Chapter 6: Governmental Influence on Trade

Question 1

What is protectionism?

Answer 1

Governmental restrictions and supper to influence international trade competitiveness

Question 2

What is the role of stakeholders?

Answer 2

Likely to speak out if affected by trade regulations

Question 3

What is the role of consumers?

Answer 3

Buy best product they can find for the price, often without knowing or caring about its origin

Question 4

What are potential implications of import restrictions?

Answer 4

• Retaliation by other countries
• Decrease export jobs because price increases for components
• Decrease export jobs because of lower incomes abroad

Question 5

Are import restrictions effective to reduce unemployment? Why or why not?

Answer 5

No - better method is through fiscal and monetary policies

Question 6

What is the infant-industry argument?

Answer 6

Government should shield emerging industry fro foreign competition by guaranteeing it a large share of domestic market until it can compete on its own

Question 7

Why does production become more competitive over time?

Answer 7

• Increased economies of sale

- Greater worker efficiency

Question 8

What are risks in determining infant industries to support?

Answer 8

• Determining probability of success

- Who should bear the costs? (Consumers? Taxpayers?)

Question 9

What assumptions do developing countries use when implementing trade protections to spur local industrialization?

Answer 9

• Surplus workers can increase manufacturing output more easily than agricultural output
• Inflows of foreign investment in industrial sector promote growth
• Prices and sales of ag products/raw materials fluctuate widely
• Markets for industrial products grow faster than markets for commodities
• Industrial growth reduces imports and/or promotes exports
• Industrial activity helps nation-building process

Question 10

What does the industrialization argument presume?

Answer 10

That unregulated importation of lower-priced manufactured goods prevents development of domestic industry

Question 11

What are two main problems caused by shifting people out of agriculture?

Answer 11

• May lose safety net of their extended families

- Improved ag practices may be better means of achieving economic success than drastic shift to industry

Question 12

What are possible implications of a country shifting from agriculture to industry?

Answer 12

• Demands on social and political services in cities increase
• Output increases if marginal productivity of ag workers is low
• Development possibilities in ag sector may be overlooked

Question 13

How can import restrictions increase FDI?

Answer 13

Foreign companies may invest to produce in restricted area

Question 14

Does a greater dependence on manufacturing guarantee diversification of export earnings? Why or why not?

Answer 14

No - population of developing economies might be small, so the dependence might shift from 1-2 commodities to 1-2 manufactured products

Question 15

What is export-led development?

Answer 15

promoting development of industries with export potential

Question 16

How does industrialization affect nation building?

Answer 16

• Build infrastructure
• Advance rural development
• Boost workforce skills

Question 17

What are two options that can affect a country’s competitive position broadly?

Answer 17

• Depreciation or devaluing its currency

- Relying on fiscal and monetary policy to bring about lower price increases in general than those in other countries

Question 18

What is the comparable access argument?

Answer 18

Countries and industries argue that they are entitled to same access to foreign markets as foreign industries and companies have to theirs

Question 19

Why is the comparable access argument impractical?

Answer 19

• May lead to restrictions that deny home consumers lower prices
• Government cannot negotiate and monitor separate agreements for the thousands of products and services that are traded

Question 20

What are two factors that countries must consider when using trade restrictions as a bargaining tool?

Answer 20

• Believability: must have access to alternate sources or consumers must be willing to do without it
• Importance

Question 21

What is dumping?

Answer 21

Companies export below cost or below home-country price (can build market abroad)

Question 22

What is the optimum-tariff theory

Answer 22

A foreign producer will lower its prices if the importing county places a tax on its products

Question 23

What is the essential industry argument?

Answer 23

Governments apply trade restrictions to protect essential domestic industries during peacetime so the country is not dependent on foreign supplies during war (U.S. Committee on Foreign Investment)

Question 24

What are national defense arguments?

Answer 24

Prevent export of strategic good stat might fall into the hands of potential enemies

Question 25

How do countries extend their spheres of influence to countries in need?

Answer 25

Give aid and credits to (and encouraging imports from) countries that join a political alliance or vote a preferred way within international bodies

Question 26

How do some countries preserve national culture with trade?

Answer 26

Prohibit exports of art and historical items deemed part of their national heritage

Question 27

What is a tariff?

Answer 27

Tax levied on a good shipped internationally- may be levied on goods entering, leaving, or passing through a country

Question 28

What are the different types of duties on tariffs?

Answer 28

• per unit (specific duty)
• value basis (ad valorem duty
• both (compound duty)

Question 29

What are subsidies?

Answer 29

Form of direct assistance to company o boost its competitiveness

Question 30

What is tied aid/loans?

Answer 30

Require that recipient spend funds in donor country

Question 31

What is a quota?

Answer 31

Limits the quantity of a product that can be imported or exported in a given timeframe, usually 1 year

Question 32

What is a Voluntary Export Restraint (VER)?

Answer 32

Country A requests (tells) Country B to restrict its exports to Country A (or else…)

Question 33

What is an embargo?

Answer 33

A quota that prohibits all trade, used as an economic means to achieve political goals

Question 34

What is “Buy Local” legislation?

Answer 34

Government purchases give preference to domestically made goods and may legislate percentage of domestic content

Question 35

What is foreign-exchange control?

Answer 35

Requires an importer to apply to a government agency to secure the foreign currency to pay for the product

Question 36

What are countertrade or offsets?

Answer 36

Government requirements in importing country whereby the exporter must provide additional economic benefits such as jobs or technology as part of the transaction

Question 37

What are a company’s options when it faces possible losses because of import competition?

Answer 37

• Move operations to another country
• Concentrate on market niches that attract less international competition
• Adopt internal innovations (innovations, superior products)
• Try to get governmental protection