* 37. * 38.
* 39. *
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Antidumping duties: a. are used to offset the effects of imports being sold at a price lower than that charged in the country of origin. b. are illegal under U.S. trade law. c. are administered by the Antitrust Division of the Justice Department. d. all of the above Which of the following statements is true? a. U.S. antidumping law only prohibits predatory dumping. b. U.S. antidumping law is completely consistent with WTO rules. c. In an antidumping case, the ITA determines if the foreign product is being dumped in the U.S. market. d. In an antidumping case, the ITC does not participate in the investigation. Countervailing duty cases involve: a. foreign monopoly pricing. b. foreign subsidies. c. foreign tariffs on U.S. exports. d. foreign VERs. Payment by government to a firm for each unit of output that it exports is known as a(n) _____. a. export subsidy b. direct tax rebate c. GATT/WTO d. local content requirement A countervailing duty is a tariff that is levied to: a. counteract the dumping of goods in the domestic market by foreign firms. b. counteract a sudden surge of imports that threaten to harm a domestic industry. c. counteract subsidies given to foreign firms by their own governments. d. counteract the tariff on domestic goods that are enacted by foreign governments. Countervailing duty cases involve allegations of: a. foreign monopoly pricing. b. foreign barriers to U.S. exports. c. foreign export subsidies. d. foreign import subsidies. The application of countervailing duties against subsidized exports: a. does not require evidence of international price discrimination. b. is handled only by the International Trade Commission. c. is handled only by the Department of Commerce. d. only applies to developing countries.
46. * 47. * 48. *
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The escape clause: a. can be used to restrict the import of fairly traded goods. b. only applies to import competition from allegedly low-wage countries. c. involves the total prohibition of goods imported from some countries. d. is imposed hundreds of times a year on thousands of different types of imports. In the U.S. raising tariffs on a fairly traded imported product that causes harm to a domestic industry is what type of action? a. Anti-dumping b. Fair trade c. Escape clause d. Countervailing Which of the following companies filed a famous escape clause case in the early 1980s? a. General Motors b. U.S. Steel c. Harley-Davidson d. Microsoft When the Allied powers met at a conference in 1944, what international organizations were developed? a. The International Monetary Fund b. The International Bank for Reconstruction and Development (World Bank) c. The World Trade Organization d. Both a and b GATT was: a. part of the International Monetary Fund. b. part of the World Bank. c. part of the United Nations. d. the interim committee designed to implement the International Trade Organization. From the late 1940s until the creation of the WTO, the treaty (organization) that was primarily responsible for conducting multilateral trade negotiations was the: a. World Bank. b. GATT. c. ITO. d. United Nations. Which of the following statements is false? a. GATT was a replacement for the failure of the U.S. to participate in the proposed ITO. b. The ITO was a substitute for GATT. c. GATT was a treaty and technically was not an organization. d. Under GATT the explicit use of quotas to protect domestic industries was illegal in most cases.
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56. * 57. *
A principle problem associated with GATT was that: a. it was not really a formal international organization. b. the U.S. was not a member. c. it had no enforcement mechanism. d. it was part of the World Bank. Most favored nation (MFN) status means that a country treats another country: a. better than its other trading partners. b. the same as its other trading partners. c. worse than its other trading partners. d. any way it chooses since it is the "most favored nation." When using the most favored nation principle in international trade, this means that: a. we prefer a foreign country's production to domestic production. b. the lowest MFN negotiated tariff rate would apply to all WTO members countries. c. the lowest negotiated tariff rate would apply to some countries. d. the countries have come close to a free trade agreement. The most favored nation principle of the WTO means that a tariff concession granted by one member country to another member country will: a. be extended to all other countries without exception. b. be extended to all other countries that are WTO members. c. be extended to all WTO member countries that make a similar concession. d. be extended to those WTO member countries that the country making the concession designates. Which of the following is an exception to the most favored nation principle? a. Trade in petroleum b. Trade with Japan c. A free-trade area or a customs union d. Trade in services Which of the following was not a multilateral trade negotiation conducted under GATT? a. The Tokyo Round b. The Kennedy Round c. The Uruguay Round d. The NAFTA Round Which of the following was not an MTN? a. The Seattle Round b. The Kennedy Round c. The Tokyo Round d. The Uruguay Round
60. * 61.
* 62. *
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The international organization that serves as a forum for trade discussions and the development of trade rules is called the: a. WTO. b. World Bank. c. United Nations. d. International Trade Commission. The current round of multilateral trade negotiations is known as: a. the Bush Round. b. the Uruguay Round. c. the Doha Round. d. the Tokyo Round. The WTO was established in which round of trade negotiations? a. The Kennedy Round b. The Uruguay Round c. The NAFTA Round d. The Tokyo Round The General Agreement of Trade in Services is: a. an agreement among countries on the services that the WTO will offer. b. a general agreement among countries that services will be regulated independently within each country. c. an agreement among countries that trade in services should be regulated by agreed upon rules. d. a general agreement among countries that eliminates the Multi-Fibre Agreement. Both the WTO and GATT have worked to: a. reduce the indebtedness of developing countries. b. reduce large fluctuations in exchange rates. c. reduce trade barriers among countries on a bilateral basis. d. reduce trade barriers among countries on a multilateral basis. Which organization has procedures for settling international trade disputes? a. The World Bank b. The International Monetary Fund c. The World Court of Appeals d. The World Trade Organization Which of the following countries is not currently a member of the WTO? a. France b. Canada c. Germany d. Iraq
64. * 65. *
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Why do domestic and firms foreign countries find it difficult to interact with U.S. trade policy? a. Congress has to approve everything so it is a slow process. b. The President has to decide what U.S. trade policy will be. c. No one agency or person is responsible for U.S. trade policy. d. The USTR conducts U.S. trade policy through constant and slow negotiations.
TRUE FALSE QUESTIONS 1. F 2. F 3. F 4. F 5. T 6. F 7. T A country's international trade policy is specifically designed measures that do not affect trade relations with the rest of the world. The theory of public choice assumes that politicians seek to maximize the amount of campaign contributions they receive. Government can never improve economic welfare. Business can never benefit from government regulation since it distorts market efficiency. Individuals within a country who band together in an attempt to influence the government to pass laws are participating in a collective action. Individuals within a democracy have an incentive to band together and pass laws that are in their collective or society's best interest. In the 1970s the American automobile manufacturers banded together to petition the government not to lower tariffs on Japanese-made automobiles. This action was a form of rent-seeking. The amount of business regulation is determined by the business demand for regulation and the supply of regulation by the government. Rent-seeking behavior enhances the welfare of society at the expense of a small group.
8. T 9. F
10. F International trade decreases world welfare, as the gains from trade are a result of losses to particular factors of production. 11. T In the late eighteenth century the U.S. government imposed tariffs as a means of raising revenue for the national government. 12. T Today, many developing countries still use tariffs as a major source of government revenue. 13. T The structure of protection refers to the fact that tariffs vary from zero to very high levels depending on the product in question.
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14. T Larger industries are more likely to receive protection than smaller industries. 15. F The more concentrated an industry is the less likely it is that it will be protected. 16. T Tariffs on intermediate products tend to be higher than tariffs on final products. 17. F Regionally concentrated industries usually have a zero tariff. 18. T Industries that do not have many voters tend to have a lower tariff. 19. T Industries that are qualitatively important to a country are more likely to be protected than those that are not. 20. F Industries that have a large number of firms are more likely to receive tariff protection. 21. F Domestic industries that have a comparative advantage are very likely to request and receive protection in the form of a higher tariff. 22. T U.S. tariffs are assessed on very narrowly defined product categories in order to both accommodate rent-seeking behavior and reduce the damage tariffs do to the overall welfare of the country. 23. F The Tariff of Abominations was passed by the U.K. and caused the Revolutionary War. 24. T During the nineteenth century, tariffs were the major source of revenue of the U.S. government. 25. F In 2001, the amount of money the U.S. government collected in the form of tariff revenue was the largest source of revenue for the government. 26. F The most widely imposed protective measure is the quota, which restricts imports into a country. 27. T The Confederate States of America had a uniform tariff. 28. F According to the Constitution, the President sets tariff rates. 29. F Congress has played no role in U.S. trade policy since it passed the Smoot-Hawley Tariff. 30. T After the disastrous effects of the Smoot-Hawley Tariff, Congress gave the President the authority to negotiate tariff reductions with the Reciprocal Trade Agreements Act of 1934. 31. T The cornerstone of U.S. commercial policy is the Reciprocal Trade Agreements Act.
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32. T If a country is not a member of the WTO, then the U.S. government is free to apply the Smoot-Hawley Tariff if it feels it is appropriate. 33. F In order for a country to legally trade with the U.S., it must first obtain most favored nation status. 34. F The principle of most favored nation was first developed in the U.S. in 1994 for trade between the U.S. and Mexico. 35. F In general, since World War II the level of trade barriers in most countries has risen. 36. T U.S. trade policy is based on the principle of most favored nation. 37. T Administered protection by the U.S. government is nominally sanctioned by WTO. 38. T The two U.S. government agencies that investigate antidumping cases are the ITA and the USITC. 39. T Antidumping laws in the U.S. are based on both cost-based dumping and price-based dumping. 40. F Price-based dumping is defined as a firm selling a product at a price well above the actual cost of production. 41. T Predatory dumping is a foreign firm pricing its product in such a manner so as to drive domestic firms out of business. 42. T Countervailing duties are used to offset the effects of foreign government subsidies to exporters. 43. F The use of the escape clause allows foreign firms to escape tariffs on goods exported to the U.S. 44. T In U.S. trade law, the escape clause allows for the imposition of restrictions on fairly traded imports that cause or threaten harm to domestic industry. 45. T The escape clause allows domestic industries to obtain temporary protection from imports even if the foreign firms have committed no violations of international trade law. 46. F In the early 1980s, Harley-Davidson filed a countervailing duty case claiming that the Japanese government was subsidizing the export of motorcycles to the U.S. 47. F The General Agreement on Tariffs and trade (GATT) was established in 1973. 48. T GATT governed international trade because the U.S. Congress did not ratify the proposed ITO.
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49. T Since GATT technically was a treaty and not an organization, countries that were included in GATT were known as contracting parties. 50. F The Nixon Round, the Taipei Round, and the Paraguay Round were GATT-sponsored multilateral trade negotiations. 51. F The Uruguay Round took only two years to negotiate because there were so few issues for the small number of countries in GATT to negotiate. 52. T The Uruguay Round of multilateral trade negotiations created the World Trade Organization. 53. T As a result of the Uruguay Round, the Multifibre Arrangement is supposed to be gradually phased out through the year 2005. 54. F The MFA is used to limit and regulate the exportation and importation of grain and foodstuffs on a worldwide basis. 55. T The WTO is an international organization that sets rules of conduct for international commerce. 56. F The WTO is clearly the best international forum for discussing the issues of labor and the environment in the world economy. 57. F The WTO has approximately 26 members. 58. T The members of the WTO are currently engaged in a new round of trade negotiations in Doha, Qatar. 59. F U.S. trade policy is very well organized because it is completely clear which government agency is responsible for all of the international trade functions of the U.S. government. SHORT ANSWER ESSAY 1. 2. 3. 4. 5. 6. Describe the market for government regulation. How does collective action lead to protectionism? Why is the tariff schedule of most countries so complicated? List the factors that cause the tariff on some products to be higher than other products. Describe the factors that tend to influence the structure of protection in the U.S. Discuss the advantages of a country having a uniform tariff.
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7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.
Describe the evolution of U.S. trade policy during the nineteenth century. Describe the evolution of U.S. trade policy during the twentieth century. What are the important components of the Reciprocal Trade Agreements Act? Why is this act so important? List and describe the three forms of administered protection. Explain the history of antidumping duties in the U.S. What is a countervailing duty case? What are the differences and similarities in the way the U.S. government handles antidumping and countervailing duty cases. What is an escape clause case? Use the Harley-Davidson case to show how an escape clause case should work. Describe what the term GATT means. What is an MTN? How do these negotiations work to reduce trade barriers? Describe who makes U.S. international trade policy. In what respects is the WTO different from GATT?
BRIEF ANSWERS TO SHORT ANSWER ESSAY 1. Not all government regulation of industries and firms works to the benefit of society as a whole; some regulation favors one segment of society. Industries and firms that benefit from regulation favor it. For example, it's illegal for firms to conspire to fix or raise prices. However, firms can legally raise prices if the government regulates and enforces minimum prices for an industry. Firms within this industry may find it in their own interest to accept regulation if it can enhance their profits. Under these circumstances, industries and firms have a demand for government regulation, and that means that there is a market for government regulation. One area where a market for government regulation exists is international trade. Imports of goods and services have conflicting effects. Consumers want the benefits that come from free trade, but firms and workers in the industries that compete with imports want to restrict trade. In the U.S., special interest groups lobby for changes in laws and regulations that will benefit them, although not society as a whole. Lobbying to restrict trade has a long history in the U.S. and most other countries. In a democracy, individuals have an incentive to form groups designed to influence the government to pass laws that serve their collective interest. This behavior is called
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collective action. In the case of trade policy, while any country benefits from free trade, the gains to individual consumers are relatively small per good consumed. Because an individual consumer cannot quantitatively feel the gains, individuals don't form groups to lobby the government for free trade. The firms within the economy's industries that have a comparative advantage find it difficult to lobby their own government for freer trade since they are concerned about the trade policies of foreign governments. The group that will lobby the domestic government concerning free trade is the group that ineffectively competes with imports and lobbies for protection from imports. Although protection is not in the country's interest, it is in the interest of this special interest group. Activities that are designed to benefit a special interest group are called rent-seeking activities. Requesting that the government raise or not lower a tariff on a particular good is a form of rentseeking. A special interest group's rent-seeking behavior may also maximize the votes a politician receives in the next election. In addition, voting for protection may gain the politician a few additional votes from the industry, firms, and workers that receive the protection. 3. Complexity in a country's tariff schedule provides two advantages. First, a producer of a good that competes with imports can focus its lobbying efforts for protection on a particular good. For example, it is easier to gain protection for a product like imported bacon than for all imported food. Second, a detailed tariff schedule makes it possible for a politician to pick up votes by protecting one specific good without inducing protests from the average consumer. This is why most countries have developed complicated tariff schedules, where tariffs on very similar goods may be dramatically different. Researchers have studied why the tariff is low on one good and high on another. This analysis of variation in tariffs by product for a country is called the structure of protection. In general, this research indicates several results. First, large industries that are important to a country are more likely to receive protection than are small unimportant industries. Second, the more concentrated the industry, the more likely it is to have protection because it is easier for the firms to organize to lobby for protection when there are fewer firms in the industry. Third, it is easier for firms to obtain protection if they produce an intermediate product, such as steel, where the voters are unlikely to notice price increases. Fourth, the potential voting strength of the industry's employees seems to make a difference. In addition, if the industry is regionally concentrated and/or unionized, the workers are able to lobby more effectively. Finally, industries that have a comparative disadvantage are more likely to be protected. This research indicates that an industry characterized by one or more of these factors does not guarantee it will be protected. However, the research does indicate that an industry having one or more of these factors increases the probability that it will have a higher tariff. The structure of protection in the U.S. is influenced by several factors. First, large industries that are important to the U.S. are more likely to receive protection than are small unimportant industries. Second, the more concentrated the industry, the more likely it is to have protection because it is easier for the firms to organize to lobby for protection when there are fewer firms in the industry. Third, it is easier for firms to obtain protection if they produce an intermediate product, such as steel, in which the
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voters are unlikely to notice price increases. Fourth, the potential voting strength of the industry's employees seems to make a difference. In addition, if the industry is regionally concentrated and/or unionized, the workers are able to lobby more effectively. Finally, industries that have a comparative disadvantage are more likely to be protected. This research indicates that an industry characterized by one or more of these factors does not guarantee it will be protected. However, the research does indicate that an industry having one or more of these factors increases the probability that it will have a higher tariff. 6. Economists have long advocated a uniform tariff that would solve a number of problems associated with a complicated tariff schedule. One, the tariff becomes easy to administer because customs officials would not have to worry about classifying a product into whatever category it might best fit. Two, a uniform tariff makes lobbying for protectionism much harder. If an import-competing industry wants an increase in the tariff, the tariff would have to increase on all imports. This is likely to create some resistance for several reasons: 1) a general increase in the tariff is unlikely to pass by consumers completely unnoticed; 2) other industries capable of lobbying the government would likely do so; 3) firms purchasing imported intermediate products would see the increase in the tariff as a direct increase in their costs and would complain to the government; 4) the same would be true of firms that are purchasing imports for final sale to the consumer; and 5) consumer preferences for lower tariffs would lead to the optimal public choice strategy for a politician to lower tariffs. Between 1792 and the Civil War, the average tariff varied from 10 to nearly 60 percent. In the late eighteenth century, tariffs were a convenient way for countries to raise revenue. There are two things to keep in mind about U.S. trade policy up to the beginning of the twentieth century. First, Congress and the President could impose any tariff on any narrowly defined good imported from any country. Second, a major source of revenue for the federal government came from tariffs. In the years before the federal government instituted an income tax, the "tariff bill" was a potential source of gain for industries as well as the major source of government revenue. By the late eighteenth century, governments recognized tariffs for their potential to protect domestic industries. In the U.S., Alexander Hamilton's "Report on Manufactures" recommended high tariffs on manufactured goods as a means of developing U.S. industry capable of competing with the British. This policy of infant-industry protection was gradually adopted, and tariffs in the U.S. were raised from 5 percent in 1792 to 12.5 percent by 1812. Tariffs leveled off for a few years following the War of 1812 but took off again reaching a peak of over 65 percent with the Tariff of Abominations of 1828. This high average rate of tariff protection by the U.S. government provoked a strong reaction from the Southern states. Northern states and Northern manufacturers favored high tariffs as a way of protecting new industries allowing the entire country to industrialize through an increase in firms' profits. The Southern states favored low tariffs to reduce the cost of the manufactured goods they imported. The states' difference of opinion concerning tariffs hampered the degree of solidarity within the country. The Southern states felt so strongly about the tariff issue that the Confederate Constitution prohibited the protection of any specific industry. Because tariff revenue was a major source of revenue for the U.S.
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government, tariffs increased dramatically to finance the Civil War and remained high until 1913. 8. In 1913, the U.S. reduced tariffs significantly to their lowest level since the Civil War. However, in the early 1920s the Republican Party returned to power in Congress and the White House and quickly raised tariffs to protect domestic industry. The last tariff bill Congress passed was the famous Smoot-Hawley Tariff of 1930. This tariff law resulted in the highest general tariff structure in U.S. history with average tariffs of approximately 60 percent on dutiable imports. Other nations retaliated by raising their tariffs against goods imported from the U.S. While this tariff escalation did not cause the Great Depression, it did not help. As a result of the Great Depression and the tariff increases, the volume of world trade declined from nearly $3 billion in 1929 to less than $500 million in 1933. Since trade policy is in part a political process, in 1933 the Roosevelt Administration persuaded Congress to transfer the authority to negotiate tariff reductions to the President. In 1934 Congress passed the Reciprocal Trade Agreements Act. This Act is the basis for current U.S. trade policy. Since World War II, the U.S. has reduced its tariffs through several MTNs under the auspices of GATT. Three provisions of this the Reciprocal Trade Agreement Act are still important today. First, tariff reciprocity means that the U.S. will negotiate tariff reductions only in return for tariff reductions by its trade partners. This reciprocity principle is based on the idea of fairness, as mutual tariff reductions benefit U.S. consumers and foreign producers through an increase in U.S. imports while the increase in exports benefit U.S. producers and foreign consumers. Reciprocity is still deeply em...