02. Exam - Commercial Policy

Question 1

Why are tariffs higher in Agriculture than in other sectors?

Answer 1

• Food security - ensure capacity for local production

- to transfer incomes to farmers and support the rural / countryside.

Question 2

Where there is overlap between countries, these industries are the most protected. What are the most protected areas in agriculture?

Answer 2

Foods:
- Dairy
- Sugar & Confectionary
- Beverages &tobacco
- Grains
- Animal products
Non-food:
- clothing
- textiles
- leather goods & footware

Question 3

Overall what is the current state of tariffs?

Answer 3

• relatively low particularly for non-agricultural goods and especially in high-income countries

Question 4

What are the reasons (3) why further trade opening is beneficial even if the dollar values of the gains are not that high?

Answer 4

1) keep markets open when there is a severe downturn avoids protectionist and retaliation behaviour
2) trade increases exposure of countries to each other and in the process leads to new knowledge
3) trade protection is grossly inefficient in achieving the goals its seeks (job protection ultimately)

Question 5

Given that costs of tariffs and quotas are high to consumers, why do consumers tolerate them according to Economist Mancur Olson?

Answer 5

a) the costs of tariffs and quotas are borne by a great number of people - each pays a little for protection
b) the benefits of protection are concentrated in a few industries - few benefit from a lot of protection

Question 6

Mancur Olson highlights the asymmetry in the incentives to oppose the policy, what is this?

Answer 6

Those benefiting from protection have much greater incentives than those hurt by it, so they will lobby hardest.

Question 7

Why do nations protect their industries (5) ?

Answer 7

• revenue
• jobs
• industrial targeting
• national security
• retaliation

Question 8

Why is revenue a driver for a country to adopt protectionist policies?

Answer 8

Particularly developing economies - they do not have other alternative stable and reliable income sources (difficult to set up an income tax system) so tariffs offer a reliable consistent source of government income.

Question 9

Why is jobs a driver for a country to adopt protectionist policies?

Answer 9

The labour argument states that protection must be used against imports from countries where wages are much lower

Question 10

What does the labour argument not consider?

Answer 10

That differences in productivity between different workforces will also play a part and as productivity rises so will wages.

Question 11

Why is industrial targeting a driver for a country to adopt protectionist policies?

Answer 11

Because of the infant industry argument which states that tariff policies are required in developing nations to protect infant industries against the competition of more mature firms in industrial countries.

Question 12

What does the infant industry argument assume?

Answer 12

1) market forces do not allow for the development of a certain industry
2) the industry has positive externalities - spillover benefits (valuable linkages to other industries or technologies)

Question 13

What are the problems with the infant argument?

Answer 13

Does not demonstrate that there is some inherent advantage in making something as opposed to buying it.

Question 14

What is the argument for national security?

Answer 14

That certain industries must be protected in order to guard national security such as military security and cultural values.

Question 15

Rather than prohibit the imports to develop domestic mineral or other resources, what is a better alternative?

Answer 15

More efficient to build stockpiles of minerals and other materials by buying large quantities in peace time when they are less expensive.

Question 16

What are cultural industries and how are they protected?

Answer 16

Movies, television, music, print media, theatre and art. Protection is usually in favour of having western or main stream themes dominate.

Question 17

What is the argument around retaliation?

Answer 17

That one country’s trade barriers must be countered with trade barriers.

Question 18

What is the problem with the retaliation argument?

Answer 18

That although retaliation can provide incentive for trade negotiations it can also lead to escalating trade wars.

Question 19

Why has protectionism increased in the US?

Answer 19

• political reforms means lobbyists more influential at Congress
• end of the Cold War reduced US willingness to sacrifice domestic political considerations for geopolitical alliances
• rise of the newly industrialised countries increased competitive pressure on US
• growth of the US trade deficit in the 80s spurred fears of loss of competitiveness.

Question 20

How is protectionism obtained?

Answer 20

1) direct action by the President (VERs)

2) four types of legal procedures

Question 21

What are the four types of legal procedure to enable protection?

Answer 21

1) countervailing duties
2) antidumping duties
3) escape clause relief
4) section 301 retaliation

Question 22

How are legal procedures enacted?

Answer 22

A firm or industry petitions the federal government to investigate a foreign country or firms produce.

Question 23

What is a countervailing duty?

Answer 23

A tariff that is granted to a US Industry that has been hurt by a foreign country subsidising its firms. (subsidies allow the foreign firms to sell their products at lower prices). Countervailing duty seeks to counter the effect of the subsidy.

Question 24

What is the problem with a countervailing duty ?

Answer 24

The problem is defining the level of the subsidy is subjective.

Question 25

What is an antidumping duty?

Answer 25

It is a tariff levied on an import that is selling at a price below the products fair value, which occurs where dumping has been proved to have caused material injury to a firm or industry.

Question 26

What is the problem with antidumping duties?

Answer 26

1) Defining fair value is subjective - anti dumping duties are thus a source of tension between countries. 2) Economic theory and legal definitions are not in agreement (if a firm is not earning above average profits somewhere it cannot maintain a price elsewhere that is below the cost.

Question 27

According to the WTO when does dumping occur?

Answer 27

When an exporter sells a product at a price below the price it charges in its home market. The problem with this is that comparing domestic and foreign market prices is very difficult due to differences in prices of transportation, wholesale products and other add ons.

Question 28

What are the three methods to determine whether a good is being dumped?

Answer 28

1) comparing the price in third-country markets 2) estimating the cost of production 3) estimating the foreign firms production costs (dumping occurs if the foreign firms are not selling at a price that provides a normal rate of return on invested capital.

Question 29

What is escape clause relief?

Answer 29

It is a temporary tariff on imports to allow a domestic industry to escape the pressure of imports and thus obtain a period of adjustment. The clause is located in the US & GATT trade rules.

Question 30

How is the escape clause relief initiated?

Answer 30

When a firm or industry petitions the USTIC directly for relief from a surge of imports. The petitioning firm or industry must show that it has been harmed by imports and not some other factor such as poor management.

Question 31

What is a Section 301 or Special 301 referring to?

Answer 31

A section in the US 1974 Trade Act which requires the US Trade Representative to take action against any nation that persistently engages in unfair trade practices as defined. A Special 301 requires the US Trade Rep to monitor property rights enforcement around the world to ensure adequate enforcement.