International Economics, 7e (Gerber)

Chapter 7 Commercial Policy

7.1 Introduction: Commercial Policy, Tariffs, and Arguments for Protection

1) Sixty years after the signing of GATT and following eight completed round of trade
negotiations,
A) trade barriers are no longer an issue.
B) trade barriers have been successfully reduced.
C) trade barrier have actually increased.
D) there has been no real change in trade barrier.
Answer: B
Topic: Introduction: Commercial Policy, Tariffs, and Arguments for Protection
Difficulty: Easy
Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.
AACSB: Application of knowledge

2) Which of the following is NOT a true statement?

A) Trade barriers are usually a good way of protecting jobs.
B) There have been significant reductions in trade barriers over the last 60 years.
C) Economists generally favor further reductions in trade barriers.
D) There are diminishing returns to trade negotiations.
Answer: A
Topic: Introduction: Commercial Policy, Tariffs, and Arguments for Protection
Difficulty: Easy
Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.
AACSB: Application of knowledge

3) The system of trade rounds under GATT and the WTO has been successful at creating trade
rules and reducing trade barriers.
Answer: TRUE
Topic: Introduction: Commercial Policy, Tariffs, and Arguments for Protection
Difficulty: Easy
Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.
AACSB: Application of knowledge

4) Since there are diminishing returns to the removal of further trade barriers, economists do not
favor further negotiations.
Answer: FALSE
Topic: Introduction: Commercial Policy, Tariffs, and Arguments for Protection
Difficulty: Easy
Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.
AACSB: Application of knowledge
7.2 Tariff Rates in the World's Major Traders

1) The pattern of protection in industrial countries is particularly harmful to the interests of

A) low-income developing countries.
B) high-income industrial countries.
C) Asian nations.
D) European nations.
Answer: A
Topic: Tariff Rates in the World's Major Traders
Difficulty: Easy
Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.
AACSB: Application of knowledge

2) High-income industrial nations such as the United States and Japan tend to have their highest
tariffs in
A) newer, high-technology manufacturing industries.
B) capital-intensive, diversified manufacturing.
C) agriculture, clothing, and textiles
D) automobiles.
Answer: C
Topic: Tariff Rates in the World's Major Traders
Difficulty: Easy
Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.
AACSB: Application of knowledge

3) At the end of World War II,

A) tariffs around the world fell substantially.
B) agricultural subsidies were significantly reduced.
C) most nations began to apply tariffs uniformly across all industries.
D) tariffs increased in low-income countries and fell a small percentage in high-income
countries.
Answer: A
Topic: Tariff Rates in the World's Major Traders
Difficulty: Easy
Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.
AACSB: Application of knowledge

4) Tariffs are highest in which sector internationally?

A) Agriculture
B) Energy
C) Technology
D) Automobiles
Answer: A
Topic: Tariff Rates in the World's Major Traders
Difficulty: Easy
Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.
AACSB: Application of knowledge
5) Developed countries have lost comparative advantage in
A) high-tech industries.
B) labor-intensive industries.
C) capital-intensive industries.
D) agricultural industries.
Answer: B
Topic: Tariff Rates in the World's Major Traders
Difficulty: Easy
Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.
AACSB: Application of knowledge

6) At this point, potential gains from further tariff reductions worldwide are
A) still very large.
B) equal to zero.
C) relatively small.
D) not worth the cost of negotiations.
Answer: C
Topic: Tariff Rates in the World's Major Traders
Difficulty: Moderate
Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.
AACSB: Application of knowledge

7) Countries like Argentina and Australia protect agriculture less heavily than other agricultural
producers because
A) they have a large comparative advantage in production.
B) it is illegal under WTO rules.
C) they do not have significant agricultural sectors.
D) they are trying to help other countries.
Answer: A
Topic: Tariff Rates in the World's Major Traders
Difficulty: Easy
Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.
AACSB: Application of knowledge

8) The average agricultural tariff in the U.S. is about

A) 3 percent.
B) 5 percent.
C) 9 percent.
D) 15 percent.
Answer: B
Topic: Tariff Rates in the World's Major Traders
Difficulty: Easy
Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.
AACSB: Application of knowledge
9) The average nonagricultural tariff in the U.S. is about
A) 3 percent.
B) 5 percent.
C) 9 percent.
D) 15 percent.
Answer: A
Topic: Tariff Rates in the World's Major Traders
Difficulty: Easy
Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.
AACSB: Application of knowledge

10) The WTO's Doha Development Agenda is only considering market access issues in
agriculture, such as tariffs and quotas, because export subsidies and production subsidies are
considered less harmful and have not been part of the GATT or WTO agenda.
Answer: FALSE
Topic: Tariff Rates in the World's Major Traders
Difficulty: Easy
Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.
AACSB: Application of knowledge

11) Tariffs are higher in agriculture than any other sector in most countries.
Answer: TRUE
Topic: Tariff Rates in the World's Major Traders
Difficulty: Easy
Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.
AACSB: Application of knowledge

12) Large and efficient agricultural producers like Argentina and Australia protect that sector
heavily.
Answer: FALSE
Topic: Tariff Rates in the World's Major Traders
Difficulty: Easy
Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.
AACSB: Application of knowledge

13) Developed countries have lost comparative advantage in textiles and apparel.
Answer: TRUE
Topic: Tariff Rates in the World's Major Traders
Difficulty: Easy
Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.
AACSB: Application of knowledge
14) Explain how potential gains from further reductions in tariff levels are different from the
gains of the past.
Answer: It is likely that tariff cuts have diminishing marginal returns, so that each successive
round of cuts leads to a smaller gain than the cuts before, and thus it is reasonable to guess that
future cuts are not likely to have a large impact on world trade and income. While it is difficult to
measure the gains from tariff reduction precisely, the value of the Doha Round of trade
negotiations were estimated to be in the range of 0.1 percent to 0.5 percent of world GDP. This is
certainly far smaller than the gains that relatively closed economies experienced when they
opened their markets to trade.
Topic: Tariff Rates in the World's Major Traders
Difficulty: Moderate
Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.
AACSB: Application of knowledge

15) Why do both developed and less-developed countries protect clothing and textiles heavily?
Answer: For developed countries, comparative advantage has been lost in these labor-intensive
industries. For less-developed countries, these are major export sectors that also have a
significant domestic market share, and so it is desirable to protect domestic markets while
exporting these goods (in which they have a comparative advantage).
Topic: Tariff Rates in the World's Major Traders
Difficulty: Moderate
Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.
AACSB: Application of knowledge

7.3 The Costs of Protectionism

1) One reason why consumers are unlikely to be too upset about tariffs is because
A) most consumers benefit from protection.
B) tariffs are an inexpensive way to create jobs.
C) consumer losses are not real losses.
D) the costs are so spread out that no one pays a big share of the total.
Answer: D
Topic: The Costs of Protectionism
Difficulty: Moderate
Objective: LO 7.3 Explain why costs to consumers of a tariff or quota are greater than the net
welfare costs to a nation.
AACSB: Application of knowledge
2) One reason why producers have an incentive to organize in favor of protection is because
A) producer gains are spread across so many firms that no one gets a large share of the benefits.
B) producer gains are relatively concentrated.
C) there is no real cost to the economy.
D) producer gains outweigh consumer losses.
Answer: B
Topic: The Costs of Protectionism
Difficulty: Moderate
Objective: LO 7.3 Explain why costs to consumers of a tariff or quota are greater than the net
welfare costs to a nation.
AACSB: Application of knowledge

3) Which of the following is FALSE?

A) The analysis of agriculture, textiles, and clothing in the EU, the United States, and Japan
supports the proposition that older sectors of the economy are most protected, particularly in
cases where the nation has lost a substantial part of its comparative advantage.
B) Even when tariffs are relatively low, the cost per job saved tends to be high.
C) Commercial policy is grossly inefficient at achieving the objective of job preservation.
D) Trade barriers in high-income countries do not cause unintended consequences in low-income
countries because most of their trade is with other industrialized countries.
Answer: D
Topic: The Costs of Protectionism
Difficulty: Easy
Objective: LO 7.3 Explain why costs to consumers of a tariff or quota are greater than the net
welfare costs to a nation.
AACSB: Application of knowledge

4) Agriculture, clothing, and textiles are singled out for treatment in the chapter because
A) they tend to be the most highly protected sectors of industrial economies.
B) they tend to be the most-protected sectors internationally.
C) the policies of high-income nations in these sectors may have beneficial effects in low-income
countries.
D) they are more important to job creation than other sectors.
Answer: A
Topic: The Costs of Protectionism
Difficulty: Easy
Objective: LO 7.2 Cite at least three reasons why economists favor trade openings.
AACSB: Application of knowledge
5) Which of the following is NOT a reason people tolerate tariffs and quotas?
A) Their jobs depend on tariffs and quotas.
B) Costs may be hidden and hard to quantify.
C) Costs of the policy are spread over a large number of people.
D) The marginal expenses to fight the protection outweigh the personal marginal costs of the
protection.
Answer: A
Topic: The Costs of Protectionism
Difficulty: Moderate
Objective: LO 7.3 Explain why costs to consumers of a tariff or quota are greater than the net
welfare costs to a nation.
AACSB: Application of knowledge

6) Which of the following describes the asymmetry Mancur Olson observed in the incentives to
support and oppose trade policy?
A) The benefits of those seeking protection outweigh the costs imposed by the protection.
B) The benefits of protection are spread out over a large number of firms and industries, but the
costs are concentrated on consumers.
C) The benefits of policy are concentrated, and the costs are spread out over a large number of
participants.
D) The costs of protection are concentrated on a few firms, and the benefits of protection are
spread out over a large number of consumers.
Answer: C
Topic: The Costs of Protectionism
Difficulty: Moderate
Objective: LO 7.2 Cite at least three reasons why economists favor trade openings.
AACSB: Application of knowledge

7) During the 1930s, countries closed markets. The effect of these policies was that
A) export industries were better off in most countries.
B) import-competing industries did not gain.
C) the reduction in trade worsened the Great Depression.
D) consumers were better off.
Answer: C
Topic: The Costs of Protectionism
Difficulty: Moderate
Objective: LO 7.2 Cite at least three reasons why economists favor trade openings.
AACSB: Application of knowledge
8) Economists believe that there are many nonmonetary gains from further trade opening. Which
of the following is NOT one of those potential gains?
A) Economies of scale from increased production decreases costs.
B) Intensified competition lowers prices.
C) Governments will be less reliant on tariff revenue.
D) Diversification of production lowers risks.
Answer: C
Topic: The Costs of Protectionism
Difficulty: Easy
Objective: LO 7.2 Cite at least three reasons why economists favor trade openings.
AACSB: Application of knowledge

9) Deadweight losses from tariffs and quotas in high-income countries

A) are small enough to be ignored.
B) have been reduced since the mid-1990s.
C) are greater than consumer losses from tariffs and quotas.
D) can be justified by jobs protected.
Answer: B
Topic: The Costs of Protectionism
Difficulty: Easy
Objective: LO 7.2 Cite at least three reasons why economists favor trade openings.
AACSB: Application of knowledge

10) During the 1990s, deadweight losses per job saved through tariffs and quotas in the apparel
industry
A) were greater than the wages earned in apparel jobs.
B) were small enough to ignore.
C) were less than the value of the jobs saved.
D) increased net national welfare.
Answer: A
Topic: The Costs of Protectionism
Difficulty: Moderate
Objective: LO 7.2 Cite at least three reasons why economists favor trade openings.
AACSB: Application of knowledge

11) Which of the following is NOT an issues in the reduction of trade protection in agriculture?
A) consumption subsidies.
B) tariffs and quotas.
C) export subsidies.
D) production subsidies.
Answer: A
Topic: The Costs of Protectionism
Difficulty: Easy
Objective: LO 7.3 Explain why costs to consumers of a tariff or quota are greater than the net
welfare costs to a nation.
AACSB: Application of knowledge

12) Direct subsidies to agriculture, whether they are export subsidies or production subsides, are
viewed as harmful because of all the following reasons EXCEPT
A) they lead to overproduction.
B) they crowd out imports.
C) they can lead to dumping of surplus production.
D) they encourage overconsumption through low market prices.
Answer: D
Topic: The Costs of Protectionism
Difficulty: Moderate
Objective: LO 7.3 Explain why costs to consumers of a tariff or quota are greater than the net
welfare costs to a nation.
AACSB: Application of knowledge

13) Some economists argue that free trade is beneficial regardless of the actions of a country's
trading partners, including trading partners that heavily protect their home markets.
Answer: TRUE
Topic: The Costs of Protectionism
Difficulty: Easy
Objective: LO 7.2 Cite at least three reasons why economists favor trade openings.
AACSB: Application of knowledge

14) Australia has one of the most heavily subsidized agricultural sectors as a percentage of
domestic GDP.
Answer: FALSE
Topic: The Costs of Protectionism
Difficulty: Easy
Objective: LO 7.3 Explain why costs to consumers of a tariff or quota are greater than the net
welfare costs to a nation.
AACSB: Application of knowledge

15) Trade barriers are an expensive and inefficient way to reach most of the goals for which they
are used.
Answer: TRUE
Topic: The Costs of Protectionism
Difficulty: Easy
Objective: LO 7.3 Explain why costs to consumers of a tariff or quota are greater than the net
welfare costs to a nation.
AACSB: Application of knowledge

16) There are asymmetric incentives to support and to oppose protectionist trade policies, with
the stronger incentives going to those that would seek protection.
Answer: TRUE
Topic: The Costs of Protectionism
Difficulty: Easy
Objective: LO 7.2 Cite at least three reasons why economists favor trade openings.
AACSB: Application of knowledge

17) In the global recession of 2007-2009, world trade declined because nations closed their
markets to trading partners.
Answer: FALSE
Topic: The Costs of Protectionism
Difficulty: Easy
Objective: LO 7.3 Explain why costs to consumers of a tariff or quota are greater than the net
welfare costs to a nation.
AACSB: Application of knowledge

18) Further trade opening is beneficial even if the monetary value of the gains is not high.
Answer: FALSE
Topic: The Costs of Protectionism
Difficulty: Easy
Objective: LO 7.3 Explain why costs to consumers of a tariff or quota are greater than the net
welfare costs to a nation.
AACSB: Application of knowledge

19) U.S. sugar quotas cost each person in the U.S. thousands of dollars per year due to higher
prices.
Answer: FALSE
Topic: The Costs of Protectionism
Difficulty: Easy
Objective: LO 7.3 Explain why costs to consumers of a tariff or quota are greater than the net
welfare costs to a nation.
AACSB: Application of knowledge

20) How did the Uruguay Round of GATT impact agriculture?

Answer: Many quotas were converted to tariffs; many industrial countries agreed to reduce their
direct support of the farm sector
Topic: The Costs of Protectionism
Difficulty: Moderate
Objective: LO 7.2 Cite at least three reasons why economists favor trade openings.
AACSB: Application of knowledge

21) Describe some of the gains from lowering trade barriers that may be difficult to measure.
Answer: Cost savings from scale economies and intensified competition, product differentiation,
spreading risks, gaining new knowledge, etc.
Topic: The Costs of Protectionism
Difficulty: Moderate
Objective: LO 7.2 Cite at least three reasons why economists favor trade openings.
AACSB: Application of knowledge
22) Carefully explain why agricultural subsidies are viewed as harmful.
Answer: Direct subsidies are viewed as harmful because they lead to overproduction, squeeze
out imports, and in some cases result in the dumping of the surplus product in foreign markets.
Topic: The Costs of Protectionism
Difficulty: Moderate
Objective: LO 7.3 Explain why costs to consumers of a tariff or quota are greater than the net
welfare costs to a nation.
AACSB: Application of knowledge

23) Agricultural subsidies are known to cause overproduction and create other problems. Are
there benefits from such subsidies? Explain.
Answer: Subsidies given by high-income countries to support their farmers will lead to cheaper
world food prices, all other factors being equal. This benefits some countries where there is a
large urban working class. For example, many young Chinese farmers have migrated to the cities
where they work in factories. Given that the productivity of these individuals in agriculture is
very low, the country as a whole gains when they become city dwellers and factory workers,
while cheaper food makes life easier and raises living standards. As a result, agricultural
subsidies in high-income countries benefit China and some other developing countries. Also,
countries often have cultural reasons to protect agriculture, including its role in the history of the
country and worries about self-sufficiency.
Topic: The Costs of Protectionism
Difficulty: Difficult
Objective: LO 7.3 Explain why costs to consumers of a tariff or quota are greater than the net
welfare costs to a nation.
AACSB: Application of knowledge

7.4 Why Nations Protect Their Industries

1) To be effective, infant industry protection requires

A) a national security externality.
B) to be extended indefinitely.
C) to be fair to existing producers.
D) a technology externality.
Answer: D
Topic: Why Nations Protect Their Industries
Difficulty: Easy
Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.
AACSB: Application of knowledge
2) Historically, one of the most common reasons for countries to impose tariffs was
A) to protect their national security.
B) to raise revenue for the government.
C) to eliminate unemployment.
D) to counter inflation.
Answer: B
Topic: Why Nations Protect Their Industries
Difficulty: Easy
Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.
AACSB: Application of knowledge

3) The biggest flaw in the logic of the labor argument is the failure to consider
A) the needs of developing countries.
B) the impact of tariffs on inflation.
C) the differences in national productivity levels.
D) the impact on employment levels.
Answer: C
Topic: Why Nations Protect Their Industries
Difficulty: Easy
Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.
AACSB: Analytical thinking

4) When comparing the U.S. and Mexican car assembly industries, the disadvantage of higher
U.S. wages is offset by
A) Mexican trade barriers.
B) trade adjustment assistance in the United States.
C) higher productivity in the United States.
D) a lower opportunity cost in Mexico.
Answer: C
Topic: Why Nations Protect Their Industries
Difficulty: Moderate
Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.
AACSB: Application of knowledge

5) If a nation protects an industry because it believes that there are positive externalities in the
production process, it is asserting that the free market will
A) produce less than is optimal from society's point of view.
B) produce more than is optimal from society's point of view.
C) produce the correct amount but charge too high a price.
D) produce the correct amount but charge too low a price.
Answer: A
Topic: Why Nations Protect Their Industries
Difficulty: Moderate
Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.
AACSB: Analytical thinking
6) A major difficulty with the infant industry argument for protection is that
A) government revenue will fall with a tariff.
B) it requires the nation to fall into the large country case for tariff protection.
C) effective rates of protection are usually greater than nominal rates.
D) the measurement of production externalities is difficult and uncertain.
Answer: D
Topic: Why Nations Protect Their Industries
Difficulty: Easy
Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.
AACSB: Analytical thinking

7) Some economists suggest the optimal way for a nation to protect its access to a strategic
mineral is with
A) an infant industry tariff.
B) a high rate of effective protection to keep local mines in business.
C) a quota on imports of the mineral.
D) a stockpile.
Answer: D
Topic: Why Nations Protect Their Industries
Difficulty: Easy
Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.
AACSB: Application of knowledge

8) Economic sanctions
A) usually work to create policy change in the targeted country.
B) are more likely to work if the international community supports them.
C) are more likely to work if military force is not used.
D) never work to create policy change in the targeted country.
Answer: B
Topic: Why Nations Protect Their Industries
Difficulty: Easy
Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.
AACSB: Application of knowledge

9) If a large percentage of economic activity in developing countries is unrecorded, then the

countries are likely to rely on which of the following taxes to provide government revenue?
A) Sales taxes
B) Property taxes
C) Income taxes
D) Tariffs
Answer: D
Topic: Why Nations Protect Their Industries
Difficulty: Easy
Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.
AACSB: Application of knowledge
10) "Cheap foreign wages" is a poor argument for protection because it fails to recognize the
importance of productivity. Which of the following does NOT contribute to increasing
productivity?
A) Education and training
B) Government subsidies
C) Infrastructure
D) Capital
Answer: B
Topic: Why Nations Protect Their Industries
Difficulty: Easy
Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.
AACSB: Application of knowledge

11) Television programming might be targeted for protection in a country using which of the
following arguments?
A) Infant industry
B) National security
C) Labor argument
D) Cultural protection
Answer: D
Topic: Why Nations Protect Their Industries
Difficulty: Easy
Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.
AACSB: Application of knowledge

12) It seems likely that economic sanctions ultimately would have led to regime change in Iraq.
Answer: FALSE
Topic: Why Nations Protect Their Industries
Difficulty: Easy
Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.
AACSB: Analytical thinking

13) The more difficult the goal, the more likely military force is going to be needed to back up
economic sanctions.
Answer: TRUE
Topic: Why Nations Protect Their Industries
Difficulty: Easy
Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.
AACSB: Analytical thinking

14) Because low tariffs have a high ratio of benefits to costs, they are an especially efficient way
for nations to achieve full employment and growth.
Answer: FALSE
Topic: Why Nations Protect Their Industries
Difficulty: Easy
Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.
AACSB: Application of knowledge
15) Protection in the form of tariffs or quotas is a very inefficient tool for job creation and
preservation.
Answer: TRUE
Topic: Why Nations Protect Their Industries
Difficulty: Easy
Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.
AACSB: Application of knowledge

16) Choose one of the arguments countries generally use to justify protection for a particular
industry. Describe the argument and any inherent problems with it. Is the argument primarily an
economic or a noneconomic one?
Answer: The revenue argument says that for low income nations and developing nations it is an
easy tax to administer.
The Labor Argument is an economic argument about jobs, but fails to recognize the importance
of productivity rather than nominal wages.
The Infant Industry argument is an economic argument, but is often misapplied. The protection
makes firms less likely to be efficient and encourages devoting resources to rent seeking.
The national security argument is a noneconomic argument. The problem is largely deciding
which products are critical and the encouragement of rent-seeking.
The cultural protection argument says that an industry is valuable for preserving heritage or
culture.
The retaliation argument is an economic argument about how to respond to trade barriers but
there is not agreement about the harm caused by foreign trade barriers.
Topic: Why Nations Protect Their Industries
Difficulty: Moderate
Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.
AACSB: Analytical thinking

17) Critique the infant industry or the labor argument for protection.
Answer: Critique of the labor argument largely rests on the confusion between nominal wage
rate differences and productivity wages.
Critique of the infant industry argument is based on 1) the rent seeking and misapplication of
what it means to be an "infant" industry, 2) the government's ability to correctly identify such
industries vs. the market's ability to do so, 3) the protection creates disincentives for efficiency
and low-cost production.
Topic: Why Nations Protect Their Industries
Difficulty: Moderate
Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.
AACSB: Analytical thinking
18) Describe traditional knowledge and how it relates to current trade issues about intellectual
property rights protection.
Answer: Traditional knowledge is often embedded in cultural practices and every day activities
of traditional societies and indigenous communities. It includes their knowledge of plants,
animals, and the natural world, which has been gathered over generations. When that knowledge
is expropriated and used by outsiders without recognition of its origin, it is not only unfair to the
originators of that knowledge but also has the potential to harm them. For example, researchers
may collect natural samples shown to them by traditional healers, isolate the key compounds in
their laboratories, patent a new pharmaceutical or other product, and ignore the interests of the
traditional community or the nation where they live.
Topic: Why Nations Protect Their Industries
Difficulty: Moderate
Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.
AACSB: Application of knowledge

7.5 The Politics of Protection in the United States

1) A countervailing duty is a tariff that is levied to counteract

A) the dumping of goods in the domestic market by foreign firms.
B) a sudden surge of imports which hurt a domestic industry.
C) subsidies given to foreign firms by their own governments.
D) low prices for imported goods that are made in countries with low wages.
Answer: C
Topic: The Politics of Protection in the United States
Difficulty: Easy
Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.
AACSB: Application of knowledge

2) Dumping occurs when a firm

A) sells too much of a good in a foreign country.
B) sells in a foreign country at prices that are below fair value.
C) sells in its home market at prices that are below the average price charged by its competitors.
D) sells in a foreign market at prices that are below the prices charged by firms based in the
foreign market.
Answer: B
Topic: The Politics of Protection in the United States
Difficulty: Easy
Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.
AACSB: Application of knowledge
3) If a country faces action under Section 301 of the U.S. Trade Act of 1974, it means that the
country has
A) exceeded average export growth by more than 50 percent.
B) tariffs that are above the legal limit.
C) been charged by the United States with systematically engaging in unfair trade practices.
D) been charged by the WTO with violating its trade obligations.
Answer: C
Topic: The Politics of Protection in the United States
Difficulty: Easy
Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.
AACSB: Application of knowledge

4) Predatory dumping occurs when

A) foreign firms sell below cost with the intent to drive firms out of the domestic market.
B) foreign firms sell below cost because the product is perishable.
C) foreign firms sell at a price that is below the price of domestic firms.
D) foreign firms sell at a price that covers the cost of their variable inputs.
Answer: A
Topic: The Politics of Protection in the United States
Difficulty: Moderate
Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.
AACSB: Application of knowledge

5) Which of the following is an example of a countervailing duty?

A) A tariff is granted because foreign firms are selling below cost.
B) A temporary tariff is granted to allow for adjustment of the domestic industry.
C) A tariff is granted to an industry because foreign firms are subsidized by their governments.
D) A tariff is granted to an industry because another nation persistently uses unfair trade
practices.
Answer: C
Topic: The Politics of Protection in the United States
Difficulty: Easy
Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.
AACSB: Application of knowledge

6) Which of the following is an example of an antidumping duty?

A) A tariff is granted because foreign firms are selling below cost.
B) A temporary tariff is granted to allow for adjustment of the domestic industry.
C) A tariff is granted to an industry because foreign firms are subsidized by their governments.
D) A tariff is granted to an industry because another nation persistently uses unfair trade
practices.
Answer: A
Topic: The Politics of Protection in the United States
Difficulty: Easy
Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.
AACSB: Application of knowledge

7) Which of the following is an example escape clause relief?

A) A tariff is granted because foreign firms are selling below cost.
B) A temporary tariff is granted to allow for adjustment of the domestic industry.
C) A tariff is granted to an industry because foreign firms are subsidized by their governments.
D) A tariff is granted to an industry because another nation persistently uses unfair trade
practices.
Answer: B
Topic: The Politics of Protection in the United States
Difficulty: Easy
Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.
AACSB: Application of knowledge

8) Which of the following is NOT a true statement about economic sanctions?

A) Economic sanctions are aimed at broad policy objectives, such as the end of apartheid.
B) Economic sanctions can seriously harm the economy of a country on which they are imposed.
C) Economic sanctions are usually effective in achieving policy goals.
D) Economic sanctions may not be sufficient to achieve policy goals without military force or
other measures.
Answer: C
Topic: The Politics of Protection in the United States
Difficulty: Easy
Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.
AACSB: Application of knowledge

9) Section 301 actions are more frequently used as a tool of trade policy, especially since the
formation of the World Trade Organization.
Answer: FALSE
Topic: The Politics of Protection in the United States
Difficulty: Easy
Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.
AACSB: Application of knowledge

10) The most common form of tariff is a countervailing duty.

Answer: FALSE
Topic: The Politics of Protection in the United States
Difficulty: Easy
Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.
AACSB: Application of knowledge

11) Antidumping duties cannot be levied when the harm to domestic industries is very small.
Answer: TRUE
Topic: The Politics of Protection in the United States
Difficulty: Easy
Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.
AACSB: Application of knowledge
12) The fair value of a good is not a subjective measure.
Answer: FALSE
Topic: The Politics of Protection in the United States
Difficulty: Easy
Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.
AACSB: Application of knowledge

13) In the United States, which part of government investigates claims of subsidies or dumping?
Answer: The International Trade Administration in the Department of Commerce
Topic: The Politics of Protection in the United States
Difficulty: Easy
Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.
AACSB: Application of knowledge

14) In the United States, which agency determines whether domestic firms have been harmed by
subsidies and dumping or by a sudden surge in imports and whether protection is warranted?
Answer: The United States International Trade Commission
Topic: The Politics of Protection in the United States
Difficulty: Easy
Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.
AACSB: Application of knowledge

15) Under Special 301, what is the U.S. government required to do?
Answer: Monitor intellectual property right enforcement around the world
Topic: The Politics of Protection in the United States
Difficulty: Easy
Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.
AACSB: Application of knowledge

16) Describe the four legal procedures available to U.S. firms to seek protection from foreign
competition. What circumstances would warrant a request under each? How frequently is each
used? What would be the result if the firm won?
Answer: Countervailing duties are granted in response to foreign subsidies.
Anti-dumping duties are granted in response to imports being sold at "unfair" prices or dumping.
Escape clause relief is granted as a temporary protection against a sudden surge in imports.
Section 301 retaliation is used to unilaterally punish a nation for "unfair" trade.
Generally, tariffs are imposed if a firm is successful in its appeal for subsidies, dumping, or
escape clause relief. Section 301 is likely to be a broader response to a country's practices. Anti-
dumping duties are the most common today.
Topic: The Politics of Protection in the United States
Difficulty: Moderate
Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.
AACSB: Application of knowledge
17) Why is it difficult to determine whether a country is dumping? Explain fully.
Answer: According to the WTO rules, dumping occurs when an exporter sells a product at a
price below what it charges in its home market. It is not always possible to compare the home
market and foreign market prices, however, and wholesalers, transportation costs, and other price
add-ons may limit the comparison's usefulness. Two other measures may be used. Comparisons
can be made between the price in the import market and either the price charged in third-country
markets, or to an estimate of the cost of production. Comparison to prices in third-country
markets is similar to that between prices in the exporter's home market and the importer's market,
and it may be uninformative for the same reasons. A comparison of the import price and the
estimated cost of production, including a normal rate of return on invested capital, assumes that
production costs in an exporting country can be measured with accuracy. Thus it is difficult to
determine when a country is dumping, and many elements of this determination are somewhat
subjective.
Topic: The Politics of Protection in the United States
Difficulty: Difficult
Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.
AACSB: Analytical thinking

18) Carefully explain why political pressure to protect industry has often been intense in the
United States.
Answer: There are many reasons why political pressure to protect industry is intense. One
reason is that Congressional reforms removed some of the insulation from industry lobbyists that
Congress enjoyed in the 1950s and 1960s. Another reason stems from the end of the Cold War
and the lessening of U.S. willingness to sacrifice trade issues for the sake of maintaining close
geopolitical alliances. A third reason is the rise of the export-oriented East Asian newly
industrializing countries (NICs), including China, and the pressure they have put on a number of
domestic U.S. industries. Finally, the growth of the U.S. trade deficit and the widespread fear in
the 1980s that the United States had lost its competitive edge also contributed to a greater
reluctance to open U.S. markets without reciprocity by other countries. More recently, the rapid
increase of the U.S. trade deficit and the loss of manufacturing jobs since 2000 are conditions
likely to bring back the competition fears of the 1980s. For each of these reasons, trade conflicts
have intensified.
Topic: The Politics of Protection in the United States
Difficulty: Difficult
Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.
AACSB: Analytical thinking

19) Are economic sanctions usually effective in achieving policy goals? Explain.
Answer: Table 7.5 in the text presents evidence that economic sanctions are successful in
achieving policy goals in, at best, only perhaps half of the time. While economic sanctions can
seriously harm the economy of a country on which they are imposed, that alone may not be
sufficient to achieve the policy goal, especially if that goal is difficult, such as regime change or
major policy changes.
Topic: The Politics of Protection in the United States
Difficulty: Difficult
Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.
AACSB: Analytical thinking