Chapter 7

What is free trade?

The absence of barriers to the free flow of goods and services between countries

Why do nations restrict international free trade?

To protect politically important groups, promote interests of key domestic producers, or for reasons of national security

What is the General Agreement on Tariffs and Trade (GATT)?

A world trade agreement aimed at promoting international trade by reducing trade barriers

What are tariffs?

Taxes on imports that raise the cost of imported products

What is the difference between specific tariffs and ad valorem tariffs?

Specific tariffs are a fixed charge per unit of an imported good, while ad valorem tariffs on a proportion of the value of an imported good

What is an import quota?

A direct restriction on the quantity of goods imported into a country

What is a voluntary export restraint (VER)?

A quota on trade imposed by the exporting country from the importing country

What are subsidies?

Subsidies are government payments made to domestic producers

What is the purpose of subsidies?

To help domestic producers compete against low cost foreign imports and gain export markets

What is dumping in international trade?

Selling goods in a foreign market below their cost of production or below their fair market value

Name one political argument for government intervention in trade.

Protecting jobs and industries

What is the infant industry argument?

It suggests that an industry should be protected until it can develop and become competitive internationally

What is strategic trade policy?

A policy that aims to help domestic firms gain first-mover advantages in an industry

What is first mover advantage?

economic and strategic advantages that accrue to early entrants into an industry

What did the Uruguay Round of negotiations emphasize?

Services, intellectual property, and agricultural subsidies.

What is one unresolved issue faced by the World Trade Organization (WTO)?

Protectionism in agriculture

What is the Doha Round aiming to achieve?

To cut tariffs, phase out agricultural subsidies, reduce barriers to investment, and limit antidumping laws.

How do antidumping policies protect domestic producers?

By punishing foreign firms that sell goods below fair market value

What economic argument supports trade intervention?

It boosts overall wealth of a nation to benefit both producers and consumers