Incoterms 2010 and International Business - 101
Incoterms 2010 and International Business - Wild - Chapter 6 - QUIZ
Incoterms 2010 and International Business - 101
International Business: The Challenges of Globalization, 8th Edition, Wild & Wild
Incoterms 2010 and International Business - Wild - Chapter 6 - QUIZ
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International Business, 8e (Wild/Wild)
Chapter 6 Political Economy of Trade
1) Which of the following is a political motive behind a government's intervention in trade?
- A) promoting a strategic trade policy
- B) gaining influence over other nations
- C) protecting a country from unwanted cultural influence
- D) protecting young industries from competition
Answer: B
AACSB: Analytical thinking; Application of knowledge
Skill: Application
Difficulty: Easy
LO: 6.1: Explain why governments sometimes intervene in trade.
2) Which of the following is true of government interventions in a country's trade practices?
- A) A major economic motive behind government intervention in trade is the protection of jobs.
- B) A major political motive behind government intervention in trade is the protection of infant industries.
- C) Government interventions help companies take advantage of economies of scale and be the first movers in their industries.
- D) Governments intervene to protect only imports, as the protection of exports is handled by private agencies.
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 6.1: Explain why governments sometimes intervene in trade.
3) Which of the following industries is typically protected for national security reasons?
- A) agriculture
- B) textile
- C) automobile
- D) housing
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.1: Explain why governments sometimes intervene in trade.
4) Which of the following do products designated as dual use require before exports can take place?
- A) currency controls
- B) countervailing duties
- C) special government approval
- D) local content requirements
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.1: Explain why governments sometimes intervene in trade.
5) Which of the following is an example of a dual use product?
- A) a blowdryer
- B) a GPS navigation device
- C) a food processor
- D) a vacuum cleaner
Answer: B
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 6.1: Explain why governments sometimes intervene in trade.
6) ________ refers to the unwanted cultural influence in a nation that can cause great distress and lead governments to block imports it believes to be harmful.
- A) Cultural imperialism
- B) Cultural protectionism
- C) Dumping
- D) Capitalism
Answer: A
Skill: Concept
Difficulty: Easy
LO: 6.1: Explain why governments sometimes intervene in trade.
7) Which of the following is the main cultural motive behind government intervention in trade?
- A) promotion of strategic trade policies
- B) protection of jobs
- C) protection of national identity
- D) protection of young industries from competition
Answer: C
AACSB: Diverse and multicultural work environments
Skill: Concept
Difficulty: Easy
LO: 6.1: Explain why governments sometimes intervene in trade.
8) Which of the following statements is true about cultural influences?
- A) Culture and trade are independent of each other.
- B) Unwanted cultural influence in a nation can cause governments to block imports that it believes are harmful.
- C) The cultures of countries are independent of the effects of exposure to the people and products of other cultures.
- D) The culture of the United States is readily adapted into the local culture of countries all over the world.
Answer: B
AACSB: Diverse and multicultural work environments
Skill: Concept
Difficulty: Easy
LO: 6.1: Explain why governments sometimes intervene in trade.
9) Which of the following countries is seen as a threat to national cultures around the world?
- A) United States
- B) India
- C) Russia
- D) France
Answer: A
Skill: Concept
Difficulty: Easy
LO: 6.1: Explain why governments sometimes intervene in trade.
10) The purpose of ________ is to force companies from other nations to use local resources in their production processes, particularly labor.
- A) administrative delays
- B) currency controls
- C) local content requirements
- D) voluntary export restraints
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.1: Explain why governments sometimes intervene in trade.
11) Which of the following statements is true of local content requirements?
- A) It is a strategy mainly used by developed nations.
- B) This strategy enforces companies to locate their manufacturing facilities in their home countries.
- C) Local content requirements hurt domestic producers through their effect on prices.
- D) It forces companies from other countries to employ local resources in their production processes.
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 6.1: Explain why governments sometimes intervene in trade.
12) When a company exports a product at a price that is lower than the price normally charged in its domestic market or lower than the cost of production, it is said to be ________.
- A) dumping
- B) ringfencing
- C) hoarding
- D) cost-shifting
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.1: Explain why governments sometimes intervene in trade.
13) An additional tariff placed on an imported product that a nation believes is receiving an unfair subsidy is called a(n) ________.
- A) countervailing duty
- B) ad valorem tariff
- C) antidumping duty
- D) compound tariff
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.1: Explain why governments sometimes intervene in trade.
Scenario: Not-So-Free Freeland
Freeland is a semi-closed economy whose government believes in protecting national identity and building a self-sustained economy. The government's priority is to protect local jobs and provide opportunities to Freeland's emerging industries to flourish without the threat of external competition.
14) Which of the following motives is least likely attributed to Freeland's restriction on free trade?
- A) political motives
- B) economic motives
- C) social motives
- D) cultural motives
Answer: C
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 6.1: Explain why governments sometimes intervene in trade.
15) Freeland's protection of its national identity is an example of a(n) ________.
- A) political motive
- B) economic motive
- C) cultural motive
- D) social motive
Answer: C
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 6.1: Explain why governments sometimes intervene in trade.
16) Which of the following motives illustrates Freeland's efforts to protect local jobs?
- A) political motive
- B) economic motive
- C) cultural motive
- D) social motive
Answer: A
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 6.1: Explain why governments sometimes intervene in trade.
17) Freeland's efforts to provide opportunities to its emerging industries is an example of its ________.
- A) political motive
- B) economic motive
- C) cultural motive
- D) social motive
Answer: B
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 6.1: Explain why governments sometimes intervene in trade.
18) Industries considered essential to national security often receive government-sponsored protection.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.1: Explain why governments sometimes intervene in trade.
19) The most common economic reason for nations attempts to influence international trade is preserving national security.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.1: Explain why governments sometimes intervene in trade.
20) The protection of infant industries by a nation's government can cause domestic companies to become complacent toward innovation.
Answer: TRUE
Skill: Concept
Difficulty: Moderate
LO: 6.1: Explain why governments sometimes intervene in trade.
21) The protection of infant industries by a nation's government can cause more economic harm than good.
Answer: TRUE
Skill: Concept
Difficulty: Moderate
LO: 6.1: Explain why governments sometimes intervene in trade.
22) The main cultural motive behind government intervention in trade includes protection of domestic jobs.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.1: Explain why governments sometimes intervene in trade.
23) Unwanted cultural influence in a nation can cause governments to block imports that it believes are harmful.
Answer: TRUE
AACSB: Diverse and multicultural work environments
Skill: Concept
Difficulty: Moderate
LO: 6.1: Explain why governments sometimes intervene in trade.
24) Transit tariffs have been almost entirely eliminated worldwide through international trade agreements.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.1: Explain why governments sometimes intervene in trade.
25) Describe the main political motives behind government intervention in trade.
Answer: Government officials often make trade-related decisions based on political motives because a politician's career can depend on pleasing voters and getting reelected. Yet a trade policy based purely on political motives is seldom wise in the long run. The main political motives behind government intervention in trade include protecting jobs, preserving national security, responding to other nations' unfair trade practices, and gaining influence over other nations.
Protect Jobs- Short of an unpopular war, nothing will oust a government faster than high rates of unemployment. Thus, practically all governments become involved when free trade creates job losses at home.
Preserve National Security-Industries considered essential to national security often receive government-sponsored protection. This is true for both imports and exports.
Respond to "Unfair" Trade- Many observers argue that it makes no sense for one nation to allow free trade if other nations actively protect their own industries. Governments often threaten to close their ports to another nation's ships or to impose extremely high tariffs on its goods if the other nation does not concede on some trade issue that is seen as being unfair. In other words, if one government thinks another nation is not "playing fair," it will often threaten to retaliate unless certain concessions are made.
Gain Influence- Governments of the world's largest nations may become involved in trade to gain influence over smaller nations. The United States goes to great lengths to gain and maintain control over events in all of Central, North, and South America, and the Caribbean basin.
Skill: Concept
Difficulty: Moderate
LO: 6.1: Explain why governments sometimes intervene in trade.
26) Explain why job protection is a political motive for governments to restrict free trade. Why might a government interested in job protection insist on local content requirements for international firms doing business in that country?
Answer: Government officials often make trade-related decisions based on political motives because a politician's career can depend on pleasing voters and getting reelected. The main political motives behind government intervention in trade include protecting jobs, preserving national security, responding to other nations' unfair trade practices, and gaining influence over other nations.
Short of an unpopular war, nothing will oust a government faster than high rates of unemployment. Thus, practically all governments become involved when free trade creates job losses at home. Ohio lost around 215,000 manufacturing jobs over a recent 14 year period. Most of those jobs went to China and the nations of Central and Eastern Europe. The despair of unemployed workers and the pivotal role of Ohio in presidential elections lured politicians to the state who promised Ohio lower income taxes, expanded worker retraining, and greater investment in the state's infrastructures.
A government interested in preserving jobs might consider local content requirements because often those requirements include local labor. Local content requirements are laws stipulating that producers in the domestic market must supply a specified amount of a good or service. These requirements can state that a certain portion of the end product consists of domestically produced goods or that a certain portion of the final cost of a product has domestic sources. The purpose of local content requirements is to force companies from other nations to use local resources in their production processes-particularly labor. Similar to other restraints on imports, such requirements help protect domestic producers from the price advantage of companies based in other, low-wage countries. Today, many developing countries use local content requirements as a strategy to boost industrialization. Companies often respond to local content requirements by locating production facilities inside the nation that stipulates such restrictions.
AACSB: Reflective thinking
Skill: Synthesis
Difficulty: Hard
LO: 6.1: Explain why governments sometimes intervene in trade.
27) What is meant by dumping? Describe the various roles of the World Trade Organization, including when a country is accused of dumping.
Answer: When a company exports a product at a price that is either lower than the price normally charged in its domestic market or lower than the cost of production, it is said to be dumping. Charges of dumping are made (fairly or otherwise) against companies from almost every nation at one time or another and can occur in any type of industry. For example, Western European plastic producers considered retaliating against Asian competitors whose prices were substantially lower in European markets than at home. More recently, U.S. steel producers and their powerful union charged that steelmakers in Brazil, Japan, and Russia were dumping steel on the U.S. market at low prices. The problem arose as those nations tried to improve their economies through increased exporting of all products, including steel.
The three main goals of the WTO are to help the free flow of trade, to help negotiate further opening of markets, and to settle trade disputes among its members. One key component of the WTO that was carried over from GATT is the principle of nondiscrimination called normal trade relations (formerly called "most favored nation status")-a requirement that WTO members extend the same favorable terms of trade to all members that they extend to any single member.
The WTO cannot punish the country in which the company accused of dumping is based because dumping is an act by a company, not a country. The WTO can respond only to the actions of a country that retaliates against a company that is dumping. The WTO allows a nation to retaliate against dumping if it can show that dumping is actually occurring, can calculate the damage to its own companies, and can show that the damage is significant. The normal way a country retaliates is to charge an antidumping duty-an additional tariff placed on an imported product that a nation believes is being dumped on its market. But such measures must expire within five years of the time they are initiated unless a country can show that circumstances warrant their continuation.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 6.1: Explain why governments sometimes intervene in trade.
28) Which of the following is an instrument that governments use to promote trade?
- A) embargoes
- B) tariffs
- C) export financing
- D) administrative delays
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.2: Outline the instruments that governments use to promote trade.
29) Financial assistance given to domestic producers in the form of cash payments is an example of a(n) ________.
- A) ad valorem tariff
- B) quota
- C) subsidy
- D) export tariff
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.2: Outline the instruments that governments use to promote trade.
30) A designated geographic region in which merchandise is allowed to pass with lower customs duties and/or fewer custom procedures is called a(n) ________.
- A) foreign trade zone
- B) free trade area
- C) single market
- D) open border
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.2: Outline the instruments that governments use to promote trade.
31) Which of the following statements is true of export financing?
- A) Small businesses that have just started to export are financially stable and seldom require financing from government agencies.
- B) The Ex-Im Bank finances the export activities of companies all over the world.
- C) Governments usually offer loans to exporters with above-market interest rates.
- D) Governments may promote exports by offering loan guarantees.
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 6.2: Outline the instruments that governments use to promote trade.
32) Which of the following financial companies in the United States is involved in activities of selling of goods abroad, and offers insurance on foreign accounts receivable?
- A) National Cooperative Bank
- B) Overseas Private Investment Corporation
- C) Export-Import Bank
- D) Inter-American Development Bank
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.2: Outline the instruments that governments use to promote trade.
33) Which of the following statements is true of foreign trade zone?
- A) It is an area through which merchandise is allowed to pass with fewer procedures but higher taxes.
- B) These areas provide very limited employment opportunities.
- C) Goods imported into these zones require import licenses and are subject to import duties.
- D) International companies can store goods in these zones without incurring taxes, before shipping them to other countries.
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 6.2: Outline the instruments that governments use to promote trade.
34) A common purpose of many companies' facilities in foreign trade zones is ________.
- A) final product assembly
- B) acquisition of raw materials
- C) product design
- D) product manufacturing
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.2: Outline the instruments that governments use to promote trade.
35) Government trade promotion agencies ________.
- A) enable imports at discounts
- B) set up foreign trade zones across the country
- C) advertise in other countries to promote the nation's exports
- D) place voluntary export restraints on companies that fail to export adequately
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 6.2: Outline the instruments that governments use to promote trade.
36) Receiving financing from government agencies is often crucial to the success of small businesses just beginning to export.
Answer: TRUE
Skill: Concept
Difficulty: Easy
LO: 6.2: Outline the instruments that governments use to promote trade.
37) The major purpose of foreign trade zones is to implement barriers to trade and commerce.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.2: Outline the instruments that governments use to promote trade.
38) Describe each instrument that governments use to promote trade.
Answer: 1. Subsidies-Financial assistance to domestic producers in the form of cash payments, low-interest loans, tax breaks, product price supports, or other forms is called a subsidy. Regardless of the form a subsidy takes, it is intended to assist domestic companies in fending off international competitors. This can mean becoming more competitive in the home market or increasing competitiveness in international markets through exports.
- Export Financing-Governments often promote exports by helping companies finance their export activities. They can offer loans that a company could otherwise not obtain or charge them an interest rate that is lower than the market rate. Another option is for a government to guarantee that it will repay the loan of a company if the company should default on repayment; this is called a loan guarantee.
- Foreign Trade Zones-Most countries promote trade with other nations by creating what is called a foreign trade zone (FTZ)–a designated geographic region through which merchandise is allowed to pass with lower customs duties (taxes) and/or fewer customs procedures. Increased employment is often the intended purpose of foreign trade zones, with a by-product being increased trade.
- Special Government Agencies-The governments of most nations have special agencies responsible for promoting exports. Such agencies can be particularly helpful to small and medium-sized businesses that have limited financial resources. Government trade promotion agencies often organize trips for trade officials and businesspeople to visit other countries to meet potential business partners and generate contacts for new business. They also typically open trade offices in other countries. These offices are designed to promote the home country's exports and introduce businesses to potential partners in the host nation. Government trade promotion agencies typically do a great deal of advertising in other countries to promote the nation's exports.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 6.2: Outline the instruments that governments use to promote trade.
39) Describe the role of special government agencies in promoting exports and imports.
Answer: The governments of most nations have special agencies responsible for promoting exports. Such agencies can be particularly helpful to small and medium-sized businesses that have limited financial resources. Government trade promotion agencies often organize trips for trade officials and businesspeople to visit other countries to meet potential business partners and generate contacts for new business. They also typically open trade offices in other countries. These offices are designed to promote the home country's exports and introduce businesses to potential partners in the host nation. Government trade promotion agencies typically do a great deal of advertising in other countries to promote the nation's exports. For example, Chile's Trade Commission, ProChile, has commercial offices in 40 countries and a Web site.
Governments not only promote trade by encouraging exports but also can encourage imports that the nation does not or cannot produce. For example, the Japan External Trade Organization (JETRO) is a trade promotion agency of the Japanese government. The agency coaches small and medium-sized overseas businesses on the protocols of Japanese deal making, arranges meetings with suitable Japanese distributors and partners, and even assists in finding temporary office spaces.
For all companies, and particularly small ones with fewer resources, learning the government regulations in other countries is a daunting task. A company must know whether its product is subject to a tariff or quota, for instance. Fortunately, it is now possible to get answers to many such questions through the Internet.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 6.2: Outline the instruments that governments use to promote trade.
40) Which of the following is a method of restricting trade?
- A) export financing
- B) local content requirements
- C) subsidy
- D) foreign trade zones
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
41) Which of the following will add to the cost of an imported product by levying an additional tax upon it?
- A) tariffs
- B) quotas
- C) local content requirements
- D) embargoes
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
42) A tariff levied by the government of a country that is selling goods abroad is called a(n) ________.
- A) export tariff
- B) ad valorem tariff
- C) compound tariff
- D) specific tariff
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
43) Which of the following statements is true of tariffs?
- A) Tariffs increase an imported product's appeal to buyers.
- B) Transit tariffs are the most widely-levied tariffs.
- C) Ad valorem tariffs are levied as a specific fee for each unit of an imported product.
- D) Export tariffs are used by countries when they believe an export's price is lower than it should be.
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 6.3: Describe the instruments that governments use to restrict trade.
44) A tariff levied by the government of a country that a product is passing through on its way to a final destination is called a ________ tariff.
- A) transit
- B) compound
- C) export
- D) specific
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
45) The most common tariffs used today are the ________ tariffs.
- A) import
- B) transit
- C) inverted
- D) export
Answer: A
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
46) A(n) ________ tariff is levied as a percentage of the stated price of an imported product.
- A) specific
- B) compound
- C) ad valorem
- D) transit
Answer: C
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
47) A(n) ________ tariff is levied as a particular fee for each unit of an imported product.
- A) specific
- B) compound
- C) ad valorem
- D) transit
Answer: A
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
48) A(n) ________ tariff is levied on an imported product and calculated partly as a percentage of its stated price and partly as a specific fee for each unit.
- A) specific
- B) compound
- C) ad valorem
- D) transit
Answer: B
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
49) Which of the following statements is true of tariffs?
- A) They are the major source of government revenue in developed nations.
- B) They increase products' appeal to buyers.
- C) They lower the effective prices of imports.
- D) They protect domestic producers.
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 6.3: Describe the instruments that governments use to restrict trade.
50) Using tariffs to generate government revenue is most common among ________.
- A) developed countries
- B) developing countries
- C) western nations
- D) First World nations
Answer: B
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
51) A restriction on the amount of a good that can enter or leave a country during a certain period of time is called a(n) ________.
- A) administrative delay
- B) local content requirement
- C) quota
- D) tariff
Answer: C
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
52) Which of the following is true of quotas?
- A) They are the most common type of trade barrier.
- B) They help domestic producers maintain their market shares and prices.
- C) Their licenses are granted by governments to other nation companies on a five-year basis.
- D) They lead to a decrease in the prices of intermediate goods.
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 6.3: Describe the instruments that governments use to restrict trade.
53) A country imposes a tariff on goods that it sells abroad at the request of another nation. This is an example of a(n) ________.
- A) embargo
- B) ad valorem tariff
- C) compound tariff
- D) voluntary export restraint
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
54) Countries might impose a(n) ________ in response to the threat of an import quota or total ban on a product by an importing nation.
- A) embargo
- B) ad valorem tariff
- C) compound tariff
- D) voluntary export restraint
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
55) A lower tariff rate for a certain quantity of imports and a higher rate for quantities that exceed the quota is called a(n) ________.
- A) export quota
- B) tariff-quota
- C) ad valorem tariff
- D) voluntary export restraint
Answer: B
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
56) Tariff-quotas are used extensively in the trade of ________.
- A) manufactured goods
- B) services
- C) textiles
- D) agricultural products
Answer: D
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
57) A(n) ________ is the most restrictive nontariff trade barrier and is typically applied to accomplish political goals.
- A) tariff-quota
- B) subsidy
- C) embargo
- D) voluntary export restraint
Answer: C
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
58) Regulatory controls or bureaucratic rules designed to impair the rapid flow of imports into a country are called ________.
- A) local content requirements
- B) administrative delays
- C) voluntary export restraints
- D) import quotas
Answer: B
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
59) Purposely understaffing customs offices to cause time delays, requiring special licenses that take a long time to obtain, and requiring air carriers to land at inconvenient airports are all examples of ________.
- A) local content requirements
- B) import quotas
- C) administrative delays
- D) voluntary export restraints
Answer: C
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
60) Restrictions on the convertibility of a currency into other currencies are referred to as ________.
- A) administrative delays
- B) currency crisis
- C) local content requirements
- D) currency controls
Answer: D
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
61) A country that believes an imported product is being sold in its market for a price lower than the cost of production for the product may impose a(n) ________ in retaliation.
- A) countervailing duty
- B) ad valorem tariff
- C) antidumping duty
- D) compound tariff
Answer: C
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
Scenario: Konesia Joins the World
Konesia, a former totalitarian economy and pariah state, is taking steps toward a free market economy. The government wants to encourage trade but also wants to find a balance so that local businesses and industries are not harmed.
62) Which of the following would be Konesia's least appropriate method to restrict unwanted trade?
- A) introduce an administrative delay
- B) impose a quota
- C) reduce tariffs
- D) impose a currency control
Answer: C
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 6.3: Describe the instruments that governments use to restrict trade.
63) If Konesia chooses to levy tariffs as a percentage of the stated price of an imported product, this would be an example of a(n) ________.
- A) compound tariff
- B) specific tariff
- C) ad valorem tariff
- D) tariff-quota
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
64) Which of the following is the most likely reason for Konesia's government to impose an import quota?
- A) to maintain adequate supplies of a product in the home market
- B) to maintain market shares and prices of domestic producers
- C) to restrict the supply of a product to world markets
- D) to maintain the exports of a product at target levels
Answer: B
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 6.3: Describe the instruments that governments use to restrict trade.
Scenario: Excelsior's Limited
Excelsior's Limited, a manufacturer of health and beauty aids, is expanding its presence in several countries around the world. Excelsior's president is surprised at some of the responses the company is receiving from other countries.
65) Excelsior's Limited tried to sell its product in Canada, but was told that at least forty percent of the product must be manufactured in Canada. This is an example of a(n) ________.
- A) administrative delay
- B) local content requirement
- C) tariff
- D) embargo
Answer: B
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 6.3: Describe the instruments that governments use to restrict trade.
66) When Excelsior's Limited tried to convert its earnings from one country, the government stipulated that the company had to exchange its currency at a very unfavorable rate. This is an example of a(n) ________.
- A) administrative delay
- B) currency control
- C) subsidy
- D) tariff
Answer: B
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 6.3: Describe the instruments that governments use to restrict trade.
67) France gave Excelsior's Limited permission to export its product as long as the company obtained a special license first. Excelsior has been waiting six months for the license and is wondering if it will ever arrive. Excelsior's Limited is experiencing a(n) ________.
- A) administrative delay
- B) local content requirement
- C) embargo
- D) currency control
Answer: A
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 6.3: Describe the instruments that governments use to restrict trade.
68) A disadvantage of protection from import competition is the added cost of continuing to produce a good domestically that could be supplied more efficiently by an international supplier.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 6.3: Describe the instruments that governments use to restrict trade.
69) The automobile industry is typically protected for national security reasons.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
70) Products that are of use in both industrial and military applications are designated as dual-use products.
Answer: TRUE
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
71) Customs duties decrease the total amount of a good's production cost.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
72) An import tariff is levied by the government of a country that a product is passing through on its way to its final destination.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
73) A compound tariff on an imported product is calculated partly as a percentage of its stated price and partly as a specific fee for each unit.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
74) Tariffs are a source of government revenue mostly among developing nations.
Answer: TRUE
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
75) Tariffs tend to exact a cost on countries as a whole because they lessen citizens' gains from trade.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
76) Consumers are benefitted when a government imposes import quotas on products.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
77) A voluntary export restraint refers to a quota that a nation imposes on its exports, usually at the request of another nation.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
78) An embargo is the most restrictive nontariff trade barrier available.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
79) Restrictions on the convertibility of one currency into others is called administrative delays.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
80) When a company exports a product at a price higher than the price normally charged in its domestic market, it is said to be dumping.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.3: Describe the instruments that governments use to restrict trade.
81) Explain why governments impose restrictions on free trade.
Answer: Governments impose restrictions on free trade for reasons that are political, economic, or cultural-or some combination of the three. Countries often intervene in trade by strongly supporting their domestic companies' exporting activities. But the more emotionally charged intervention occurs when a nation's economy is underperforming. In tough economic times, businesses and workers often lobby their governments for protection from imports that are eliminating jobs in the domestic market.
Government officials often make trade-related decisions based on political motives because a politician's career can depend on pleasing voters and getting reelected. The main political motives behind government intervention in trade include protecting jobs, preserving national security, responding to other nations' unfair trade practices, and gaining influence over other nations.
Although governments intervene in trade for highly charged cultural and political reasons, they also have economic motives for their intervention. The most common economic reasons for nations' attempts to influence international trade are the protection of young industries from competition and the promotion of a strategic trade policy.
Nations often restrict trade in goods and services to achieve cultural objectives, the most common being protection of national identity. Culture and trade are intertwined and greatly affect one another. The cultures of countries are slowly altered by exposure to the people and products of other cultures. Unwanted cultural influence in a nation can cause great distress and cause governments to block imports that it believes are harmful.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 6.3: Describe the instruments that governments use to restrict trade.
82) Describe the different types of tariffs and provide an example of each.
Answer: We can classify a tariff into one of three categories. An export tariff is levied by the government of a country that is exporting a product. Countries can use export tariffs when they believe an export's price is lower than it should be. Developing nations whose exports consist mostly of low-priced natural resources often levy export tariffs. A transit tariff is levied by the government of a country that a product is passing through on its way to its final destination. Transit tariffs have been almost entirely eliminated worldwide through international trade agreements. An import tariff is levied by the government of a country that is importing a product. The import tariff is by far the most common tariff used by governments today.
We can further break down the import tariff into three subcategories based on the manner in which it is calculated. An ad valorem tariff is levied as a percentage of the stated price of an imported product. A specific tariff is levied as a specific fee for each unit (measured by number, weight, etc.) of an imported product. A compound tariff is levied on an imported product and calculated partly as a percentage of its stated price and partly as a specific fee for each unit.
Skill: Concept
Difficulty: Moderate
LO: 6.3: Describe the instruments that governments use to restrict trade.
83) Explain how tariffs protect domestic producers, and describe how a foreign trade zone might offset the effects of tariffs.
Answer: A tariff is a government tax levied on a product as it enters or leaves a country. A tariff increases the price of an imported product directly and, therefore, reduces its appeal to buyers.
Nations can use tariffs to protect domestic producers. For example, an import tariff raises the cost of an imported good and increases the appeal of domestically produced goods. In this way, domestic producers gain a protective barrier against imports.
While tariffs are designed to restrict trade, most countries promote trade with other nations by creating what is called a foreign trade zone (FTZ)–a designated geographic region through which merchandise is allowed to pass with lower customs duties (taxes) and/or fewer customs procedures. Increased employment is often the intended purpose of foreign trade zones, with a by-product being increased trade.
Customs duties increase the total amount of a good's production cost and increase the time needed to get it to market. Companies can reduce such costs and time by establishing a facility inside a foreign trade zone. A common purpose of many companies' facilities in such zones is final product assembly. The U.S. Department of Commerce administers dozens of foreign trade zones within the United States. Many of these zones allow components to be imported at a discount from the normal duty. Once assembled, the finished product can be sold within the U.S. market with no further duties charged. State governments welcome such zones to obtain the jobs that the assembly operations create.
AACSB: Reflective thinking
Skill: Synthesis
Difficulty: Hard
LO: 6.3: Describe the instruments that governments use to restrict trade.
84) What are voluntary export restraints and how are they used?
Answer: A unique version of the export quota is called a voluntary export restraint (VER)–a quota that a nation imposes on its own exports, usually at the request of another nation. Countries normally self-impose a voluntary export restraint in response to the threat of an import quota or total ban on the product by an importing nation. The classic example of the use of a voluntary export restraint is from the 1980s when Japanese carmakers were making significant market share gains in the United States. The closing of U.S. carmakers' production facilities in the United States was creating a volatile anti-Japan sentiment among the population and the U.S. Congress. Fearing punitive legislation if Japan did not limit its automobile exports to the United States, the Japanese government and its carmakers self-imposed a voluntary export restraint on cars headed for the United States.
Consumers in the country that imposes an export quota benefit from lower-priced products (due to their greater supply) as long as domestic producers do not curtail production. Producers in an importing country benefit because the goods of producers from the exporting country are restrained, which may allow them to increase prices. Export quotas hurt consumers in the importing nation because of reduced selection and perhaps higher prices. Yet export quotas might allow these same consumers to retain their jobs if imports were threatening to put domestic producers out of business. Again, detailed economic studies are needed to determine the winners and losers in any particular export quota case.
Skill: Concept
Difficulty: Moderate
LO: 6.3: Describe the instruments that governments use to restrict trade.
85) The pattern of imports and exports that occurs in the absence of trade barriers is called ________.
- A) vertical integration
- B) autarky
- C) protectionism
- D) free trade
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.4: Summarize the main features of the global trading system.
86) Which of the following is prompting farmers in many developed nations to discover new ways to manage risk and increase agricultural efficiency?
- A) enforcement of trade embargoes and tariffs
- B) exposure of agribusiness to market forces
- C) provision of extensive government subsidies
- D) designation of agricultural products as dual use products
Answer: B
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 6.4: Summarize the main features of the global trading system.
87) Which of the following best describes the infant industry argument?
- A) It states that small businesses that have just started to export are financially stable and seldom require financing from government agencies.
- B) It states that protecting a country's emerging industries from international competition will enhance domestic companies' incentives to obtain knowledge to be competitive.
- C) It states that a country's emerging industries need protection from international competition during their development until they become sufficiently competitive.
- D) It states that domestic companies that are provided protection from international competition become more competitive and less reliant on protection.
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 6.4: Summarize the main features of the global trading system.
88) According to the ________ argument, as an industry grows and matures, it gains the knowledge it needs to become more innovative, efficient, and competitive.
- A) maturing industry
- B) infant industry
- C) standardized product
- D) developing economy
Answer: B
Skill: Concept
Difficulty: Easy
LO: 6.4: Summarize the main features of the global trading system.
89) Which of the following is true regarding the protection of infant industries from international competition?
- A) It is difficult for governments to identify the industries worth protecting.
- B) Protection of infant industries helps domestic companies become innovative.
- C) Protection from competition leads to improved quality and lower prices.
- D) Protection leads to more economic good than harm.
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 6.4: Summarize the main features of the global trading system.
90) Which of the following is a result of the protection of domestic companies from international competition?
- A) Consumers need to pay lesser for products.
- B) There are increased incentives to cut production costs and improve quality.
- C) Companies become more reliant on protection.
- D) Protection increases a company's incentives to obtain the knowledge it needs to become more competitive.
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 6.4: Summarize the main features of the global trading system.
91) Rice imports to a nation under a quota limit of 8,500 tons are charged a tariff of 15 percent. Imports of rice above the quota limit are charged a tariff of 60 percent. This is an example of a(n) ________.
- A) export quota
- B) voluntary export restraint
- C) ad valorem tariff
- D) tariff-quota
Answer: D
AACSB: Analytical thinking
Skill: Application
Difficulty: Hard
LO: 6.4: Summarize the main features of the global trading system.
92) Country A implements a ban on trade in two products with Country B. This is an example of a(n) ________.
- A) embargo
- B) tariff-quota
- C) tariff
- D) voluntary export restraint
Answer: A
AACSB: Analytical thinking
Skill: Concept
Difficulty: Easy
LO: 6.4: Summarize the main features of the global trading system.
93) Which of the following statements is true of embargoes?
- A) An embargo may be placed on one or a few goods or may completely ban trade in all goods.
- B) An embargo is the least restrictive nontariff barrier available.
- C) An embargo is usually employed for economic reasons.
- D) Embargoes are used frequently today because they are easy to implement.
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 6.4: Summarize the main features of the global trading system.
94) The ________ altered the U.S. trade policy from a stance of free trade to one of protectionism in the 1930s.
- A) Norris-LaGuardia Act
- B) Smoot-Hawley Act
- C) Wheeler-Lea Act
- D) Taft-Hartley Act
Answer: B
Skill: Concept
Difficulty: Easy
LO: 6.4: Summarize the main features of the global trading system.
95) In which of the following ways did the Uruguay Round of Negotiations modify the original General Agreement on Tariffs and Trade (GATT) treaty?
- A) It helped standardize intellectual property rules around the world.
- B) It called on developing and least-developed economies to cut agricultural tariffs significantly.
- C) It relaxed the additional tariffs imposed on companies charged with dumping.
- D) It increased barriers to trade in all developed, developing and least-developed nations.
Answer: A
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 6.4: Summarize the main features of the global trading system.
96) The Uruguay Round of Negotiations created the TRIPS Agreement to ________.
- A) help standardize the intellectual property rules around the world
- B) increase the exposure of national agricultural sectors to market forces
- C) drastically reduce tariffs and nontariff barriers in agricultural trade
- D) include international trade in services for the first time
Answer: A
Skill: Concept
Difficulty: Moderate
LO: 6.4: Summarize the main features of the global trading system.
97) One of the main goals of the World Trade Organization is to ________.
- A) encourage dumping among trading nations
- B) restrict the free flow of trade
- C) provide favorable terms of trade to a few selected countries
- D) settle trade disputes among its members
Answer: D
Skill: Concept
Difficulty: Moderate
LO: 6.4: Summarize the main features of the global trading system.
98) A requirement that all WTO members extend the same favorable terms of trade to all members that they extend to any single member is called ________.
- A) normal trade relations
- B) antidumping duties
- C) local content requirements
- D) countervailing duties
Answer: A
Skill: Concept
Difficulty: Easy
LO: 6.4: Summarize the main features of the global trading system.
Scenario: Not-So-Free Freeland
Freeland is a semi-closed economy whose government believes in protecting national identity and building a self-sustained economy. The government's priority is to protect local jobs and provide opportunities to Freeland's emerging industries to flourish without the threat of external competition.
99) The belief that Freeland's emerging industries need protection from international competition during their development phase is an example of ________.
- A) a local content requirement
- B) a normal trade relation
- C) the infant industry argument
- D) the political motive of Freeland
Answer: C
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.4: Summarize the main features of the global trading system.
Scenario: Konesia Joins the World
Konesia, a former totalitarian economy and pariah state, is taking steps toward a free market economy. The government wants to encourage trade but also wants to find a balance so that local businesses and industries are not harmed.
100) Konesia has created a hybrid form of trade restriction-a lower tariff rate for a certain quantity of imports and a higher rate for quantities that exceed the quota. This is an example of a(n) ________.
- A) compound tariff
- B) export quota
- C) ad valorem tariff
- D) tariff-quota
Answer: D
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.4: Summarize the main features of the global trading system.
101) The pattern of imports and exports that would result in lesser trade barriers is called free trade.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
LO: 6.4: Summarize the main features of the global trading system.
102) When one World Trade Organization member files a complaint against another, decisions are to be rendered in less than one year.
Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 6.4: Summarize the main features of the global trading system.
103) The World Trade Organization can punish a country in which a company accused of dumping is based.
Answer: FALSE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 6.4: Summarize the main features of the global trading system.
104) Define subsidies. What are their disadvantages? In what ways do the protection of infant industries produce similar drawbacks?
Answer: Financial assistance to domestic producers in the form of cash payments, low-interest loans, tax breaks, product price supports, or other forms is called a subsidy. Regardless of the form a subsidy takes, it is intended to assist domestic companies in fending off international competitors. This can mean becoming more competitive in the home market or increasing competitiveness in international markets through exports. It is nearly impossible to calculate the amount of subsidies a country offers its producers because of their many forms. Critics say that subsidies encourage inefficiency and complacency by covering costs that truly competitive industries should be able to absorb on their own. Many believe subsidies benefit companies and industries that receive them but harm consumers because they tend to be paid for with income and sales taxes. Thus, although subsidies provide short-term relief to companies and industries, whether they help a nation's citizens in the long term is questionable.
In a similar way, the protection of infant industries can produce complacency and prevent an industry from being fully competitive. According to the infant industry argument, a country's emerging industries need protection from international competition during their development phase until they become sufficiently competitive internationally. This argument is based on the idea that infant industries need protection because of a steep learning curve. In other words, only as an industry grows and matures does it gain the knowledge it needs to become more innovative, efficient, and competitive.
Protection from international competition can cause domestic companies to become complacent toward innovation. This can limit a company's incentives to obtain the knowledge it needs to become more competitive. The most extreme examples of complacency are industries within formerly communist nations. When their communist protections collapsed, nearly all companies that were run by the state were decades behind their competitors from capitalist nations. To survive, many government-owned businesses required financial assistance in the form of infusions of capital or outright purchase.
AACSB: Reflective thinking
Skill: Synthesis
Difficulty: Hard
LO: 6.4: Summarize the main features of the global trading system.
105) Describe the purpose of a foreign trade zone. How is it used to promote trade?
Answer: Most countries promote trade with other nations by creating what is called a foreign trade zone (FTZ)–a designated geographic region through which merchandise is allowed to pass with lower customs duties (taxes) and/or fewer customs procedures. Increased employment is often the intended purpose of foreign trade zones, with a by-product being increased trade.
Customs duties increase the total amount of a good's production cost and increase the time needed to get it to market. Companies can reduce such costs and time by establishing a facility inside a foreign trade zone. A common purpose of many companies' facilities in such zones is final product assembly. The U.S. Department of Commerce administers dozens of foreign trade zones within the United States. Many of these zones allow components to be imported at a discount from the normal duty. Once assembled, the finished product can be sold within the U.S. market with no further duties charged. State governments welcome such zones to obtain the jobs that the assembly operations create.
Skill: Concept
Difficulty: Moderate
LO: 6.4: Summarize the main features of the global trading system.
106) Discuss the benefits and drawbacks of strategic trade policy. How are the drawbacks of subsidies similar to the drawbacks of strategic trade policy?
Answer: Benefits of Strategic Trade Policy-Supporters of strategic trade policy argue that it results in increased national income. Companies should earn a good profit if they obtain first-mover advantages and solidify positions in their markets around the world. Advocates claim that strategic trade policies helped South Korea build global conglomerates (called Chaebol) that dwarf competitors. For years, South Korean shipbuilders received a variety of government subsidies, including low-cost financing. The Chaebol helped South Korea to emerge strongly from the global economic crisis because of their market power and the wide range of industries in which they compete. Such policies had spin-off effects on related industries, and local suppliers to the Chaebol are now thriving.
Drawbacks of Strategic Trade Policy-Although it sounds as if strategic trade policy has only benefits, there can be drawbacks as well. Lavish government assistance to domestic companies in the past caused inefficiency and high costs for both South Korean and Japanese companies. Large government concessions to local labor unions hiked wages and forced Korea's Chaebol to accept low profit margins.
In addition, when governments decide to support specific industries, their choice is often subject to political lobbying by the groups seeking government assistance. It is possible that special interest groups could capture all the gains from assistance with no benefit for consumers. If this were to occur, consumers could end up paying more for lower-quality goods than they could otherwise obtain.
Like strategic trade policy, government subsidies can also encourage complacency in an industry and prevent it from becoming competitive internationally. Critics say that subsidies encourage inefficiency and complacency by covering costs that truly competitive industries should be able to absorb on their own. Many believe subsidies benefit companies and industries that receive them but harm consumers because they tend to be paid for with income and sales taxes. Thus, although subsidies provide short-term relief to companies and industries, whether they help a nation's citizens in the long term is questionable.
AACSB: Reflective thinking
Skill: Synthesis
Difficulty: Hard
LO: 6.4: Summarize the main features of the global trading system.
107) Describe the three categories of tariffs, and explain how the Smoot—Hawley Act of 1930 influenced tariffs in the United States.
Answer: A tariff is a government tax levied on a product as it enters or leaves a country. A tariff increases the price of an imported product directly and, therefore, reduces its appeal to buyers.
We can classify a tariff into one of three categories. An export tariff is levied by the government of a country that is exporting a product. Countries can use export tariffs when they believe an export's price is lower than it should be. Developing nations whose exports consist mostly of low-priced natural resources often levy export tariffs. A transit tariff is levied by the government of a country that a product is passing through on its way to its final destination. Transit tariffs have been almost entirely eliminated worldwide through international trade agreements. An import tariff is levied by the government of a country that is importing a product. The import tariff is by far the most common tariff used by governments today.
We can further break down the import tariff into three subcategories based on the manner in which it is calculated. An ad valorem tariff is levied as a percentage of the stated price of an imported product. A specific tariff is levied as a specific fee for each unit (measured by number, weight, etc.) of an imported product. A compound tariff is levied on an imported product and calculated partly as a percentage of its stated price and partly as a specific fee for each unit.
The Smoot-Hawley Act of 1930 caused a major increase in the number of U.S. tariffs. World trade volume reached a peak in the late 1800s, only to be devastated when the United States passed the Smoot—Hawley Act in 1930. The act represented a major shift in U.S. trade policy from one of free trade to one of protectionism. The act set off round after round of competitive tariff increases among the major trading nations. Other nations felt that, if the United States was going to restrict its imports, they were not going to give exports from the United States free access to their domestic markets. The Smoot—Hawley Act, and the global trade wars that it helped to usher in, crippled the economies of the industrialized nations and helped spark the Great Depression. Living standards around the world were devastated throughout most of the 1930s.
AACSB: Reflective thinking
Skill: Synthesis
Difficulty: Hard
LO: 6.4: Summarize the main features of the global trading system.
108) Write a short note on the World Trade Organization and its influence on the environment.
Answer: Steady gains in global trade and rapid industrialization in many developing and emerging economies have generated environmental concerns among both governments and special interest groups. Of concern to many people are levels of carbon dioxide emissions—the principal greenhouse gas believed to contribute to global warming. Most carbon dioxide emissions are created from the burning of fossil fuels and the manufacture of cement.
The World Trade Organization has no separate agreement that deals with environmental issues. The WTO explicitly states that it is not to become a global environmental agency responsible for setting environmental standards. It leaves such tasks to national governments and the many intergovernmental organizations that already exist for such purposes. The WTO works alongside existing international agreements on the environment, including the Montreal Protocol for protection of the ozone layer, the Basel Convention on international trade or transport of hazardous waste, and the Convention on International Trade in Endangered Species.
Nevertheless, the preamble to the agreement that established the WTO does mention the objectives of environmental protection and sustainable development. The WTO also has an internal committee called the Committee on Trade and Environment. The committee's responsibility is to study the relationship between trade and the environment and to recommend possible changes in the WTO trade agreements.
In addition, the WTO does take explicit positions on some environmental issues related to trade. Although the WTO supports national efforts at labeling "environmentally friendly" products as such, it states that labeling requirements or policies cannot discriminate against the products of other WTO members. Also, the WTO supports policies of the least developed countries that require full disclosure of potentially hazardous products entering their markets for reasons of public health and environmental damage.
AACSB: Application of knowledge
Skill: Concept
Difficulty: Moderate
LO: 6.4: Summarize the main features of the global trading system.
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