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Unformatted text preview: UNIVERSITY OF SOUTHERN CALIFORNIA
Marshall School of Business
FBE 462 – International Trade & Commercial Policy Problem Set #3
1) Canada currently imports all of its domestic consumption of decorative ceramic tiles (used in
bathrooms, kitchens, and so forth). A leading Canadian politician has proposed a tariff of 30
percent on decorative ceramic tiles imported into the Canada. He argues that decorative ceramic
tile is an infant industry in Canada, and the tariff will permit the industry to be established in
Canada. You have been hired to write a report analyzing this proposal.
a) What are the effects in Canada during the first few years after the tariff is imposed (the time
when the Canadian industry is an infant)? Show graphically and explain the effects of the
imposition of this tariff on price, quantities, surpluses, and government revenues. During
this time period what are the benefits or costs to Canadian national well-being?
b) Explain why protection of an infant industry may be economically justified. What questions
would you try to answer before accepting this reason for protecting the Canadian industry? 2) The United States government has convinced foreign producers of clothespins to reduce their
level of exports to the United States through a VER. Assume that the supply of imports into the
United States under free trade is infinitely elastic at the going world price. This means that the
foreigners are willing to sell any quantity of imports at the world price.
a) Show graphically and explain the effects of this VER on the U.S. market for clothespins.
b) U.S. market demand for clothespins is expected to decline over the next few years, due to
growing consumer acceptance of substitutes. Show graphically and explain the effects of
this shift in demand, if the VER quantity is left unchanged.
c) How would your answer to part B differ, if the United States uses a tariff (instead of a VER)
to reduce the level of imports of clothespins? Explain.
3) Assume that all imports of socks into the United States come from the developing countries. The
United States has decided that it must maintain a domestic production level of socks higher than
now exists. You represent the developing countries in sock negotiations with the U.S. The U.S.
is willing to consider two methods of assuring its minimum domestic production level:
a) A quota on imports; or
b) The imposition by the exporting countries of a voluntary export restraint.
Discuss each of these alternatives from your point of view as a representative of the
developing countries, and compare their effects on the interests of the developing countries FBE 462 Problem Set #3 as exporters. Assume that the world price of socks is unaffected by U.S. demand for sock
imports. 4) True, false, or uncertain, and explain why.
a) Persistent dumping indicates that foreign firms are not trying to earn high profits on
b) From the importing country's point of view, a clear economic case exists for the importing
country to impose a countervailing duty on a good whose export is subsidized by a foreign
c) For a large country that imports leather, the optimal tariff on leather is a tariff rate that
results in almost no imports of leather. 5) Which one of the following cannot be the argument for using the export tariff?
a) The export tariff will cause deadweight loss to a nation.
b) The export tariff will reduce the domestic price of the good that is to be exported and
thus encourage the development of the domestic processing industries.
c) The export tariff is an important revenue source for some countries.
d) The export tariff will ensure that the domestic price is lower so that the product is
affordable to people. 6) The optimal tariff rate of a large country is
c) a positive number.
d) the same as the effective rate of protection. 7) An export duty will
a) increase the export.
b) increase the domestic production of the exportable goods.
c) decrease the domestic consumption of the exportable goods.
d) decrease the export. 2 FBE 462 Problem Set #3 8) Which of the following is an argument for trade protection?
a) Free trade will lead to efficiency gains to a nation.
b) Industries in a development country need time to gain efficiency to compete in the future.
c) With trade protection, the market gets smaller.
d) There will be less technological transfer with trade protection. 9) Which one of the following correctly describes the “Dutch Disease”?
a) It is a disease that destroys the elm trees. The consequence of this disease is to lower
national income and thus result in social instability.
b) When the Dutch discovered the natural gas in the North Sea, its natural gas related
industry expands resulting in the depreciation of its currency, and thus leading to the
increased competitiveness of its traditional industries.
c) When the Dutch discovered the natural gas in the North Sea, its natural gas related
industry shrinks resulting the appreciation of its currency, and thus leading to the
decreased competitiveness of its traditional industries.
d) When the Dutch discovered the natural gas in the North Sea, its natural gas related
industry expands resulting in the appreciation of its currency, and thus leading to the
decreased competitiveness of its traditional industries. 3 ...
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This note was uploaded on 02/15/2011 for the course FBE 462 at USC.