Chapter 7 Government Policy & International Trade

International Business

What is true about nations that support free trade?

Nations nominally committed to free trade but intervene to protect interests of politically important groups.

What are import tariffs?

Taxes levied on imports.

What are specific tariffs?

Specific tariffs are levied as a fixed charge for each unit of imported good.

What are ad valorem tariffs?

Ad valorem tariffs are levied as a proportion of the value of an imported good.

Who pays import tariffs?

Are paid by the IMPORTER.

What is one benefit of import tariffs for governments?

Governments get an increase in revenue.

What is an export tariff?

Export tariff is a tax placed on the export of a good.

What is the goal of an export tariff?

Goal is to discriminate against exporting in order to ensure that there is sufficient supply of a good within a country

What is an export ban?

Export ban is a policy that partially or entirely restricts the export of a good.

What are subsidies?

Government payment to a domestic producer.

What are examples of subsidies?

Cash grants; Low-interest loans; Tax breaks; Government equity participation.

What do subsidies help domestic producers do?

Help domestic producers compete against foreign imports and gain export markets.

Who benefits and who pays for subsidies?

Domestic producers gain while consumers typically absorb the costs.

What are import quotas?

Import quotas are direct restrictions on quantity of some good that may be imported.

What are Local Content Requirements (LCR)?

Some fraction of a good must be produced locally

How are Local Content Requirements expressed?

Expressed in either physical or value terms

What is dumping?

Dumping occurs when companies sell goods in a foreign market at below their costs of production or below their “fair” market value.

Why do firms engage in dumping?

A way to unload excess production.

What is the most common political argument for government intervention?

Protecting jobs and industries.

Why might governments protect certain industries?

Certain industries, like defense-related ones, must be protected. \

Why might governments threaten intervention?

Government should use threat of intervention as bargaining tool to open foreign markets.

How can trade policy help foreign policy objectives?

Government may grant preferential trade terms to a country where it wants to build strong relations.

How can trade policy be used against hostile countries?

Trade policy can be used to punish “rogue states.”

How does the infant industry argument suggest governments should support industries?

Support comes through tariffs, import quotas, and subsidies

What is a criticism of the infant industry argument?

Protection of manufacturing from foreign competition does no good unless it helps make the industry efficient

What is strategic trade policy?

Government can help raise national income when a domestic firm gains first-mover advantages

What may strategic trade policies provoke?

Will probably provoke retaliation

Why are governments reluctant to lower trade barriers on their own?

Governments unwilling to unilaterally lower trade barriers for fear others might not follow suit.

What did the Smoot-Hawley Act do?

Smoot-Hawley Act created a wall of tariff barriers against imports into the United States.

What was true about WTO membership by 2024?

By 2024, 164 members accounting for 98 percent of world trade.

What events suggest a move toward greater protectionism?

The Brexit vote and election of Donald Trump also suggest a move toward greater protectionism.

What does the current agenda of the WTO focus on?

• The rise of anti-dumping policies

• The high level of protectionism in agriculture

• The lack of strong protection for intellectual property rights in many nations

Why is protection of intellectual property important?

Inadequate protections would reduce the incentive for innovation, resulting in less economic growth.

What are bilateral and multilateral trade agreements?

Reciprocal trade agreements between two or more partners