Council on Foreign Relations | What Gets in the Way of Free Trade?

Tariffs and Trade 1

Which description best captures the idea of free trade?
A) Government-managed exchange between countries
B) Trade conducted only within economic alliances
C) Buying and selling across borders without government interference
D) Trade restricted to strategic goods

C

Why do most countries still accept free trade as a long-term goal?
A) It guarantees immediate job growth
B) It eliminates domestic industries
C) It lowers variety but raises wages
D) It increases variety, lowers costs, and improves relations

D

What organization regulates trade rules and settles trade disputes globally?
A) IMF
B) WTO
C) World Bank
D) OECD

B

Which principle is NOT one of the WTO’s five trade principles?
A) Nondiscrimination
B) Predictability and transparency
C) National industrial favoritism
D) Environmental sustainability

C

Which trade barrier directly raises the price of foreign goods?
A) Subsidies
B) Tariffs
C) Export controls
D) Sanctions

B

Which barrier limits quantity rather than price?
A) Tariffs
B) Quotas
C) Dumping
D) Subsidies

B

• Which trade barrier involves government financial support to domestic industries?
  A) Subsidies
  B) Sanctions
  C) Export controls
  D) Currency manipulation

A

Which trade barrier alters exchange rates to favor exports?
A) Dumping
B) Tariffs
C) Currency manipulation
D) Quotas

C

Which practice involves selling goods abroad below their normal price?
A) Dumping
B) Subsidizing
C) Sanctioning
D) Quota enforcement

A

Which barrier restricts what a country can sell abroad for security or political reasons?
A) Sanctions
B) Export controls
C) Tariffs
D) Currency manipulation

B

1. Which trade barrier seeks to coerce political behavior from another country?
   A) Dumping
   B) Subsidies
   C) Sanctions
   D) Quotas

C

1. What is free trade, and why do countries pursue it?

• Free trade is the ideal condition where individuals and firms buy and sell across borders without government interference.

• It increases product variety, reduces prices, generates job growth, and improves international relations.

• Its benefits are often long-term, which makes them politically difficult to prioritize.

2. Why do countries still create trade barriers despite supporting free trade?

• Governments often prioritize short-term goals like protecting domestic industries.

• Political pressure, national security concerns, and economic instability outweigh abstract future benefits.

• As a result, trade frequently deviates from the WTO’s ideal “open road.”

3. What role does the WTO play in global trade?

• It creates global trade rules.

• It settles disputes between countries.

• It promotes five principles:

  • Nondiscrimination

  • Predictability and transparency

  • Competitiveness

  • Benefits for less developed countries

  • Environmental sustainability

4. What is a tariff?

• A tariff is a tax placed on imported goods.

5. Why do countries use tariffs?

• To make foreign goods more expensive than domestic alternatives.

• To encourage consumers to buy from domestic producers.

6. How were tariffs used in the U.S.–China trade conflict?

• In 2018, the Trump administration imposed heavy tariffs on Chinese goods, citing unfair trade practices and WTO violations.

• China retaliated with tariffs on U.S. goods, including agricultural products.

• Chinese exports to the U.S. fell by $35 billion in the first half of 2019 and continued declining.

• Studies estimate the trade war cost the U.S. hundreds of thousands of jobs and hundreds of billions of dollars.

• Tariffs remained under the Biden administration.

• In 2025, Trump announced a 10 percent tariff on all Chinese products, escalating the conflict.

7. What is a quota?

• A quota is a hard limit on how much of a product a country can import.

• Sometimes imports above the limit face higher tariffs instead of being banned outright.

8. Why do countries use quotas?

• To protect domestic manufacturing.

• Quotas alone do not generate revenue, so they are often paired with tariffs.

9. How did the U.S. corn broom quota work?

• After NAFTA reduced a tariff on Mexican corn brooms from 33% to 22%, U.S. broom makers were harmed.

• The U.S. imposed a quota of 2.6 million brooms.

• Any imports beyond that limit were taxed at the original 33% rate.

• The policy triggered two years of escalating tariffs.

• In 1997, a special panel ruled the quota violated trade rules.

• President Bill Clinton removed the quota later that year.

10. What are subsidies?

• Government actions that financially support domestic industries.

• They can be direct payments, tax breaks, or other financial benefits.

• They disadvantage foreign competitors.

10. What are subsidies?

• Government actions that financially support domestic industries.

• They can be direct payments, tax breaks, or other financial benefits.

• They disadvantage foreign competitors.

12. What happened with U.S. dairy subsidies in the 1970s?

• Low milk prices caused dairy shortages.

• In 1977, the government provided $2 billion in subsidies.

• Farmers overproduced milk, creating a surplus.

• The government bought excess milk and processed it into products like cheese.

• The U.S. accumulated 500 million pounds of “government cheese” across 35 states.

13. What is currency manipulation?

• When a government alters its currency’s exchange rate by printing money or other tactics.

14. Why do countries manipulate currency?

• To make exports cheaper in foreign currencies, especially the U.S. dollar.

• This boosts export competitiveness.

15. How does currency manipulation affect trade?

• Domestic goods become cheaper abroad.

• Foreign goods become more expensive domestically.

• It acts as a barrier to other countries’ exports.

16. How did Japan use currency manipulation?

• After WWII, Japan grew rapidly through exports.

• In the 1990s, Japan’s economy stagnated.

• A rising yen threatened export competitiveness.

• In 2003, Japan’s Ministry of Finance intervened to keep the yen weak.

• Exports increased, but foreign goods became harder for Japanese consumers to afford.

17. What is dumping?

• When a company sells a product abroad below its normal price.

18. Why do companies engage in dumping?

• To gain foreign market share.

• To reduce competition.

• To later raise prices and reduce quality once dominance is achieved.

19. What was the Egypt–Pakistan match dispute?

• By 2003, over 80% of matchboxes in Egypt came from Pakistan.

• Egypt imposed anti-dumping duties on Pakistani matches.

• Pakistan filed a complaint with the WTO.

• The dispute was settled in 2006.

20. What are export controls?

• Government restrictions on exporting goods tied to security or foreign policy.

• They include physical goods and intellectual property.

• Controls may require licenses or ban exports entirely.

21. Why do countries impose export controls?

• To protect national security and economic interests.

• To restrict sensitive materials like nuclear technology or medical supplies.

22. How were export controls used during COVID-19?

• PPE became globally scarce.

• The U.S. exported over 10% of global PPE.

• In April 2020, the U.S. restricted exports of PPE labeled “scarce or threatened materials.”

23. What are sanctions?

• Trade restrictions or bans imposed on another country.

24. Why do countries use sanctions?

• To force political change.

• To deter human rights abuses or nuclear weapons development.

25. How did U.S. sanctions affect Iran?

• In 1979, the U.S. banned imports after the Iran Hostage Crisis.

• In 1992, Congress passed the Iran-Iraq Arms Nonproliferation Act.

• The EU supported some sanctions.

• Iran adapted economically but suffered setbacks.

• Financial restrictions caused shortages of non-sanctioned goods like cancer medication in 2012.

26. What is the central takeaway about trade barriers?

• They are used to promote domestic interests or political goals.

• They often produce unintended economic consequences.

• They rarely fully achieve their intended outcomes.

• Global trade remains messier than the WTO’s ideal model.