Chapter 6 – Governmental Influence on Trade

 

 

Multiple Choice Questions

 

WHAT IS MEANT BY THE CONFLICTING RESULTS OF TRADE POLICIES?

 

1.      Which of the following statements regarding the conflicting results of trade policies is FALSE?

a.      Governments intervene in trade only to attain cultural objectives. (moderate, page 176)

b.      Governments pursue political rationality when trying to regulate trade.

c.       Determining the best way to influence trade is complicated by frequent conflicts between objectives.

d.      Proposals for trade regulation reform often spark fierce debate among people and groups that believe they will be affected.

 

2.      Governments influence trade to satisfy all of the following objectives EXCEPT:

a.       economic

b.      natural resources (moderate, page 176)

c.       social

d.      political

 

3.      Which of the following statements is FALSE regarding the conflicting results of trade policies?

a.       All nations interfere with international trade to varying degrees.

b.      Governmental officials apply trade policies that they reason have the best chance to benefit the nation and its citizens.

c.       Proposals for trade regulation reform are often met with extensive cooperation among the groups that believe they will be affected. (difficult, page 176)

d.      Governments would like to help struggling companies and industries without penalizing those who are doing well.

 

WHY MIGHT IMPORT RESTRICTIONS NOT CREATE MORE DOMESTIC EMPLOYMENT?

 

4.      All of the following are TRUE regarding a country’s import restrictions EXCEPT:

a.       they may lead to retaliation by other countries

b.      they are less likely to be met with retaliation if implemented by small economies

c.       they may decrease export jobs because of lower incomes abroad

d.      they are less likely to be met with retaliation if implemented by large economies (difficult, page 177)

 

5.      _______________ stimulate ________________ although less directly, by increasing foreign income and foreign-exchange earnings, which are then spent on new imports by foreign consumers.

a.      Imports; exports (moderate, page 177)

b.      Exports; imports

c.       Domestic products; foreign products

d.      Foreign products; domestic products

 

6.      The _______________ issue complicates moving to freer trade because displaced workers are frequently the ones who are least able to find alternative work.

a.       technology

b.      employment (moderate, page 177)

c.       financial

d.      essentiality


 

EXPLAIN THE RATIONALE FOR AND PROBLEMS OF MAKING THE INFANT-INDUSTRY ARGUMENT WORK AS INTENDED.

 

7.      Developing countries typically use the _______________ argument to justify their protectionist policies.

a.       mature industry

b.      product life cycle

c.       infant-industry (moderate, page 178)

d.      competitive advantage

 

8       The _______________ argument is based on the logic that, although the initial output costs for an industry in a given country may be so high as to make it noncompetitive in world markets, over time the costs will decrease to a level sufficient to achieve efficient production.

a.       mature industry

b.      product life cycle

c.       competitive advantage

d.      infant-industry (moderate, page 178)

 

9.      If _______________ protection goes to an industry that does not reduce costs enough to make it competitive against imports, chances are its owners, workers, and suppliers will constitute formidable pressure groups that may prevent the importation of a cheaper competitive product.

a.      infant-industry (moderate, page 178)

b.      mature industry

c.       product life cycle

d.      competitive advantage

 

10.    For the infant-industry argument to be fully viable:

a.       early costs must exceed future benefits.

b.      future benefits must exceed early costs. (moderate, page 178)

c.       future benefits and early costs must be equal.

d.      there is no relationship between future benefits and early costs.

 

WHY DO DEVELOPING COUNTRIES SOMETIMES IMPOSE IMPORT RESTRICTIONS TO INCREASE THEIR LEVELS OF INDUSTRIALIZATION?

 

11.    Many developing countries use trade _______________ to increase their level of industrialization because of industrial countries’ economic earlier successes with this policy.

a.       diversification

b.      negotiation

c.       protection (moderate, page 179)

d.      decentralization

 

12.    Many developing countries use protection to increase their level of industrialization for all of the following reasons EXCEPT:

a.       Inflows of foreign investment in the industrial area will promote growth.

b.      Prices and sales of traditional agricultural products and raw materials fluctuate too much.

c.       Markets for industrial products will grow faster than markets for agricultural products.

d.      Growth for agricultural products will exceed growth for industrial products. (difficult, page 179)

 

13.    Which of the following best describes the argument that says that importing cheaper products from abroad will prevent the establishment of domestic industry if free-market conditions prevail?

a.      infant-industry (moderate, page 179)

b.      mature industry

c.       product life cycle

d.      competitive advantage


 

14.    Shifting people from the agriculture to industrial sector poses all of the following risks EXCEPT:

a.       Workers may have high expectation from industrial jobs that are left unfulfilled, leading to excessive demands on social and political services.

b.      Industrialization is always a better means of increasing output than agriculture. (difficult, page 179)

c.       Agriculture may be a better means of increasing output than through industry.

d.      If government protects manufacturing companies, policymakers must decide on which type of industry to protect to minimize consumer price and tax increases.

 

WHAT IS MEANT BY THE TERMS OF TRADE?

 

15.    The _______________ is the quantity of imports that a given quantity of a country’s exports can buy.

a.       terms of importation

b.      terms of subsidies

c.       terms of trade (moderate, page 180)

d.      terms of exportation

 

16.    Which of the following statement regarding the terms of trade is FALSE?

a.       Over time, it takes more low-priced primary products to buy the same among of high-priced manufactured goods.

b.      Developing countries have become increasingly poorer relative to developed countries because the quantity of primary products demanded does not rise as rapidly as the prices of finished products.

c.       The terms of trade are the quantity of imports that a given quantity of a country’s exports can buy.

d.      Historically, the prices of raw materials and agricultural commodities rise faster than the prices of finished products. (difficult, page 180)

 

17.    The terms of trade is the ____________ that a given quantity of a country’s exports can buy.

a.      quantity of imports (moderate, page 180)

b.      quality of imports

c.       quality of exports

d.      quantity of exports

 

COMPARE IMPORT SUBSTITUTION POLICIES WITH EXPORT-LED DEVELOPMENT POLICIES.

 

18.    When a country restricts imports in order to produce for local consumption goods they formerly imported, this is known as:

a.       export substitution

b.      import substitution (moderate, page 180)

c.       an embargo

d.      a sanction

 

19.    Some countries have achieved rapid economic growth by promoting export industries, an approach known as:

a.       import-led development

b.      import substitution

c.       export-led development (moderate, page 180)

d.      export dislocation


 

20.    The idea of _______________ argues that in industries where increased production will greatly decrease cost, producers that lack equal access to a competitor’s market will have a disadvantage in gaining enough sales to be cost-competitive.

a.       differentiated protection

b.      monopoly pricing

c.       managerial capitalism

d.      comparable access (moderate, page 180)

 

21.    All of the following represent arguments against the “fairness doctrine” EXCEPT:

a.      ­­­­­­­­­­­­­The cumulative disadvantages of freer trade outweigh the advantages of freer trade. (difficult, page 180)

b.      There are advantages of freer trade, even if imposed unilaterally.

c.       Countries’ imposition of additional import restrictions to coerce other countries to reduce their restrictions may escalate economic tensions rather than remove trade barriers.

d.      Governments would find it cumbersome and expensive to negotiate separate agreements for each of the many thousands of different products and services that might be traded.

 

WHY MIGHT GOVERNMENTS ENACT EXPORT RESTRICTIONS? WHAT ARE THE POSSIBLE NEGATIVE CONSEQUENCES OF THESE RESTRICTIONS?

 

22.    Export restrictions may lead to all of the following EXCEPT:

a.       make it extremely costly to prevent smuggling

b.      decrease world prices (moderate, page 182)

c.       lead to substitution

d.      keep domestic prices down by increasing domestic supply

 

23.    Countries sometimes withhold supplies from international markets in order to raise prices abroad. However, which of the following situations would be considered practical for a country to withhold supplies from international markets?

a.       Other countries can easily substitute the resource.

b.      The resource is produced in abundance by other countries.

c.       The country holds a monopoly or near monopoly of that resource. (easy, page 182)

d.      The resource is unique and not many countries currently use the resource.

 

24.    A country may limit exports of a product that is in global short supply so that domestic consumers have more available to them. With a greater supply, domestic consumers should find that:

a.       their prices are higher than the world market prices.

b.      their prices are the same as the world market prices.

c.       the world market prices are lower than their prices.

d.      their prices are lower than the world market prices. (moderate, page 182)

 

EXPLAIN THE PRICE CONTROL OBJECTIVES FROM IMPORT RESTRICTIONS.

 

25.    Import restrictions may do to all of the following EXCEPT:

a.      encourage foreign countries to dump products in the country (moderate, page 182)

b.      prevent dumping from being used to put domestic producers out of business

c.       get other countries to bargain away restrictions

d.      get foreign producers to lower their prices


 

26.    If entry barriers are _______________, it is argued that the surviving foreign producers may charge exorbitant prices abroad or limit exports so that companies in their own countries gain better access to supplies.

a.       low

b.      high (moderate, page 182)

c.       minimal

d.      illegal

 

27.    Companies can afford to dump products in all of the following situations EXCEPT:

a.       The competitive landscape allows them to charge high domestic prices.

b.      The home country government subsidizes them.

c.       The company is on the verge of bankruptcy. (easy, page 182)

d.      The company commands a profitable monopoly in its home market.

 

28.    A company that believes it is competing against dumped products may ask its government to restrict the imports. However, determining a foreign company’s production cost or wholesale price is often difficult because of all of the following reasons EXCEPT:

a.       non-access to the foreign producers’ accounting statements

b.      fluctuations in exchange rates

c.       The passage of products through layers of distribution before reaching consumers is often difficult to determine.

d.      easy access and interpretation of foreign producers’ accounting statements (easy, page 182)

 

EXPLAIN THE OPTIMUM TARIFF THEORY.

 

29.    The _______________ theory holds that a foreign producer will lower its prices if the importing country places a tax on its products.

a.      optimum-tariff (moderate, page 182)

b.      embargo

c.       sanction

d.      cause and effect

 

30.    If the optimum-tariff theory is in effect, the benefits shift to:

a.       foreign producer in the exporting country.

b.      importing country consumers. (difficult, page 182)

c.       employees producing the product in the exporting country.

d.      importing country exporters.

 

31.    The optimum-tariff theory is a ______________ argument for governmental influence on trade.

a.       non-price

b.      cultural

c.       price (moderate, page 182)

d.      political

 

WHAT ARE THE NONECONOMIC RATIONALES FOR GOVERNMENTAL INTERVENTION IN THE FREE MOVEMENT OF TRADE?

 

32.    All of the following are examples of noneconomic rationales for government action on trade EXCEPT:

a.       maintenance of essential industries (especially defense)

b.      maintenance or extension of spheres of influence

c.       conservation of activities that help preserve a national identity

d.      the infant-industry argument (moderate, page 183)


 

33.    In protecting essential industries, countries must do all of the following EXCEPT:

a.      reduce the burden placed upon foreign competitors (moderate, page 183)

b.      determine which industries are essential

c.       consider the costs of alternative forms of protection

d.      estimate the political consequences of protection

 

34.    A major consideration behind governmental action on trade is the protection of essential domestic industries during peacetime so that a country is not dependent on foreign sources of supply during war. This is called the:

a.       infant-industry argument

b.      essential-industry argument (moderate, page 183)

c.       product life cycle argument

d.      absolute advantage argument

 

DEFINE AND EXPLAIN THE DIFFERENT TYPES OF TARIFFS (DUTIES)

 

35.    _______________ primarily serve as a means of raising the price of imported goods so that domestically produced goods will gain a relative price advantage.

a.       Embargos

b.      Sanctions

c.       Import tariffs (moderate, page 185)

d.      Transit tariffs

 

36.    _______________ were once a major source of revenue for countries, but have been nearly abolished through governmental treaties.

a.       Embargos

b.      Sanctions

c.       Import tariffs

d.      Transit tariffs (moderate, page 185)

 

37.     A government may assess a tariff on a per-unit basis, in which case it is a(n):

a.       ad valorem duty

b.      compound duty

c.       cultural duty

d.      specific duty (moderate, page 186)

 

38.    If a government assesses a tariff as a percentage of the value of the item, the tariff would be known as a(n):

a.       specific duty

b.      ad valorem duty (moderate, page 186)

c.       compound duty

d.      cultural duty

 

LIST AND DEFINE THE TYPES OF NONTARIFF BARRIERS THAT LIMIT THE QUANTITY OF GOODS TRADED.

 

39.    A(n) _______________ most frequently limits the quantity of a product allowed to be imported in a given year.

a.       tariff

b.      subsidy

c.       quota (moderate, page 187)

d.      embargo


 

40.    The implementation of which of the following types of trade controls frequently reflects a guarantee that domestic producers will have access to a certain percentage of the domestic market in that year?

a.       tariff

b.      subsidy

c.       embargo

d.      quota (moderate, page 188)

 

41.    A specific type of quota that prohibits all trade is:

a.      an embargo. (moderate, page 188)

b.      a subsidy.

c.       a sanction.

d.      a tariff.

 

42.    A form of quantitative trade control in which governments sometimes specify a content restriction, that a certain percentage of a product is of local origin, is known as:

a.        “buy imports” legislation.

b.      “buy local” legislation. (easy, page 190)

c.        “buy abroad” legislation.

d.      “export” legislation.

 

WHAT ARE THE MAIN ARGUMENTS FOR LIMITING TRADE IN SERVICES?

 

43.    Countries restrict trade in services for all of the following reasons EXCEPT:

a.       immigration

b.      standards

c.       emigration (moderate, page 191)

d.      essentiality

 

44.    Which of the following statements regarding the limitation of trade in services due to essentiality is FALSE?

a.       Countries judge certain service industries to be essential because they serve strategic purposes or because they provide social assistance to their citizens.

b.      Postal, education, and hospital health care services are not-for-profit sectors in which few foreign firms compete.

c.       Service companies sometimes pressure their home governments to negotiate deregulation abroad when they believe they have competitive advantages.

d.      When a government privatizes essential industries, its customary preference for foreign ownership and control of essential services discourages local ownership. (difficult, page 191)

 

45.    Which of the following statements regarding the limitation of trade in services due to standards is FALSE?

a.      At present, there is a great deal of reciprocal recognition in licensing from one country to another, because occupational standards and requirements differ substantially. (difficult, page 192)

b.      Governments limit foreign entry into many service professions to ensure practice by qualified personnel.

c.       An accounting or legal firm from one country cannot easily do business in another country.

d.      An accounting or legal firm with professionals must hire professionals within each foreign country or else try to earn certification abroad.


 

WHAT ARE THE FUNCTIONS OF THE WORLD TRADE ORGANIZATION (WTO)?

 

46.    In 1947, 23 countries formed an association called _______________ to negotiate reductions in trade restrictions and work toward common procedures for handling imports and exports.

a.       the United Nations

b.      the General Agreement on Tariffs and Trade (moderate, page 192)

c.       the World Trade Organization

d.      the Ministry of Finance

 

47.    GATT concessions applied to all countries (with a few exceptions) under a clause known as _______________, which means that a country’s most favorable trade concessions must apply to all trading partners.

a.       least-favored-nation

b.      absolute advantage

c.       most-favored-nation (moderate, page 194)

d.      comparative advantage

 

48.    _______________ was formally established in 1995 to replace GATT and deal with its shortcomings.

a.       The United Nations

b.      The Ministry of Arbitration

c.       The Ministry of Finance

d.      The World Trade Organization (moderate, page 194)

 

WHEN A COMPANY FACES IMPORT COMPETITION THAT THREATENS ITS MARKET POSITION, WHAT ALTERNATIVES MIGHT IT FOLLOW?

 

49.    All of the following are mentioned in the text as options for companies that have the potential of losing market share due to import competition, or are unable to compete effectively abroad EXCEPT:

a.      move production to a more industrialized, higher cost country (difficult, page 195)

b.      move production to a lower-cost country

c.       concentrate on market niches where there is less international competition

d.      effect internal adjustments, such as cost efficiencies, product innovations, or improved marketing

 

50.    In which of the following categories did the U.S. industry receive some protection from Japanese imports in the form of quotas?

a.       computer hardware

b.      automobile (moderate, page 195)

c.       computer software

d.      biotechnology

 

51.    Which of the following statements regarding the alternatives for a company that faces import competition that threatens its market position is FALSE?

a.       It is impossible for governments to try to help every company that faces tough international competition.

b.      Companies improve the odds of success if they can ally most, if not all, companies in their industry.

c.       Companies that have integrated their production and supply chains among countries tend to support protectionism. (difficult, page 195)

d.      Companies often build public support by advertising their position to stakeholders.


 

Essay Questions

 

52.    Why might import restrictions not create more domestic employment?

 

         Answer

One problem with restricting imports in order to create jobs is that other countries might retaliate with their own restrictions. New import restrictions by a major country have usually brought quick retaliation, sometimes causing more job losses than gains in industries protected by the new restrictions. Even if no country retaliates, the restricting country will gain jobs one place and lose them somewhere else. That is because of losing import-handling jobs. Imports may also help create jobs in other industries, and these industries may form pressure groups against protectionism.

         (difficult, page 177)

 

53.    Explain the rationale for and problems of making the infant industry argument work as intended.

 

         Answer

The infant-industry argument holds that a government should guarantee an emerging industry a large share of the domestic market until it becomes efficient enough to compete against imports. Developing countries still use this argument to support their protectionist policies. The infant-industry argument is based on the logic that although the initial output costs for an industry in a given country may be so high as to make it noncompetitive in world markets, over time the costs will decrease to a level sufficient to achieve efficient production. The cost reductions may occur for two reasons: As companies gain economies of scale and employees become more efficient through experience, total unit costs drop to competitive levels. Although it is reasonable to expect costs to decrease over time, they may not go down enough, which poses two problems for protecting an industry. First, governments have difficulty identifying those industries that have a high probability of success. If infant-industry protection goes to an industry that does not reduce costs enough to make it competitive against imports, changes are its owners, workers, and suppliers will constitute a formidable pressure group that may prevent the importation of a cheaper competitive product. Second, even if policymakers can ascertain which industries are likely to succeed, it does not necessarily mean that companies in those industries should receive governmental assistance. For the infant-industry argument to be fully viable, future benefits should exceed early costs.

         (moderate, page 178)

 

54.    Why do developing countries sometimes impose import restrictions to increase their levels of industrialization?

 

         Answer

Countries with a large manufacturing base generally have higher per-capita incomes than do countries without such a base. Moreover, a number of countries, such as the United States and Japan, developed an industrial base while largely preventing competition from foreign-based production. Many developing countries use protection to increase their level of industrialization because of industrial countries’ economic success and experience. Specifically, they believe:

a.       Surplus workers can more easily increase manufacturing output than they can increase agricultural output.

b.      Inflows of foreign investment in the industrial area will promote growth.

c.       Prices and sales of traditional agricultural products and raw materials fluctuate too much.

d.      Markets for industrial products will grow faster than markets for agricultural products

(easy, page 179)


 

55.    Compare import substitution policies with export-led development policies.

 

         Answer

Developing countries promote industrialization by restricting imports in order to produce for local consumption goods they formerly imported. This is known as import substitution. In recent years, most countries have come to believe that import substitution is not the best way to develop new industries. If the protected industries do not become efficient, consumers may have to support them by paying higher prices or higher taxes. In addition, because the industries must usually import capital equipment and other supplies, foreign-exchange savings are minimal. In contrast to import substitution, some countries have achieved rapid economic growth by promoting export industries, an approach known as export-led development. These countries try to develop industries for which export markets should logically exist. Industrialization may result initially in import substitution, yet export development of the same products may be feasible later.

         (moderate, page 180)

 

56.    Why might governments enact export restrictions? What are the possible negative consequences of these restrictions?

 

Answer

A country may limit exports of a product that is in short supply worldwide in order to favor domestic consumers. Typically, greater supply drops local prices beneath those in the intentionally undersupplied world markets. Countries also fear that foreign producers will price their exports so artificially low that they drive domestic producers out of business. Competition among foreign producers limits their ability to charge exorbitant prices as well as encourages them to forgo selling abroad. However, the ability to price low abroad may result from high domestic prices due to a lack of competition at home or from home-country governmental subsidies

(moderate, page 182)

 

57.    Explain the optimum tariff theory.

 

Answer

The optimum-tariff theory states that a foreign producer will lower its prices if the importing country places a tax on its products. If this occurs, benefits shift to the importing country because the foreign producer lowers its profits on the export sales. As long as the foreign producer lowers its price by any amount, some shift in revenue goes to the importing country and the tariff is deemed an optimum one. There are many examples of products whose prices did not rise as much as the amount of the imposed tariff; however, it is difficult to predict when, where, and which exporters will voluntarily reduce their profit margins.

(moderate, page 182)

 

58.    Define “dumping” and discuss its effects on a country’s economy.

 

         Answer

When companies export below cost or below their home-country price, this is called dumping. Most countries prohibit imports of dumped products, but enforcement usually occurs only if the imported product disrupts domestic production. If there is no domestic production, then the only host-country effect is a low price to its consumers. Companies may dump because they cannot otherwise build a market abroad. They can afford to dump if the competitive landscape allows them to charge high domestic prices or if their home country government subsidizes them. They may also incur short-term losses abroad if they believe they can recoup those losses after eliminating competitors in the market. Home-country consumers or taxpayers seldom realize that they are, in effect, paying so that foreign consumers have low prices. A company believing it is competing against dumped products may ask its government to restrict the imports.

         (moderate, page 182)

 

59.    Many companies and industries argue that they should have the same access to foreign markets as foreign industries and companies have to their markets. In a short essay, discuss this issue of “comparable access” or “fairness.”

 

         Answer

From an economic standpoint, comparable access argues that in industries in which increased production will greatly decrease cost, either from scale economies or learning effects, producers that lack equal access to a competitor’s market will have a disadvantage in gaining enough sales to be cost-competitive. This has been noted, for example, in the semiconductor, aircraft, and telecommunications industries. The argument for equal access also is presented as one of fairness. There are at least three arguments against this fairness doctrine. First, there are advantages of freer trade, even if imposed unilaterally. Restrictions may deny one’s own consumers’ lower prices. Second, countries’ imposition of additional import restrictions to coerce other countries to reduce their restrictions may escalate economic tensions, rather than remove trade barriers. Third, governments would find it cumbersome and expensive to negotiate separate agreements for each of the many thousands of different products and services that might be traded.

         (moderate, page 181)

 

60.    What are the noneconomic rationales for governmental intervention in the free movement of trade?

 

         Answer

a.       Maintenance of essential industries (especially defense) – A major consideration behind governmental action on trade is the protection of essential domestic industries during peacetime so that a country is not dependent on foreign sources of supply during war. This is called the essential-industry argument. This argument for protection has much appeal in rallying support for import barriers. However, in times of real crisis or military emergency, almost any product could be essential. Because of the high cost of protecting an inefficient industry or a higher-cost domestic substitute, the essential-industry argument should not be accepted without a careful evaluation of costs, real needs, and alternatives. Once an industry becomes protected, that protection is difficult to terminate because protected companies and their employees support politicians who will support their protection from imports.

b.      Prevention of shipments to unfriendly countries – Groups concerned about security often use defense arguments to prevent exports, even to friendly countries, of strategic goods that might fall into the hands of potential enemies or that might be in short supply domestically. Export constraints may be valid if the exporting country assumes there will be no retaliation that prevents it from securing even more essential goods from the potential importing country. Trade controls on non-defense goods also may be used as a weapon of foreign policy to try to prevent another country from easily meeting its economic and political objectives.

c.       Maintenance or extension of spheres of influence – Governments frequently give aid and credits to, and encourage imports from, countries that join a political alliance or vote a certain way within international bodies. A country’s trade restrictions may also coerce governments to follow certain political actions, or punish companies whose governments do not follow the actions.

d.      Conservation of activities that help preserve a national identity – Countries are held together partially through a common sense of identity that sets their citizens apart from other nationalities. To protect this “separateness”, countries limit foreign products and services in certain sectors.

(difficult, page 193)


 

61.    Define and explain the different types of tariffs (duties).

 

         Answer

A tariff, or duty, which is the most common type of trade control, is a tax that a government levies on a good shipped internationally. If collected by the exporting country, it is known as an export tariff; if collected by a country through which the goods have passed, it is a transit tariff; if collected by the importing country, it is an import tariff. The import tariff is by far the most common. Import tariffs primarily serve as a means of raising the price of imported goods so that domestically produced goods will gain a relative price advantage. A tariff may be protective even though there is no domestic production in direct competition. Tariffs also serve as a source of governmental revenue. Import tariffs are of little importance to large industrial countries, but are a major source of revenue in many developing countries. Transit tariffs were once a major source of revenue for countries, but they have been nearly abolished through governmental treaties. A government may assess a tariff on a per-unit basis, in which case it is a specific duty. It may assess a tariff as a percentage of the value of the item, in which case it is an ad valorem duty. If it assesses both specific and an ad valorem duty on the same product, the combination is a compound duty. A specific duty is easy for customs officials who collect duties to assess because they do not need to determine a good’s value on which to calculate a percentage tax. During periods of normal inflation, the specific duty will, unless changed, become a smaller percentage of a product’s value and therefore be less restrictive to imports. Because an ad valorem tariff is based on the total value of the product, meaning the raw materials and the processing combined, nonindustrial countries argue that the effective tariff on the manufactured portion turns out to be higher than the published tariff rate.

         (moderate, page 185)

 

62.    List and define the types of nontariff barriers that limit the quantity of goods traded.

 

         Answer

a.       Quotas – The most common type of import or export restriction based on quantity is the quota. From the standpoint of imports, a quota most frequently limits the quantity of a product allowed to be imported in a given year. The amount frequently reflects a guarantee that domestic producers will have access to certain percentage of the domestic market in that year.

b.      “Buy Local” legislation – Another form of quantitative trade control is “buy local” legislation. If government purchases are a large part of total expenditures within a country, they comprise an important part of the market. Most governments favor domestic producers in their purchases of goods. Sometimes they specify a content restriction—in which a certain percentage of the product is of local origin.

c.       Standards – Countries commonly have set classification, labeling, and testing standards in a manner that allows the sales of domestic products but inhibits that of foreign-made ones. The purpose of testing standards is to protect the safety or health of the domestic population. However, there have been situations where exporters have argued that such restrictions protect domestic producers instead.

d.      Specific permission requirements – Some countries require that potential importers or exporters secure permission from governmental authorities before conducting trade transactions, a requirement known as an import license.

e.       Administrative delays – Closely related to specific permission requirements are intentional administrative delays, which create uncertainty and raise the cost of carrying inventory.

f.       Reciprocal requirements – Governments sometimes require that exporters take merchandise in lieu of money or that they promise to buy merchandise or services in the country to which they export. This requirement is common in the aerospace and defense industries—sometimes because the importer is short of foreign currency to purchase what it wants.

         (difficult, page 187)


 

63.    In a short essay, list and discuss the non-tariff barriers that relate to direct price influences.

 

         Answer

a.       Subsidies – Countries sometimes make direct payments (called subsidies) to domestic companies to compensate them for losses incurred from selling abroad.

b.      Aids and loans – Governments also give aid and loans to other countries. Because the recipient is required to spend the funds in the donor country, some products can compete abroad that might otherwise be noncompetitive. Most industrial countries also provide repayment insurance for their exporters, thus reducing the risk of nonpayment for overseas sales.

c.       Customs valuation – Most countries have agreed on a procedure for assessing values when their customs agents levy tariffs.

d.      Other direct price influences – Countries frequently use other means to affect prices, including special fees, requirements that customs deposits be placed in advance of shipment, and minimum price levels at which goods can be sold after they have customs clearance.

         (easy, page 190)

 

64.    What are the main arguments for limiting trade in services?

 

Answer

Countries restrict trade in services for three reasons:

a.       Essentiality – Countries judge certain service industries to be essential because they serve strategic purposes or because they provide social assistance to their citizens. They sometimes prohibit private companies, foreign or domestic, in some sectors because they feel the services should not be sold for profit.

b.      Standards – Governments limit foreign entry into many service professions to ensure practice by qualified personnel. The licensing standards of these personnel vary by country. At present, there is little reciprocal recognition in licensing from one country to another because occupational standards and requirements differ substantially.

c.       Immigration – Satisfying the standards of a particular country does not guarantee that a foreigner can then work there. Governmental regulations often require that an organization—domestic or foreign—search extensively for qualified personnel locally before it can even apply for work permits for personnel it would like to bring in from abroad.

(moderate, page 191)

 

65.    When a company faces import competition that threatens its market position, what alternatives might it follow?

 

Answer

Governments’ intervention in trade affects the flow of import and exports of goods between countries. Companies have several options to deal with this situation. (1) Move operations to a lower-cost country, (2) concentrate on market niches that attract less international competition, (3) adopt internal innovations, namely greater efficiency or superior products, or (4) try to get governmental protection.

(moderate, page 195)